<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1999
REGISTRATION NUMBER 333-82151
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
OMNILYNX COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 76-0530551
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
1770 MOTOR PARKWAY, SUITE 300
HAUPPAUGE, NEW YORK 11788
(516) 582-2222
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
JOSEPH A. GREGORI
CHIEF EXECUTIVE OFFICER
OMNILYNX COMMUNICATIONS CORPORATION
1770 MOTOR PARKWAY, SUITE 300
HAUPPAUGE, NEW YORK 11788
(516) 582-2222
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
ROBERT G. REEDY MICHAEL L. FALTISCHEK
PORTER & HEDGES, L.L.P. PAUL RUBELL
700 LOUISIANA RUSKIN, MOSCOU, EVANS & FALTISCHEK, P.C.
HOUSTON, TEXAS 77002-2764 170 OLD COUNTRY ROAD
(713) 226-0674 MINEOLA, NEW YORK 11501
(516) 663-6600
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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, 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, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
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 SECURITIES EXCHANGE COMMISSION, ACTING PURSUANT TO
SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
1,600,000 SHARES
[LOGO]
OMNILYNX COMMUNICATIONS CORPORATION
COMMON STOCK
This is OmniLynx Communications Corporation's initial public offering of
common stock. We expect that the initial public offering price will be between
$9.00 and $11.00 per share. After the offering, we expect that the common stock
will trade on the American Stock Exchange under the symbol "OL."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN "RISK
FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price................................................... $ $
Underwriting discount................................................... $ $
Proceeds, before expenses, to us........................................ $ $
</TABLE>
The underwriters may also purchase up to an additional 240,000 shares at the
public offering price, less the underwriting discount, within 45 days from the
date of this prospectus to cover over-allotments.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
WEATHERLY SECURITIES CORPORATION
WESTPORT RESOURCES INVESTMENT SERVICES, INC.
, 1999
<PAGE>
INSIDE FRONT COVER OF PROSPECTUS:
Title: OmniLynx The InfoHighway-TM- Company
Intro Paragraph: OmniLynx is a leading communications provider that delivers a
comprehensive package of high-speed data, voice, Internet, network design and
wiring services to medium and small sized businesses and residential customers.
Using the latest data networking technologies combined with Internet services
and local and long distance telecommunications, we deliver innovative services
to our customers. The Internet is not only the focus of our key products and
services, it will be our primary customer service interface.
OmniLynx intends to respond to today's changing needs with fully integrated
services at competitive pricing, state-of-the-art billing and customer service,
and minimal capital requirements.
http://www.infohwy.com
Products and Services
High-Speed Internet:
Digital Subscriber Line (DSL)
Dedicated Direct Access
ISDN
Web Services:
Web Hosting
Web Content Development
E-Mail Services
Remote Back-Up
Data Networking:
Dedicated Line
Frame Relay
Virtual Private Networks (VPN)
Asynchronous Transfer Mode (ATM)
Local Service:
Local Dial Tone
Dedicated Private Line
Long Distance:
Switched and Dedicated Services
Custom International Services
800/888 Toll Free Services
Calling Card Services
Network Design:
Local Area Network Design
Backbone Design
Wiring Services:
Telephone Cable
Twisted Pair Cable
Coaxial Cable
Fiber Optic Cable
Installation and Maintenance
INSIDE GATEFOLD:
Graphic Depicting Products and Services of OmniLynx
1) High Speed Internet 2) Web Services 3) Data Networking 4) Local Phone Service
5) Long Distance 6) Network Design 7) Wiring
INSIDE BACK COVER OF PROSPECTUS:
Title: SDSL Service
Graphic Depicting SDSL Service
Title: ADSL Service
Graphic Depicting ADSL Service
Glossary:
Access Tandem: telephone company's switch connecting other switches
ADSL: Asynchronous Digital Subscriber Line--High-speed modem technology that
provides data services, such as Internet access over existing telephone lines.
Rates of transmission vary to and from the Internet.
ATM: Asynchronous Transfer Mode--High-speed connection oriented switching
technology that can transmit different types of data (e.g., voice, data and
video) using a cell format. Speeds can range from 25Mbs to 655Mbs.
Central Office: Local telephone company switch location
DSLAM: Digital Subscriber Line Access Module-- Network equipment used for
DSL-type transmission of data
DSL: Digital Subscriber Line--High-speed modem technology that provides data
services, such as Internet access over existing telephone lines
Frame Relay: Data networking technology using virtual connections to transport
data between networks
ISP: Information Services Provider--Company that provides direct access to the
Internet
PC: Personal Computer
POP: Point of Presence--Connection site where the ISP can connect customers to
their networks
POTS: Plain Old Telephone Service--Regular business or residential phone service
Router: Intelligent data network transmission equipment transferring data to
specific networks
SDSL: Synchronous Digital Subscriber Line--High-speed modem technology that
provides data services, such as Internet access over existing telephone lines
(from 128Kbs to 9Mbs)
Splitter: Device separating voice and data traffic
Switch: Telephone company switch
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary............................................................ 3
Risk Factors.................................................................. 8
The Company................................................................... 25
Use of Proceeds............................................................... 27
Dividend Policy............................................................... 28
Capitalization................................................................ 29
Dilution...................................................................... 31
Selected Financial Data....................................................... 33
Management's Discussion and Analysis of Pro Forma Financial Condition and
Results of Operations....................................................... 36
Management's Discussion and Analysis Of Financial Condition and Results of
Operations Combined and Founding Companies.................................. 52
Business...................................................................... 66
Management.................................................................... 94
Certain Relationships and Related Transactions................................ 106
Principal Stockholders........................................................ 115
Description of Capital Stock.................................................. 119
Shares Eligible for Future Sale............................................... 126
Underwriting.................................................................. 131
Legal Matters................................................................. 134
Experts....................................................................... 134
Where You Can Find More Information........................................... 134
Index to Financial Statements................................................. F-1
</TABLE>
---------------------
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS AND MAY
NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ
THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND RELATED NOTES, BEFORE
MAKING AN INVESTMENT DECISION. EXCEPT AS OTHERWISE NOTED, THE INFORMATION IN
THIS PROSPECTUS:
- ASSUMES THAT OMNILYNX HAS ACQUIRED ALL OF THE FOUNDING COMPANIES;
- ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED;
- ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $10.00 PER SHARE; AND
- GIVES EFFECT TO A 1.922704 TO 1 REVERSE SPLIT OF OUR COMMON STOCK IN JUNE
1999.
THE COMPANY
OmniLynx acquired ARC Networks, Inc. on June 30, 1999. We will acquire
InfoHighway International, Inc. and AXCES, Inc. simultaneously with and as a
condition of the closing of this offering. Prior to the completion of the
acquisition of ARC, we had not conducted any operations other than in connection
with the acquisitions. The following is a description of the founding companies:
AXCES, INC. AXCES is a provider of long-distance services to metropolitan
residential customers and is based in Houston, Texas. AXCES currently has
approximately 160,000 customers located primarily in Chicago, Dallas, Houston
and San Antonio. AXCES is licensed in 20 states and operates in the Southwestern
Bell and Ameritech regions. AXCES has been in business since 1994 and accounted
for 52% of our pro forma combined revenues for the six months ended June 30,
1999.
INFOHIGHWAY INTERNATIONAL, INC. InfoHighway is a business oriented Internet
service provider based in Houston, Texas. InfoHighway was founded in 1994 and
was one of the earliest Internet service providers in the nation. InfoHighway
specializes in offering high-speed Internet access and other Internet services
to small to medium-sized business and residential customers in Texas, New York,
New Jersey and Florida. Our high-speed Internet access services, called
InfoHighway-TM- DSL and InfoHighway-TM- Connect, are faster than most comparably
priced offerings from our competitors. InfoHighway also offers additional
Internet services including web-hosting and data backup services. InfoHighway
accounted for approximately 6% of our pro forma combined revenues for the six
months ended June 30, 1999.
ARC NETWORKS, INC. ARC is a competitive local telephone company based in
New York and has been in business since 1993. ARC offers local telephone
service, long distance, network wiring and other network services to customers
primarily in the New York metropolitan area. ARC provides service to over 20
prominent high-rise buildings in Manhattan and many brand name clients. ARC
accounted for approximately 42% of our pro forma combined revenues for the six
months ended June 30, 1999.
The combination of these three companies creates an extensive product mix,
and produces efficiencies by combining sales and marketing efforts,
administrative and billing operations and customer service. Our complementary
product lines will enable us to become a full service telecommunications
company. We will offer both a combination of services for customer convenience
and a wide array of individual services for specific applications. We intend to
service both residential and commercial customers.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock we are
offering................. 1,600,000 shares
Common stock outstanding
after this offering(1)... 4,587,242 shares
Use of proceeds............ We expect that the net proceeds from this offering will
be approximately $13.3 million. We intend to use these
proceeds for:
- repayment of certain indebtedness of OmniLynx and
the founding companies;
- capital expenditures for hardware to enable us to
serve additional buildings;
- general working capital purposes; and
- future acquisitions of telecommunications
companies.
American Stock Exchange
Symbol................... OL
</TABLE>
- ---------------------
(1) The calculation of the number of shares of common stock outstanding after
the offering consists of:
- 1,600,000 shares to be sold in the public offering;
- 939,000 shares issued to the founders of OmniLynx and other investors; and
- 2,048,242 shares to be issued to the shareholders of the founding
companies.
The number of shares of common stock outstanding after the offering in the table
above does not include 3,909,410 shares which are issuable pursuant to
contingent common stock issue rights and various warrants, options, convertible
notes and convertible preferred stock. For a detailed description of these
additional shares, see "Capitalization."
---------------------
RISK FACTORS
Investing in the common stock involves risks which are described in "Risk
Factors" beginning on page 8 of this prospectus.
---------------------
4
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA INFORMATION
OmniLynx acquired ARC on June 30, 1999. We will acquire InfoHighway and
AXCES simultaneously with and as a condition of the closing of this offering.
For financial statement presentation purposes, AXCES has been identified as the
accounting acquiror. The following table presents summary unaudited pro forma
combined financial information for OmniLynx, as adjusted for:
- the effects of the acquisition of the founding companies on a historical
basis;
- the effects of certain pro forma adjustments to the historical financial
statements;
- the consummation of the offering and our use of the estimated net
proceeds; and
- the reverse stock split.
The pro forma combined financial data does not purport to represent what our
results of operations or financial position actually would have been had these
events, in fact, occurred on the date or at the beginning of the period
indicated, nor are they intended to project our results of operations or
financial position for any future date or period. See "Selected Financial Data"
and the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA COMBINED
------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1):
Revenues................................................................. $ 46,373 $ 19,366
Cost of services......................................................... 22,719 10,731
----------------- -----------------
Gross profit............................................................. 23,654 8,635
Selling, general and administrative expenses(2).......................... 20,741 7,632
Depreciation and amortization(3)......................................... 3,818 2,015
----------------- -----------------
Loss from operations..................................................... (905) (1,012)
Interest expense, net(4)................................................. (412) (233)
----------------- -----------------
Loss before income taxes................................................. (1,317) (1,245)
Provision for income taxes(5)............................................ 547 115
----------------- -----------------
Net loss before dividends on preferred stock............................. (1,864) (1,360)
Dividends on preferred stock............................................. 841 420
----------------- -----------------
Net loss applicable to common stockholders............................... $ (2,705) $ (1,780)
----------------- -----------------
----------------- -----------------
Net loss per share - basic and diluted................................... $ (0.59) $ (0.39)
----------------- -----------------
----------------- -----------------
Shares used in computing pro forma net loss per share(6)................. 4,587,242 4,587,242
----------------- -----------------
----------------- -----------------
OTHER DATA:
EBITDA(7)................................................................ $ 2,913 $ 1,003
EBITDA margin(7)......................................................... 6.3% 5.2%
Gross margin............................................................. 51.0% 44.6%
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------
PRO FORMA
COMBINED AS ADJUSTED(9)
----------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA(8):
Working capital (deficit)................................................ $ (9,190) $ 4,130
Total assets............................................................. 41,512 48,163
Total debt, including current portion.................................... 9,309 2,640
Stockholders' equity..................................................... 20,251 33,571
</TABLE>
- ------------------------
(1) The pro forma combined statement of operations data assume that the
acquisition of the founding companies and the offering were closed on
January 1, 1998.
(2) Reflects adjustments to salaries, bonuses and benefit amounts to reflect
those established in contractual agreements with key management personnel of
the founding companies.
(3) Reflects the amortization of excess purchase price relating to the
acquisitions which has been preliminarily allocated to an undifferentiated
pool of intangible assets to be amortized over an average period of 10 years
for pro forma purposes. Also reflects annual amortization of the customer
list acquired in connection with InfoHighway's acquisition of Eden Matrix
over the estimated useful life of three years and annual depreciation on
property and equipment also acquired in the acquisition of Eden Matrix over
the estimated useful life of five years. InfoHighway acquired Eden Matrix,
an Austin, Texas-based Internet service provider, in January 1999.
(4) Reflects the reduction in interest expense due to the planned repayment and
planned conversion of certain debt in connection with the acquisitions.
(5) Assumes all income is subject to a federal corporate tax rate of 34%.
(6) The number of shares includes:
- 939,000 shares outstanding immediately prior to the offering,
- 2,048,242 shares to be issued to the owners of the founding companies
as consideration for the acquisitions, and
- 1,600,000 shares to be sold in the offering.
Does not include 3,909,410 shares which are issuable pursuant to contingent
common stock issue rights and various warrants, options, convertible notes
and convertible preferred stock, since their effect would be antidilutive.
(7) EBITDA as used in this prospectus consists of earnings before interest,
income taxes, depreciation and amortization. It is calculated by adding to
net income the amounts for interest expense, all income taxes, depreciation
expense and amortization expense. We have included EBITDA data because it is
a measure commonly used in the telecommunications industry and the
significance attached to this measure by most Wall Street security analysts
who follow our industry. Based on our experience in the industry, we believe
that EBITDA is an important tool for measuring the performance of companies
in the industry in several areas such as liquidity, operating performance
and leverage. In addition, lenders use EBITDA as a criterion in evaluating
companies in the industry. EBITDA is not a measure of financial performance
determined under generally accepted accounting principles, should not be
considered as an alternative to net income as a measure of performance or to
cash flows as a measure of liquidity, and is not necessarily comparable to
similarly titled measures of other companies. EBITDA margin is calculated by
dividing EBITDA into the total revenues generated during the indicated
period.
(8) The pro forma combined balance sheet data assume that the acquisitions of
the founding companies occurred on June 30, 1999.
(9) Adjusted for the sale of the 1,600,000 shares of common stock included in
the offering and the application of the net proceeds therefrom. See "Use of
Proceeds."
6
<PAGE>
SUMMARY HISTORICAL FINANCIAL INFORMATION FOR THE FOUNDING COMPANIES
The following table presents certain summary historical statement of
operations data for each of the founding companies for the years ended December
31, 1996, 1997 and 1998, and the six months ended June 30, 1998 and 1999. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Combined and Founding
Companies" and the financial statements and notes thereto included in this
prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
AXCES, INC.
Revenues.................................................. $ 8,468 $ 19,474 $ 30,280 $ 17,349 $ 10,095
Gross profit.............................................. 4,508 11,471 20,391 12,041 6,650
Operating income.......................................... 773 2,426 2,253 3,656 1,624
Net cash provided by (used in) operating activities....... 762 269 (1,249) 1,367 3,842
Net cash provided by (used in) investing activities....... (260) (642) (348) (38) 205
Net cash provided by (used in) financing activities....... (111) 43 1,671 (10) (1,734)
EBITDA(1)................................................. 835 2,561 2,456 3,745 1,736
INFOHIGHWAY INTERNATIONAL, INC.
Revenues.................................................. 426 915 1,385 797 1,100
Gross profit.............................................. 208 267 389 287 508
Operating loss............................................ (483) (1,389) (1,211) (455) (466)
Net cash used in operating activities..................... (250) (604) (587) (79) (196)
Net cash used in investing activities..................... (121) (216) (147) (125) (122)
Net cash provided by financing activities................. 354 820 734 204 318
EBITDA(1)................................................. (431) (1.214) (950) (313) (205)
ARC NETWORKS, INC.
Revenues.................................................. 5,583 9,648 13,931 6,660 8,171
Gross profit.............................................. 509 753 2,280 969 1,477
Operating loss............................................ (947) (2,378) (1,592) (415) (570)
Net cash provided by (used in) operating activities....... (424) (479) (594) 392 (721)
Net cash used in investing activities..................... (416) (83) (485) (446) (39)
Net cash provided by financing activities................. 903 567 1,203 101 737
EBITDA(1)................................................. (930) (1,942) (1,185) (250) (351)
</TABLE>
- ------------------------
(1) EBITDA as used in this prospectus consists of earnings before interest,
income taxes, depreciation and amortization. It is calculated by adding to
net income the amounts for interest expense, all income taxes, depreciation
expense and amortization expense. We have included EBITDA data because it is
a measure commonly used in the telecommunications industry and the
significance attached to this measure by most Wall Street security analysts
who follow our industry. Based on our experience in the industry, we believe
that EBITDA is an important tool for measuring the performance of companies
in the industry (including potential acquisition targets) in several areas
such as liquidity, operating performance and leverage. In addition, lenders
use EBITDA as a criterion in evaluating companies in the industry. EBITDA is
not a measure of financial performance determined under generally accepted
accounting principles, should not be considered as an alternative to net
income as a measure of performance or to cash flows as a measure of
liquidity, and is not necessarily comparable to similarly titled measures of
other companies.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING FACTORS AS WELL AS THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED COMBINED
OPERATING HISTORY.
OmniLynx was incorporated in December 1996 and acquired ARC on June 30,
1999. We will acquire InfoHighway and AXCES simultaneously with and as a
condition of the closing of the offering. As a result, the pro forma combined
financial results presented in this prospectus may not be indicative of the
actual results which might have occurred if our operations and management teams
had been combined during the periods presented, and may not be representative of
future results. Our prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in an early stage of
development, particularly those in new and rapidly evolving markets. If our
newly-assembled management team is unable to operate the combined companies
effectively and recognize the anticipated cost savings, our future results of
operations may be significantly worse than those presented in this prospectus.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE THE FOUNDING COMPANIES.
The acquisition of the founding companies involves a number of risks,
including:
- the assimilation of new operations and personnel;
- integration of each founding company's respective equipment, service
offerings, networks and technologies, financial and information systems
and brand names;
- coordination of geographically separated facilities and work forces;
- coordination of their respective sales, marketing and service development
efforts; and
- maintenance of standards, controls, procedures and policies.
The process of integrating the operations of the founding companies,
including their personnel, could cause interruption of, or loss in momentum of
our business and operations activities, including those of the businesses
acquired. Further, employees of the founding companies who may be key to the
integration effort or our ongoing operations may choose not to continue to work
for us following the closing of the acquisitions.
8
<PAGE>
WE MAY INCUR UNFORSEEN EXPENSES WHILE INTEGRATING THE FOUNDING COMPANIES.
We will incur certain expenses in connection with the integration of the
founding companies. However, the actual amount of these expenses could be higher
than anticipated. We may not achieve the benefits and strategic objectives
sought through the acquisitions. Costs associated with the acquisitions that
exceed our expectations, could lower or eliminate our net income. See
"Management's Discussion and Analysis of Pro Forma Financial Condition and
Results of Operations--Pro Forma Liquidity and Capital Resources."
WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY IN ALL OF OUR BUSINESS SEGMENTS.
Two of the three founding companies have incurred substantial historical net
operating losses and experienced negative cash flow during recent periods. As a
result, we had a historical combined deficit, prior to giving effect to the
acquisition of ARC, of approximately $4.1 million as of June 30, 1999. In
addition, the independent auditors' reports of ARC and InfoHighway contain
explanatory paragraphs describing the uncertainty as to the ability of each of
those companies to continue as a going concern. We currently intend to increase
our capital expenditures and operating expenses significantly in order to:
- integrate the founding companies;
- expand our networks to support additional expected customers in existing
and future markets; and
- market and provide our services to a growing number of potential
customers.
In addition, we intend to record intangible assets of $29.2 million
associated with the acquisitions. Such amounts will result in an annual
amortization charge of approximately $2.9 million for each of the next 10 years.
If the 10-day average closing price of the common stock exceeds $16.00 and
$21.00 per share, we will be required to record significant additional
intangible assets related to the contingent common stock issue rights based upon
the market value of the common stock at that time. As a result, our net income
and earnings per share will be adversely affected in each of those years. See
"Management's Discussion and Analysis of Pro Forma Financial Condition and
Results of Operations--Operations."
DUE TO VARIOUS MARKET AND ECONOMIC FACTORS, OUR FUTURE QUARTERLY OPERATING
RESULTS MAY VARY SIGNIFICANTLY. THIS MAY ADVERSELY IMPACT OUR STOCK PRICE.
Our annual and quarterly operating results may fluctuate significantly in
the future as a result of numerous factors. Factors that may affect our
operating results include:
- our ability to complete the integration of the founding companies and
achieve the expected operating efficiencies;
9
<PAGE>
- our ability to successfully provide combinations of telecommunication
services in a single package;
- the amount and timing of capital expenditures and other costs relating to
the expansion of our network;
- the introduction of new services by us or our competitors;
- technical difficulties or network downtime;
- the rate at which customers subscribe to our services;
- the prices the customers pay for such services;
- the rates we pay the underlying carriers who supply telecommunications
services directly to us;
- customer turnover; and
- our ability to deploy data transmission and high-speed Internet access
equipment.
As a result of all of the foregoing factors, it is likely that in some
future quarter our operating results will be below the expectations of
securities analysts and investors. Such events would likely materially lower the
price of our common stock. Fluctuations in operating results may also result in
volatility in the price of our common stock.
OUR BUSINESS MODEL IS UNPROVEN AND WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING OUR
BUSINESS STRATEGY. IN ADDITION, OUR PRODUCTS AND SERVICES MAY NOT ACHIEVE
SIGNIFICANT MARKET ACCEPTANCE.
We are a competitive local telephone company providing Internet access and
data communications services combined with traditional telephone services using
emerging technology. A competitive local telephone company provides local
telephone services in competition with the traditional local phone company. A
traditional local telephone company is an established provider of dedicated and
local telephone services to all or virtually all telephone subscribers within
its service area. As such, our business strategy is unproven. To be successful,
we must, among other things, develop and market services that are widely
accepted by small to medium-sized businesses and consumers. Our InfoHighway DSL
and InfoHighway Connect services have only been launched in limited areas, and
may not achieve broad commercial acceptance.
In addition, the prices we charge for certain services are in some cases
higher than those charged by our competitors for similar services. A sufficient
number of customers may not be willing to pay the prices we charge for our
services. Additionally, prices for digital communications services have fallen
historically, and prices in the industry in general, and for the services we
offer, and plan to offer, are expected to continue to fall. We have provided,
and expect in the future to provide, price discounts to customers that subscribe
to multiple services. In addition, we may
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be required to reduce prices periodically to respond to competition and to
generate increased sales volume. Accordingly, we may not be able to build a
profitable enterprise based upon our current business model. See "Management's
Discussion and Analysis of Pro Forma Financial Condition and Results of
Operations" and "Business--Business Strategy."
OUR LENGTHY SALES CYCLE FOR COMMERCIAL BUILDINGS AND MULTIPLE DWELLING UNITS
REQUIRES US TO INCUR SIGNIFICANT EXPENSES IN ADVANCE OF THE RECEIPT OF REVENUES.
Our practice of marketing to commercial buildings either through real estate
management companies or landlords has taken significant effort to date and the
sales cycle is lengthy. Further, we have targeted new construction as one of our
principal markets. This market is subject to construction delays and other
conditions beyond our control. During this lengthy sales cycle, we incur
significant expenses in advance of the receipt of revenues. Therefore, any
long-term failure to roll out our services could have a material adverse effect
on our cash flows and revenue recognition. See "Business--Customers."
WE DEPEND ON OUR SUPPLIERS AND OTHER SERVICE PROVIDERS.
LOCAL TELEPHONE FACILITIES. We are dependent on Bell Atlantic, Southwestern
Bell and other competitive local telephone companies, such as Level 3, for space
to locate our facilities for our equipment in certain geographical areas.
However, space may not be available in the facilities we request and we may
experience initial rejections of our applications to obtain space from the
traditional local telephone companies. In addition, many of the companies are
our competitors. Also, physical space may become exhausted in certain areas as
demand increases. The rejection of our applications for space could result in
delays in and increased expenses associated with, the roll out of our services
in our target markets.
TRANSMISSION FACILITIES. We lease the majority of our transmission and
transport facilities in our network. We are dependent on multiple carriers,
including MCI WorldCom, Savis Communications, Level 3, AT&T, Winstar and Taylor
Communications for these transmission and transport facilities. Many of these
companies are currently experiencing delays in providing these facilities. While
we believe that there are several suppliers that can provide these facilities to
us, switching vendors and shifting traffic to an alternative provider may cause
temporary delays in providing service to our customers. Several of these
providers currently are or may become our competitors in the future and may act
slowly to provide facilities to us. Also, failure of these carriers to provide
their facilities to us may materially harm our business. The risks inherent in
utilizing third party providers include the possible inability to negotiate and
renew favorable supply agreements and dependence on the timeliness of the fiber
optic transport providers in processing our orders for transmission facilities.
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DIGITAL SUBSCRIBER LINE SERVICES. We have a volume purchase agreement with
AccessLan Communications, Inc. for DSL and other data transport and switching
equipment. If our selected vendor or its equipment fails to perform as expected,
selecting an alternative supplier may delay and require us to change our
offerings.
OTHER COMPONENTS. We also rely on other companies to supply key components
of our network infrastructure, including switching and networking equipment.
These components are only available in the quantities and quality we require
from sole or limited sources. From time to time we have experienced delays or
other problems in receiving communications services and facilities. We can give
no assurance that we will be able to obtain such services or facilities on the
scale and within the time frames required by us at an affordable cost, or at
all.
CALL RECORDS. The accurate and prompt billing of our customers is dependent
upon the timeliness and accuracy of call detail records, including those
provided by providers whose services we resell. We can give no assurance that
the current providers will continue to provide, or that new providers, including
traditional local telephone companies, will provide, accurate information on a
timely basis. Any provider's failure to do so would materially adversely effect
our ability to properly bill our customers.
THE QUALITY OF THE WIRING AND EQUIPMENT USED BY THE TRADITIONAL LOCAL TELEPHONE
COMPANIES MAY IMPACT THE QUALITY OF OUR SERVICES.
We are dependent upon the technology and capabilities of the traditional
local telephone companies to meet certain telecommunications needs of our
customers and maintain our service standards. We are highly dependent on the
quality and availability of the traditional local telephone companies' copper
lines and their maintenance of such lines. We may not be able to obtain the
copper lines and the services we require from the traditional local telephone
companies or obtain such lines at quality levels, rates, terms and conditions
satisfactory to us. The failure to obtain such services or obtain such lines at
satisfactory quality levels, rates, terms and conditions would affect our
ability to deliver quality high-speed Internet access and data networking
services.
WE HAVE MINIMUM PURCHASE AGREEMENTS WHICH MAY SUBJECT US TO HIGHER COSTS IN THE
FUTURE.
We have entered into minimum purchase agreements with several of our service
providers that commit us to minimum monthly purchase discounts regardless of our
actual usage charges. These minimum purchase agreements range from month to
month to as long as five years. In the past we have been able to renegotiate
such minimum purchase agreements to avoid any costs beyond our actual usage.
However, we may not be able to avoid such minimum amounts in future periods. If
we are unable to grow our business in future periods, these minimum purchase
agreements
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could cause our expenses to increase without any corresponding increase in
revenues. See "Business--Telecommunications Services--Long Distance Service."
COMPETITION IN OUR INDUSTRY IS INTENSE AND GROWING, AND WE MAY BE UNABLE TO
COMPETE EFFECTIVELY.
Our industry is highly competitive, and we expect competition to intensify
in the future. We do not have a significant market share in any of our markets.
Most of our actual and potential competitors have substantially greater
financial, technical, marketing and other resources, including brand or
corporate name recognition, than we do. In addition, we believe that the
traditional distinctions between the local, long distance data and Internet
access markets are eroding. As these markets converge, the remaining competitors
may be more dominant and have greater market share than today. Our success will
depend upon our ability to provide high-quality services at competitive prices.
Any reduction in the prices of long distance, local, DSL or other services by
our competitors could materially adversely affect us. DSL is a high-speed modem
technology that provides data services over existing telephone lines.
We also face the following specific competitive risks:
OVERALL COMMUNICATIONS MARKET
- LARGER AND MORE COMPETITIVE COMPANIES RESULTING FROM COMMUNICATIONS
MERGERS. A continuing trend towards business combinations and
alliances in the communications industry may create significant new
competitors for us. Many of these combined entities will have
resources far greater than ours. These combined entities may provide a
bundled package of communications products, including local, long
distance and DSL services, that compete directly with the products we
offer. These entities may also offer services sooner and at more
competitive rates than we do.
- THE COMPETITIVE IMPLICATIONS OF OTHER TECHNOLOGIES. We also face
competition from companies deploying new technologies that do not
require site or network licensing or the deployment of extensive
networks.
- ENTRANCE OF FOREIGN COMPANIES INTO U.S. MARKETS. In February 1998, the
Federal Communications Commission rules went into effect that make it
substantially easier for many non-U.S. communications companies to
enter the U.S. market. This may further increase the number of our
competitors.
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LONG DISTANCE SERVICES MARKET
- CUSTOMER TURNOVER. The long distance industry is characterized by a
high level of customer attrition, or "churn." Our revenue has been,
and is expected to continue to be, affected by churn.
- EFFECT OF NEW RATES AND RATE PLANS. AT&T Corp., MCI WorldCom, Inc.,
Sprint and other carriers have implemented price plans aimed at
residential customers with significantly simplified rate structures.
This may lower long distance prices. Long distance carriers have made
similar offerings available to the small and medium-sized businesses
we primarily serve, creating additional pricing competition and
creating pressure on gross margins. If we are unable to reduce costs
in a timely manner, our margins may be significantly reduced.
- ENTRANCE OF THE TRADITIONAL LOCAL TELEPHONE COMPANIES INTO THE
IN-REGION LONG DISTANCE MARKET. The traditional local telephone
companies such as Southwestern Bell, Ameritech and Bell Atlantic are
currently precluded from providing long distance services to customers
in each of the regions in which they currently provide local telephone
services. We anticipate that a number of these phone companies will
seek authority to provide in-region long distance services in 1999 and
beyond. In-region long distance service for a traditional local
telephone company simply means long distance service between two
points inside its region. For example, Bell Atlantic recently filed to
seek approval to provide long distance services to customers in New
York and Massachusetts. Once traditional local telephone companies are
allowed to offer in-region long distance services, they will be in a
position to offer single-source local and long distance service.
LOCAL SERVICES MARKET
- NEED TO COMPETE WITH TRADITIONAL PROVIDERS. In the local
communications market, our primary competitor is currently the
traditional local telephone company serving each geographic area. For
example, Southwestern Bell and Bell Atlantic are our competitors in
each of the areas in which we resell their local telephone services.
Traditional local telephone companies benefit from:
- longstanding relationships with their customers;
- greater financial and technical resources;
- the ability to subsidize local services with revenues from other
businesses; and
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- recent regulations that relax price restrictions and decrease
regulatory oversight of traditional local telephone companies.
If the traditional local telephone companies are allowed
additional flexibility to offer discounts to large customers,
engage in aggressive discount pricing practices, or charge
competitors excessive fees for interconnection to their networks,
the revenue of their competitors, including us, could be
materially adversely affected.
- ENTRANCE OF LARGE LONG DISTANCE AND OTHER CARRIERS INTO THE LOCAL
MARKET. We also face competition in local markets from other new
entrants, including long distance and other carriers, many of which
have significantly greater financial resources than we do. For
example, AT&T, MCI WorldCom and Sprint have each begun to offer local
communications services in major U.S. markets. Other entities that
currently or may offer local switched services including companies
that have previously operated as competitive local telephone
companies, cable television companies or electric utilities could,
upon entering into appropriate interconnection agreements or resale
agreements with local telephone companies, offer single-source local
and long distance services similar to those offered by us.
- CHANGING GOVERNMENT REGULATIONS. Competition in local services has
also increased as a result of changing government regulations. The
Telecommunications Act of 1996 has increased competition in the local
telecommunications business. This act:
- requires traditional local phone companies to interconnect their
networks with those of requesting telecommunications carriers
and to allow requesting carriers to locate equipment at the
facilities of traditional local telephone companies; and
- requires all traditional local telephone companies to offer
their services for resale at wholesale rates.
Competition may also increase as a result of a recent World Trade
Organization agreement on telecommunications services. As a result
of the agreement, the FCC has made it easier for foreign companies
to enter the U.S. telecommunications market.
DATA SERVICES MARKET
- The market for data communications and Internet access services is
extremely competitive and characterized by rapid technological
innovation. There are no substantial barriers to entry, and we expect
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that competition will intensify in the future. We expect significant
competition from a large variety of companies, including:
- long distance service providers such as AT&T and MCI WorldComm;
- cable modem service providers such as Time Warner Communications
and Cablevision;
- Internet service providers such as Covad Communications Group,
Inc. and Northpoint Communications Group, Inc.;
- online service providers such as America Online, Inc. and
Verios;
- wireless data services providers such as Winstar Communications,
Inc. and Teligent, Inc.; and
- other companies focusing on DSL services.
These companies may offer competing products with price or other
characteristics that are more attractive than our own.
WE MAY BE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGE
The communications industry has been, and is likely to continue to be,
subject to:
- rapid and significant technological change, including continuing
developments in DSL technology, which does not presently have widely
accepted standards;
- frequent introductions of new services and alternative technologies,
including new technologies for providing high-speed data services; and
- evolving industry standards.
We expect that new products and technologies will emerge that may be
superior to, or may not be compatible with, some of our products or
technologies. Changes in technology could cause more competitors to enter the
industry in which we have recently begun to compete. Also, technological
changes, including advancements in emerging wireline and wireless technologies
and Internet services and technologies, could result in lower retail rates for
communications services. Failure to adapt successfully to any technological
change or obsolescence, or the failure to obtain access to important
technologies, could materially adversely affect us.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL CAPITAL, WE MAY NOT BE ABLE TO COMPLETE
FUTURE NETWORK EXPANSION AND ACQUISITIONS.
NETWORK EXPANSION. We estimate that our capital needs will be approximately
$0.7 million in 1999 and $1.5 million in 2000. We expect to fund these capital
expenditures from the net proceeds of this offering and/or through our existing
cash flows. However, if the amount needed for our expansion plans increases
materially over these amounts or we otherwise do not have sufficient cash
resources to fund these costs, we may need to revise or curtail our expansion
plans.
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ACQUISITIONS. We currently intend to use our common stock to fund a portion
of the purchase price for any future acquisitions. If our common stock does not
maintain an acceptable trading price in the public markets or if potential
acquisition candidates are unwilling to accept our common stock, we may require
additional capital to complete any acquisitions. If we are unable to raise
additional capital, we may be required to revise or curtail our acquisition
plans.
OUR FUTURE INDEBTEDNESS MAY SUBJECT US TO FINANCIAL AND OPERATING RESTRICTIONS.
We intend to enter into negotiations with commercial banks to provide us
with a credit facility to be used for acquisitions, working capital, capital
expenditures and other general corporate purposes. Any such credit facility or
other debt financing will require that we make certain financial covenants which
could limit our operational and financial flexibility. In addition, incurring
debt would increase our leverage and make us more vulnerable to economic
downturns and limit our ability to compete. See "Management's Discussion and
Analysis of Pro Forma Financial Condition and Results of Operations--Pro Forma
Liquidity and Capital Resources."
WE ARE DEPENDENT UPON THE CONTINUED GROWTH OF THE DEMAND FOR HIGH-SPEED INTERNET
ACCESS AND OTHER DATA COMMUNICATION SERVICES.
The market for high-speed Internet access and related services is relatively
new and characterized by rapidly changing technology, evolving industry
standards, changes in customer needs and frequent new product and service
introductions. Our future success will depend, in part, on our ability to:
- effectively use leading technologies;
- continue to develop our technical expertise;
- enhance our current services;
- develop new products and services that meet changing customer needs; and
- influence and respond to emerging industry standards and other
technological changes on a timely and cost-effective basis.
We may not be successful in responding to these challenges. If the market
for high-speed Internet access services fails to develop, develops more slowly
than expected, or becomes saturated with competitors, or if the high-speed
Internet access and services we offer are not broadly accepted, our business,
operating results and financial condition will be materially adversely affected.
HACKERS, COMPUTER VIRUSES AND OTHER DISRUPTIVE PROBLEMS COULD POSE SECURITY
RISKS AND CAUSE MATERIAL INTERRUPTIONS IN THE SERVICES WE PROVIDE.
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Internet service providers and corporate networks
have experienced interruptions in service as a result of accidental or
intentional actions of Internet users, current and former employees and others.
Unauthorized access could
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also potentially jeopardize the security of confidential information stored in
the computer systems of our customers and such customers' end-users, which might
result in our liability to our customers and also might deter potential
customers. We may not be able to implement security measures in a timely manner
or to our various customers' satisfaction, or that can not be circumvented.
Eliminating computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service to our customers and such
customers' end-users, which could cause us to lose customers. See
"Business--Network Architecture and Technology."
OUR SUCCESS IS HEAVILY DEPENDENT UPON OUR RETENTION OF CERTAIN OF OUR KEY
OFFICERS AND THE HIRING OF ADDITIONAL PERSONNEL.
Our success depends to a significant extent upon the abilities and continued
efforts of our management team, particularly Joseph A. Gregori, our Chief
Executive Officer and other members of our senior management team. Although we
have entered into employment agreements with most of our executive officers,
they may not continue to be employed by us. The loss of any of these individuals
could materially adversely affect us. Our success will also depend upon our
ability to hire and retain additional personnel, including technical and sales
personnel. Competition for qualified personnel in the communications industry is
intense. Difficulty in hiring and retaining personnel could materially adversely
affect our ability to manage and support our operations. See "Management" and
"Business--Employees."
THE INCREASE OF CURRENT GOVERNMENTAL SURCHARGES AND FEES ON OUR GROSS REVENUES
WOULD ADVERSELY AFFECT OUR BUSINESS.
Telecommunications providers pay a variety of surcharges and fees related to
providing interstate and intrastate services. Interstate surcharges include
those imposed at the federal level and those imposed by various state regulators
on intrastate services. The division of our services between interstate services
and intrastate services is a matter of interpretation and may in the future be
contested by the FCC or relevant state commissions. A change in the
characterization of the jurisdiction of our services could cause an increase in
our payment obligations. In addition, pursuant to periodic revisions by state
and federal regulators of the applicable surcharges, we may be subject to
increases in the surcharges and fees currently paid.
OUR BUSINESS IS HIGHLY REGULATED AND MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES
IN GOVERNMENTAL REGULATIONS RELATING TO OUR INDUSTRY.
Our services are subject to significant federal, state and local government
regulation. Delays in receiving required regulatory approvals, or new regulatory
requirements, may materially adversely affect our business, prospects, financial
condition and results of operation. In particular, we face the following
regulatory risks:
- NEED TO COMPLY WITH FEDERAL REGULATIONS. We are regulated at the federal
level by the FCC. We are required to file and maintain domestic and
international
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tariffs containing the currently effective rates, terms and conditions of
service for our long distance services. We are also required to maintain
an FCC authorization to provide international services. We are also
required to comply with FCC regulations concerning changing a customer's
local or long distance provider. The FCC has the authority to sanction us
or revoke our authorization if we violate applicable law.
- NEED TO COMPLY WITH STATE LAW. Our local and long distance services are
also subject to state law. In the states where we offer local or long
distance services, we are required to file and maintain tariffs containing
the currently effective rates, terms and conditions of service. We are
also required to maintain state authorization to provide local or long
distance services. Some states also must approve changes in the ownership
of AXCES and ARC, as well as the issuance of the securities contemplated
by this offering. We are also required to comply with state regulations
concerning changing a customer's local or long distance provider. We have
been involved in several legal proceedings in various states in which it
was alleged that we violated these regulations. Some of those cases have
been settled, but others are still pending. See "--We may incur additional
liability as a result of allegations of slamming and cramming," and
"Business-- Legal Proceedings." Our retail marketing program is subject to
state laws and regulations. The states have the authority to sanction us
or revoke our authorization if we violate applicable law.
- CHANGES RESULTING FROM THE TELECOMMUNICATIONS ACT OF 1996. The 1996
Telecommunications Act has resulted in comprehensive changes in the
regulatory environment for the communications industry and has materially
affected the competitive environment. Among other things, the
Telecommunications Act removes barriers to entry in the local exchange
market by preempting state and local laws that restrict competition and by
providing competitors interconnection, access to individual components of
the traditional local telephone company's telephone network, and retail
services at wholesale prices. We cannot predict how the FCC, state
regulators and the courts will interpret and implement the relevant
provisions of the Telecommunications Act.
- CHANGES IN ACCESS CHARGES AND OTHER FEES. Changes in the regulations
governing access charges and other fees could materially adversely affect
our business, prospects, financial condition and results of operations.
- UNCERTAINTY IN THE EVOLVING REGULATORY ENVIRONMENT. There is considerable
uncertainty regarding numerous regulatory issues in the communications
industry, including the regulation of advance services provided by
traditional local telephone companies, regulation of Internet telephone
service, and the requirement that the traditional local telephone
companies make available to competitors individual components of their
telephone network and space to locate their equipment.
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WE MAY INCUR ADDITIONAL LIABILITY AS A RESULT OF ALLEGATIONS OF SLAMMING AND
CRAMMING.
Federal and state law prohibits the practices known as "slamming" and
"cramming." Slamming is a practice whereby telephone companies switch a
customer's local or long distance provider without the customer's permission.
Cramming is a practice whereby unauthorized charges are included on a customer's
telephone bill. We have been involved in a number of legal proceedings in
various states in which we were alleged to have been engaged in the practices of
slamming and cramming. There have been approximately 11 lawsuits filed against
us alleging slamming and 1 lawsuit alleging cramming. Some of the cases have
been settled while others are still pending. See "Business--Legal Proceedings."
In response, we have adopted safeguards, including new policies and procedures,
to reduce significantly and substantially the number of slamming and cramming
complaints against us. However, we may be penalized again for possible slamming
practices in the future, despite our new safeguards, and such penalty, whether
in the form of a fine or a suspension of our right to conduct business, may have
a material adverse impact on our operating results.
WE MAY BE LIABLE FOR THE TRANSMISSION OF INDECENT, LIBELOUS OR COPYWRITTEN
MATERIALS BY OUR INTERNET SUBSCRIBERS.
Laws governing use of the Internet, including taxation of transactions,
privacy, security, digital signatures, and encryption are continually under
consideration at the state and federal level. In particular, the law governing
the liability of online service providers and Internet access providers for
participating in the hosting or transmission of objectionable materials or
information currently remains unsettled. In addition, several private parties
have filed lawsuits seeking to hold Internet service providers accountable for
information they transmit. We cannot predict the outcome of this litigation or
the potential for the imposition of liability on Internet service providers for
information that they host, distribute or transport. To the extent that we
become parties to future litigation or there are new regulations, such
litigation or new regulations could subject us to significant monetary fines or
damage awards. See "Business--Government Regulations--Internet Regulations"
WE MAY NOT BE ABLE TO USE OUR MARKS IN ALL GEOGRAPHIC AREAS.
Even though we are using the mark "OmniLynx Communications" and
"InfoHighway" in the United States, other companies in many different industries
have preexisting rights to those names within defined territories. One specific
company may have the right to use the name "OmniLynx" for telecommunications
services within an established area. If any other companies are successful with
their claims to our name, we may be required to either obtain a license from
them for the use of the name "OmniLynx," or be required to change our name
within certain defined territories. Additionally, InfoHighway is one of our key
product and marketing brands. Although we have filed for a registered trademark
application, we are aware of other companies using similar names. These
companies may contest our
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use of the brand. Either result would cause us to incur additional expenses. If
we are required to change our name, we may lose the goodwill associated with the
"OmniLynx" and "InfoHighway" names in these markets.
OUR MANAGEMENT AND PRINCIPAL STOCKHOLDERS WILL CONTROL A MAJORITY OF OUR STOCK,
AND THEIR INTERESTS MAY CONFLICT WITH THOSE OF OUR STOCKHOLDERS.
Our executive officers, directors and principal stockholders together will
beneficially own approximately 67.7% of the outstanding common stock after
completion of this offering. Accordingly, these stockholders will be able to
determine the composition of our board of directors, will retain the voting
power to approve all matters requiring stockholder approval and will continue to
have significant influence over our affairs. This concentration of ownership
could have the effect of delaying or preventing a change in control of or
otherwise discouraging a potential acquiror from attempting to obtain control of
us, which in turn could have a material adverse effect on the market price of
the common stock or prevent our stockholders from realizing a premium over the
then prevailing market prices for their shares of common stock. See "Management"
and "Principal Stockholders."
FAILURE OF COMPUTER SYSTEMS AND SOFTWARE PRODUCTS TO BE YEAR 2000 COMPLIANT
COULD NEGATIVELY IMPACT OUR BUSINESS.
Some computers, software, and other equipment include computer codes in
which calendar year data is abbreviated to only two digits. Some of these
computer systems could fail to operate properly if they interpret "00" to mean
1900, rather than 2000. This problem is widely known as the "year 2000 problem."
We are highly dependent on our computer systems and those of third party
suppliers, vendors and customers. The year 2000 problem affects some of our
computers, software, and other equipment, including the computers which run our
administrative functions. If we fail to properly identify, correct and test our
computer systems for the year 2000 problem, our business operations could be
adversely affected. In addition, the computer systems used by our service
providers such as billing vendors, telecommunications service providers, our
customers and other third parties, may not function properly by the year 2000. A
failure of our service providers to cause their computers systems to be year
2000 compliant could have an adverse effect on our ability to deliver services
to our customers. See "Management's Discussion and Analysis of Pro Forma
Financial Condition and Results of Operations--Year 2000 Compliance--Combined."
THE ABSENCE OF AN ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK MAY MAKE IT
DIFFICULT FOR YOU TO RESELL YOUR SHARES AT OR ABOVE THE OFFERING PRICE, AND OUR
STOCK PRICE MAY FLUCTUATE.
Prior to this offering, there has been no public market for the common
stock, and there can be no assurance that an active public market for the common
stock will develop or be sustained after the offering. The initial public
offering price will be determined by negotiation between us and the underwriters
based upon several factors and may not be indicative of the market price of the
common stock after the
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offering. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The trading price of the common
stock could be subject to wide fluctuations in response to factors included in
this prospectus, many of which are beyond our control. In addition, in recent
years the stock market has experienced extreme price and volume fluctuations.
These fluctuations have had a substantial effect on the market prices for many
emerging growth companies, often unrelated to the operating performance of the
specific companies. Such market fluctuations could adversely affect the price of
our common stock.
SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK MAY ADVERSELY AFFECT OUR STOCK
PRICE AND MAKE FUTURE OFFERINGS TO RAISE CAPITAL MORE DIFFICULT.
Sales of a large number of shares of our common stock in the market after
this offering or the perception that sales may occur could cause the trading
price of our common stock to drop. There will be approximately 4,587,242 shares
of our common stock outstanding immediately after the offering. The 1,600,000
shares sold in the offering, plus any shares issued upon exercise of the
underwriters' overallotment option, are freely tradeable.
RESTRICTED SECURITIES AND LOCK-UP AGREEMENT. A total of 2,822,242 shares of
common stock outstanding are restricted securities as defined in Rule 144 of the
Securities Act. In addition, there are approximately 3,909,410 shares which are
issuable pursuant to contingent common stock issue rights and various warrants,
options, convertible notes and convertible preferred stock, 416,917 of which are
not subject to the lock-up agreement. Of the shares not subject to the lock-up
agreement, 219,250 shares are eligible for sale in the public market on May 19,
2000 and 120,667 shares are eligible for sale on the first anniversary of the
offering, subject to the restrictions of Rule 144.
REGISTRATION RIGHTS. The holders of 280,667 of those shares can require us
to register their shares for resale at any time beginning one year after the
closing of this offering. In addition, 165,000 shares of common stock have been
registered for resale by Benchmark Equity Group for a period of 90 days, which
period shall begin 90 days after the closing of this offering.
Subsequent sales of these shares or the perception that those sales might
occur could materially adversely affect the price of our common stock and make
it more difficult for us to raise funds through future offerings of common
stock. See "Shares Eligible for Future Sale."
YOU WILL EXPERIENCE IMMEDIATE, SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF THE SHARES YOU PURCHASE.
Purchasers of our common stock in this offering:
- will pay a price per share that substantially exceeds the value on a per
share basis of our assets after we subtract from those assets our
intangible assets and our liabilities;
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- will incur immediate dilution in net tangible book value of $9.05 per
share;
- will contribute a majority of the funds we will need to complete our
initial acquisitions and repay indebtedness, but will own only 34.9% of
the outstanding shares of our common stock and 30.8% of the voting
interest; and
- may experience further dilution in the net tangible value of their common
stock as a result of future issuances of common stock.
See "--If we are unable to obtain additional capital, we may not be able to
complete future acquisitions" and "Dilution."
WE MAY ISSUE PREFERRED STOCK WHOSE TERMS COULD ADVERSELY AFFECT THE VOTING POWER
OR VALUE OF OUR COMMON STOCK.
Our certificate of incorporation authorizes us to issue, without the
approval of our stockholders, one or more classes or series of preferred stock
having such preferences, powers and relative, participating, optional and other
rights, including preferences over our common stock respecting dividends and
distributions, as our board of directors may determine. The terms of one or more
classes or series of preferred stock could adversely impact the voting power or
value of our common stock. For example, we might afford holders of preferred
stock the right to elect some number of our directors in all events or on the
happening of specified events or the right to veto specified transactions.
Similarly, the repurchase or redemption rights or liquidation preferences we
might assign to holders of preferred stock could affect the residual value of
the common stock.
Upon the completion of this offering we will have two series of preferred
stock outstanding:
- SERIES A PREFERRED STOCK. Upon completion of this offering there will be
1,206,673 shares of series A preferred stock outstanding. Since the series
A preferred stock has a conversion rate which is dependent upon the
current market price of our common stock, the number of shares issuable
upon its conversion will vary inversely with the market price of our
common stock. This means that as our stock price drops, the dilution
caused by the conversion of the series A preferred stock will increase.
However, the maximum shares of common stock issuable upon conversion of
the outstanding series A preferred stock is approximately 362,000 shares.
Beyond that point, the series A stockholders may require that we redeem
their shares for the price of $1.00 per share plus any accrued but unpaid
dividends.
- SERIES B PREFERRED STOCK. Upon completion of this offering there will be
60,000 shares of series B preferred stock outstanding. Holders of the
series B preferred stock have the same voting rights as the holders of our
common stock on an as-converted basis. Since the dividends payable on the
series B preferred stock are payable either in cash or additional series B
preferred stock, the voting rights of our common stockholders could be
further diluted. Also, in addition to their dividend and liquidation
preferences, the series B
23
<PAGE>
preferred stockholders are entitled to receive dividends and liquidation
distributions at the same time and on the same basis as the holders of our
common stock.
See "Description of Capital Stock--Preferred Stock."
PROVISIONS IN OUR CORPORATE DOCUMENTS AND DELAWARE LAW COULD DELAY OR PREVENT A
CHANGE IN CONTROL OF OUR COMPANY, EVEN IF THAT CHANGE WOULD BE BENEFICIAL TO OUR
STOCKHOLDERS.
The existence of some provisions in our corporate documents and Delaware law
could delay or prevent a change in control of our company, even if that change
would be beneficial to our stockholders. Our certificate of incorporation and
bylaws contain provisions that may make acquiring control of our company
difficult, including:
- provisions relating to the classification, nomination and removal of our
directors;
- provisions limiting the right to call special meetings of our board and
our stockholders;
- provisions regulating the ability of our stockholders to bring matters for
action at annual meetings of our stockholders;
- a prohibition of action by our stockholders without a meeting; and
- the authorization to issue and set the terms of preferred stock.
WE ENCOURAGE YOU NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING INFORMATION.
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us, including, among other things:
- the successful implementation of our anticipated growth strategies;
- our ability to integrate our founding companies and future acquisitions;
- continual changes in the telecommunications industry and technology;
- the actions of our competitors;
- market acceptance of our services;
- economic and demographic trends affecting our business; and
- future expenditures for capital projects.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
24
<PAGE>
THE COMPANY
OMNILYNX COMMUNICATIONS CORPORATION. Our executive offices are located at
1770 Motor Parkway, Suite 300, Hauppauge, New York 11788, and our telephone
number is (516) 582-2222. We acquired ARC in June 1999. We will acquire
InfoHighway and AXCES simultaneously with and as a condition of the closing of
the offering. The following is a description of the founding companies:
AXCES, INC. AXCES is a provider of long-distance service to metropolitan
residential customers and is based in Houston, Texas. Although AXCES generates
the vast majority of its sales from its long distance service, it also offers
paging service, 800 service, voice-mail and calling cards. AXCES is licensed in
20 states and maintains billing operations and customers in the Southwestern
Bell Telephone region, which includes Texas, Kansas, Missouri, Arkansas and
Oklahoma as well as in the Ameritech region, which includes Illinois, Indiana,
Michigan, Wisconsin and Ohio. As of August 1, 1999, AXCES had approximately
160,000 active customers concentrated in Dallas, Houston, San Antonio and
Chicago. AXCES maintains carrier agreements with Coastal Telephone Services and
Frontier Communications as well as billing and collection agreements with
Southwestern Bell Telephone and Ameritech. AXCES outsources its call rating
function. AXCES' objective is to become a leading provider of long-distance
service and expand its product line to include local service and Internet access
to residential customers in large metropolitan areas.
INFOHIGHWAY INTERNATIONAL, INC. InfoHighway is a business oriented Internet
service provider based in Houston, Texas. InfoHighway was founded in 1994 and
was one of the earliest Internet service providers in the nation. InfoHighway
specializes in offering high-speed Internet access and other Internet services
to small to medium-sized businesses and residential customers in Texas, New
York, New Jersey and Florida. Its high-speed Internet services, called
InfoHighway DSL and InfoHighway Connect, are faster than most comparably priced
offerings from our competitors. InfoHighway offers additional Internet services
including Internet and data backup services. InfoHighway also provides
traditional Internet services such as dial-up Internet access utilizing
traditional phone lines and ISDN connections, and web services including e-mail,
web-site design, and web-site hosting to businesses. InfoHighway also provides
ISDN or integrated services digital network service combining voice service and
dedicated data lines at speeds up to 2.25 times greater than a traditional
telephone line. InfoHighway is currently testing SDSL and ADSL services with
various business and residential customers in Florida and in Houston, Texas.
SDSL or synchronous digital subscriber line is a high speed modem technology
that provides data services over existing telephone lines. ADSL or asynchronous
digital subscriber line is a related high speed modem technology that provides
data services over existing telephone lines. Commercial availability is planned
for September 1999. During January 1999, InfoHighway acquired the operations of
Eden Matrix.
25
<PAGE>
ARC NETWORKS, INC. ARC is a competitive local telephone company based in
New York and has been in business since 1993. ARC offers local phone service,
long distance, network wiring and other network services to customers primarily
in the New York metropolitan area. ARC was founded as a division of Avionics
Research Corporation, an engineering firm that has provided design and
engineering services for over 40 years. ARC works within its customer's existing
communications infrastructure to offer an extensive array of services from
consulting services to complete turnkey telecommunication systems. Customers can
use ARC in conjunction with their existing providers or choose to receive all of
their telecommunications services on a single bill from ARC. ARC's sales force
and consultants work with clients to supply the most appropriate, cost-effective
telecommunications solutions. Like InfoHighway, ARC is currently testing SDSL
and ADSL services with various business and residential customers in the New
York market. Commercial availability is planned for September 1999. They have an
extensive client list from a wide spectrum of industries. They provide service
to over 20 high-rise buildings in Manhattan and many brand name clients. Their
mission is to provide the highest level of customer satisfaction by offering
quality service, dependability and diversity at competitive prices.
26
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the offering, after deducting
estimated underwriting discounts and commissions and offering expenses, are
estimated to be approximately $13.3 million assuming an initial public offering
price of $10.00 per share. The net proceeds will increase to $15.4 million if
the underwriters exercise their over-allotment option in full.
We anticipate that the $13.3 million of net proceeds of this offering will
be used to repay $6.7 million of indebtedness of OmniLynx and the founding
companies. Debt to be repaid is summarized as follows:
- up to $3.0 million of short-term borrowings to be secured by AXCES during
the third quarter of 1999 for the funding of distributions to its owners;
- $2.0 million of bridge financings received by OmniLynx during the first
six months of 1999, of which $1.2 million was utilized to fund operations
and third party services pertaining to the offering;
- $0.9 million of notes payable to shareholders of InfoHighway, including
$0.5 million of financings received during the fourth quarter of 1998 from
Trident III for capital expenditures and working capital needs; and
- $0.8 million of payments on the short-term revolving credit facility of
ARC.
The indebtedness to be repaid bears interest ranging from 10.0% to 15.9%, with a
weighted average interest rate of approximately 13.0%, and would otherwise
mature at various dates through March 2003. We anticipate that the remaining
$6.6 million of the net proceeds will be used for:
- capital expenditures for hardware to expand our network capabilities to
deliver high speed Internet and data network services;
- general working capital purposes; and
- future acquisitions.
We believe that the net proceeds of this offering will be sufficient to fund
our aggregate capital expenditures and working capital requirements, including
operating losses, for the foreseeable future. The amounts we actually expend for
these purposes may vary significantly depending upon a number of factors,
including future revenue growth, if any, capital expenditures and the amount of
cash generated by our operations. Additionally, if we determine it would be in
our best interest, we may increase or decrease the number, selection and timing
of entry of our targeted regions. Accordingly, our management will retain broad
discretion in the allocation of the net proceeds remaining after the repayment
of indebtedness in connection with the acquisitions. Although we may use a
portion of the net proceeds to pursue possible acquisitions of businesses,
technologies or products complementary to our current operations in the future,
there are no present understandings, commitments or agreements with respect to
any such acquisitions. Pending use of such net proceeds
27
<PAGE>
for the above purposes, we intend to invest such funds in short-term,
interest-bearing, investment-grade securities. See "Risk Factors--If we are
unable to obtain additional capital, we may not be able to complete future
acquisitions" and "Management's Discussion and Analysis of Pro Forma Financial
Condition and Results of Operations."
DIVIDEND POLICY
We have never paid cash dividends and have no plans to do so in the
foreseeable future. Our future dividend policy will be determined by our board
of directors and will depend upon a number of factors, including:
- our financial condition and performance;
- our cash needs and expansion plans;
- income tax consequences; and
- the restrictions Delaware and other applicable laws and our credit
arrangements then impose.
28
<PAGE>
CAPITALIZATION
The following table sets forth the cash, short-term debt and current
maturities of long-term debt and capitalization as of June 30, 1999:
- on a pro forma combined basis to give effect to the acquisition of the
founding companies, and
- on a pro forma combined basis as adjusted to give effect to the offering
and the application of the estimated net proceeds.
See "Use of Proceeds" and Unaudited Pro Forma Combined Financial Statements
and the related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------
PRO FORMA AS
COMBINED ADJUSTED
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................. $ 991 $ 8,155
--------- ---------
--------- ---------
Short-term debt and current maturities of long-term debt (1)........... 9,304 2,635
Long-term debt and other long-term liabilities, less current
maturities........................................................... 5 5
Redeemable preferred stock; Series A, 1,206,673 shares issued and
outstanding, pro forma and as adjusted (2)........................... 1,207 1,207
Stockholders' equity
Preferred stock, $.0001 par value, 3,000,000 shares authorized:
Series B, 60,000 shares issued and outstanding,
pro forma and as adjusted........................................ -- --
Common stock, $.0001 par value, 25,000,000 shares authorized;
2,987,242 shares issued and outstanding, pro forma; and 4,587,242
shares issued and outstanding, as adjusted (3)................... -- --
Additional paid-in capital........................................... 20,622 33,942
Deficit.............................................................. (371) (371)
--------- ---------
Total stockholders' equity......................................... 20,251 33,571
--------- ---------
Total capitalization............................................. $ 30,767 $ 37,418
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) For a description of our debt, see the Notes to Unaudited Pro Forma Combined
Financial Statements and the Notes to the Financial Statements of the
founding companies included elsewhere herein.
(2) Redeemable by holder at $1.00 per share in the event the market price of our
common stock declines below 33% of the initial public offering price.
(3) The calculation of the number of shares of common stock outstanding after
the offering in the table above consists of:
- 1,600,000 shares to be sold in the public offering;
- 939,000 shares issued to the founders of OmniLynx and other investors; and
- 2,048,242 shares to be issued to the shareholders of the founding
companies.
29
<PAGE>
The number of shares of common stock outstanding after the offering in the
table above does not include:
- 727,511 shares issuable from contingent common stock issue rights to our
management and other investors and the previous shareholders of ARC and
InfoHighway based upon the performance of our common stock beginning 90
days after the completion of this offering;
- 616,000 shares issuable upon exercise of options at $10 per share which
will be issued to certain members of our management and board of directors
upon consummation of the offering;
- 600,000 shares issuable upon conversion of our series B preferred stock
which will be issued to the shareholders of AXCES at a conversion price of
$15 per share;
- 600,000 shares issuable upon exercise of options at $8 per share which
were granted to certain members of our management in connection with the
acquisition of ARC;
- 573,333 shares issuable upon exercise of warrants at $8 per share which
were issued in connection with certain bridge loans to OmniLynx prior to
the offering;
- 206,250 shares issuable upon conversion of a convertible promissory note
issued to a former debtholder of ARC at a conversion price of $8 per
share;
- 160,000 shares issuable upon exercise of warrants at $12 per share which
will be issued to the representative of the underwriters in connection
with this offering;
- 159,000 shares issuable upon exercise of options at $5 per share which
will be issued to our management upon consummation of the offering;
- 120,667 shares issuable upon conversion of our series A preferred stock
which was issued to a former debtholder of ARC at a conversion price of
$10 per share;
- 90,000 shares issuable upon exercise of warrants at $8 per share which
were issued to a former debtholder of ARC;
- 36,185 shares issuable upon conversion of warrants at $5.71 which were
issued to a consultant prior to the offering; and
- 20,464 shares issuable upon conversion of warrants at $122.17 per share
which were issued to former warrant holders of ARC.
For a detailed description of these additional shares, see "Description of
Capital Stock," and "Shares Eligible for Future Sale."
30
<PAGE>
DILUTION
The deficit in our pro forma combined net tangible book value as of June 30,
1999 was approximately $(9.0) million, or approximately $(3.00) per share, after
giving effect to the acquisitions but before giving effect to the offering. The
deficit in pro forma net tangible book value per share represents the amount by
which our pro forma total liabilities exceed our pro forma net tangible assets
as of June 30, 1999, divided by the number of shares to be outstanding after
giving effect to the acquisitions. After giving effect to the sale of the
1,600,000 shares offered hereby, and applying approximately $6.7 million of the
net proceeds of the offering to repay indebtedness of OmniLynx and the founding
companies, and deducting the estimated underwriting discount and estimated
offering expenses payable by us, our pro forma net tangible book value as of
June 30, 1999 would have been approximately $4.4 million, or approximately $0.95
per share, based on an assumed initial public offering price of $10.00 per
share. This represents an immediate increase in pro forma net tangible book
value of approximately $3.95 per share to existing shareholders and an immediate
dilution of approximately $9.05 per share to new investors purchasing shares of
this offering. The following table illustrates this per share pro forma
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................... $ 10.00
Pro forma net tangible book value (deficit) per share before this
offering.............................................................. $ (3.00)
Increase per share attributable to new investors.......................... 3.95
---------
As adjusted pro forma net tangible book value per share after the
offering................................................................ 0.95
---------
Dilution per share to new investors....................................... $ 9.05
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999,
the difference between the existing stockholders and new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid at an assumed initial
public offering price of $10.00 per share (before deducting estimated
underwriting discounts and commissions and offering expenses payable by us):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
----------------------- --------------- PRICE PER
NUMBER PERCENT AMOUNT SHARE
------------ --------- --------------- -----------
<S> <C> <C> <C> <C>
Existing stockholders................................... 2,987,242 65.1% $ 3,330,952 $ 1.12
New investors........................................... 1,600,000 34.9% 16,000,000 $ 10.00
------------ --------- ---------------
Total................................................... 4,587,242 100.0% $ 19,330,950
------------ --------- ---------------
------------ --------- ---------------
</TABLE>
The foregoing table does not include 3,909,410 shares which are issuable
pursuant to contingent common stock issue rights and various warrants, options,
convertible notes and convertible preferred stock. Options to purchase 1,375,000
shares of common stock were outstanding as of June 30, 1999 with a weighted
average exercise price of $8.55 per share. Warrants to purchase 879,982 shares
of common stock were outstanding as of June 30, 1999 with a weighted average
exercise price of $11.29 per
31
<PAGE>
share. To the extent the aforementioned securities are subsequently exercised
issued or converted into common shares, there will be further dilution to new
investors. See "Management" and Notes to Unaudited Pro Forma Combined Financial
Statements.
32
<PAGE>
SELECTED FINANCIAL DATA
OmniLynx acquired ARC on June 30, 1999. We will acquire InfoHighway and
AXCES simultaneously with and as a condition of the closing of this offering.
OmniLynx has not conducted any operations to date, except in connection with
this offering and the acquisitions. For financial statement presentation
purposes, AXCES has been identified as the accounting acquiror. The following
selected historical financial data for AXCES for the years ended December 31,
1994, 1995, 1996, 1997 and 1998, and as of December 31, 1994, 1995, 1996, 1997
and 1998 have been derived from the audited financial statements of AXCES. The
following selected historical financial data for AXCES for the six months ended
June 30, 1998 and 1999, and as of June 30, 1999 have been derived from the
unaudited financial statements of AXCES which have been prepared on the same
basis as the audited financial statements and, in the opinion of AXCES, reflects
all adjustments consisting of normal recurring adjustments, necessary for a fair
presentation of such data. Our summary unaudited pro forma financial information
presents certain data, as adjusted for:
- the effects of the acquisition of the founding companies on a historical
basis;
- the effects of certain pro forma adjustments to the historical financial
statements; and
- the closing of the offering and the application of the proceeds therefrom.
Our pro forma financial data do not purport to represent what our results of
operations or financial position actually would have been had these events, in
fact, occurred on the date or at the beginning of the period indicated, nor are
they intended to project our results of operations or financial position for any
future date or period. See the Unaudited Pro Forma Combined Financial Statements
and the notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
AXCES:
Revenues................................ $ 667 $ 2,691 $ 8,468 $ 19,474 $ 30,280 $ 17,349 $ 10,095
Cost of services........................ 441 1,606 3,960 8,003 9,889 5,308 3,445
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................ 226 1,085 4,508 11,471 20,391 12,041 6,650
Selling, general and administrative
expenses.............................. 203 823 3,674 8,910 17,934 8,296 4,914
Depreciation and amortization........... 1 7 61 135 204 89 112
--------- --------- --------- --------- --------- --------- ---------
Income from operations.................. 22 255 773 2,426 2,253 3,656 1,624
Interest income (expense), net.......... -- (11) 37 (19) (208) (148) (50)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes.............. 22 244 810 2,407 2,045 3,508 1,574
Provision (benefit) for income taxes.... 1 74 279 837 (917) (917) --
--------- --------- --------- --------- --------- --------- ---------
Net income.............................. $ 21 $ 170 $ 531 $ 1,570 $ 2,962 $ 4,425 $ 1,574
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED
------------------------------
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1998 JUNE 30, 1999
-------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA (1):
Revenues.................................................. $ 46,373 $ 19,366
Cost of services.......................................... 22,719 10,731
-------------- --------------
Gross profit.............................................. 23,654 8,635
Selling, general and administrative expenses (2).......... 20,741 7,632
Depreciation and amortization (3)......................... 3,818 2,015
-------------- --------------
Loss from operations...................................... (905) (1,012)
Interest expense, net (4)................................. (412) (233)
-------------- --------------
Loss before income taxes.................................. (1,317) (1,245)
Provision for income taxes (5)............................ 547 115
-------------- --------------
Net loss before dividends on preferred stock.............. $ (1,864) $ (1,360)
Dividends on preferred stock.............................. 841 420
-------------- --------------
Net loss applicable to common stockholders................ $ (2,705) $ (1,780)
-------------- --------------
-------------- --------------
Net loss per share--basic and diluted..................... $ (0.59) $ (0.39)
-------------- --------------
-------------- --------------
Shares used in computing pro forma net loss per share
(6)..................................................... 4,587,242 4,587,242
-------------- --------------
-------------- --------------
OTHER DATA:
EBITDA (7)................................................ 2,913 $ 1,003
EBITDA margin (7)......................................... 6.3% 5.2%
Gross margin.............................................. 51.0% 44.6%
</TABLE>
<TABLE>
<CAPTION>
AXCES
------------------------------------------------------- AS OF JUNE 30, 1999 (UNAUDITED)
-------------------------------------
AS OF DECEMBER 31, PRO FORMA
------------------------------------------------------- AXCES COMBINED AS ADJUSTED
1994 1995 1996 1997 1998 ACTUAL (8) (9)
----- --------- --------- --------- --------- --------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..... $ 49 $ 127 $ 391 $ 1,538 $ 4,706 $ 6,414 $ (9,190) $ 4,130
Total assets.................. 81 919 2,235 4,735 8,269 7,815 41,512 48,163
Total debt, including current
portion..................... -- 130 19 63 1,734 -- 9,309 2,640
Stockholders' equity.......... 34 204 736 2,306 5,268 6,842 20,251 33,571
</TABLE>
- ------------------------
(1) Assumes the acquisition of the founding companies and the offering were
closed on January 1, 1998.
(2) Reflects adjustments to salaries, bonuses and benefit amounts to reflect
those established in contractual agreements with key management personnel of
the founding companies.
(3) Reflects the amortization of excess purchase price relating to the
acquisition of the founding companies which has been preliminarily allocated
to an undifferentiated pool of intangible assets to be amortized over an
average period of 10 years for pro forma purposes. Also reflects annual
amortization of the customer list acquired in connection with InfoHighway's
acquisition of Eden Matrix in January 1999 over the estimated useful life of
three years and annual depreciation on
34
<PAGE>
property and equipment also acquired in the acquisition of Eden Matrix over
the estimated useful life of five years.
(4) Reflects the reduction in interest expense due to the planned repayment and
planned conversion of certain debt in connection with the acquisitions.
(5) Assumes all income is subject to a federal corporate tax rate of 34%.
(6) The number of shares includes:
- 939,000 shares outstanding immediately prior to the offering,
- 2,048,242 shares to be issued to the owners of the founding companies, and
- 1,600,000 shares to be sold in the offering.
Does not include 3,909,410 shares which are issuable pursuant to contingent
common stock issue rights and various warrants, options, convertible notes
and convertible preferred stock since their effect would be anti-dilutive.
(7) EBITDA as used in this prospectus consists of earnings before interest,
income taxes, depreciation and amortization. It is calculated by adding to
net income the amounts for interest expense, all income taxes, depreciation
expense and amortization expense. We have included EBITDA data because it is
a measure commonly used in the telecommunications industry and the
significance attached to this measure by most Wall Street security analysts
who follow our industry. Based on our experience in the industry, we believe
that EBITDA is an important tool for measuring the performance of companies
in the industry in several areas such as liquidity, operating performance
and leverage. In addition, lenders use EBITDA as a criterion in evaluating
companies in the industry. EBITDA is not a measure of financial performance
determined under generally accepted accounting principles, should not be
considered as an alternative to net income as a measure of performance or to
cash flows as a measure of liquidity, and is not necessarily comparable to
similarly titled measures of other companies. EBITDA margin is calculated by
dividing EBITDA into the total revenues generated during the indicated
period.
(8) The pro forma combined balance sheet data assume that the acquisition of the
founding companies occurred on June 30, 1999.
(9) Adjusted for the sale of the 1,600,000 shares of common stock included in
the offering and the application of the net proceeds therefrom. See "Use of
Proceeds."
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Pro Forma Combined Financial Statements and related notes thereto and "Selected
Financial Data" appearing elsewhere in this prospectus.
SUMMARY
We were formed to become a leading provider of Internet, data and
telecommunications solutions to businesses and consumers. Prior to the
acquisition of ARC, we had conducted no operations. We acquired ARC on June 30,
1999. We will acquire InfoHighway and AXCES simultaneously with and as a
condition of the closing of this offering. Our services include high-speed
Internet access, local phone services with innovative features, long distance
service at competitive rates, and other value added Internet services that are
under development. On a pro forma basis, the combined operations generated
revenues of $46.4 million and $19.4 million for the year ended December 31, 1998
and the six months ended June 30, 1999, respectively.
We intend to integrate these businesses and their operations and
administrative functions. This integration process may present opportunities to
reduce costs through the elimination of duplicative functions and through
economies of scale, but will necessitate additional costs and expenditures for
corporate management and administration. The founding companies have been
managed throughout the periods discussed below as independent private companies,
and their results of operations reflect different tax structures (S Corporation
and C Corporations) which have influenced, among other things, their historical
levels of owners' compensation. Except for the compensation and benefits
reductions aggregating $2.6 million for the year ended December 31, 1998, as
provided for in agreements entered into in connection with the acquisition of
the founding companies, no such cost savings were reflected in the pro forma
results of operations data. We will also incur corporate expenses related to
being a public company, implementation of an acquisition program and systems
integration. These various costs and possible cost savings may make comparison
of pro forma operating results not comparable to, nor indicative of, future
performance.
Our plan to integrate the founding companies and become a leading provider
of Internet, data and telecommunications solutions to businesses and consumers
may be impacted by the intense and growing competition we expect to encounter
from the traditional local telephone companies, long distance service providers,
cable modem providers, Internet service providers, satellite data service
providers and the emerging wireless carriers. Some of these entities are
significantly larger than we are, and have greater financial, technical and
human resources than we do. In addition, many of them have announced plans to
group multiple telecommunications services into packages offered to customers at
competitive prices. Consequently, pricing for the services which we offer and
plan to offer generally have been declining, and we expect
36
<PAGE>
continued downward pressure on the pricing of the products we sell. See "Risk
Factors" and "Business--Legal Proceedings."
In order to provide some of our services, we must negotiate and maintain
agreements related to interconnection, the location of our equipment at the
local telephone company's facilities, telephone lines and network capacity with
these same competitors as suppliers of telecommunications services. We must also
obtain the approval of, and comply with the regulations of, various governmental
regulatory agencies, which have imposed a variety of surcharges and fees upon
the services we offer and may impose additional charges in the future. These
factors may impact the quality, pricing and speed of deployment of our services.
In connection with the provision of our services, certain claims have been made
against us, including claims for breach of contract, "slamming" and "cramming."
See "Risk Factors" and "Business--Legal Proceedings."
In addition, we operate in an industry subject to rapid technological
change, our business model is unproven and we have a limited combined operating
history. We may be unable to adapt to this technological change, or we may need
additional capital to remain competitive in such an environment. Also, we may
not be able to successfully integrate the founding companies or future
acquisitions, and we may incur unforeseen expenses in integrating these
companies. See "Risk Factors" and Business--Legal Proceedings."
ORGANIZATION
We acquired ARC on June 30, 1999, and will acquire InfoHighway and AXCES
simultaneously with and as a condition of the closing of this offering for an
aggregate consideration of approximately $28.6 million, assuming an initial
public offering price of $10.00 per share, as described in the following table:
<TABLE>
<CAPTION>
CONTINGENT COMMON
STOCK ISSUE
COMMON STOCK RIGHTS(1) PREFERRED STOCK
---------------------- ----------------- --------------------------
VALUE OF VALUE OF VALUE OF
ACQUISITION SHARES SHARES SHARES SHARES SHARES SHARES
- ---------------------------------------- --------- ----------- ------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
AXCES................................... 700,000 $ 6,300,000 -- $ -- 60,000(2) $ 9,000,000
InfoHighway............................. 958,166 8,623,494 235,878 -- -- --
ARC..................................... 390,076 3,510,684 152,672 -- 1,206,673(3) 1,206,673
--------- ----------- ------- -------- --------- -------------
Total................................... 2,048,242 $18,434,178 388,550 $ -- 1,266,673 $ 10,206,673
--------- ----------- ------- -------- --------- -------------
--------- ----------- ------- -------- --------- -------------
</TABLE>
- ------------------------
(1) The contingent common stock issue rights entitle the holder to receive
common stock based upon market performance beginning 90 days after this
offering. Approximately one-half of the shares are issuable when the common
stock reaches a 10-day average of $16.00 per share. The remaining one-half
is issuable when the common stock reaches a 10-day average of $21.00 per
share. The rights expire after 3 years.
(2) Each share of series B preferred stock is convertible into 10 shares of
common stock at anytime at the option of the holder. The series B preferred
stock is redeemable after 36 months out of a designated portion of our cash
flow. If the common stock trades for an average of $20 per share
37
<PAGE>
for 10 consecutive days, we may force the conversion of the series B
preferred stock into common stock.
(3) The series A preferred stock is convertible into common stock at the option
of the holder at any time after 90 days from the closing of this offering or
earlier with the consent of both OmniLynx and the representative of the
underwriters with respect to this offering. The number of shares issuable
upon conversion of the series A preferred stock is dependent on the
conversion rate which is calculated by dividing $1.00 by the lesser of the
offering price or the five-day average closing price ending on the trading
day prior to such conversion date. The series A preferred stock is to be
issued to a former affiliate of ARC in exchange for a current note payable
from ARC of $1.2 million.
The consideration paid or to be paid in the acquisitions includes:
- common stock;
- contingent common stock;
- series A and series B convertible redeemable preferred stock; and
- warrants to purchase common stock.
In addition, we will be assuming certain of the debt of all of the founding
companies. For purposes of computing the estimated purchase price for accounting
purposes, the value of the common shares issued has been determined using an
estimated fair value of $9.00 per share, which represents a discount of 10% from
the estimated initial public offering price of $10.00 per share due to
restrictions on the sale and transferability of the shares issued. The estimated
purchase price for the acquisitions is based upon preliminary estimates and is
subject to certain purchase price adjustments at and following closing. In the
opinion of management, the final allocation of the purchase price will not
materially differ from these preliminary estimates.
Contingent common stock issue rights as a form of purchase consideration was
negotiated between us and two of the founding companies. The usage of contingent
common stock issue rights as purchase consideration provided a means whereby we
could provide incentives for founding shareholders to continue to focus on
activities contributing to share price appreciation while protecting us from
immediate share dilution in the event the shares were issued outright without
performance requirements. For accounting purposes, no value has been allocated
to the contingent common stock issue rights.
We intend to record intangible assets of $29.2 million associated with the
acquisitions. Such amounts will result in an annual amortization charge of
approximately $2.9 million for each of the next 10 years. If the 10-day average
closing price of the common stock exceeds $16.00 and $21.00 per share, we will
be required to record significant additional intangible assets related to the
contingent common stock issue rights based upon the market value of the common
stock at that time. This would increase the annual amortization charge.
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<PAGE>
TOTAL DEBT ASSUMED. Total debt we assumed related to the founding companies
consists of $1.4 million, $4.8 million, and up to $3.0 million, for InfoHighway,
ARC and AXCES, respectively. Unless noted otherwise below, all of the debt that
is to be repaid pursuant to the consummation of the offering is due to loan
covenants that provide for early debt repayments in the event of specific debt
or equity transactions, including the merger into a publicly-traded company.
ACQUISITION OF INFOHIGHWAY
The acquisition consideration to be received by the stockholders of
InfoHighway consists of 958,166 shares of our common stock and 235,878
contingent common stock issue rights. This number of shares includes 85,397
shares of our common stock and 17,584 contingent common stock issue rights
earmarked for the Eden Acquisition. Issuances of contingent common stock is
conditional upon achievement of certain share price targets. The first 50% of
the common stock shall be issued when the price of the common stock reaches a
10-day average of $16 per share. The remaining 50% of the common stock shall be
issued when the price of the common stock reaches a 10-day average of $21 per
share. For accounting purposes, no value has been allocated to the contingent
common stock issue rights. Additionally, we are assuming InfoHighway's
outstanding debt, which totaled $1.4 million at June 30, 1999, as follows:
- $0.5 million of financings received during the fourth quarter of 1998 from
Trident III for capital expenditures and working capital needs which bear
interest at 12% annually;
- $0.4 million related to a unit offering debt during 1998 that bears
interest at 10% annually;
- $0.2 million of notes payable to OmniLynx that will be eliminated from the
consolidated financial statements as an intercompany debt; and
- the balance of approximately $0.3 million primarily pertains to other
related parties bearing interest at a weighted average annual rate of
10.0%.
Accelerated debt payments on assumed debt from InfoHighway out of offering
proceeds are projected to total $0.9 million.
During January 1999, InfoHighway acquired the operations of Eden Matrix, an
Internet service provider based in Austin, Texas operated by AMICI Online
Investments, L.L.C. The acquisition consideration approximated $1.0 million,
consisting of a $50,000 cash down payment and a short-term note payable for $0.9
million. During the second quarter of 1999, $0.8 million of the short-term note
payable was converted into 968,750 common shares of InfoHighway.
ACQUISITION OF ARC
The acquisition consideration received by the stockholders of ARC consists
of:
39
<PAGE>
- 390,076 shares of our common stock;
- 152,672 contingent common stock issue rights; and
- 20,464 warrants to purchase our common stock.
Issuances of common stock are conditional upon achievement of certain share
price targets; 50% of the common stock shall be issued when the price of the
common stock reaches a 10-day average of $16 per share. The remaining 50% of the
common stock shall be issued when the price of the common stock reaches a 10-day
average of $21 per share. For accounting purposes, no value has been allocated
to the contingent common stock issue rights or the warrants.
The warrants to purchase 20,464 shares of our common stock are exercisable
at $122.17 per share and expire in February 2007. These warrants were issued in
exchange for outstanding warrants to purchase ARC common stock.
The merger agreement also provides for the exchange of $1.2 million of an
existing ARC note payable to an affiliated company for 1,206,673 shares of
series A preferred stock of OmniLynx valued at $1.2 million. The series A
preferred stock is convertible into common stock at the option of the holder at
any time after 90 days from the closing of this offering or earlier with the
consent of both OmniLynx and the representative of the underwriters with respect
to this offering. The number of shares issuable upon conversion of the series A
preferred stock is dependent on the conversion rate which is calculated by
dividing $1.00 by the lesser of the offering price or the five-day average
closing price ending on the trading day prior to such conversion date. The
series A preferred stock is to be issued to a former affiliate of ARC in
exchange for a current note payable from ARC of $1.2 million.
Additionally, we have assumed all debt outstanding of ARC, which totaled
$3.6 million at June 30, 1999, with the exception of the ARC note payable which
will be exchanged for preferred stock as discussed in the aforementioned
paragraph.
Debt assumed from ARC consists of:
- $2.4 million revolving line of credit due to Consolidated Technology;
- $1.2 million note payable to Trans Global that will be converted into the
series A preferred stock;
- $0.5 million 8% current note payable;
- $0.4 million of notes payable to OmniLynx that will be eliminated from the
consolidated financial statements as an intercompany debt; and
- $0.25 million 12% demand note.
The merger agreement also provides for:
- the repayment of $0.8 million of the outstanding balance on the revolving
line of credit due to Consolidated Technology from proceeds of the
offering;
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<PAGE>
- the exchange of $0.45 million of the revolving line of credit for a note
payable due on January 31, 2000 that is convertible at the holder's option
into 56,250 of our common shares; and
- the balance of the revolving line of credit being exchanged for a note
payable to Consolidated Technology maturing in June 2000 unless converted
earlier by the holder into 150,000 of our common shares.
The balance outstanding under the revolving line of credit was $2.4 million at
June 30, 1999.
ACQUISITION OF AXCES
The acquisition consideration to be received by the stockholders of AXCES
consists of 700,000 shares of our common stock and 60,000 shares valued at $150
per share, of our series B preferred stock. The series B preferred stock is
convertible into 600,000 shares of our common stock at the holder's option and
is redeemable after 36 months out of a designated portion of our cash flow. If
the common stock trades for an average of $20 per share for 10 consecutive days,
we may force the conversion of the series B preferred stock into common stock.
Prior to the closing of the acquisition, AXCES may incur up to $3.0 million
of debt, the proceeds of which may only be used for distribution to MTM Holdings
Corporation, its sole shareholder prior to this offering. AXCES may distribute
to its owner prior to closing of the acquisitions up to $6.5 million in cash,
including the loan proceeds, provided that the distributions do not decrease
AXCES' working capital below a minimum level. The minimum level is an amount
equal to:
- $600,000; plus
- the amount of AXCES' net income plus noncash expenses for the period from
May 1, 1999 to the closing date of the acquisitions; minus
- the amount of AXCES' net income and noncash expenses in that period used
to settle the litigation shown on the schedule of litigation involving
AXCES attached to the acquisition agreement.
Following the closing of the acquisition, AXCES will pay, or OmniLynx will
cause AXCES to pay, certain tax liabilities of AXCES, MTM Holdings and its
former shareholders attributable to AXCES' operations from January 1, 1999
through the closing date and any fees and expenses of counsel engaged to give
advice on methods to decrease that tax liability. Portions of the tax liability
may be payable over time. Our obligation to pay the tax liability and fees and
expenses of counsel may not exceed $1.6 million in the aggregate or $400,000 in
any calendar quarter. Any amount of tax liability and costs and expenses of
counsel exceeding $1.6 million in the aggregate must be paid by MTM Holdings and
its owners.
Pursuant to the AXCES acquisition agreement, MTM Holdings and its owners
have agreed to indemnify us for any damages incurred in connection with pending
41
<PAGE>
litigation and administrative proceedings on the same basis as we are
indemnified for any breaches of representations and warranties made by AXCES in
the acquisition agreement except that the indemnity does not cover attorneys'
fees and litigation costs. Because of this, MTM Holdings and its owners will be
required to indemnify us for breaches of representations and warranties in the
acquisition agreement and liabilities incurred in the pending litigation to the
extent that such amounts exceed, in the aggregate, $200,000, and for any tax
liability of AXCES, MTM Holdings and its owners that exceeds $1.6 million in the
aggregate. However, the indemnification threshold related to litigation shall
increase to the extent of AXCES' net income plus noncash expenses for the period
from May 1, 1999 until the closing of the acquisition, less any amounts used to
pay agreed settlements of the scheduled litigation. The aggregate liability of
MTM Holdings and its owners may not exceed the value of the shares of our common
stock issued to MTM Holdings on the closing, plus the value of the shares of our
common stock issuable on conversion of the series B preferred stock. The value
of each share of our common stock is set at the initial public offering price.
In addition, the aggregate liability of any owner of MTM Holdings may not exceed
$2,000,000.
OPERATIONS
REVENUES. Our revenues are derived from two principal sources, namely
Internet services and telecommunication services.
INTERNET SERVICES. Internet services are typically billed to a customer
at an established rate per service pursuant to a contract. Contract terms
range from one month to one year. Revenue is recognized over the period that
services are rendered.
TELECOMMUNICATION SERVICES. Services include local telephone service,
private data and voice lines, long distance, network design and wiring and
other network services. For local and long distance telephone service,
revenue is recognized as service is provided to customers. Revenue from our
network design and wiring services is recognized using the percentage of
completion method, measured by the percentage of cost incurred to date to
the total estimated cost for each contract. Revisions in cost estimates and
recognition of losses, if any, on these contracts are reflected in the
accounting period in which the facts become known.
ANTICIPATED TRENDS. It is anticipated that the largest percentage of growth
will come from our internet services. Current plans call for new product
introductions of our InfoHighway DSL and InfoHighway Connect services. Margins
in the business have been historically higher than traditional local and long
distance telephone services, typically 50% or more.
Axcess has re-evaluated its marketing strategy to eliminate lower margin
service offerings and to focus its marketing strategies in areas where it has
favorable pricing arrangements with its telecommunications providers.
42
<PAGE>
COST OF SALES. Cost of sales is comprised of carrier costs provided by the
underlying supplier of telephone services for long distance, local and internet
services and material and labor related to network design and wiring and
technical support staff.
GROSS PROFIT. Gross profit percentages vary among the founding companies,
primarily because of differences in the mix of products and services and due to
differences in local market demand and competition. The founding companies'
gross profit percentages for telecommunication services has differed
significantly among the founding companies, and has ranged from approximately 8%
to 67% in recent years.
SELLING, GENERAL AND ADMINISTRATIVE COSTS. Selling, general and
administrative costs represent compensation costs of our employees, commissions
paid our direct sales personnel and to third party sales agents, promotional and
other marketing costs, travel and trade shows, cost of billing by third party
providers, bad debt expenses and other overhead costs.
GOODWILL AND OTHER INTANGIBLE ASSETS. In July 1996, the SEC issued Staff
Accounting Bulletin No. 97 relating to business combinations immediately prior
to an initial public offering. Staff Accounting Bulletin No. 97 requires that
these combinations be accounted for using the purchase method of accounting.
Under the purchase method, the founding company whose owners receive the largest
portion of voting rights in the combined enterprise is presumed to be the
accounting acquiror. Accordingly, AXCES has been designated as the accounting
acquiror. As a result of the acquisitions of the founding companies, the excess
of the consideration paid over the fair value of the net assets to be acquired
for the founding companies other than the accounting acquiror has been
preliminarily allocated to an undifferentiated pool of intangible assets. We
intend to obtain independent appraisals of the founding companies for purposes
of determining values under purchase accounting for the tangible and intangible
net assets acquired. Upon completion of the appraisals and in accordance with
the terms thereof, the intangible assets in the pool will be allocated to the
appropriate asset classifications, including customer lists, non-compete
agreements, and goodwill and will be amortized over the appropriate useful lives
of the individual intangible assets. Until such time as the appraisals are
finalized, the pool of intangible assets will be amortized over an average
period of 10 years which represents management's best estimation for the average
useful life of the intangible assets.
S CORPORATION ELECTIONS. AXCES' parent company, MTM Holdings, elected to
have AXCES treated as a qualified subchapter S Corporation under the Internal
Revenue Code of 1986, as amended, on January 1, 1998. In general, a qualified
subchapter S Corporation is not treated as a separate taxable entity, and the
respective gains, income, losses and separately stated tax items are taxed to
the S Corporation's shareholders on a pro rata basis.
43
<PAGE>
Consequently, the historical financial statements of AXCES do not reflect an
income tax provision since taxable income flows directly through to its
shareholders. AXCES' qualified subchapter S Corporation status will terminate in
connection with its acquisition and future taxable income will be subjected to
income tax in our consolidated tax return.
Prior to the acquisition, AXCES will make distributions to MTM in an
aggregate amount not to exceed $6.5 million, provided, that such distributions
do not reduce working capital below $0.6 million. AXCES' working capital as of
June 30, 1999 was $6.6 million. The distributions are to be funded by up to $3.0
million in borrowings and cash balances of AXCES.
INCOME TAXES. We have adopted the liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Deferred income taxes are recognized for temporary
differences between financial statement and income tax bases of assets and
liabilities and net operating loss carryforwards, and is measured using enacted
tax rates expected to apply to taxable income in the years in which these
temporary differences are expected to be recovered or settled.
PRO FORMA RESULTS OF OPERATIONS
We acquired ARC on June 30, 1999. We will acquire InfoHighway and AXCES
simultaneously with and as a condition of the closing of this offering. The
following summary unaudited pro forma financial information presents certain
data for OmniLynx, as adjusted for:
- the effects of the acquisitions on a historical basis,
- the effects of certain pro forma adjustments to the historical financial
statements, and
- the closing of the offering and the application of the proceeds therefrom.
See "Selected Financial Information" and the Unaudited Pro Forma Combined
Financial Statements and the notes thereto included elsewhere in this
prospectus.
44
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, 1998 JUNE 30, 1999
-------------------- --------------------
AMOUNT % AMOUNT %
--------- --------- --------- ---------
(UNAUDITED, $ IN THOUSANDS EXCEPT NUMBER
OF SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 46,373 100.0% $ 19,366 100.0%
Cost of services.................................... 22,719 49.0 10,731 55.4
--------- --------- --------- ---------
Gross profit........................................ 23,654 51.0 8,635 44.6
Selling, general and administrative expenses........ 20,741 44.7 7,632 39.4
Depreciation and amortization....................... 3,818 8.2 2,015 10.4
--------- --------- --------- ---------
Loss from operations................................ (905) (1.9) (1,012) (5.2)
Interest expense, net............................... (412) (0.9) (233) (1.2)
--------- --------- --------- ---------
Loss before income taxes............................ (1,317) (2.8) (1,245) (6.4)
Provision for income taxes.......................... 547 1.2 115 0.6
--------- --------- --------- ---------
Net loss............................................ (1,864) (4.0) (1,360) (7.0)
Preferred dividend requirement...................... 841 1.8 420 2.2
--------- --------- --------- ---------
Net loss available to common stockholders........... $ (2,705) (5.8) $ (1,780) (9.2)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share--basic and diluted............... $ (0.59) $ (0.39)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per
share-- basic and diluted........................... 4,587,242 4,587,242
--------- ---------
--------- ---------
</TABLE>
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
The total acquisition cost of the founding companies is $28.6 million,
reflecting consideration of common stock, contingent common stock issue rights,
series A preferred stock and series B preferred stock. Additionally, total debt
assumed by us related to the founding companies consists of $1.4 million, $4.8
million, and up to $3.0 million, for InfoHighway, ARC and AXCES, respectively.
The net proceeds we will receive from the offering, after deducting
estimated underwriting discounts and commissions and offering expenses, are
estimated to be approximately $13.3 million assuming an initial public offering
price of $10.00 per share. We estimate that the net proceeds will be $15.4
million if the underwriters exercise their over-allotment option in full.
We anticipate that the $13.3 million of net proceeds from the offering will
be used to repay $6.7 million of indebtedness of OmniLynx and the founding
companies. Debt to be repaid from offering proceeds is summarized as follows:
- up to $3.0 million short-term borrowings to be secured by AXCES during the
third quarter of 1999 for the funding of undistributed earnings to its
owners;
- $2.0 million of bridge financings received by OmniLynx during the first
six months of 1999, of which $1.2 million was utilized to fund operations
and third party services pertaining to the offering;
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<PAGE>
- $0.9 million of notes payable to shareholders of InfoHighway, including
$0.5 million of financings received during the fourth quarter of 1998 from
Trident III for capital expenditures and working capital needs; and
- $0.8 million of payments on the short-term revolving credit facility of
ARC.
The indebtedness to be repaid bears interest ranging from 10.0% to 15.9%, with a
weighted average interest rate of approximately 13.0%, and would otherwise
mature at various dates through March 2003.
Unless noted otherwise below, the accelerated payment of assumed debt from
the founding companies is due to loan covenants that provide for early debt
repayments in the event of specific debt or equity transactions, including the
merger into a publicly-traded company.
We anticipate that the remaining $6.6 million of the net proceeds will be
used for capital expenditures, future acquisitions, and general working capital
purposes. We intend to increase capital expenditures and operating expenses in
order to integrate the founding companies, expand networks to support additional
expected end-users in existing and future markets and to market and provide
services to a growing number of potential end-users. Current capital resources,
including the proceeds of this offering, are anticipated to be sufficient to
fund aggregate capital expenditures and working capital requirements, including
operating losses, if any, for the foreseeable future. At this time, net proceeds
earmarked for capital expenditures, future acquisitions and general working
capital purposes total approximately $2.0 million, $2.0 million, and $2.5
million, respectively. Axcess also has a $3.0 million accounts receivable
financing which it may maintain subject to it continuing to be priced
competitively.
In connection with our business expansion we expect to increase capital
expenditures in 1999 and 2000. We estimate that for 1999 such amounts will
approximate $0.7 million and for year 2000 up to approximately $1.5 million. The
majority of these capital expenditures will be to support the expansion of
InfoHighway DSL and InfoHighway Connect service offerings. However, our strategy
is based upon successful acceptance of our products in the marketplace.
Accordingly, such capital expenditures may vary based upon our success.
Future acquisitions may require significant capital. We cannot predict with
certainty what our capital needs will be for future acquisitions, although we
have tentatively dedicated $2.0 million of offering proceeds to fund future
acquisitions. We currently intend to use our common stock to fund a portion of
the purchase price of future acquisitions. If our common stock does not maintain
an acceptable price in the public markets or if potential acquisition candidates
are unwilling to accept our common stock as part of the consideration for the
sale of their businesses, we may have to use more cash to finance our
acquisition program. If we do not have enough cash resources, our ability to
make acquisitions could be limited unless we are able to obtain additional cash
through future debt or equity financings. Incurring debt would
46
<PAGE>
increase our leverage and make us more vulnerable to economic downturns and
limit our ability to compete.
During the first six months of 1999, we utilized bridge financings to meet
our cash flow needs. Bridge financings totaled $2.2 million during this period,
of which $2.0 million remains outstanding at June 30, 1999. Warrants to acquire
an aggregate of 573,333 shares of common stock at an initial exercise price per
share of $8.00 were issued to the bridge lenders; such warrants expire five
years from the date of the bridge loans. Each of the bridge loans bears interest
at 13% annually.
At June 30, 1999, on a pro forma basis after giving effect to the
acquisition of the founding companies, the acquisition of Eden Matrix, the
closing of the offering and the application of its net proceeds, we would have
an aggregate of $8.2 million of cash and cash equivalents, working capital of
$4.1 million, and no long-term debt. At June 30, 1999, minimum purchase
commitments with long-distance and local service providers totaled $28.1 million
and $0.8 million, respectively. Estimated minimum future payments due under the
agreements in the aggregate are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1999.................................................................................... $ 5,808
2000.................................................................................... 9,224
2001.................................................................................... 9,171
2002.................................................................................... 4,171
2003.................................................................................... 550
------------
$ 28,924
------------
------------
</TABLE>
On a pro forma basis, cash flow generated from the operations of AXCES
serves to offset the operating cash shortfalls incurred from the operations of
InfoHighway and ARC. InfoHighway and ARC have historically suffered recurring
losses and negative cash flows from operations and have working capital and
stockholders' deficits that raise substantial doubt about their abilities to
continue as going concerns on a stand-alone basis.
INFOHIGHWAY. In early 1998, InfoHighway proceeded on an expansion
program involving its InfoHighway DSL and InfoHighway Connect Internet
services to high rise office buildings. This expansion was predicated on a
recapitalization. This recapitalization did not materialize. With the
expansion underway, InfoHighway financed operating activities and capital
purchases through increases in accounts payable and short-term borrowings.
In the fourth quarter of 1998, reductions in selling, general and
administrative expenses resulting primarily from staff reductions, coupled
with a $0.5 million bridge loan enabled InfoHighway to operate at a near
break-even EBITDA level. With a 38% increase in first half 1999 revenues
over the first half of 1998, EBITDA losses
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<PAGE>
decreased by 35% from $313,000 to $205,000. First half cash flow shortfalls
in 1999 have been financed through additional short-term borrowings,
including bridge financings totaling $170,000 from OmniLynx. InfoHighway
anticipates that small negative cash flows from operations will continue in
the near-term, and expects to manage this liquidity issue through
traditional means, including management of working capital and short-term
borrowings.
ARC. ARC has sustained approximately $7.3 million of net losses since
inception. Historical cash flow shortfalls have been funded by a combination
of related party and external financings. At June 30, 1999, ARC had total
debt of $4.8 million consisting of the following:
- a $2.4 million revolving line of credit with its former parent,
Consolidated Technology Group;
- a $1.2 million note payable to an affiliate through common ownership by
Consolidated Technology Group;
- $0.4 million of notes payable to OmniLynx that will be eliminated from
the consolidated financial statements as an intercompany debt; and
- two external current notes aggregating $0.8 million.
The merger agreement with us provides for:
- the repayment of $0.8 million of the outstanding balance of the
revolving line of credit from proceeds from the offering;
- the exchange of $0.45 million of the revolving line of credit for a
note payable due on January 31, 2000 that is convertible at the
holder's option into 56,250 of our common shares; and
- the balance of the revolving line of credit being exchanged for a note
payable maturing in June 2000 unless converted earlier by the holder
into 150,000 of our common shares.
The $1.2 million note payable to an affiliate is to be exchanged for
1,206,673 shares of our series A preferred stock which is convertible into
common stock at the option of the holder at any time after 90 days from the
closing of this offering or earlier with the consent of both OmniLynx and
the representative of the underwriters with respect to this offering. The
number of shares issuable upon conversion of the series A preferred stock is
dependent on the conversion rate which is calculated by dividing $1.00 by
the lesser of the offering price or the five-day average closing price
ending on the trading day prior to such conversion date.
We intend to enter into negotiations with commercial banks to provide us
with a credit facility to be used for acquisitions, working capital, capital
expenditures and other general corporate purposes. Any such credit facility or
other debt financing will require that we make certain financial covenants which
could limit our operational
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and financial flexibility. We may not be able to obtain financing for our
acquisition program at all or on terms we deem acceptable. As a result, we might
be unable to successfully pursue our acquisition strategy.
INFLATION
Due to the relatively low level of inflation experienced in 1998, inflation
did not have a significant effect on the pro forma results of our operations in
1998. However, there can be no assurances that our business will not be affected
by inflation in the future.
YEAR 2000 COMPLIANCE--COMBINED
Many software applications, computer hardware and related equipment and
systems that use embedded technology, such as microprocessors, rely on two
digits rather than four digits to represent years in performing computations and
decision-making functions. These programs, hardware items and systems may fail
on January 1, 2000 or earlier because they misinterpret "00" as the year 1900
rather than 2000. These failures could have an adverse effect on us because of
our direct dependence on our own applications, equipment and systems and our
indirect dependence on those of third parties.
Our year 2000 program consists of the following phases:
- identifying all items that may be affected by the year 2000;
- investigating those items for year 2000 compliance;
- assessing the potential impact of year 2000 noncompliance;
- designing solutions for noncompliant items;
- repairing and replacing any noncompliant items and testing those
improvements; and
- contingency planning.
Each company we are acquiring has assigned one or more individuals in its
organization year 2000 responsibility. We have also assigned an individual
overall year 2000 responsibility to track and coordinate the efforts of the
individual companies. Each of the founding companies has completed
identification of its mission-critical information technology hardware and
software, including business applications, operations software, service
providers and product suppliers that may be affected by the year 2000. We have
determined that the potential impact of embedded technologies on the founding
companies is not substantial.
We are also contacting various third parties to obtain representations and
assurances that their hardware, embedded technology systems and software which
we use or will impact us are, or will be modified on a timely basis to be, year
2000 compliant. We have contacted all of our primary vendors based on their
importance to
49
<PAGE>
our business. These third parties include telecommunications and billing
companies. The founding companies began contacting these third parties as early
as 1998 and have received responses from approximately 50% to date. All the
third parties that have responded have stated that they are or expect to be year
2000 compliant by the end of 1999. We expect to have this part of our program
completed by the fourth quarter of 1999. To date, our costs associated with
assessing and monitoring the progress of third parties in resolving their year
2000 issues have not been significant, and we do not expect to incur any
material costs in the future relating to this aspect of our year 2000 program.
All of the founding companies are in the solution design phase of their
efforts to determine whether noncompliant information hardware and software
systems can be repaired or replaced. We estimate that we have completed
approximately 90% of this phase and expect to complete it by the fourth quarter
of 1999.
As part of the acquisitions, we are replacing some of their financial and
other systems in order to obtain internal consistency. Some systems we are
replacing happen not to be year 2000 compliant, but we would replace them in all
events this year and are not including the cost of their replacements as a part
of our year 2000 program.
We have decided not to develop formal budgets or perform detailed analysis
of the costs associated with this effort. We based this decision on the low
number of systems that comprise our technical environment and the fact that our
year 2000 efforts are being addressed during the normal course of business. To
date, our external costs of our year 2000 program have not been significant and
we do not expect to incur significant costs in the future. We have not deferred
other information technology projects because of our year 2000 efforts.
We have begun a formal analysis of various failure scenarios, their
potential impact and possible contingency plans. We expect that we will have
completed the development of the necessary contingency plans by the fourth
quarter of 1999 and that these will primarily consist of replacing noncompliant
third-party suppliers and service providers, and developing backup procedures to
handle the failure of any of our internal systems.
We do not anticipate any material adverse effect from year 2000 failures,
but we cannot guarantee that we will achieve total compliance. Factors that give
rise to this uncertainty include our possible failure to identify all
susceptible systems, noncompliance by third parties whose systems and operations
impact us and a possible loss of technical resources to perform the work.
Our most likely worst-case year 2000 noncompliance scenarios are:
- failures of a traditional local telephone company or other service
provider;
- equipment failures;
- an interruption in our ability to bill or collect amounts due from
customers; and
50
<PAGE>
- loss of accurate accounting records.
Depending on the length of any noncompliance or system failure, any of these
situations could have a material adverse impact on our ability to serve our
customers in a timely manner and result in lost business and revenues or
increased costs.
This disclosure is subject to protection under the Year 2000 Information and
Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year 2000 Statement"
and "Year 2000 Readiness Disclosure" as that Act defines those terms.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments and hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
provisions of this statement, as amended by SFAS No. 137, are effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Financial
Accounting Standards Board recently issued Statement of Financial Accounting
Standards No. 135, "RESCISSION OF FASB STATEMENT NO. 75 AND TECHNICAL
CORRECTIONS." The Statement is effective for financial statements issued for
fiscal years ending after February 15, 1999. We believe that these standards
will not have a material impact on our financial statements or disclosures
thereto.
Statement of Position No. 98-5, "REPORTING ON THE COSTS OF START-UP
ACTIVITIES," requires all start-up and organizational costs to be expensed as
incurred. It also requires all remaining historically capitalized amounts of
these costs existing at the date of adoption to be expensed and reported as the
cumulative effect of a change in accounting principles. Statement of Position
No. 98-5 is effective for all fiscal years beginning after December 31, 1998. We
believe that the adoption of Statement of Position No. 98-5 will not have a
material impact on their financial statements or disclosures thereto.
51
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMBINED AND FOUNDING COMPANIES
The following discussions should be read in conjunction with the financial
statements of the founding companies and related notes appearing elsewhere in
this prospectus.
COMBINED FOUNDING COMPANIES GROSS PROFIT DATA
The following unaudited combined financial information does not purport to
present the combined historical results of operations of the founding companies
in accordance with generally accepted accounting principles, but represents
merely a summation of the revenues, cost of services, and gross profit of the
individual founding companies. The historical combined results as shown below
will not be comparable to, and are not necessarily indicative of, anticipated
post-combination results for a number of reasons, including:
- the founding companies were not under common control or management during
the periods presented;
- using the purchase method of accounting, we will revalue the assets
acquired and liabilities assumed at their fair market value and record
goodwill and other intangible assets to be amortized in future periods;
- we will incur additional costs for corporate management and the costs
associated with being a publicly-traded company; and
- we anticipate increased revenues and cost savings once we begin operating
as a combined entity.
The following table sets forth certain historical combined data and such
data of the founding companies as a percentage of revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------- ------------------------------------------
1996 1997 1998 1998 1999
-------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............ $ 14,477 100% $ 30,037 100% $ 45,596 100% $ 24,806 100% $ 19,366 100%
Cost of services.... 9,252 64% 17,546 58% 22,536 49% 11,509 46% 10,731 55%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........ $ 5,225 36% $ 12,491 42% $ 23,060 51% $ 13,297 54% $ 8,635 45%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Combined revenues declined $5.4 million, or 22%, from $24.8
million in 1998 to $19.4 million in 1999. The revenue decrease was due to a $7.2
million decrease in revenues generated at AXCES.
GROSS PROFIT. Combined gross profit decreased $4.7 million, or 35%, from
$13.3 million in 1998 to $8.6 million in 1999. Overall combined gross profit as
a percentage
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<PAGE>
of combined revenues was 54% and 45% for the six months ended June 30, 1998 and
1999, respectively.
COMPARISON OF 1998, 1997 AND 1996
REVENUES. Combined revenues increased $15.6 million, or 52%, from $30.0
million for 1997 to $45.6 million for 1998. Combined revenues increased $15.6
million, or 108%, from $14.5 million in 1996 to $30.0 million in 1997. This
increase was primarily attributable to revenue growth experienced at AXCES in
the amount of $11.0 million, or 130%, in 1997 compared to 1996 and $10.8
million, or 55%, in 1998 compared to 1997. In addition, ARC's revenue increased
by $4.1 million, or 73%, in 1997 compared to 1996 and $4.3 million, or 44%, in
1998 compared to 1997 due primarily to ARC's new product offering of Bell
Atlantic local telephone services.
GROSS PROFIT. Combined gross profit increased $10.6 million, or 85%, from
$12.5 million for 1997 to $23.1 million for 1998. Combined gross profit
increased $7.3 million, or 140%, from $5.2 million for 1996 to $12.5 million for
1997. Overall combined gross profit as a percentage of combined revenues was
36%, 42%, and 51% in 1996, 1997 and 1998, respectively. The increase in combined
gross profit was primarily due to significant margin improvement experienced at
AXCES, where gross profits as a percentage of sales was 53%, 59% and 67% in
1996, 1997 and 1998, respectively.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected unaudited cash flow information for
OmniLynx on a historical combined basis (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ --------------------
1998 1998 1999
------------ --------- ---------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities............................ $ (2,430) $ 1,680 $ 2,925
Net cash provided by (used in) investing activities............................ (980) (609) 44
Net cash provided by (used in) financing activities............................ 3,608 295 (679)
------------ --------- ---------
Net increase in cash and equivalents........................................... $ 198 $ 1,366 $ 2,290
------------ --------- ---------
------------ --------- ---------
</TABLE>
For the six months ended June 30, 1999, on a combined basis, operating
activities generated $2.9 million of cash due to AXCES' generation of $3.8
million, partially offset by ARC's use of $0.7 million and InfoHighway's use of
$0.2 million. Combined net cash provided by investing activities approximated
$0.1 million, primarily due to sale of property and equipment and proceeds from
related party loans by AXCES, in excess of purchases of certain intangible
assets and property and equipment by InfoHighway. Combined financing activities
consumed $0.7 million primarily due to $1.7 million of debt repayments on
short-term debt at AXCES which offset short-term borrowings at InfoHighway of
$0.3 million and ARC of $0.7 million.
53
<PAGE>
For the six months ended June 30, 1998, on a combined basis, operating
activities generated $1.7 million due to AXCES' generation of $1.4 million and
ARC's generation of $0.4 million, partially offset by InfoHighway's use of $0.1
million as described below. Combined net cash used in investing activities
totaled $0.6 million, primarily due to the acquisition of a long distance
customer base at ARC. Combined net cash provided by financing activities was
$0.3 million, due to a rights offering at InfoHighway which generated $0.2
million and funding of $0.1 million from ARC's former asset-based lender.
For the year ended December 31, 1998, on a combined basis, operating
activities consumed $2.4 million of cash due primarily to net losses generated
by InfoHighway and ARC, and higher investments in accounts receivable across all
companies. Combined net cash used in investing activities approximated $1.0
million, primarily for a strategic telecommunications acquisition at ARC and
purchases of property and equipment. Combined net cash provided by financing
activities totaled $3.6 million, due to debt and equity financings from various
sources including private placement offerings, commercial bank lendings, and
related party transactions.
At June 30, 1999 on a combined basis, we had an aggregate of $1.0 million of
cash and cash equivalents, and a working capital deficit of $9.2 million.
We intend to increase capital expenditures and operating expenses
significantly in order to integrate the founding companies, expand networks to
support additional expected end-users in existing and future markets and to
market and provide services to a growing number of potential end-users. Current
capital resources, including the proceeds of this offering, are anticipated to
be sufficient to fund aggregate capital expenditures and working capital
requirements, including operating losses, for the foreseeable future.
Our expansion through acquisitions may require significant capital. We
cannot predict with certainty what our capital needs will be for future
acquisitions. We currently intend to use our common stock to fund a portion of
the purchase price of future acquisitions. If our common stock does not maintain
an acceptable price in the public markets or if potential acquisition candidates
are unwilling to accept our common stock as part of the consideration for the
sale of their businesses, we may have to use more cash to finance our
acquisition program. If we do not have enough cash resources, our ability to
make acquisitions could be limited unless we are able to obtain additional cash
through future debt or equity financings. Incurring debt would increase our
leverage and make us more vulnerable to economic downturns and limit our ability
to compete.
We intend to enter into negotiations with a group of commercial banks to
provide us with a credit facility to be used for acquisitions, working capital,
capital expenditures and other general corporate purposes. Any such credit
facility or other debt financing will require that we make certain financial
covenants which could limit our operational and financial flexibility. We cannot
guarantee that we will be able to
54
<PAGE>
obtain financing for our acquisition program or, if available, that it will be
available on terms we deem acceptable. As a result, we might be unable to
successfully pursue our acquisition strategy. See "Management's Discussion and
Analysis of Pro Forma Financial Condition and Results of Operations--Pro Forma
Liquidity and Capital Resources."
AXCES, INC.
RESULTS OF OPERATIONS
The following table sets forth certain historical financial data of AXCES
and that data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------- ------------------------------------------
1996 1997 1998 1998 1999
-------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $ 8,468 100% $ 19,474 100% $ 30,280 100% $ 17,348 100% $ 10,095 100%
Cost of services...... 3,960 47% 8,003 41% 9,889 33% 5,307 31% 3,445 34%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit.......... 4,508 53% 11,471 59% 20,391 67% 12,041 69% 6,650 66%
SG&A expenses......... 3,674 43% 8,910 46% 17,934 59% 8,296 48% 4,914 49%
Depreciation and
amortization........ 61 1% 135 1% 204 1% 89 -- 112 1%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating income...... $ 773 9% $ 2,426 12% $ 2,253 7% $ 3,656 21% $ 1,624 16%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Revenues decreased $7.2 million from $17.3 million in 1998 to
$10.1 million in 1999. The decrease in revenues can be attributed primarily to
the results of an extensive study of AXCES' customer base which was completed in
May 1998 in order to eliminate potential regulatory complaints. Through this
review process many valid customers were also eliminated from the database
resulting in approximately $3.5 million of lost revenue. In addition, other
factors leading to the decrease in revenues included:
- the elimination of Texas state line charges of approximately $0.8 million;
- the loss of all GTE accounts totaling approximately $0.9 million due to a
changing relationship with its carriers which eliminated its ability to
bill GTE customers under its carriers' billing contracts; and
- an increase in Ameritech returns and allowances of approximately $0.9
million.
As a result of these and other factors, AXCES re-evaluated its marketing
strategy. Consequently, the number of new customers acquired on a monthly basis
was greatly reduced. In addition, due to mounting competitive pressure, AXCES'
sales price for interstate long distance was substantially reduced.
GROSS PROFIT. Gross profit decreased $5.4 million from $12.0 million in
1998 to $6.6 million in 1999. Overall gross profit as a percentage of revenues
was 69% and
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<PAGE>
66% in 1998 and 1999, respectively. The decrease in the gross profit can be
attributed to:
- loss of all GTE accounts; and
- elimination of Texas state line charges.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $3.4 million or 41% from $8.3 million in 1998
to $4.9 million in 1999. The significant decrease in expense levels was due
primarily to:
- a $1.1 million reduction in compensation expense for the owners in 1999;
and
- significant changes in AXCES' marketing strategy which reduced selling,
general and administrative expenses by 44% or $3.6 million.
Bad debts and other uncollectible amounts were $2.2 million, or 21.8% of
sales for the six months ended June 30, 1999 compared to $1.8 million, or 10.4%
of 1998 sales. The allowance is withheld and uncollectible amounts deducted from
customer remittances by Southwestern Bell Telephone and Ameritech as revenue is
generated. The increased write-off's are a result of higher sales levels in
previous periods which, although previously reserved for, are determined to be
uncollectible in the current period and charged against the allowance.
COMPARISON OF 1998, 1997 AND 1996
REVENUES. Revenues increased $10.8 million, or 55%, from $19.5 million in
1997 to $30.3 million in 1998. Revenues increased $11.0 million, or 130%, from
$8.5 million in 1996 to $19.5 million in 1997. The significant revenue increases
experienced over these periods were primarily attributable to growth in the
customer base resulting from:
- new office openings;
- expanded sales force;
- intensified sales and marketing campaigns; and
- new user fees in 1998 associated with various state and federal
assessments.
GROSS PROFIT. Gross profit increased $8.9 million, or 78%, from $11.5
million in 1997 to $20.4 million in 1998. Gross profit increased $7.0 million,
or 156%, from $4.5 million in 1996 to $11.5 million in 1997. Overall gross
profit as a percentage of revenues was 53%, 59% and 67% in 1996, 1997 and 1998,
respectively. Gross profit percentages have improved dramatically over recent
years due to:
- cost synergies resulting from expanding the customer base from
approximately 9,600 customers at December 31, 1995 to 160,000 customers at
December 31, 1998;
- new user fees in 1998 associated with various state and federal
assessments;
- successful sales and marketing efforts; and
- improved pricing on service offerings.
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<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $9.0 million, or 101%, from $8.9 million in
1997 to $17.9 million in 1998. The significant increase in expense levels was
due primarily to:
- a $2.4 million increase in compensation, benefits and performance bonuses
received by the owners during 1998;
- a $2.1 million increase in sales and marketing-related expenses due to
higher personnel costs resulting from higher average sales force headcount
and increased exhibit space rentals and other promotional expenses; and
- growth in personnel and administrative expenses overall across most
functional areas due to the sustained growth in operations.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from AXCES' statements
of cash flows (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
-------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities....... $ 762 $ 269 $ (1,249) $ 1,367 $ 3,842
Net cash provided by (used in) investing activities....... (260) (642) (348) (38) 205
Net cash provided by (used in) financing activities....... (111) 43 1,671 (10) (1,734)
--------- --------- ---------- --------- ----------
Net decrease in cash and equivalents...................... $ 391 $ (330) $ 74 $ 1,319 $ 2,313
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
</TABLE>
For the six months ended June 30, 1999, operating activities generated $3.8
million of cash. Net income of $1.6 million, increased collections of accounts
receivable of $2.2 million, provision for doubtful accounts of $1.6 million and
a decrease in federal income tax receivable of $0.4 million were partially
offset by an increase in receivables from related parties of $1.8 million and a
decrease in sales tax payable of $0.4 million.
For the six months ended June 30, 1998, operating activities generated $1.4
million of cash. Net income of $4.4 million, an increase in other accrued
expenses of $1.4 million, provision for doubtful accounts of $1.9 million and a
decrease in prepaid expenses of $0.1 million were partially offset by an
increase in receivables from related parties of $3.3 million, a decrease in
current income tax payable of $0.6 million, an increase in accounts receivable
of $1.5 million and a decrease in sales tax payable of $0.4 million.
For the year ended December 31, 1998, operating activities consumed $1.2
million of cash as positive cash flow from operations was offset by a
significant investment in working capital, including increases of $7.2 million
and $0.7 million in
57
<PAGE>
accounts receivable and tax refund receivables, respectively. Net cash used in
investing activities totaled $0.3 million, consisting of purchases of property
and equipment and note issuances to related parties of $0.1 million and $0.2
million, respectively. Financing activities generated $1.7 million consisting of
a $1.0 million short-term note payable to an independent third party lender and
a $0.7 million short-term bank line of credit.
For the year ended December 31, 1997, operating activities generated $0.3
million of cash as positive cash flow from operations was largely offset by
investments in various working capital accounts, primarily a $3.8 million
increase in accounts receivable. Net cash consumed by investing activities
totaled $0.6 million, including purchases of property and equipment and
issuances of notes to related parties of $0.4 million and $0.2 million,
respectively. Minimal financing activities occurred during 1997 as $0.04 million
was raised from proceeds of long-term notes payable and principal payments on
long-term debt totaled $0.02 million.
For the year ended December 31, 1996, operating activities generated $0.8
million of cash as positive cash flow from operations was partially offset by
investments in working capital, including a $1.1 million increase in accounts
receivable. Investing activities, consisting of purchases of property and
equipment, totaled $0.3 million. Financing activities consumed $0.1 million due
primarily to payments on a note payable to a vendor.
AXCES expects to be able to fund its cash needs such as working capital
through cash generated from its operations. AXCES generally funds its purchases
of property and equipment with internally generated cash or debt. AXCES also has
a $3.0 million accounts receivable financing which it expects to maintain if it
remains competitively priced with other forms of financing we may obtain in the
future. However, we expect to be able to fund operations from cash flow and
proceeds from this offering.
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<PAGE>
INFOHIGHWAY INTERNATIONAL, INC.
RESULTS OF OPERATIONS
The following table sets forth certain historical financial data of
InfoHighway International, Inc. and that data as a percentage of revenues for
the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
-------------------- -------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $ 426 100% $ 915 100% $ 1,385 100% $ 796 100% $ 1,100
Cost of services....... 218 51% 648 71% 996 72% 509 64% 592
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........... 208 49% 267 29% 389 28% 287 36% 508
SG&A expenses.......... 639 150% 1,481 162% 1,339 97% 600 75% 713
Depreciation and
amortization......... 52 12% 175 19% 261 19% 142 18% 261
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating loss......... $ (483) (113%) $ (1,389) (152%) $ (1,211) (88%) $ (455) (57%) $ (466)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
<S> <C>
Revenues............... 100%
Cost of services....... 54%
---------
Gross profit........... 46%
SG&A expenses.......... 65%
Depreciation and
amortization......... 24%
---------
Operating loss......... (43%)
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Revenues increased $0.3 million, or 38%, from $0.8 million in
1998 to $1.1 million in 1999. The significant revenue increase was directly
attributable to the consummation of the Eden acquisition during January 1999.
GROSS PROFIT. Gross profit increased $0.2 million, or 67%, from $0.3
million in 1998 to $0.5 million in 1999. Overall gross profit as a percentage of
revenues was 36% and 46% for 1998 and 1999, respectively. The increase was
primarily due to the acquisition of Eden Matrix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.1 million, or 17%, from $0.6 million in
1998 to $0.7 million in 1999. Despite growth in personnel headcount, selling,
general and administrative expenses as a percent of revenues declined slightly
from 75% in 1998 to 65% in 1999 due to expense efficiencies created by the full
integration of the acquisition of Eden Matrix during the 1999 period.
COMPARISON OF 1998, 1997 AND 1996
REVENUES. Revenues increased $0.5 million, or 55%, from $0.9 million in
1997 to $1.4 million in 1998. Revenues increased $0.5 million, or 125%, from
$0.4 million in 1996 to $0.9 million in 1997. The significant revenue increases
experienced over these periods were primarily attributable to the following:
- overall growth in demand for Internet access services;
- revenue contributions from the acquisition of several Internet service
providers located in Texas and California during 1997; and
- the introduction of the InfoHighway Connect service offering during 1997.
InfoHighway Connect is a high-speed Internet service currently offered in
59
<PAGE>
office buildings in Texas, New Jersey and Florida, which provides building
tenants access to a shared high-speed dataline.
The InfoHighway Connect service provides several benefits over traditional
dial-up services, including continuous connection, faster connection speeds,
fewer technical problems, lower cost, increased security and greater usability.
GROSS PROFIT. Gross profit increased $0.1 million from $0.3 million in 1997
to $0.4 million in 1998. Gross profit increased from $0.2 million in 1996 to
$0.3 million in 1997. Overall gross profit as a percentage of revenues was 49%,
29% and 28% in 1996, 1997 and 1998, respectively. Gross profit percentages
declined from 1996 to 1998 due to significant increases in technical support
staff and higher communication costs as InfoHighway expanded its network.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.2 million, or 13%, from $1.5 million in
1997 to $1.3 million in 1998. The decline in expenses was primarily attributable
to higher expense levels experienced during 1997 for specific expenses
including:
- non-recurring stock compensation charges;
- higher expenses incurred on the closing of equity offerings; and
- duplicative network and staffing costs on acquisitions prior to full
integration into InfoHighway.
Selling, general and administrative expenses increased $0.8 million, or 133%,
from $0.6 million in 1996 to $1.5 million in 1997. The increase in expenses was
reflected across most expense categories, due primarily to increased personnel
costs to support revenue growth and the specific 1997 expenses noted above.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from InfoHighway's
statements of cash flows (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net cash used in operating activities........................... $ (250) $ (604) $ (587) $ (79) $ (196)
Net cash used in investing activities........................... (121) (216) (147) (125) (122)
Net cash provided by financing activities....................... 354 820 734 204 318
--------- --------- --------- --------- ---------
Net decrease in cash and equivalents............................ $ (17) $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
For the six months ended June 30, 1999, operating activities consumed $0.2
million as the net loss from operations of $0.5 million and increases in
accounts receivable of $0.3 million were partially offset by depreciation and
amortization expenses of $0.3 million, increases in accounts payable of $0.2
million and increases in
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<PAGE>
deferred revenues of $0.1 million. Investing activities consumed $0.1 million
due to purchases of certain intangible assets and property and equipment.
Financing activities generated $0.3 million due to short-term borrowings.
Amounts charged to allowance for bad debts was $0.1 in 1999 compared to less
than $0.05 million in 1998. In addition, approximately $0.8 million was charged
against revenues for sales returns and allowances. In 1999, InfoHighway hired
additional staff, to help it better manage its uncollectibles.
For the six months ended June 30, 1998, operating activities consumed $0.1
million as the net loss from operations of $0.5 million was partially offset by
increases in accounts payable of $0.2 million, depreciation and amortization of
$0.1 million and increases in deferred revenue of $0.1 million. Investing
activities consumed $0.1 million, primarily due to purchases of property and
equipment. Financing activities generated $0.2 million primarily due to a rights
offering to existing shareholders.
For the year ended December 31, 1998, operating activities consumed $0.6
million as the net loss from operations was partially offset by a $0.3 million
increase in accounts payable and accrued expenses. Net cash used in investing
activities totaled $0.1 million due primarily to purchases of property and
equipment. Financing activities generated $0.7 million of cash flow, including
$0.5 million of proceeds from a unit offering of debt and equity securities and
$0.5 million of proceeds from a note payable executed with Trident III during
the fourth quarter, which served to offset net payments of notes payable to
shareholders and repayments of capital lease obligations in the amounts of $0.2
million and $0.1 million, respectively.
For the year ended December 31, 1997, operating activities consumed $0.6
million as the net loss from operations was partially mitigated by increases in
accounts payable and deferred revenues totaling $0.4 million. Approximately $0.2
million was incurred on investing activities for the purchase of property and
equipment. Financing activities generated $0.8 million consisting of $0.2
million of net proceeds from notes payable to shareholders and $0.6 million from
common stock issuances under private placement offerings.
For the year ended December 31, 1996, operating activities consumed $0.3
million as the net loss from operations was partially offset by increases in
accounts payable and deferred revenues totaling $0.2 million. Investing
activities, consisting of purchases of property and equipment, totaled $0.1
million. Financing activities consisted of common stock issuances which raised
$0.4 million in capital for the year.
Since its inception, InfoHighway has suffered losses and negative cash flows
from operations and has a working capital deficit and stockholders' deficit that
raise substantial doubt about its ability to continue as a going concern. Its
ability to continue as a going concern is dependent upon the success of its
marketing efforts, its ability to produce sufficient margins to cover operating
and overhead expenses and its access to sufficient funding to enable it to
continue operations. InfoHighway has been
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funded through its own operating cash flows, loans received from outside
investors and sales of common stock. It is anticipated that the proceeds from
this offering will be sufficient to fund its operations for the foreseeable
future.
ARC NETWORKS, INC.
RESULTS OF OPERATIONS
The following table sets forth certain historical financial data of ARC and
that data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
-------------------- -------------------- -------------------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $ 5,583 100% $ 9,648 100% $ 13,931 100% $ 6,660 100% $ 8,171
Cost of services....... 5,074 91% 8,895 92% 11,651 84% 5,691 85% 6,694
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........... 509 9% 753 8% 2,280 16% 969 15% 1,477
SG&A expenses.......... 1,439 26% 2,695 28% 3,465 24% 1,219 18% 1,828
Depreciation and
amortization......... 17 -- 436 5% 407 3% 165 3% 219
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating loss......... $ (947) (17%) $ (2,378) (25%) $ (1,592) (11%) $ (415) (6%) $ (570)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
<S> <C>
Revenues............... 100%
Cost of services....... 82%
---------
Gross profit........... 18%
SG&A expenses.......... 22%
Depreciation and
amortization......... 3%
---------
Operating loss......... (7%)
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Revenues increased $1.5 million, or 22%, from $6.7 million in
1998 to $8.2 million in 1999. Long distance and local telephone revenues
increased $1.5 million, or 32%, from $4.7 million in 1998 to $6.2 million in
1999. The increase is a result of greater market penetration into the local
telephone market, principally New York City, through ARC's reseller programs
with Teleport Communications Group and Winstar Communications, both competitive
local telephone companies, and with Bell Atlantic, the traditional local
telephone company, which began in April 1997. Also contributing was the
aggressive marketing of ARC's long distance telephone service. Data cabling
revenues remained unchanged at $2.0 million.
GROSS PROFITS. Gross profit increased $0.5 million, or 50%, from $1.0
million in 1998 to $1.5 million in 1999. Overall gross profit as a percentage of
revenues was 15% and 18% in 1998 and 1999, respectively. Gross profit on long
distance and local telephone revenue increased $0.6 million, or 300%, from $0.2
million in 1998 to $0.8 million in 1999. Gross profit on data wiring revenues
decreased $0.1 million, or 14%, from $0.7 million in 1998 to $0.6 million in
1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.6 million, or 50%, from $1.2 million in
1998 to $1.8 million in 1999. These increases were primarily due to increased
personnel costs associated with revenue growth, establishment of a customer
service operation, the cost of external billing services associated with long
distance and local telephone revenues and administrative and accounting costs.
Selling, general and administrative expenses as a percent of revenues were 18%
and 22% in 1998 and 1999, respectively.
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COMPARISON OF 1998, 1997 AND 1996
REVENUES. Revenues increased $4.3 million, or 45%, from $9.6 million in
1997 to $13.9 million in 1998. Revenues increased $4.0 million, or 71%, from
$5.6 million in 1996 to $9.6 million in 1997. Long distance and local telephone
revenues increased $2.6 million, or 36%, from $7.2 million in 1997 to $9.8
million in 1998. Long distance and local telephone revenues increased $2.8
million, or 64%, from $4.4 million in 1996 to $7.2 million in 1997. The increase
in both periods is a result of greater market penetration into the local
telephone market, principally New York City, through ARC's reseller programs
with Teleport, Winstar and Bell Atlantic, which began in April 1997. Also
contributing was the aggressive marketing of ARC's long distance telephone
service. Data wiring revenues increased $1.6 million, or 64%, from $2.5 million
in 1997 to $4.1 million in 1998. Data wiring revenues increased $1.3 million, or
108%, from $1.2 million in 1996 to $2.5 million in 1997. Revenues in both
periods increased principally as a result of services to New York State in
connection with updating its buildings for computers and Internet services. ARC
also was a subcontractor to Mitel Systems, Inc. who was the primary contractor
with New York City schools to rewire classrooms for computer and Internet
services.
GROSS PROFITS. Gross profit increased $1.5 million, or 188%, from $0.8
million in 1997 to $2.3 million in 1998. Gross profit increased $0.3 million, or
60%, from $0.5 million in 1996 to $0.8 million in 1997. Overall gross profit as
a percentage of revenue was 9%, 8% and 16% in 1996, 1997 and 1998, respectively.
Gross profit on long distance and local telephone revenues increased $0.8
million, or 800%, from $0.1 million in 1997 to $0.9 million in 1998. Gross
profit on long distance and local telephone revenues decreased $0.2 million, or
67%, from $0.3 million in 1996 to $0.1 million in 1997. Our total gross profit
and gross profit for the long distance and local telephone market decreased in
1997 as a result of unfavorable performance in ARC's discontinued prepaid
telephone debit card operation. Gross profit on data cabling revenues increased
$0.7 million, or 100%, from $0.7 million in 1997 to $1.4 million in 1998. Gross
profit on data cabling revenues increased $0.5 million, or 250%, from $0.2
million in 1996 to $0.7 million in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.8 million, or 30%, from $2.7 million in
1997 to $3.5 million in 1998. Selling, general and administrative expenses
increased $1.3 million, or 93%, from $1.4 million in 1996 to $2.7 million in
1997. These increases were primarily due to increased personnel costs associated
with revenue growth, establishment of a customer service operation, the cost of
external billing services associated with long distance and local telephone
revenue and administrative and accounting costs. Selling, general and
administrative expenses as a percent of revenue were 26%, 28% and 24% in 1996,
1997 and 1998, respectively. In 1997, ARC recorded a loss on an impaired asset
of $0.4 million which was the primary cause of the increase in the 1997
percentage of revenue.
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LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from ARC's statements of
cash flows (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities.............. $ (424) $ (479) $ (594) $ 392 $ (721)
Net cash used in investing activities............................ (416) (83) (485) (446) (39)
Net cash provided by financing activities........................ 903 567 1,203 101 737
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and equivalents.................. $ 63 $ 5 $ 124 $ 47 $ (23)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
For the six months ended June 30, 1999, ARC used cash in operating
activities of $0.7 million. ARC also incurred a net loss of $0.9 million which
was offset by non-cash items of $0.4 million and a net decrease in other working
capital accounts of $0.5 million. Net cash used in investing activities of $0.04
million was primarily for the acquisition of office equipment such as computers.
Net cash provided by financing activities of $0.7 million was the result of an
increase in debt financing received from related parties, offset by $.05 of debt
repayments.
Amounts charged to allowance for doubtful accounts increased by $0.2 million
from June 30, 1999 to $0.3 million, or 3.7% of sales. The principle reason for
this increase was the increase in sales to its local telephone customers who are
typically small to midsize companies. As ARC experienced increased losses,
additional clerical staff and a collection agency were hired to help it better
manage its uncollectibles.
For the six months ended June 30, 1998, ARC generated $0.4 million from
operating activities, primarily by an increase in interim billings in excess of
costs and earnings of $1.2 million and non-cash items of $0.2 million offset by
a net loss of $0.6 million and a decrease in other working capital accounts of
$0.4 million. Net cash used by investing activities of $0.4 million was for the
acquisition of a long distance customer base. Net cash provided by financing
activities of $0.1 million was due to an increase in funding from ARC's former
asset based lender.
For the year ended December 31, 1998, ARC used cash in operating activities
of $0.6 million. ARC also incurred a net loss of $1.9 million which was offset
by non-cash items of $0.9 million and a net decrease in other working capital
accounts of $0.4 million, including a $1.5 million reserve on disputed amounts
under contract. Net cash used in investing activities of $0.5 million was
primarily for the acquisition of a long distance telephone customer base of $0.4
million. Net cash provided by financing activities of $1.2 million was primarily
the result of a $2.0 million debt refinancing received from a related party
offset by debt repayments of $0.8 million.
For the year ended December 31, 1997, ARC used cash in operating activities
of $0.5 million. ARC also incurred a net loss of $2.7 million which was offset
by non-
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cash items of $0.8 million including a write down of $0.4 for an impaired asset
in ARC's prepaid telephone calling card operation and a $1.4 million decrease in
other working capital accounts. Net cash used for investing activities of $0.1
was for office equipment such as personal computers. Net cash provided by
financing activities of $0.6 million was due to $0.9 million of loans received
to support its operating activities offset by debt repayments of $0.3 million.
For the year ended December 31, 1996, ARC used cash in operating activities
of $0.4 million. ARC also incurred a net loss of $1.1 million which was
partially offset by non-cash items of $0.1 million and a net decrease in other
working capital accounts of $0.6 million. Net cash used in investing activities
of $0.4 million was for the acquisition of telephone switching equipment. Net
cash provided by financing activities of $0.9 million resulted from $0.4 million
in loans received from related parties to support its operating activities and
$0.4 million to acquire equipment.
Since its inception, ARC has suffered losses and negative cash flows from
operations and has a working capital deficit and stockholders' deficit that
raise substantial doubt about its ability to continue as a going concern. Its
ability to continue as a going concern is dependent upon the success of its
marketing efforts, its ability to produce sufficient margins to cover operating
and overhead expenses and its access to sufficient funding to enable it to
continue operations. ARC has been funded in the past through an accounts
receivable financing of $2.4 million obtained from its former parent, notes
payable received from outside investors and internal cash flows. It is
anticipated that funds received from this offering will be sufficient to fund
its operations for the foreseeable future.
In March 1999, ARC received a demand for repayment of the 8% $550,000 note
payable and the 12% $125,000 demand note. ARC is in default relating to interest
on the 12% notes in the amount of $43,750. In July we paid $20,000 of such
amount. We are currently negotiating with the lenders to amend the terms of
these notes which may include extending the maturity dates and agreeing to pay
additional interest in the future.
Subsequent to December 31, 1998, in order to help fund the operating
activities, ARC's former parent, Consolidated Technology Group, advanced an
additional $400,000 even though ARC was, and continues to be, in default of
certain provisions of the loan agreement relating to amounts funded in excess of
eligible accounts receivable, unpaid interest of $0.5 million and rent expense.
We expect to successfully resolve these defaults after the completion of this
offering.
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BUSINESS
OVERVIEW
We acquired ARC on June 30, 1999. We will acquire InfoHighway and AXCES
simultaneously with and as a condition of the closing of this offering. Through
these companies, we intend to offer an extensive array of Internet and
telecommunications services to businesses and consumers. These services will
initially include a combination of high-speed Internet access, and local phone
and long distance telephone service. In the future, we intend to offer cable
television, video conferencing, secure online shopping, online data backup,
virtual private networks and other advanced data services. We currently operate
principally in New York, New Jersey, Florida, Illinois, Texas and California.
The combination of these three companies creates an extensive product mix,
and produces efficiencies by combining sales and marketing efforts, back office
operations and customer service. Our complementary product lines will enable us
to become a full service telecommunications company. We will offer both a
combination of services for customer convenience and a wide array of individual
services for specific applications. We intend to service both residential and
small to medium-sized business customers, providing us with a balance between
the long sales cycle of the complex combination of services sold to businesses
and the mass marketing efforts that enjoy a short sales cycle in the less
complex residential arena.
Our current service offerings which we offer for the most part on a stand
alone basis and expect in the future to make available on a combined basis to
all of our customers include the following:
<TABLE>
<S> <C>
Internet Services Our Internet services include high speed service
available either as dedicated direct access or our
InfoHighway DSL and InfoHighway connect products,
dial-up service, web services including web-site
hosting, web-site design, with e-mail services,
and online backup.
Local and Regional We offer a full range of local services including
Telephone Services voice mail, universal messaging services,
conference calling, call return services, call
pick-up, repeat dialing and speed calling. We
provide local services primarily in New York and
to a lesser degree in New Jersey and Florida.
Long Distance Service We offer both domestic interstate and
international switched and dedicated long distance
services including long distance 1+ service, toll
free services, calling card service, and paging
services.
</TABLE>
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<TABLE>
<S> <C>
Network Design and Wiring We offer a full range of network wiring design and
Services installation services including local and wide
area networks, premise network wiring for
computers and telephone systems.
</TABLE>
We currently offer a broad range of Internet and telecommunication services
including high speed Internet access, local phone service, long distance, and
other value added data services. Combining ARC's competitive local telephone
company expertise with InfoHighway's Internet and data background and AXCES'
marketing experience in the resale of telecommunications services, we will be
able to offer an integrated "single bill" solution for customer phone and
Internet needs. By using new technology, we will be able to offer traditional
telecommunication services at a competitive price as well as new data services
not currently available through traditional providers.
Additionally, we provide data services, secure on line data back-up and
virtual private network services. Virtual private networks provide businesses
capabilities similar to those of private lines through the public switched
network using special software and dialing plans. In the future, we intend to
offer additional products such as video conferencing, secure on-line shopping
and other Internet related products.
The following table sets forth the percentage of total pro forma revenue for
each of 1996, 1997 and 1998 and the six months ended June 30, 1999 for each
class of services we provide:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------------- ENDED JUNE
SERVICE 1996 1997 1998 30, 1999
- --------------------------------------------------------------------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C>
Internet................................................................... 3% 3% 3% 6%
Local telephone............................................................ 30% 18% 13% 18%
Long distance.............................................................. 59% 71% 75% 66%
Network design and wiring.................................................. 8% 8% 9% 10%
</TABLE>
In addition, we intend to continue to grow in all of our markets through the
acquisition or merger of complementary technology or service companies. We
intend to use these acquisitions to increase our market share and increase our
Internet and telecommunications products, services and revenues.
One of our objectives is to become a leading provider of multiple services
and expand our product lines to include local service and Internet access to
residential customers in large metropolitan areas where we primarily sell only
long distance service today. In order to achieve this goal, we will continue to
emphasize the following key elements of our operating strategy:
- continue to develop effective marketing campaigns that offer high value to
potential customers through customized telecommunications offerings;
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- focus on maintaining highly efficient distribution capabilities with
emphasis on direct contact with our customers utilizing a variety of
channels, such as direct sales, agents, telemarketing and e-commerce;
- develop new promotional packages that integrate both local telephone
service and Internet access to our target market;
- expand our product offering to additional cities consistent with our
acquisition strategy; and
- building an operational support system to streamline all customer care and
related billing activities utilizing electronic interfaces and the
Internet.
With our dedicated high-speed Internet services, such as our InfoHighway
Connect service and InfoHighway SDSL and ADSL services currently under trial, we
service or have under contract, over 30 multi-story buildings and other
locations. These services are significantly faster than dial up modem
connections, yet sell for less than the cost of a dedicated high-speed
connection. We also provide Internet and telecommunications services to over
10,000 access lines, and serve more than 160,000 residential customers with long
distance service. We believe significant opportunities exist to expand revenues
by cross selling our products and services to current and future customers in
our existing and targeted new markets.
The residential market presently accounts for a significant portion of our
overall revenues. We believe this segment of the market is attractive and has
been underserved by many long distance service providers. In addition, we
believe residential customers are receptive to new and innovative marketing
programs targeting their specific segment with custom solutions. We also believe
these customers are likely to switch service providers for an attractive
offering.
Each of the founding companies has at least five years of experience in its
respective industry and a seasoned management team.
- Mr. Joseph A. Gregori is our Chief Executive Officer, and has over 13
years in the telecommunications industry. Prior to becoming ARC's
Executive Vice President in 1998, he served as Chief Operating Officer of
PriCellular Corporation, a publicly traded wireless telephone provider,
and President of Nationwide Cellular Service Inc. and its successor
company, MCI Wireless.
- Mr. Peter F. Parrinello, our Chairman of the Board and President, has over
25 years of experience in the telecommunications industry.
- Mr. Peter Karoczkai, our Senior Vice-President of Sales and Marketing has
over 12 years of experience in the telecommunications and computer
industry. Previously, Mr. Karoczkai served as Vice President of Marketing
for Bell Atlantic's Telecom Industry Services developing its wholesale
product and service portfolio and distribution.
- Mr. Charles N. Garber, our Chief Financial Officer, has over 25 years
experience in the telecommunications industry. Previously, he served as
Chief
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Financial Officer for two publicly traded start-ups in the
telecommunications, Internet and media sectors, and as Senior Vice
President, Treasurer and Controller of Cincinnati Bell, Inc.
- Mr. Tony Howlett, our Chief Technology Officer, founded InfoHighway and
has served as Chief Executive Officer of InfoHighway since 1995.
MARKET OPPORTUNITY
There is significant market opportunity for our services brought about by
the Telecommunications Act of 1996, which allows for competition in the local
telecommunications market, and the growing demand for Internet access and data.
We believe that the following market conditions support our business
strategy:
- Demand for Internet service, particularly high-speed Internet for small to
medium-sized business applications and residential users is increasing.
- There is increasing demand by companies and individuals for buildings that
provide access to an advanced telecommunications infrastructure.
- The growing number of alternate telecommunications services is creating a
competitive wholesale buyer's market.
- Individuals and businesses currently purchase Internet, data and
telecommunications services from multiple vendors and would be interested
in purchasing these from one provider.
- There is a demand for an alternative to the complexity of the current
voice/ data/Internet supplier mix, and for an alternative to traditional
monopoly providers of local phone service.
Our goal is to attract customers in our target market segments with a
unified product offering including high-speed Internet and telecommunications
service with focus on customer service and superior performance. We believe we
can meet this goal because of the combination of the existing product portfolio
of the founding companies, and because our new product and service offerings
will be accelerated by the rate of growth in the telecommunications industry.
The Internet is experiencing explosive growth at a rate of over 100% per year
worldwide. Currently, over 147 million people use the Internet and that number
is expected to be over 320 million by the end of the year 2000 according to
Computer Almanac Industry, Inc. 1998. Furthermore, businesses are embracing the
Internet in record numbers. In 1998, 36% of businesses were online with
projected growth to 88% by 2001. We believe the unique requirements of business
data and communications traffic will continue to drive high-speed Internet and
data communications demand. Additionally, the Telecommunications Act of 1996
deregulated the telecommunications industry by mandating that competitive local
telephone companies such as ourselves be allowed to provide competitive services
using the existing networks and infrastructure of the incumbent local telephone
companies.
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BUSINESS STRATEGY
Our objective is to become one of the leading providers of combined
high-speed Internet service, data services and telecommunications service in
each of the markets in which we operate. Through the founding companies, we
currently have offices or facilities in the following markets: San Diego, New
York, New Jersey, Houston, Dallas, San Antonio, Jacksonville and Chicago. We
intend to combine our high-speed Internet data products with our local and long
distance products and deliver this telecommunications combination to new and
existing customers. Additionally, we may expand the purchase of data
transmission, switchings and transport facilities to further improve our
operating margins. We believe there is significant demand for our products on a
standalone and combined basis. We plan on implementing the following business
strategy:
MARKET PENETRATION STRATEGY. We are pursuing a strategy of providing
service to small to medium-sized businesses and residential markets by
targeting highly populated, business and residential areas in major U.S.
cities. Additionally, as we reach successful penetration of these markets,
we may continue to deploy data transmission, switching and transport
facilities to further enhance our operating margins through the utilization
of unbundled network elements. Our approach will be to target niche markets
and highly populated areas, including, multi-tenant buildings. For services
such as InfoHighway DSL and InfoHighway Connect, we can locate our equipment
either in the buildings or in the facilities of the traditional local
telephone company. In addition, we will resell the traditional local
telephone company's high-speed data and Internet offerings for a broader
market reach and to expand our product portfolio.
FOCUS ON HIGH-SPEED INTERNET SERVICES. We intend to focus on our
InfoHighway DSL and InfoHighway Connect Internet products, which offer high-
speed Internet access to businesses and to tenants of high rise office and
residential buildings located in selected cities around the country. These
services, called InfoHighway DSL and InfoHighway Connect, are provided by
installing data switches in either the facilities of the traditional local
telephone company or in buildings pursuant to a contract with the owner of
the building. We offer customers Internet access at speeds near those
achieved if they had dedicated high-speed lines and will be able to provide
local and long distance phone service to the tenants as well. For those
customers that sign up for more than one of our services, additional
discounts will be offered across selected product lines. In this manner, we
expect to be able to provide a highly competitive combination of Internet
and telecommunications services to our end-users.
LEVERAGE THE ECONOMICS OF SUCCESS-BASED PENETRATION. To date, we have
only installed data switches for high-speed Internet access after a building
has been signed under contract, thereby limiting our exposure to capital
expenditures. It is our intention to deploy telephone switches only after we
have successfully
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penetrated our key markets, thereby postponing capital expenditures until we
are well marketed in an area and largely success-based.
PROVIDE A SUPERIOR PRODUCT AND SERVICE SOLUTION. We believe that we can
build a significant competitive position by providing a comprehensive
product offering and service solution to our customers. We will undertake to
provide all of the necessary products and services required to establish and
maintain high-speed Internet and telecommunication services in our target
markets, including:
- providing a service that is superior to other competitors in terms of
speed and responsiveness at a price point that is equal to or lower
than competitive offerings;
- provisioning all local and long distance service required to initiate
service providing a single point of contact and hassle free
installation;
- providing all billing and customer service functions on a 24
hour-a-day, 7 day-a-week basis; and
- by providing a responsive, customer-oriented approach to our business
that will distinguish us from traditional phone companies and new
competitors.
ACQUIRE SELECT COMPETITORS IN TARGET MARKETS TO ACCELERATE GROWTH AND
MARKET PENETRATION. The founding companies have in the past acquired small
competitors involved in the Internet service industry and have undertaken
the purchase of a customer base in the telephone sector where it was
determined to be of strategic importance. We intend to continue to seek out
opportunities where we believe that acquisitions provide for either valuable
customer bases and/or accelerated access into a desired market. We believe
that acquisitions can be a valuable part of our overall strategy to expand
our business offerings and achieve faster entry into new markets.
INTERNET SERVICES
INFOHIGHWAY DSL AND INFOHIGHWAY CONNECT INTERNET SERVICES
We have created services called InfoHighway DSL and InfoHighway Connect to
pursue a significant opportunity in the business and residential market. These
high-speed Internet services offered in Texas, New York, New Jersey and Florida
provide customers access to high-speed data lines on a dedicated or shared
basis. Few customers can afford the cost of dedicated high-speed lines by
themselves as provided by the traditional local telephone companies. The current
implementation of InfoHighway DSL and InfoHighway Connect uses dedicated data
lines and standard telephone wiring to provide high-speed Internet and data
network services at speeds up to 24 times faster than a standard 56k modem.
We have entered into an agreement with AccessLan and are currently
negotiating purchase agreements with selected other vendors for DSL and other
data transport and switching equipment. We have tested AccessLan's equipment in
our facilities and
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compared its performance and specific features to other alternative suppliers'
equipment. Our testing concluded that AccessLan's equipment was best suited for
our application and target markets.
The InfoHighway DSL and InfoHighway Connect services provide several
benefits over traditional dial-up services:
- CONTINUOUS CONNECTION. The customer never receives a busy signal since
it is always connected through a network connection rather than a
modem. This is ideal for customers accessing stock tickers, news
updates and other information that require a dedicated connection.
- FEWER TECHNICAL PROBLEMS. Over 90% of technical problems encountered
by Internet users today are modem related. With InfoHighway DSL and
InfoHighway Connect, a network and our equipment provide a continuous
connection.
- LOWER COST. InfoHighway DSL Connect and InfoHighway Connect provide
fast connection speeds at a lower cost than other alternatives such as
ISDN.
- INCREASED SECURITY. As part of the InfoHighway DSL and InfoHighway
Connect services, a basic firewall service is provided at each site to
keep unwanted hackers and other visitors out of customer's networks. A
firewall is a combination of hardware and software that can prevent the
unauthorized access of a network. Additional protection is available
for a fee.
- GREATER USABILITY. Because of the higher speeds, clients can use
additional services that are not practical at lower speeds, such as
video-conferencing, virtual private networks and online data backup. We
already offer data backup and plan to introduce video conferencing and
virtual private networks.
VALUE ADDED INTERNET SERVICES
We are also developing a number of value added services that will be offered
to the InfoHighway DSL and InfoHighway Connect customers. The nature of the
high-speed connection will allow us to provide unique services that will
differentiate us from other companies providing similar services. These services
should also have the effect of increasing client retention, as customers are not
currently able to get this combination of services elsewhere. These services
include:
ONLINE DATA BACKUP. We are able to provide secure online data backup for
clients using the InfoHighway DSL and InfoHighway Connect services. Utilizing
our network at night when usage is very low, a central backup computer remotely
contacts the client's server and downloads files onto archival storage over the
InfoHighway DSL and InfoHighway Connect. The files are encrypted for security
purposes. The benefit of this service is that no personnel or hardware is
required at the customer
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site. Additionally, the backup data is stored off-site and thus protected from a
catastrophic loss such as fire or flood. Finally, the backup data is available
immediately online. The customer can restore or recall the data instantly as
compared to other alternatives which require shipping of physical tapes.
VIRTUAL PRIVATE NETWORKS. Small to medium-sized businesses are recognizing
the value of using the Internet for inter-office communications versus using
expensive private data lines. However, there are security concerns when using
the public Internet to transmit sensitive corporate data. With the InfoHighway
DSL and InfoHighway Connect services, the customer can connect two or more
physically separate networks without transmitting data across the public
Internet. The data flows across our private Intranet allowing for faster
transmission times and greater security.
INTERNET TELEPHONE. As the underlying technology permits, we plan to offer
Internet telephone services such as long distance and local dial tone using
voice over Internet technology to our InfoHighway DSL and InfoHighway Connect
customers. These services may offer additional revenue and further cement the
customer relationship.
DATA COMMUNICATIONS SUPPLIERS. We depend on other telecommunications
companies to provide us with data transmission capacity which we use to provide
our Internet service products. Currently we lease data curcuits from
Southwestern Bell, MCI WorldCom, Savis Communications, Level 3 and Taylor
Communications for periods ranging from month to month to as long as five years.
The following table summarizes our commitments for data circuits from our
major suppliers:
<TABLE>
<CAPTION>
MONTHLY RUNNING TOTAL ESTIMATED
PROVIDER AMOUNT RUNNING AMOUNT
- ------------------------------- ---------------- ---------------------
<S> <C> <C>
Southwestern Bell $ 16,000 $302,000
MCI WorldComm 18,000 36,000
Taylor Communications 3,500 132,000
Level 3 30,000 up to 540,000
</TABLE>
TELECOMMUNICATIONS SERVICES
LOCAL AND REGIONAL TELEPHONE SERVICE
As a result of the Telecommunications Act of 1996, the traditional local
telephone companies were required to sell at wholesale rates their local
telephone services to other telecommunications providers. A customer may now
keep his existing local exchange carrier service and have it provided by us at a
discounted rate. We entered the local telephone market in 1993, when we
recognized the potential in the local market with over $100 billion of annual
recurring revenue and the marketing advantage provided by offering local service
as a part of a combination of discounted telecommunications services. We offer
an extensive array of local services. We have
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the ability to install local service facilities at a discount to and that bypass
the traditional local telephone companies.
As we expand our role in the local market, the focus will be on expanding
services offered and increasing profit margins. To accomplish this, we have
received competitive local telephone status with the Public Service Commission
in New York. This will allow us to purchase the individual components of the
traditional local telephone company's telephone network and to reduce costs and
increase the flexibility of who provides each component of the telephone
network. It is our intention to continue to obtain competitive local telephone
company certification in various other states that we choose to enter.
Since 1993, we have been providing alternate local telephone, wide-area
network, and private line services to customers in the metropolitan New York
City area. These services offer reliable disaster-resistant local and regional
calling as well as access to long distance carriers. In addition to adding
diversity to a subscriber network, we have been successful in providing
significant savings to our customers.
RELATIONSHIPS WITH TRADITIONAL LOCAL TELEPHONE COMPANIES. We currently
purchase telephone service at wholesale rates from Bell Atlantic and AT&T, which
we resell to our own customers. We purchase this service from Bell Atlantic
under the published tariff rates and have also signed a volume and term
agreement with Bell Atlantic for additional wholesale discounts. Our wholesale
agreement with AT&T has a ten-year term ending in 2003 and requires us to meet
minimum monthly volume commitments totalling $171,000 per annum.
In order to locate our equipment in the traditional local telephone
company's facilities we will be required to enter into and implement
interconnection agreements in each of our target markets with the appropriate
traditional local telephone company. These interconnection agreements govern the
relationship between us and the traditional local telephone companies. Since
interconnection agreements are subject to interpretation by both parties,
differences in interpretation may arise that cannot be resolved on favorable
terms to us. Also, the interconnection agreements are subject to state
commission, FCC and judicial oversight. Future modification to the terms,
conditions or prices of our future interconnection agreements by these
governmental bodies, or disputes with the traditional local telephone companies
over the terms of the interconnection agreements by these governmental bodies,
or disputes with traditional local telephone companies over the terms of the
interconnection agreements generally, may have a material adverse effect on our
business, prospects, operating results and financial condition.
The 1996 Telecommunications Act requires traditional local telephone
companies to interconnect with other carriers and to provide competitive local
telephone companies access to their unbundled network elements. The 1996
Telecommunications Act generally requires that interconnection charges as well
as charges for unbundled network elements be cost-based and nondiscriminatory.
Our nonrecurring and recurring monthly charges for lines may vary greatly. These
rates are subject to the
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approval of the appropriate state regulatory commission. The approval process
typically involves a lengthy review of the traditional local telephone
company-proposed rates in each state. The ultimate rates approved typically
depend greatly on the traditional local telephone company's initial rate
proposals and such factors as the geographic deaveraging/averaging policy of the
state public utility commission. These proceedings are time-consuming and will
absorb scarce resources including legal personnel and cost experts as well as
participation by our management. Consequently, we are subject to the risk that
the non-recurring and recurring charges for lines and other individual
components of the traditional local telephone company's telephone network will
increase from time to time based on new rates proposed by the traditional local
telephone company and approved by state regulatory commissions. Any of the
foregoing matters could result in a material adverse effect on our business,
prospects, operating results and financial condition. See "--Network
Architecture and Technology," "--Government Regulation" and "--Legal
Proceedings."
Additionally, we will need to negotiate interconnection agreements with the
traditional local telephone companies to support our product offerings. In July
1999, we requested interconnection agreements from both Southwestern Bell and
Bell Atlantic covering the following states:
- Southwestern Bell--Texas, Missouri, Oklahoma, Kansas, Arkansas and
Connecticut
- Bell Atlantic--New York, New Jersey, Pennsylvania, Maryland, Connecticut,
Rhode Island, Massachusetts, Vermont, New Hampshire and Maine.
We expect to negotiate these interconnection agreements over the next 90 day
period. The law requires the negotiation period not exceed 130 days unless the
parties are unable to agree on the various terms. Arbitration is required if the
companies are unable to conclude their agreement within the 130-day time frame.
We anticipate signing one-year interconnection agreements with these
telephone companies which will automatically renew on a yearly basis unless
otherwise requested by one of the parties. These agreements are also extensively
regulated by both the state and FCC regulatory agencies.
LONG DISTANCE SERVICE
Today's subscribers are bombarded with various types of calling plans from
long distance companies. However, the restrictions and billing methods with most
of these promotions may raise the actual costs of the service. We offer a
straight forward long distance service for either a switched or dedicated
business customer. The billing rate is a competitive flat rate, seven days a
week, which is billed in six-second increments. We entered the long distance
market in response to demand from our business customers for full service
providers who could deliver a combination of telecommunications services. In
addition to traditional nationwide long distance, we have taken the initiative
to offer new international calling plans for our customers. Further, we offer
our customers dedicated facilities, such as high-speed dedicated
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lines, to allow access to our point of presence at 60 Hudson Street in New York
City to allow for connection directly to an international long distance carrier
whose service we resell.
We are exploring opportunities with international telephone companies as
they prepare for deregulation of worldwide telecommunications services.
Currently, we have an arrangement with an international provider that gives us
access to the provider's facilities in New York and Los Angeles and the option
to purchase international usage at the largest provider discount available.
Additionally, we are exploring arrangements with certain competitive local
telephone companies to provide dedicated access to our local facility. This will
allow us to sell a combination of long distance services and to offer discounted
dedicated rates when providing local services from the competitive local
telephone company's facilities. In this manner, very competitive rates can be
offered when using our local phone service. We also offer combined billing and
management reports for our local and long distance services. We are constantly
seeking new markets and alliances as the telecommunications industry continues
to evolve and change due to the effects of deregulation.
We also offer a competitive flat rate with a monthly fee to residential
customers who might not otherwise have been able to obtain a long distance
service as well as to customers attracted to our convenient payment plan. We are
currently licensed to provide our service in 20 states and do so to over 160,000
customers monthly. We have also recently begun to offer paging services to our
customers as the first of other related products that we intend to distribute to
this customer base.
In our residential market, our focus has been on attracting large numbers of
customers through our promotional service offerings. We believe that our
successful marketing techniques in the residential market, coupled with both
local telephone service and Internet access will prove to be an even more
attractive offering to this market segment. Through our direct sales force we
intend to solicit residential customers with various promotional offerings,
including competitive flat rate minute pricing plans. We attribute our success
to maintaining control over the sales and marketing campaigns through our direct
sales force, direct contact with the end-user customer and focusing our efforts
on marketing programs that appeal to various residential and ethnic customers.
We also intend to create customer interest in our products by promoting to a
special or niche interest in our prospective target market by offering a low
promotional price point on a particular portion of our service offering. We
believe that this segment of the marketplace, specific niches of the residential
population are underserved and through creative marketing campaigns including
such promotions as special low rates to international countries will allow us to
be successful in marketing to these customer groups.
We believe that with our marketing experience and the availability of
additional telephone products including local service and Internet access, we
will have an attractive marketing package to sell to our target market. To date,
our sales force has
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primarily sold our long distance products in Texas and Illinois. Through the
combination of the founding companies we will begin to expand upon our products
and open new markets consistent with our expansion plans.
Currently, our sales force consists of approximately 50 employees who
utilize various sales methods in reaching prospective customers. One of our
principal methods of reaching our prospective customers in the residential
market is to take temporary space such as kiosks or counter space in large
retail traffic areas such as malls, supermarkets, and fairs to promote our
products directly. In this manner we are able to reach a large prospective
audience without the high fixed selling costs associated with long-term store
leases and related overhead. Additionally, this approach allows us to capitalize
on successful marketing programs and sign up large numbers of customers. To the
extent that a promotional offering does not have the expected appeal, we are
able to modify such and remarket it within days to the same prospective
audience.
During 1998, as a result of changes in the regulatory requirements
concerning industry marketing techniques, we eliminated several successful
promotions including sweepstakes and unmanned displays across our residual
markets. Additionally, we instituted strict verification procedures designed to
validate our customer's choice of selecting our long distance service. As a
result of these actions we have concentrated our sales and marketing focus on
the residential segment as discussed above.
Our core residential product offering is long-distance service. We also
provide paging service, 800 service, voice-mail and calling cards, although
these products and services represent a small percentage of total residential
sales. We offer our long distance service through approximately 30 different
pricing plans. However, we generate the vast majority of our sales from several
pricing plans. One of our plans bills a flat rate of $6.95 per month plus
9.9 CENTS per minute for interstate calls and our standard rate for intrastate
calls. International calls are billed at varying prices based on the day and
time, as well as the destination of the call.
We intend to develop additional products and services. In addition to
prepaid calling cards, we will offer a special rate plan for customers who make
a high number of calls to one primary international destination. This plan will
initially be offered to customers with a high number of calls to Mexico. The
success of this initial roll-out will determine the other countries to which we
will provide these services.
We currently have contracts with Frontier Communications and Coastal for
long distance services which we resell to our residential and small to
medium-sized business customers. The minimum purchase amounts of our commitment
is summarized as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Frontier Communications............ $ 5,585,000 $ 9,000,000 $ 9,000,000 $ 4,200,000 $ 500,000
Coastal............................ $ 53,000 $ 53,000 -- -- --
</TABLE>
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We also have established billing arrangements with Southwestern Bell and
Ameritech. Under these agreements both Southwestern Bell and Ameritech provide
billing and collection services to us for our residential customers, and remit
amounts billed and collected net of fees and an allowance for uncollectible
accounts. There are no material minimum purchase amounts required by these
billing arrangements.
NETWORK DESIGN AND WIRING SERVICES
We provide the services of fiber optic technologists, as well as equipment
and wiring installation, including outside plant. We provide customer solutions
for premise network wiring, local and wide area networks and system integration.
We presently have a network wiring contract with the State of New York Office of
General Services. This contract enables various state agencies to purchase
service directly from us without the traditional bid process. Under this
agreement, we have made strides in the education market where the Federal
Government E Rate program has financed enhanced data infrastructure in schools
and created business arrangements with companies in various parts of the country
to support these needs.
COMBINED SERVICES
We have the ability to offer a combination of all the above services and
offer volume discounts and one-stop shopping for both businesses and residential
customers. Combining services offers additional marketing opportunities as well
as convenience for the customer. Commercial customers have the option of
purchasing local, long distance and dedicated Internet access services over the
same local loop delivered to their office. There are few competitive local
telephone companies or other providers in the country offering this range of
services. Residential customers can purchase a unique high-speed Internet access
product as well as local phone service, and long distance in buildings serviced
by us. This capability is an effective marketing tool and provides the company
with a significant identity separate and distinct from others in the highly
competitive telecommunications marketplace.
SALES AND MARKETING
Our marketing goal is to provide a wide range of Internet and
telecommunications related services to our small to medium-sized business
customers and residential customers in our target markets. Our plans include
further expansion into key markets, such as Massachusetts, Connecticut and
several other New England states in addition to other states including
Pennsylvania and Maryland. We currently have a presence and a customer base in
these locations because they contain a large part of the population and most of
the major markets. The business market is targeted because of the relatively low
penetration of this market for Internet services and the potential for
cross-selling additional services. We believe that our existing customer base is
interested in our combination of products and services. We also believe that
these customers have been traditionally underserved by larger providers and will
look to purchase Internet and telecommunications services from a single
provider. The
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residential market is targeted because it provides large numbers of customers
who have historically been serviced by multiple telecommunications providers
offering stand-alone services. For example, most traditional local telephone
companies cannot offer local telephone service, long distance service and
Internet access on a single statement. Additionally, we believe as residential
communications needs have increased, such as the need for multiple phone lines
and dial-up Internet access, the traditional local telephone companies have not
kept up with the growing demand with adequate and flexible service offerings.
In the case of the residential market where we have experience selling long
distance service, we believe that providing access to local telephone service at
prices below the traditional local telephone companies bundled with an Internet
service will be attractive. Though current penetration of Internet service is
low in our residential market, we believe that the advent of low cost personal
computers coupled with the desire of customers for the entertainment and
educational opportunities afforded by the Internet will continue to drive
demand. By combining this product with local service and long distance, we
believe that we will be able to dramatically increase customer retention and
cross-selling opportunities.
We plan to leverage our high-speed Internet services as a way to establish
relationships with businesses and consumers alike. By capitalizing on this huge
market opportunity, we will use our Internet offering as our lead product and
then, after successfully reaching our targeted customer, cross-sell our
telecommunications products. Because most businesses already purchase local
phone service and long distance, we will market our telecommunications services
as an alternative to the local telephone companies and as an opportunity to have
one provider handle the business's account. As many of our high-speed Internet
services will involve the configuration and wiring of the customers' premises,
we will be in the position to provide additional services, such as virtual
private networks and web services including e-mail, web-site design and web-site
hosting.
CUSTOMERS
INTERNET SERVICES. In our Internet service sector, we presently provide or
have agreed to provide service to over 30 buildings who subscribe to our
high-speed InfoHighway DSL and InfoHighway Connect products. The customers we
service with these products are primarily small to medium-sized businesses and
residential customers.
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TELECOMMUNICATIONS SERVICES
LOCAL AND LONG DISTANCE SERVICES. In our local and long distance services
sector, we provide data networking and local and long distance services to small
to medium-sized business customers in the New York and New Jersey areas. We
expect to expand those services to all of our existing and planned markets. The
following is a sample of some of our larger data networking and local and long
distance services customers:
<TABLE>
<CAPTION>
<S> <C> <C>
Avis DKNY IONA College
Century 21 J. Crew Inc. Queens College
New York Daily News Lehman College The MONY Group
Bronx Community College Lord and Taylor United Jewish Appeal
New York Transit Authority CUNY Law School Harper Collins Publishing
Daiwa Securities America, Inc. Winstar Wireless Inc.
</TABLE>
We have already started our marketing efforts to provide our high-speed internet
and web services to these and other business customers.
We are also involved in a pilot project with Bell Atlantic as a marketing
agent to deliver a package of Internet and telecommunications products to luxury
high rise multiple dwelling units in New York. This pilot project has reinforced
our belief that residential customers want a single provider to offer multiple
telecommunications products while serving as the only point of contact for
service.
In our residential market, we currently service over 160,000 customers on a
monthly basis with our long distance products. We have recently introduced a
paging product and feel that the ability to offer additional products to the
customer base including local service and Internet access will both increase
customer retention and increase revenue per customer.
NETWORK DESIGN AND WIRING SERVICES. We have experience as a provider of
network configuration and wiring installation. Over the past two years, we have
generated approximately $8 million in network configuration and wiring revenues.
We have wired several hundred buildings and locations providing voice and data
network capabilities. Our technical team has experience with telephone and
computer network configuration, wiring installations and fiber optics. We
believe that network configuration and wiring installation experience will
enhance our ability to provide our high-speed Internet access products and
services. Some of our largest customers include New York State School districts,
NYC colleges and other state agencies. As of July 31, 1999, we had approximately
$1,550,000 of committed orders for our network design and wiring services.
INTEGRATION STRATEGY
The acquisition of the founding companies creates marketing and operational
synergies that will allow us to bring a complete communications solution to our
customers. Cross-selling opportunities among each of the founding companies'
existing customer bases create significant revenue potential. Billing
integration will allow for
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single bill capability that will greatly increase convenience for customers. By
combining telecommunications purchasing, additional volume discounts can be
achieved with major vendors and other strategic partners. Finally, by combining
sales and marketing operations and administration, customer care and billing and
collection, additional cost savings and economies of scale will be achieved.
It is expected that initially, combined and cross-marketed services from the
founding companies will be provided on different types of networks. In the early
stages of integration, we anticipate that we will consolidate our
telecommunications service offerings to take advantage of maximizing vendor
discounts where possible. The technical integration of our operations and
billing systems will be a priority for us. The implementation of our integration
plan will be centered around the development of integrated and scalable
electronic operational support systems that will streamline our operating and
administrative requirements. Our goals for our operational support system
include the following:
- developing application-to-application electronic interfaces with our
vendors including the local telephone companies;
- streamlining customer care requirements including the processing of new
orders and changes to existing customer accounts;
- integrating billing and collection; and
- providing an efficient system of assisting customers reporting problems
with their service.
To accomplish these goals, we expect to utilize a sophisticated, secure,
Internet-based, graphical user interface gateway. This interface will allow our
sales force, agents, customer service representatives as well as our customers
to place orders, inquire about an account, review bills and report service
troubles instantaneously. The efficiency of the electronic interface coupled
with the electronic transmittal of transactions to our vendors will allow us to
streamline our service delivery.
We will incur certain expenses in connection with the integration of the
founding companies, which are not expected to be significant. However, the
actual amount of these expenses could be higher than anticipated. Factors that
could increase such costs include any unexpected employee turnover, unforeseen
delays in addressing duplicate facilities once the acquisitions have been
completed and the associated costs of hiring temporary employees, and any
additional fees and charges to obtain consents, regulatory approvals or permits.
We may not achieve the benefits and strategic objectives sought through the
acquisitions. Costs associated with the acquisitions, or liabilities and
expenses associated with the operations of the founding companies, that exceed
our expectations, could have a material adverse effect on our business,
prospects, operating results and financial condition. See "Management's
Discussion and Analysis of Pro Forma Financial Condition and Results of
Operations--Pro Forma Liquidity and Capital Resources."
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NETWORK ARCHITECTURE AND TECHNOLOGY
The key design principles of our network are intended to provide:
HIGH-SPEED INTERNET SERVICES. Our InfoHighway DSL and InfoHighway Connect
services were developed to provide dedicated high-speed connections at various
speeds to the Internet. These services provide always-on, secure connections to
the Internet that are up to 24 times faster than a 56k modem. The InfoHighway
DSL service also provides us the ability to configure virtual private networks,
and to manage end-user service configurations from a central location.
REDUNDANCY AND BACKUP. Our network is built to provide maximum uptime for
customers. It maintains multiple connections into the Internet's main network
providers to ensure connectivity even during power outages. It also maintains
all of its data on servers that are backed up by an online data back up system.
This means that in the event of a server outage, data can be immediately
recovered and that data loss and customer down time are minimized. Finally, we
maintain working, ready to deploy spares in our primary computer center so that
any equipment outage is generally not noticed by customers.
FLEXIBLE AND EXPANDABLE NETWORK. We have designed and built our network
with the maximum amount of flexibility in mind. As we grow, we will add capacity
to our network. Through an agreement with multiple major carriers, we are able
to expand our network within 48 hours of being requested. We are also installing
equipment that allows upgradability to new features and allows us to offer new
services in the future. We use servers from Ascend Communications which can be
upgraded to provide new products and services, such as virtual private networks
and transmitting voice telephone traffic through the Internet's date transport
capability, which is commonly known as Voice Over Internet Protocol.
COMPETITION
The markets for business and consumer telecommunications and data services
are intensely competitive and we expect that such markets will become
increasingly competitive in the future. Our most immediate potential competitors
are the traditional local telephone companies, long distance service providers,
Internet service providers, wireless data service providers and other
competitive local telephone companies. Many of these competitors are offering,
or may soon offer, technologies and services that directly compete with some or
all of our high-speed digital services and telecommunications services. We
believe that the traditional distinctions between the local, long distance, data
and Internet access markets are eroding. The principal bases of competition in
our markets include transmission speed, reliability of service, breadth of
service availability, price/performance, network security, ease of access and
use, combinations of services, customer support, brand recognition, operating
experience, capital availability and exclusive contracts. We believe that we
compare unfavorably with our competitors with regard to, among other things,
brand recognition, operating experience, exclusive contracts, and capital
availability. Many of
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our competitors and potential competitors have substantially greater resources
than do we and there can be no assurance that we will be able to compete
effectively in our target markets.
TRADITIONAL LOCAL TELEPHONE COMPANIES. BellAtlantic, Ameritech and
Southwestern Bell are the largest traditional local telephone companies present
in our target markets. Each of these is conducting technical and/or market
trials or has entered into commercial deployment of the DSL based services. We
recognize that traditional local telephone companies have the resources to
quickly overcome many of the technical issues that we believe have slowed their
wide deployment of DSL services in the past. The traditional local telephone
companies represent strong competition in all of our target service areas. The
traditional local telephone companies have an established brand name and
reputation for high quality in their service areas, possess sufficient capital
to deploy DSL equipment rapidly, have their own copper lines and can combine
digital data services with their existing analog voice services to achieve
economies of scale in serving customers. Certain of the traditional local
telephone companies have aggressively priced their consumer DSL services as low
as $30-$40 per month, placing pricing pressure on our InfoHighway DSL and
InfoHighway Connect services. Additionally, the traditional local telephone
companies are seeking authority to provide in-region long distance to their
existing customers. Accordingly, we may be unable to compete successfully
against the traditional local telephone companies, and any failure to do so
would materially and adversely affect our business, prospects, operating results
and financial condition. See "Risk Factors--Competition in our industry is
intense and growing, and we may be unable to compete efficiently."
CABLE MODEM SERVICE PROVIDERS. Cable modem service providers such as @Home
Network and MediaOne are deploying high-speed Internet access services over
cable networks. Where deployed, these networks provide similar and in some cases
higher-speed Internet access and remote local access network access than we
provide. They may also offer these services at lower price points than our
InfoHighway DSL and InfoHighway Connect services and target residential
consumers, as well as business customers. They achieve these lower price points
in part by offering a consumer grade of service, which shares the capacity
available on the cable network among multiple end-users. This architecture is
well-suited to compete with our consumer Internet market but is less suited to
our markets for business Internet access. Also, much of the current cable
infrastructure in the U.S. must be upgraded to support cable modems, a process
which we believe is significantly more expensive and time-consuming than the
deployment of traditional networks. Actual or prospective cable modem service
providers competition may have a significant negative effect on our ability to
secure customers and may create downward pressure on the prices we can charge
for our services. In addition, cable modem service providers have or may enter
into the telecommunications services markets.
LONG DISTANCE PROVIDERS. Long distance providers such as AT&T, Sprint, MCI
WorldCom and Qwest have deployed large-scale Internet access and data transport
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networks, sell connectivity to businesses and residential customers, and have
high brand recognition. They also have interconnection agreements with many of
the traditional local telephone companies and a number of facilities from which
they are currently offering or could begin to offer competitive long distance
services.
COMPETITIVE LOCAL TELEPHONE COMPANIES. Companies such as Teleport
Communications Group, Inc. (acquired by AT&T), Brooks Fiber Properties, Inc.
(acquired by WorldCom) and MFS (acquired by MCI WorldCom) have extensive data
networks based on fiber wiring in many metropolitan areas primarily providing
high-speed digital and voice circuits to large corporations. They also have
interconnection agreements with the traditional local telephone companies
pursuant to which they have acquired facilities in many markets targeted by us.
These companies are modifying or could modify their current business focus to
include residential and small business customers using DSLs in combination with
their current fiber networks.
INTERNET SERVICE PROVIDERS. Internet service providers such as BBN
(acquired by GTE), UUNET Technologies (acquired by WorldCom), Earthlink
Networks, Concentric Network, Mindspring Enterprises, Netcom On-Line
Communication Services and PSINet provide Internet access to residential and
business customers, generally using the existing local telephone company's
network at ISDN speeds or below. Some Internet service providers such as UUNET
Technologies in California and New York, HarvardNet Inc. and InterAccess have
begun offering DSL services.
ONLINE SERVICE PROVIDERS. Online service providers include companies such
as America Online, CompuServe (acquired by AOL), MSN (a subsidiary of Microsoft
Corp.) and WebTV (acquired by Microsoft Corp.) that provide, over the Internet
and on proprietary online services, content and applications ranging from news
and sports to consumer video conferencing. These services are designed for broad
consumer access over telecommunications-based transmission media, which enable
the provision of digital services to the significant number of consumers who
have personal computers with modems. In addition, they provide Internet
connectivity, ease-of-use and consistency of environment. Many of these online
service providers have developed their own access networks for modem
connections.
WIRELESS AND SATELLITE DATA SERVICE PROVIDERS. Wireless and satellite data
service providers are developing wireless and satellite-based Internet
connectivity. We may face competition from these providers and other competitors
using various microwave frequencies. For example, the FCC has adopted new rules
to permit multi-channel microwave distribution system licensees to use their
systems to offer two-way services, including high-speed data, rather than solely
to provide one-way video services. The FCC also recently auctioned spectrum for
local multi-channel distribution system services in all markets. This spectrum
is expected to be used for wireless cable and telecommunications services,
including high-speed digital services. In addition, companies such as Teligent
Inc., Advanced Radio Telecom Corp. and WinStar Communications, Inc., hold
point-to-point microwave licenses to provide services such as voice, data and
video conferencing.
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We also may face competition from satellite-based systems. Motorola
Satellite Systems, Inc., Hughes Communications (a subsidiary of General Motors
Corporation), Teledesic and others have filed applications with the FCC for
global satellite networks which can be used to provide high capacity voice and
data services, and the FCC has authorized several of these applicants to operate
their proposed networks.
OTHER COMPETITIVE DATA AND LOCAL TELEPHONE COMPANIES. Other companies such
as Rhythms NetConnections and NorthPoint Communications offer high-speed digital
services similar to ours. The 1996 Act specifically grants competitive local
telephone companies the right to negotiate interconnection agreements with the
traditional local telephone companies. Further, the 1996 Act allows competitive
local telephone companies to enter into interconnection agreements which can be
and are identical to other competitors.
GOVERNMENT REGULATION
OVERVIEW. Our communications services are subject to extensive federal,
state and local regulation. Through ARC and AXCES we hold various federal and
state authorizations for our regulated services. The FCC has jurisdiction over
all our services and facilities to the extent those facilities are used to
provide interstate domestic or international telecommunications services. State
regulatory commissions retain jurisdiction over our facilities and services to
the extent those facilities are used to provide intrastate services. In
addition, local municipal government authorities may require carriers to obtain
licences or franchises to install facilities that cross public rights-of-way.
Most data and Internet services are not currently subject to regulation, though
communications services used for access to the Internet are regulated. Many of
the regulations issued by these federal, state and local regulatory bodies may
change and are the subject of various judicial proceedings, legislative hearings
and administrative proposals. We cannot predict the results of any changes.
FEDERAL REGULATION. Our provision of telecommunications services must
comply with the requirements of the Communications Act of 1934, as amended by
the 1996 Telecommunications Act, as well as regulations promulgated by the FCC
under the Act. The FCC regulates us as a non-dominant common carrier. Our
interstate and international services are not subject to significant regulation
although we must file tariffs with the FCC for these services. We have obtained
authority from the FCC to provide international services between the United
States and foreign countries. The FCC must approve the transfer of control or
assignment of our international authorization. The FCC has the authority to
condition, modify, cancel or revoke our international authorization if we do not
comply with federal law, or the rules, regulations and policies of the FCC. The
FCC may also impose fines or other penalties for such violations.
The 1996 Act eliminates many of the pre-existing legal barriers to
competition in the telecommunications and video programming communications
businesses, preempts state and local laws that prevent competitive entry, and
sets basic standards for
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relationships between telecommunications providers. The law delegates to the FCC
and the states broad regulatory and administrative authority to implement the
1996 Act.
Among other things, the 1996 Act requires traditional local telephone
companies to:
- interconnect their networks with competitors;
- offer to locate competitors' equipment at their premises;
- make available elements of their networks on non-discriminatory,
cost-based terms;
- offer retail services for resale at discounted rates; and
- provide nondiscriminatory access to telephone poles, ducts, conduits, and
rights-of-way.
All competitive local telephone companies, including us, are required to:
- complete calls originated by competing carriers;
- permit resale of services;
- permit users to retain their telephone number when changing carriers; and
- provide equal access for the origination and termination of long distance
calls.
These requirements recognize that local telephone competition is dependent upon
cost-based and non-discriminatory interconnection with and use of traditional
local telephone company networks, including the location of equipment with such
networks. Failure to achieve such interconnection or location of equipment
arrangements could have a material adverse impact on our ability to provide
local telephone services. The FCC has adopted specific rules to implement the
local competition requirement of the 1996 Telecommunications Act.
On January 25, 1999, the United States Supreme Court affirmed the authority
of the FCC to establish rules governing interconnection. However, the Supreme
Court remanded to the FCC issues regarding which individual components of the
traditional local telephone companies' telephone network they must make
available to competitive local telephone companies. We cannot predict what
decision the FCC will reach. An adverse decision could affect our local service
product.
The 1996 Act also allows the traditional local telephone companies to enter
the long distance market within their own local service regions upon meeting
certain requirements to open local telephone markets to competition. To date,
the FCC has rejected each traditional local telephone company's application to
provide long distance service and it is uncertain when the FCC will grant the
first request. Bell Atlantic has sought a ruling from the New York Public
Service Commission that it has met the market opening requirements. If approval
is received from the New York Public Service Commission, Bell Atlantic must file
with the FCC for approval. The timing of the various traditional local telephone
companies in-region long distance
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entry will likely affect the level of cooperation we receive from each of the
traditional local telephone companies.
Long distance companies purchase interstate access service from local
telephone companies to reach end users. Interstate access rates make up a
significant portion of the cost of providing long distance services. On August
5, 1999, the FCC adopted an order that gives traditional local telephone
companies greater flexibility in setting interstate access rates as competition
develops. In part, this flexibility includes the ability to provide term and
volume discounts which may be more advantageous to long distance carriers that
are larger than we are.
The 1996 Telecommunications Act allows the FCC to take explicit regulatory
action in order to encourage the deployment of high-speed, broadband advanced
services to all Americans. The FCC is considering a proposal that would allow
traditional local telephone companies to offer these services through separate
affiliates, whose facilities would not be made available to us or other
competitors for interconnection or resale. Our inability to meet future demand
for broadband local services may put us at a competitive disadvantage.
To date, the FCC has not asserted jurisdiction over companies that provide
Internet access services. However, the FCC is considering the applicability of
access charge and other service fees to Internet service providers. If the FCC
imposes access charges or other service fees on Internet service providers in a
way that affects our services more than that of our competitors, such action
could have a material adverse impact on our business.
STATE REGULATION. We provide intrastate telecommunications that are subject
to various state laws and regulations. To date, we are authorized to operate as
a competitive local telephone company in New York, Florida, Michigan and
Connecticut and intend to obtain authorization in the other states necessary to
cover our target regions. We must obtain such authorizations before providing
service. We are also authorized to provide intrastate long distance services in
approximately 20 states. In most states, we are required to file and keep
current tariffs setting forth our rates, terms and conditions for our intrastate
services. We are also subject to various reporting requirements in these states.
Some of the states in which we hold competitive local telephone company and
long distance licenses must approve the changes in ownership of ARC and AXCES,
as well as the issuance of the securities contemplated in this offering. An
application for approval of the change in ownership of ARC are pending in
California and Pennsylvania. Applications for approval of the acquisition of
Axces are pending in California, Missouri, New York and Georgia.
LOCAL GOVERNMENT REGULATION. In certain instances, we may be required to
obtain various permits and authorizations from municipalities in which we
construct and operate our own facilities. In some jurisdictions, we may be
required to pay franchise fees or other fees for access to public rights-of-way.
The actions of municipal
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governments in imposing conditions on the grant of permits or other
authorizations or their failure to act in granting such permits or other
authorizations could have a material adverse effect on our business, prospects,
operating results and financial condition.
Other existing federal regulations are currently the subject of judicial
proceedings, legislative hearings and administrative proposals, which could
change, in varying degrees, the manner in which communications companies operate
in the U.S. The ultimate outcome of these proceedings, and the ultimate impact
of the 1996 Act or any final regulations adopted pursuant to the 1996 Act on us
or our business cannot be determined at this time but may well be adverse to our
interests. We cannot predict the impact, if any, that future regulation or
regulatory changes may have on our business and there can be no assurance that
such future regulation or regulatory changes will not have a material adverse
effect on our business, prospects, operating results and financial condition.
See "Risk Factors--Our business strategy depends upon securing and maintaining
interconnection agreements with local providers" and "--Our business is highly
regulated and may be adversely affected by future changes in governmental
regulations relating to our industry."
INTERNET REGULATIONS. The law governing the liability of online service
providers and Internet access providers for participating in the hosting or
transmission of objectionable materials or information currently remains
unsettled. Under the terms of the 1996 Telecommunications Act, courts can impose
civil and criminal penalties for the use of interactive computer services for
the transmission of certain indecent or obscene communications. The United
States Supreme Court in 1997 held this provision unconstitutional as it relates
to indecent, but not obscene, communications. In October 1998, Congress enacted
the Child Online Protection Act, which requires that online material that is
"harmful" to minors be restricted. This law is currently being challenged and on
February 1, 1999 a U.S. District Court judge issued a preliminary injunction
against enforcement of portions of that act. The U.S. Justice Department has
filed an appeal of the February 1999 ruling. Also, certain states have adopted
and other states may adopt similar restrictions on the transmission of
objectionable materials over the Internet. The constitutionality of such state
requirements remains unsettled at this time. In addition, several private
parties have filed lawsuits seeking to hold Internet service providers
accountable for information that they transmit, such as libelous material and
copyrighted material. We cannot predict the outcome of this litigation or the
potential for the imposition of liability on Internet service providers for
information that they host, distribute or transport. These suits and other
regulations could materially change the way Internet service providers must
conduct business and could impact our determination to expand or continue this
business. To the extent that we become parties to future litigation, such
litigation could have a material adverse effect on our business, prospects,
operating results and financial condition.
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INTELLECTUAL PROPERTY
We regard our products, services and technology as proprietary and will
attempt to protect it with copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. There can be no assurance these
methods will be sufficient to protect our technology. We also generally enter
into confidentiality or license agreements with our employees and consultants,
and generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our products, services or
technology without authorization, or to develop similar technology
independently. In addition, effective copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries. There can
be no assurance that the steps we have taken and will take will prevent
misappropriation or infringement of our technology. In addition, litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on our
business, prospects, operating results and financial condition.
"OmniLynx-TM-," "InfoHighway-TM-," "InfoHighway DSL-TM-," "InfoHighway
Connect-TM-," "ARC Networks-TM-," "AXCES-TM-" and the OmniLynx logo names and
marks are our trademarks. This prospectus contains our other product names,
trade names and trademarks and those of other organizations.
EMPLOYEES
As of May 31, 1999, we had 166 employees employed in engineering, sales,
marketing, customer support and related activities, and general and
administrative functions. None of our employees is represented by a labor union,
and we consider our relations with our employees to be good. Our ability to
achieve our financial and operational objectives depends in large part upon the
continued service of our senior management and key technical, sales, marketing
and managerial personnel, and our continuing ability to attract and retain
highly qualified technical, sales, marketing and managerial personnel.
Competition for such qualified personnel is intense, particularly in software
development, network engineering and product management.
FACILITIES
Our facilities are all located in the United States and consist of eight
leased facilities. We lease our corporate headquarters office in Hauppauge, New
York and lease a sales office from a related party in New York City on a
month-to-month basis, and have two branch offices under lease in Houston, Texas.
See "Certain Relationships and Related Transactions." We lease sales offices in
San Antonio and Dallas, Texas, and Chicago, Illinois. We have a warehouse for
our data wiring operations in Hauppauge, New York under lease. Our current
leases have remaining terms ranging from less than six months to four years.
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We consider our current facilities adequate for our current needs and
believe that suitable additional or replacement space will be available, as
needed, to accommodate further physical expansion of our operations or
relocation.
LEGAL PROCEEDINGS
From time to time we may be involved in litigation that arises in the normal
course of business operations. As of the date of this prospectus and except as
described below, we are not a party to any litigation that we believe could
reasonably be expected to have a material adverse effect on our business or
results of operations.
ARC
In January 1999, ARC was served with a summons from the State Supreme Court
of New York, County of New York, by Mitel Telecommunications Systems, Inc., for
a breach of contract claim in the amount of $1,715,000 relating to wiring and
installation services for which ARC has been paid in full. As is customary, ARC
recorded this payment as a liability for unearned contracts. ARC believes the
action is without merit and filed a motion to dismiss the action based on
numerous defenses available to it. In addition, ARC continues to perform all
requested services under the contract from Mitel with Mitel's consent, thereby
reducing the liability over time. As of June 30, 1999, ARC estimates that its
maximum exposure resulting from this claim was $1,290,000 and has reduced the
liability to that amount. Since that time, as additional contract work has been
performed, ARC has further reduced the liability to approximately $1 million. In
June 1999, Mitel amended its summons to include Consolidated Technology Group,
Ltd., SIS Capital Corp., Technology Acquisitions, Ltd., and the officers,
directors and shareholders of ARC, Consolidated, SIS and Technology
Acquisitions, Ltd. Consolidated and SIS were parent companies of ARC prior to
its acquisition in June 1999. Technology Acquisitions is controlled by Benchmark
Equity Group and acquired 67% of ARC prior to our acquisition of ARC.
In March 1999, ARC was served with a summons from the State Supreme Court of
New York, County of Orange, by an employee of a customer of ARC located in
Thiells, N.Y., for $1,000,000. The employee claims to have fallen over wiring
which was negligently installed by ARC. ARC has a liability insurance policy
which should provide sufficient coverage in the event the plaintiff's claim is
successful. ARC believes the action is without merit and filed a motion to
dismiss the action based on numerous defenses available to it.
AXCES
The Public Utility Commission of Texas, and the Office of the Attorney
General for the State of Texas brought claims under the Texas Deceptive Trade
Practices Act alleging that AXCES engaged in the practice known as slamming.
Slamming involves the unauthorized change of a customer's long distance service.
The Texas Attorney General sought to restrain certain marketing practices and to
assess damages. The case was settled in June 1998 for $155,000 and while the
settlement did not constitute
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an admission of liability on AXCES' part, AXCES did agree to comply with the
rules promulgated by the Public Utility Commission. The settlement agreement
required a payment of approximately $150,000 which has been paid.
In May 1999, the Public Utility Commission informed AXCES that it had
received additional complaints concerning slamming allegations, and that it was
seeking administrative penalties of approximately $400,000. AXCES intends to
vigorously contest this matter, and believes these claims are without merit and
covered by the prior settlement with the Public Utility Commission.
Similar claims were brought against AXCES in early 1998 by the Attorneys
General of Illinois, Oklahoma, Kansas, and Missouri. Inquiries were also
received from the Attorneys General of Arkansas and Wisconsin regarding
allegations of slamming.
- PEOPLE OF THE STATE OF ILLINOIS V. AXCES, INCORPORATED in the United
States District Court for the Northern District of Illinois, Eastern
Division. The Attorney General for the State of Illinois alleged AXCES had
engaged in or facilitated the practice of slamming. AXCES settled the case
in March 1999 for $50,000.
- BILL BURNETT V. AXCES. The Oklahoma Corporation Commission/Consumer
Service Division brought two claims of unauthorized switches against
AXCES. Although AXCES denied the allegations, in September 1998, an
administrative judge found against AXCES imposing a fine of $15,000 and
ordering that AXCES' Certificate of Convenience and Necessity be revoked
if AXCES is found guilty of any additional slamming acts. AXCES has
appealed the decision to the Commissioners of the Oklahoma Commerce
Commission where the Commissioners' decision remains pending.
- OFFICE OF THE ATTORNEY GENERAL OF THE STATE OF KANSAS. In December 1998,
AXCES received a subpoena from the Office of the Attorney General of the
State of Kansas, Consumer Protection/Antitrust Division. The subpoena was
issued under the authorization of the Kansas Consumer Protection Act and
sought information with regard to unauthorized switches and the use of
sweepstakes boxes to gather letters of agency. AXCES responded to the
subpoena in January and February of 1999. The Office of the Attorney
General has requested that AXCES agree to assessment of an administrative
penalty in the amount of $100,000, based on the conduct cited in the
initial inquiry. AXCES believes this request is without merit.
Accordingly, AXCES has rejected this proposal, although it is willing to
continue settlement discussions with the State.
- STATE OF MISSOURI, EX. REL. JEREMIAH W. (JAY) NIXON V. AXCES,
INCORPORATED, in the Circuit Court of Jackson County, Missouri at Kansas
City. This case seeks damages and penalties stemming from allegations of
slamming on the part of AXCES. The case was removed to federal court and
then remanded back to
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state court. AXCES has requested the federal court to reconsider its
order. The parties have engaged in preliminary discovery and have had some
limited settlement discussions.
- ARKANSAS PUBLIC SERVICES COMMISSION. In November 1998, AXCES received
Staff Interrogatory JPB-1 from the Arkansas Public Services Commission,
Utilities Division. The interrogatory sought information with regard to
switches in Arkansas consumers' long distance service and complaints
regarding same. AXCES responded to the interrogatory in January of 1999.
Since the date of the response, there has been no further communication
from the Arkansas Public Service Commission, Utilities Division.
- STATE OF WISCONSIN. In November 1998, AXCES received an inquiry from the
State of Wisconsin with regard to a consumer complaint of Mr. Michael
Orville. Pursuant to the states' request, AXCES investigated Mr. Orville's
complaint and provided the State of Wisconsin documents regarding same.
Since December 3, 1998, there has been no further action on this matter.
AXCES believes these claims are without merit, that it has meritorious
defenses to them and intends to vigorously defend itself against these claims.
In addition, AXCES was named a defendant in two suits seeking class action
certification. The first case, which was brought in the 138th Judicial District
of Cameron County, Texas and names Michael Avignon as a co-defendant, seeks
damages, class certification, and penalties stemming from allegations of
slamming and deceptive advertising with respect to Spanish-speaking individuals
in the Brownsville, Texas area. The second case, which was brought in 134th
Judicial District Court of Tarrant County, Texas, seeks damages and penalties
and potential class certification relating to violations of the Texas Deceptive
Trade Practices Act and Consumer Protection Act. More specifically, this case
involves allegations of unauthorized switches of long distance service based on
the letters of agency that were in use at the time. No amount of damages is set
forth in the pleadings and the number of persons potentially affected is also
not presently estimable. Both suits are in the preliminary phases of discovery,
and management of AXCES intends to vigorously contest them.
AXCES and one of its officers have also been sued in the United States
District Court for the Northern District of Illinois, Eastern District by a
former employee for violation of wage and hour laws, wrongful termination and
tortious interference with employment. No relief was set forth in the pleadings.
Although the case is in the preliminary phases of discovery, AXCES believes the
claim is without merit and intends to vigorously contest it.
Pursuant to the AXCES acquisition agreement, MTM and its owners have agreed
to indemnify us for any damages incurred in connection with pending litigation
and administrative proceedings on the same basis as we are indemnified for any
breaches of representations and warranties made by AXCES in the acquisition
agreement except that the indemnity does not cover attorneys' fees and
litigation costs. Because
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of this, MTM and its owners will be required to indemnify us for breaches of
representations and warranties in the acquisition agreement and liabilities
incurred in the pending litigation to the extent that such amounts exceed, in
the aggregate, $200,000, and for any tax liability of AXCES, MTM and its owners
that exceeds $1.6 million in the aggregate. However, the indemnification
threshold related to litigation shall increase to the extent of AXCES' net
income plus noncash expenses for the period from May 1, 1999 until the closing
of the acquisition, less any amounts used to pay agreed settlements of the
scheduled litigation. The aggregate liability of MTM and its owners may not
exceed the value of the shares of our common stock issued to MTM on the closing,
plus the value of the shares of our common stock issuable on conversion of the
series B preferred stock. The value of each share of our common stock is set at
the initial public offering price. In addition, the aggregate liability of any
owner of MTM may not exceed $2,000,000.
IN GENERAL
The founding companies have also been subject to other legal proceedings
which have arisen in the ordinary course of business and have not been fully
adjudicated. In addition, we routinely receive inquiries from state and federal
regulatory authorities concerning consumer billing complaints which we respond
to. Although there can be no assurance as to the ultimate disposition of these
matters and the proceedings disclosed above, in the opinion of management, based
upon information available at this time and the availability of indemnification
from AXCES discussed above, the cost of defense or settlement of these actions,
individually or in the aggregate, will not have a material adverse effect on our
financial position or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages, and positions of our directors and
executive officers. All directors hold office until their successors are duly
elected and qualified and all executive officers hold office at the pleasure of
the board of directors.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION CLASS
- --------------------------------------------- --- --------------------------------------------- -------------
<S> <C> <C> <C>
Joseph A. Gregori........................... 45 Chief Executive Officer and Director Class 3
*Peter Parrinello............................ 50 Chairman, Board of the Directors and Class 3
President
Peter Karoczkai............................. 38 Senior Vice President of Sales and Marketing
Charles N. Garber........................... 51 Chief Financial Officer
*Tony Howlett................................ 30 Chief Technical Officer
*Glenn Kramer................................ 52 President of Internet Services and Director Class 1
*Harry Bennett (1)(2)........................ 54 Director Class 2
Christopher Efird (1)....................... 35 Director Class 1
*Weatherly nominee (1)(2).................... -- Director Class 2
*Michael Macaluso............................ 47 Director Class 3
</TABLE>
- ---------------------
* Appointment will become effective upon closing of this offering.
(1) Member of the compensation committee.
(2) Member of the audit committee.
JOSEPH A. GREGORI. Mr. Gregori became our Chief Executive Officer and a
director upon consummation of the acquisition of ARC in June 1999. Over the last
25 years, Mr. Gregori has had extensive business experience in the wireless
telecommunications industry and public accounting. Prior to joining ARC in June
1998, Mr. Gregori was Chief Operating Officer for PriCellular Corp., (d/b/a,
Cellular One), an AMEX listed rural cellular telephone provider. Mr. Gregori
joined PriCellular in September 1996 and served as Chief Operating Officer until
June 1998, when PriCellular was acquired by American Cellular Corp. From 1986
through April of 1996, Mr. Gregori was employed by Nationwide Cellular Service,
Inc., a Nasdaq listed reseller of cellular telephone service. Mr. Gregori served
in a number of senior positions, including Vice President of Operations, Chief
Operating Officer and finally as President. Nationwide Cellular was acquired by
MCI in October of 1995 and Mr. Gregori served as President of MCI Wireless until
he resigned his position in April 1996. Mr. Gregori began his professional
career in public accounting and worked in the audit department of Deloitte
Touche (formerly Touche Ross) as a senior manager. He is an honors graduate
(Magna Cum Laude) of Adelphi University and is a CPA.
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PETER PARRINELLO. Mr. Parrinello will become our Chairman of the Board and
President upon the consummation of this offering. Chief Executive Officer and
founder of ARC, Mr. Parrinello was formerly Executive Vice President of Avionics
Research Corporation, where he established the engineering firm's
telecommunications division. In 1993, this division took the name of ARC and
became one of the first re-sellers of local telephone service in the United
States. Mr. Parrinello's background in telecommunications spans over twenty-five
years starting with Military Networks in Southeast Asia in the late 1960's and
early 70's. His professional career began at New York Telephone in Central
Office Operations in 1971 and later moved to Litton Industries during the
establishment of the interconnect industry in 1972. Mr. Parrinello started with
Tel Plus in 1975 during the inception of that company and served to develop new
markets. Seimens Corporation later acquired TelPlus. Mr. Parrinello received his
BS at New York Institute of Technology at Old Westbury (Cum Laude), in
Electrical Engineering and Business Administration.
PETER KAROCZKAI. Mr. Karoczkai has served as our Senior Vice President of
Sales and Marketing since July 1999. From March 1997 through July 1999, Mr.
Karoczkai was Vice President, Marketing and Product Management for Bell Atlantic
Telecom Industry Services, Bell Atlantic Corporation's wholesale division which
has estimated revenues of $1 billion in 1999. From July 1995 through March 1997,
Mr. Karoczkai was the Managing Director, Resale Services of NYNEX Corporation,
where he established the company's resale division. From September 1992 through
July 1995, Mr. Karoczkai was Director, Marketing for NYNEX Mobile Communications
Company, managing NYNEX Mobile's reseller channel and developing channel
strategy for the company's agent, direct and telemarketing distribution. Mr.
Karoczkai began his career in marketing computer networks and services for
technology companies. Mr. Karoczkai received his BS in Marketing Management from
the University of North Carolina at Greensboro and his MBA in Marketing and
International Management from New York University.
CHARLES N. GARBER. Mr. Garber has served as our Chief Financial Officer
since July 1999. From June 1998 through December 1998, Mr. Garber was Chief
Financial Officer at DigiTEC 2000, Inc., a publicly traded telecommunications
startup company. From July 1996 through June 1998, Mr. Garber was Chief
Financial Officer of SpeedUS.com, Inc., a publicly traded Internet and media
startup company. From December 1994 through June 1996, Mr. Garber was Senior
Vice President of Corporate Planning and Strategic Development of ICS
Communications, Inc., a media and telecommunications company. In his twenty-five
year telecommunications career, Mr. Garber has held executive positions with
AT&T, Bell Atlantic, Cincinnati Bell, Inc., BellSouth Capital Funding and
BellSouth Corporation. Mr. Garber was involved in AT&T's divestiture of the Bell
companies and BellSouth's diversification program. In addition, he completed
over $2 billion in merger and acquisition transactions and the closings of
approximately $2.5 billion in financings. Mr. Garber is an honors
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graduate of Virginia Polytechnic Institute & State University with a BS in
Electrical Engineering and an MBA in Finance. He is a Chartered Financial
Analyst and a member of the New York Society of Security Analysts.
TONY HOWLETT. Mr. Howlett will become our Chief Technical Officer upon
consummation of the acquisition of InfoHighway. Mr. Howlett founded InfoHighway
in 1994 and was one of the principal shareholders of InfoHighway. Previously,
from April 1993 to July 1994 he was the owner of Howlett Consulting Company, a
database and networking consulting firm, and a sales engineer from 1989 to 1993
for MCP, a personal computer reseller providing networking technologies to
Fortune 1000 firms. He was a contributing editor to Texas Computing Magazine.
Mr. Howlett holds a BBA in Management Information Systems from the University of
Houston.
GLENN KRAMER. Mr. Kramer will become our President of Internet Services and
a director upon consummation of the acquisition of InfoHighway. Mr. Kramer, a
25-year veteran of the computer industry, has served in a number of management
capacities throughout his career. He served as Southern Regional Manager for SCM
Corporation from 1970 to 1972, as Marketing Manager for National Business &
Security Systems, Inc. from 1972 to 1976 and 1978 to 1987, and as Eastern
Regional Manager of Mylee Digital Sciences, Inc. from 1976 to 1978. As the
President and Chief Executive Officer of Classic Configurations, Inc. from 1987
to 1996, he was the architect of a national computer dealer franchise. He has
also served as a consultant to a number of industry leaders such as Hewlett
Packard, Digital, Novell, and MicroAge. Mr. Kramer attended the University of
Maryland where he pursued a liberal arts education.
HARRY BENNETT. Mr. Bennett will become a director upon consummation of this
offering. Mr. Bennett has served as Chairman and Chief Executive Officer of
TelaLink Network, Ltd. since 1998. Mr. Bennett served as Executive Vice
President, Local Services for AT&T from 1993 to 1998. During his 25-year career
with AT&T, he was responsible for the phone giant's move into local service
markets across the United States after passage of the Telecommunication Act of
1996. Bennett was named to this position January 1, 1996, and was responsible
for local services activities in both the consumer and business markets.
Previously, Bennett had been vice president and general manager for AT&T's
IntraLATA/Local Markets organization, where he led AT&T's activities in
IntraLATA and local access markets, developing new markets to increase AT&T's
revenues from sources other than its traditional long-distance services base.
Bennett joined AT&T in 1973 as an operations supervisor in Washington, D.C. He
later served as National Account Manager in Chicago and then Division
Manager--Market Management at AT&T Communications. Bennett joined the
headquarters marketing team in 1985 and was later promoted to Director-- Market
Management Center, Service Vice President. A 1968 graduate of the U.S. Military
Academy at West Point, Bennett earned a master's degree in management from the
Massachusetts Institute of Technology, where he was a Sloan Fellow.
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CHRISTOPHER EFIRD. Mr. Efird has served as one of our directors since April
1997. Mr. Efird is a principal of Benchmark Equity Group, Inc., one of our
principal stockholders, where his duties include the origination and management
of consolidation and restructuring transactions. Since joining Benchmark at
inception in April 1994, Mr. Efird has participated in the execution of mergers
and acquisitions of domestic and international companies, as well as the
completion of new public equity offerings for the firm's clients. Mr. Efird is a
graduate of Texas A&M University and holds a Masters of Arts degree from Sam
Houston State University with a concentration in the quantitative analysis of
the political risk faced by international companies.
[BIO OF DIRECTOR TO BE NOMINATED BY WEATHERLY TO BE PROVIDED BY AMENDMENT]
MICHAEL MACALUSO. Mr. Macaluso will become a director upon consummation of
this offering. Mr. Macaluso founded International Printing & Publishing in 1989
and served as President and a director of that company until 1998. International
Printing was a joint venture between Mr. Macaluso and Touche Holdings, a partner
investment fund for a large accounting firm. International Printing recently
merged with another company to form Page/International Communications, a large
sheet-fed printing operation located in Texas. He serves as a director of this
new company. Mr. Macaluso became a principal and a director at AXCES in 1997. He
holds a seat on the board and owns 25% of MTM Holdings, the parent company of
AXCES. A graduate of Canisius College, Mr. Macaluso played professional
basketball and attended graduate school at Golden Gate University in San
Francisco. He brings both operational and merger and acquisition experience to
our board.
CLASSIFIED BOARD
Our board of directors is divided into three classes, each of which,
following a transition period, will serve for three years, with one class being
elected each year at our annual stockholders' meeting. During the transitional
period, the terms of the class 1 directors will expire at the 2000 annual
meeting, while the terms of the class 2 directors and the class 3 directors will
expire at the 2001 and 2002 annual meetings, respectively. Classification of our
board of directors could have the effect of lengthening the time necessary to
change the composition of a majority of the members comprising the board. In
general, at least two annual meetings of stockholders will be necessary for
stockholders to effect a change in a majority of the members of the board.
COMMITTEES OF THE BOARD OF DIRECTORS
In June 1999, the board of directors established a compensation committee
and an audit committee. The compensation committee makes recommendations
concerning salaries and incentive compensation of our employees and consultants
and administers our incentive plan. The audit committee reviews, acts on and
reports to
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the board of directors with respect to various auditing and accounting matters,
including reviewing our audit policies, overseeing the engagement of our
independent auditors and developing our financial strategies.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to June 1999, we had no separate compensation or stock option
committee or other board committee performing equivalent functions, and these
functions were performed by our board of directors. In June 1999, we established
compensation, audit and executive committees of our board of directors. The sole
current member of the compensation committee is Christopher Efird with Harry
Bennett and the Weatherly nominee to be named to the committee prior to the
closing of this offering. Mr. Efird will serve as our President until the
closing of this offering at which time Peter Parrinello will become our
President. In June 1999 and in connection with the acquisition of the founding
companies, Mr. Efird was issued contingent common stock issue rights for up to
67,243 shares of our common stock. Upon the closing of this offering, the
compensation committee will be composed of non-employee directors. See
"--Committees of the Board of Directors."
DIRECTOR COMPENSATION
All non-employee directors are reimbursed for travel and other related
expenses incurred in attending meetings of the board of directors. In addition,
each non-employee director serving on the board of directors will be granted
options to purchase 10,000 shares of common stock upon his initial appointment
to the board, and will receive 10,000 additional options upon the date of the
first board meeting in the second calendar quarter of each year pursuant to our
incentive plan. The options will vest immediately and will have an exercise
price equal to the fair market value of the common stock on the date of grant.
EXECUTIVE COMPENSATION
We did not pay any compensation to our executive officers prior to the
acquisition of ARC in June 1999. We anticipate that our Chief Executive Officer
and four most highly compensated executive officers and their annualized base
salaries will be Joseph A. Gregori--$150,000; Peter Parrinello--$160,000; Peter
Karoczkai-- $175,000; Charles N. Garber--$175,000; and Tony Howlett--$120,000.
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SUMMARY COMPENSATION TABLE. The following table sets forth the projected
compensation to be paid by us to our chief executive officer and each of the
other four most highly-paid executive officers upon the effectiveness of their
respective employment agreements with us.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------------------
ANNUAL COMPENSATION AWARDS
----------------------------------- -------------------------- PAYOUTS
OTHER RESTRICTED SECURITIES ------------------------
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION ($) ($) ($) ($) (#)(1) ($) ($)
- ------------------------ --------- --------- ------------- ----------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph A. Gregori....... 150,000(2) -- -- -- 480,000 -- --
Chief Executive
Officer
Peter Parrinello........ 160,000(2) -- -- -- 375,000 -- --
President and Chairman
of the board of
directors
Peter Karoczkai......... 175,000(2) -- -- -- 225,000 -- --
Senior Vice President
of Sales and
Marketing
Charles N. Garber....... 175,000(3) -- -- -- 100,000 -- --
Chief Financial
Officer
Tony Howlett............ 120,000(2) -- -- -- -- -- --
Chief Technical
Officer
</TABLE>
- --------------------------
(1) See "Option Grants Prior to Offering" for certain information with respect
to options granted in 1999.
(2) These amounts represent the annual salaries to be paid to Messrs. Gregori,
Parrinello, Karoczkai and Howlett pursuant to their respective employment
agreements which will become effective upon the closing of this offering.
(3) This amount represents the annual salary to be paid to Mr. Garber pursuant
to his employment agreement which became effective July 19, 1999.
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OPTIONS GRANTS PRIOR TO OFFERING. The following table sets forth
information on grants of stock options to the named persons in the Summary
Compensation Table prior to offering.
OPTION GRANTS PRIOR TO OFFERING
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED ANNUAL
SECURITIES RATES OF STOCK PRICE
UNDERLYING PERCENT OF TOTAL APPRECIATION FOR OPTION
OPTIONS/SARS OPTIONS/SARS EXERCISE OR TERM($)(1)
GRANTED IN 1999 GRANTED TO BASE PRICE EXPIRATION -------------------------------
NAME (#) EMPLOYEES IN 1999 ($/SH) DATE 0% 5% 10%
- ----------------------- --------------- ----------------- ------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph A. Gregori...... 300,000(2) 28.6 8.00 6/30/04 600,000 1,428,845 2,431,530
113,443(3) 10.8 10.00 (6) 0 313,422 692,580
66,557(4) 6.3 5.00 (6) 332,785 516,669 739,122
Peter Parrinello....... 300,000(2) 28.6 8.00 6/30/04 600,000 1,428,845 2,431,530
47,267(3) 4.5 10.00 (6) 0 130,590 288,570
27,733(4) 2.6 5.00 (6) 138,665 215,286 307,978
Peter Karoczkai........ 225,000(5) 21.4 10.00 7/19/09 0 1,415,013 3,585,921
Charles N. Garber...... 100,000(5) 16.7 10.00 7/19/09 0 628,895 1,593,742
</TABLE>
- --------------------------
(1) Based on actual option term (five years for options granted to Messrs.
Gregori and Parrinello, and ten years for options granted to Messrs.
Karoczkai and Garber) and annual compounding at rates shown.
(2) These are incentive stock options, to the extent allowed by tax law, granted
under our incentive plan, and which vested one-third in June 1999, and vest
an additional one-third in June 2000 and 2001.
(3) These are incentive stock options, to the extent allowed by tax law, granted
under our incentive plan, and vest ratably each month over the three-year
period from the closing of this offering.
(4) These are incentive stock options, to the extent allowed by tax law, granted
under our incentive plan, and vest on the closing of this offering.
(5) These are incentive stock options, to the extent allowed by tax law, granted
under our incentive plan, and vest ratably one-third on the closing of this
offering and then one-third each on the first and second anniversaries of
the closing of this offering.
(6) These options will be granted on and will expire 5 years from the date of
the closing of this offering.
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OPTION HOLDINGS. The following table sets forth the number and value of
unexercised stock options in 1999 held by the named persons in the Summary
Compensation Table at the close of the offering.
AGGREGATED OPTION VALUES AT THE CLOSING OF THIS OFFERING
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE- MONEY OPTIONS AT
OPTIONS AT THE CLOSING OF THE CLOSING OF THIS
THIS OFFERING(#) OFFERING($)(1)
SHARES ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph A. Gregori........... -- -- 166,557 313,443 532,785 400,000
Peter Parrinello............ -- -- 127,733 247,267 338,665 400,000
Peter Karoczkai............. -- -- 75,000 150,000 0 0
Charles N. Garber........... -- -- 33,333 66,667 0 0
</TABLE>
- --------------------------
(1) Value of in-the-money options calculated based on the assumed price per
share of the common stock at the closing of this offering or $10.00.
EMPLOYMENT AGREEMENTS
As of the closing of this offering, we will enter into employment agreements
with Messrs. Gregori, Parrinello, Karoczkai, Howlett and Kramer. Mr. Garber's
employment agreement became effective on July 19, 1999. Each of the agreements:
- provides for a minimum base salary;
- entitles the employee to participate in all our benefit plans in which
other members of our management participate; and
- has an initial term of three years from their effective date.
If we terminate the employee's employment for any reason other than for cause,
voluntary resignation or death, the employee will be entitled to the payment of
any annual base salary and continuation of health insurance benefits for six
months. Each employment agreement contains a covenant limiting competition with
us following the termination of employment for a period of the longer of one
year after commencement of the employment agreement or one year after employment
terminates.
Under the agreements, "cause" is defined as a determination by the board of
directors that:
- the employee has breached the agreement;
- the employee has willfully failed to substantially perform his duties
thereunder or failed to follow the directives of the board of directors;
or
- the employee has willfully engaged in misconduct which is materially
injurious to OmniLynx.
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INCENTIVE PLAN
The description below summarizes all material features of our incentive
plan.
GENERAL. The objectives of our incentive plan, which has been approved by
our board of directors, are to attract and retain selected key employees,
consultants and outside directors, encourage their commitment, motivate their
performance, facilitate their obtaining equity ownership interests by aligning
their personal interests to those of our shareholders and enable them to share
in our long-term growth and success.
SHARES SUBJECT TO INCENTIVE PLAN. Under the incentive plan, we may issue
incentive awards covering at any one time an aggregate of 1,500,000 shares of
our common stock. No more than 1,500,000 shares of our common stock will be
available for incentive stock options. The number of securities available under
the incentive plan and outstanding incentive awards are subject to adjustments
to prevent enlargement or dilution of rights resulting from stock dividends,
stock splits, recapitalization or similar transactions or resulting from a
change in applicable laws or other circumstances.
ADMINISTRATION. The incentive plan will be administered by the compensation
committee of our board of directors. The committee consists only of non-employee
directors, each of whom is:
- an "outside director" under Section 162(m) of the Internal Revenue Code
and
- a "non-employee director" under Rule 16b-3 under the Exchange Act.
The committee may delegate to our chief financial officer or other senior
officers its duties under the incentive plan, except for the authority to grant
incentive awards or take other action on persons who are subject to Section 16
of the Exchange Act or Section 162(m) of the Internal Revenue Code. In the case
of an incentive award to an outside director, the entire board of directors acts
as the committee. Subject to the express provisions of the incentive plan, the
committee is authorized to, among other things, select grantees under the
incentive plan and determine the size, duration and type, as well as the other
terms and conditions, of each incentive award. The committee also construes and
interprets the incentive plan and any related agreements. All determinations and
decisions of the committee are final, conclusive and binding on all parties. We
will indemnify members of the committee against any damage, loss, liability,
cost or expenses in connection with any claim by reason of any act or failure to
act under the incentive plan, except for an act or omission constituting willful
misconduct or gross negligence.
ELIGIBILITY. Key employees, including our officers, consultants and
non-employee directors are eligible to participate in the incentive plan. A key
employee generally is any of our employees who, in the committee's opinion, is
in a position to contribute materially to our growth, development and financial
success.
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TYPES OF INCENTIVE AWARDS. Under the incentive plan, the committee may
grant incentive awards which can be any of the following:
- incentive stock options as defined in Section 422 of the Internal Revenue
Code;
- nonstatutory stock options;
- shares of restricted stock; and
- other stock-based awards.
Incentive stock options and nonstatutory stock options together are called
"options." The terms of each incentive award will be reflected in an incentive
agreement between us and the participant.
OPTIONS. Generally, options must be exercised within 10 years of the grant
date. Incentive stock options may be granted only to employees, and the exercise
price of each incentive stock options may not be less than 100% of the fair
market value of a share of our common stock on the date of grant. The committee
has the discretion to determine the exercise price of each nonstatutory stock
option granted under the incentive plan. To the extent that the aggregate fair
market value of shares of our common stock for which incentive stock options are
exercisable for the first time by any employee during any calendar year exceeds
$100,000, those options must be treated as nonstatutory stock options.
The exercise price of each option is payable in cash or, in the committee's
discretion, by the delivery of shares of common stock owned by the optionee, or
the withholding of shares that would otherwise be acquired on the exercise of
the option, or by any combination of the two.
An employee will not recognize income for federal income tax purposes at the
time an incentive stock option is granted, or on the qualified exercise of an
incentive stock option, but instead will recognize capital gain or loss upon the
subsequent sale of shares acquired in a qualified exercise. The exercise of an
incentive stock option is qualified if a participant does not dispose of the
shares acquired by the participant's exercise within two years after the
incentive stock option grant date and one year after the exercise date. We are
not entitled to a tax deduction for the grant or qualified exercise of an
incentive stock option.
An optionee will not recognize income for federal income tax purposes, nor
will we be entitled to a deduction, when a nonstatutory stock option is granted.
However, when a nonstatutory stock option is exercised, the optionee will
recognize ordinary income in an amount equal to the difference between the fair
market value of the shares received and the exercise price of the nonstatutory
stock option, and we will generally recognize a tax deduction in the same amount
at the same time.
RESTRICTED STOCK. Restricted stock may be subject to a substantial risk of
forfeiture, a restriction on transferability or rights of repurchase or first
refusal on our
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behalf, as determined by the committee. Unless the committee determines
otherwise, during the period of restriction, the grantee will have all other
rights of a stockholder, including the right to vote and receive dividends on
the shares.
OTHER STOCK-BASED AWARDS. Other stock-based awards are awards denominated
or payable in, valued in whole or in part by reference to, or otherwise related
to, shares of our common stock. Subject to the terms of the incentive plan, the
committee may determine any terms and conditions of other stock-based awards,
provided that, in general, the amount of consideration we receive shall be
either:
- no consideration other than services actually rendered or to be rendered;
or
- in the case of an award in the nature of a purchase right, consideration
at least equal to 50% of the fair market value of the shares covered by
such grant on the grant date.
Payment or settlement of other stock-based awards will be in shares of common
stock or in other consideration related to such shares.
OTHER TAX CONSIDERATIONS. Upon accelerated exercisability of options and
accelerated lapsing of restrictions upon restricted stock or other incentive
awards in connection with a "change in control", certain amounts associated with
such incentive awards could, depending upon the individual circumstances of the
participant, constitute "excess parachute payments" under Section 280G of the
Internal Revenue Code. Such a determination would subject the participant to a
20% excise tax on those payments and deny us a corresponding deduction. The
limit on deductibility of compensation under Section 162(m) of the Code is also
reduced by the amount of any excess parachute payments. Whether amounts
constitute excess parachute payments depends upon, among other things, the value
of the incentive awards accelerated and the past compensation of the
participant.
Taxable compensation earned by executive officers who are subject to Section
162(m) of the Code with respect to incentive awards is subject to certain
limitations set forth in the incentive plan. Those limitations are generally
intended to satisfy the requirements for "qualified performance-based
compensation," but we may not be able to satisfy these requirements in all
cases, and we may, in our sole discretion, determine in one or more cases that
it is best not to satisfy these requirements even if we can.
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL. Except as otherwise
provided in the applicable incentive agreement, if a participant's employment or
other service with us is terminated other than due to his death, disability,
retirement or for cause, his then exercisable options will remain exercisable
until the earlier of their expiration date or 90 days after termination. If this
termination is due to disability or death, his then exercisable options will
remain exercisable until the earlier of their expiration date or one year
following termination. On retirement, his then exercisable options will remain
exercisable for six months. However, incentive stock options will remain
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exercisable for three months. On a termination for cause, all his options will
expire at the opening of business on the termination date.
If we undergo a change in control, any restrictions on restricted stock and
other stock-based awards may be deemed satisfied, all outstanding options may
become immediately exercisable and any other stock-based awards may become fully
vested and deemed earned in full, all at the discretion of the committee. These
provisions could in some circumstances have the effect of an "anti-takeover"
defense because, as a result of these provisions, a change in control could be
more difficult or costly.
INCENTIVE AWARDS NONTRANSFERABLE. No incentive award may be assigned, sold
or otherwise transferred by a participant, other than by will or by the laws of
descent and distribution, or be subject to any lien, assignment or charge;
provided, that, the committee may permit nonstatutory stock options to be
transferred to the participant's immediate family or trusts or partnerships
established exclusively for the benefit of his immediate family. An incentive
award may be exercised during the participant's lifetime only by the
participant, the participant's legal guardian or a permitted transferee.
AMENDMENT AND TERMINATION. Our board of directors may amend or terminate
our incentive plan at any time. However, the incentive plan may not be amended,
without shareholder approval, if the amendment would:
- increase the number of shares of common stock which may be issued under
the incentive plan, except in connection with a recapitalization of our
common stock;
- amend the eligibility requirements for employees to purchase our common
stock under the incentive plan; or
- extend the term of the incentive plan.
Without a participant's consent, no termination or amendment of the incentive
plan shall adversely affect in any material way any outstanding incentive award
previously granted to him.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DESCRIPTION OF CERTAIN PARTIES
The following is a description of the identities of and relationships
between certain parties mentioned in the prospectus. For the complete beneficial
ownership of any of the following persons or entities, see "Principal
Stockholders."
- FRANK M. DELAPE--Mr. DeLape is the sole stockholder and director of
Benchmark. He also serves a director for Technology Acquisitions and
Consolidated Technology. In addition, he and his children are remote
contingent beneficiaries of a variable universal life insurance contract
issued by Lighthouse.
- BENCHMARK EQUITY GROUP, INC.--Benchmark is a Delaware corporation that
owns 579,886 shares of our common stock and 158,363 contingent common
stock issue rights. Benchmark also is the manager of and owns a 1%
membership interest in Emerging Ventures, the other interest holders of
which are unaffiliated with Benchmark or OmniLynx. In addition, Benchmark
owns all of the voting shares of Technology Acquisition. See Frank M.
DeLape.
- TECHNOLOGY ACQUISITIONS, LTD.--Technology Acquisitions is a Bermuda
corporation that purchased all of the 6,392,800 shares of ARC Networks
owned by Consolidated Technology for a total purchase price of $850,000 in
March 1999. Technology Acquisitions will receive 261,645 shares of our
common stock and 102,405 contingent common stock issue rights in
connection with our acquisition of ARC. Technology Acquisitions also owns
17.1% of the outstanding common stock of Consolidated Technology and an
option to purchase an additional 17.1% of the common stock from other
shareholders of Consolidated Technology at any time through April 2000. In
addition for as long as the option is outstanding, Technology Acquisitions
has the right to vote these additional shares of Consolidated Technology.
See Frank M. DeLape and Benchmark.
- CONSOLIDATED TECHNOLOGY GROUP, LTD.--Consolidated Technology is a New York
corporation which holds a $1.85 million promissory note which is
convertible into 206,250 shares of common stock at a conversion price of
$8.00 per share. Consolidated Technology also holds a warrant to purchase
90,000 shares of our common stock at an exercise price of $8.00 per share.
In addition, it owns 14.2% of the common stock of Trans Global. See Frank
M. DeLape and Technology Acquisitions.
- TRANS GLOBAL SERVICES, INC.--Trans Global is a Delaware corporation and
former affiliate of ARC Networks through their common ownership by
Consolidated Technology. Trans Global will receive 1,206,673 shares of our
series A preferred stock upon completion of this offering in exchange for
$1,206,673 of debt ARC owes Trans Global. See Consolidated Technology.
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- EMERGING VENTURES, L.L.C.--Emerging Ventures is a Delaware limited
liability company that owns 97,260 shares of our common stock and 38,067
contingent stock issue rights. See Benchmark and Trident III.
- LIGHTHOUSE CAPITAL INSURANCE COMPANY--Lighthouse is an unaffiliated Cayman
Islands unlimited licensed insurance company. Lighthouse has issued a
variable universal life insurance contract of which Mr. DeLape and his
children are remote contingent beneficiaries. Through this contract,
Lighthouse is the sole stockholder of Trident Equity Management Group. See
Frank M. DeLape.
- TRIDENT EQUITY MANAGEMENT GROUP, INC.--Trident Equity Management Group is
a Cayman Island exempted company that manages Trident III, L.L.C. See
Lighthouse.
- TRIDENT III, L.L.C.--Trident III is Cayman Islands limited liability
company which received 2,298,318 shares of InfoHighway common stock in
September 1998 in return for a $500,000 bridge loan to InfoHighway.
Trident III will receive 208,040 shares of our common stock and 102,405
contingent common stock issue rights in connection with our acquisition of
InfoHighway. In addition, Trident III owns a 33% membership interest in
Emerging Ventures. See Trident Equity Management Group.
- MTM HOLDINGS CORPORATION--MTM Holdings is a Texas corporation which is
owned by:
- Timothy Till--37.5%;
- Michael Avignon--37.5%; and
- Michael Macaluso--25%.
Messrs. Till and Avignon serve as officers of AXCES while Mr. Macaluso is
a member of our board of directors.
ORGANIZATION OF OMNILYNX
INITIAL CAPITALIZATION. We were initially capitalized with $1,000 provided
by Benchmark for 939,000 shares of our common stock. In August 1998, Benchmark
transferred 236,203 of the 939,000 shares by gift to the following:
- Emerging Ventures--97,260 shares;
- Christopher H. Efird--115,429 shares; and
- Jeffrey W. Tomz--23,514 shares.
Mr. Efird is one of our current directors. Mr. Tomz served as a director until
June 1999.
CONTINGENT COMMON STOCK ISSUE RIGHTS. In June 1999 and in connection with
the acquisitions of the founding companies, we issued contingent common stock
issue rights representing up to a total of 277,372 shares of common stock to the
following:
- Benchmark--up to 158,363 shares;
- Emerging Ventures--up to 38,067 shares;
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- Mr. Efird--up to 67,243 shares; and
- Mr. Tomz--up to 13,699 shares.
Approximately one-half of these shares are issuable, if at any time within three
years of the issuance of those contingent common stock issue rights, when our
common stock reaches a 10-day average of $16.00 per share. The remaining
one-half are issuable, if at any time within three years of the issuance of the
contingent common stock issue rights, our common stock reaches a 10-day average
of $21.00 per share.
BENCHMARK LETTER AGREEMENT. In September 1998, we entered into a letter
agreement with Benchmark. Under the terms of the agreement, Benchmark agreed to
serve as our non-exclusive agent in connection with an acquisition or
disposition by us for a term of two years. Benchmark's fee under the agreement
is equal to the following:
- five percent of the first $5 million of aggregate consideration;
- four percent of the second $5 million of aggregate consideration;
- three percent of the third $5 million of aggregate consideration; and
- two percent of any consideration over $15 million in the aggregate paid in
connection with an eligible transaction with a minimum fee of $100,000.
The acquisitions of ARC, AXCES and InfoHighway are excluded from the fee
requirement of the agreement, as amended.
BENCHMARK CONSULTING AGREEMENT. In September 1998, we entered into a
consulting agreement with Benchmark which provided for, among other things, a
monthly consulting fee of $14,000 for a two year period and reimbursement of
expenses incurred during the course of the consulting engagement. In June 1999,
the consulting agreement was amended to waive any accrued or future consulting
fees and to recognize the aggregate amount of expenses to be reimbursed as of
that date to be $105,000.
VANDERHIDER CONSULTING AGREEMENT. During the first quarter of 1999, we
entered into an agreement with John Vanderhider, our former Chief Financial
Officer, for services to be rendered in conjunction with the offering. The
agreement, as amended, provided for, among other things, the granting of
five-year exercisable warrants to purchase 86,844 shares of our common stock at
$5.71 per share in exchange for services rendered. Warrants for 7,237 shares of
common stock vest each month over a period of twelve months starting in February
1999. Of the warrants for 7,237 shares,
- warrants for 5,201 shares are immediately exercisable upon vesting;
- warrants for 1,018 shares are exercisable when the common stock has closed
at a price of at least $16.00 per share for 10 consecutive trading days;
and
- warrants for 1,018 shares are exercisable when the common stock has closed
at a price of at least $21.00 per share for 10 consecutive trading days.
BRIDGE LOANS. In March 1999, we issued a $100,000 13% promissory note to
Trident III maturing at the earlier of March 1, 2000 or the closing of an
outside
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financing with minimum gross proceeds of $500,000. Trident III also received
warrants to purchase an aggregate of 100,000 shares of our common stock at an
exercise price of $8.00 per share subject to certain provisions and terms. The
warrants have a term of five years and have registration rights. In June 1999,
we repaid this note out of the proceeds of the $1.5 million June promissory note
offering described below.
In April 1999, we issued a $100,000 13% promissory note to Trident III
maturing at the earlier of April 5, 2000 or the closing of an outside financing
with minimum gross proceeds of $500,000. Trident III also received warrants to
purchase an aggregate of 50,000 shares of our common stock at an exercise price
of $8.00 per share subject to certain provisions and terms. The warrants have a
term of five years and have registration rights. In June 1999, we repaid this
note out of the proceeds of the $1.5 million June promissory note offering
described below.
In June 1999, we issued an aggregate of $1,500,000 13% promissory notes to
ten individual, accredited investors. These notes mature at the earlier of June
22, 2000 or the closing of an outside financing by us with minimum gross
proceeds of $5,000,000. The individual investors also received warrants to
purchase an aggregate of 300,000 shares of common stock at an exercise price of
$8.00 per share. The warrants have a term of five years and have registration
rights.
THE ACQUISITIONS
We acquired ARC on June 30, 1999. We will acquire InfoHighway and AXCES
simultaneously with and as a condition of the closing of this offering. Subject
to certain adjustments described below, the aggregate consideration we will pay
to acquire the founding companies is approximately $28.6 million as described in
the table below. We will also repay an aggregate of approximately $6.7 million
of indebtedness of OmniLynx and the founding companies with the proceeds of the
offering. The consideration we are paying for each founding company was
determined by arm's length negotiations between us and a representative of that
founding company.
<TABLE>
<CAPTION>
CONTINGENT COMMON
COMMON STOCK STOCK ISSUE RIGHTS(1) PREFERRED STOCK
------------------------- ---------------------- --------------------------------
VALUE OF VALUE OF VALUE OF
ACQUISITION SHARES SHARES SHARES SHARES SHARES SHARES
- ---------------------------- ---------- ------------- --------- ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
AXCES....................... 700,000 $ 6,300,000 -- $ -- 60,000(2) $ 9,000,000
InfoHighway................. 958,166 8,623,494 235,878 -- -- --
ARC......................... 390,076 3,510,684 152,672 -- 1,206,673(3) 1,206,673
---------- ------------- --------- ----- -------------- ----------------
Total....................... 2,048,242 $ 18,434,178 388,550 $ -- 1,266,673 $ 10,206,673
---------- ------------- --------- ----- -------------- ----------------
---------- ------------- --------- ----- -------------- ----------------
</TABLE>
- ------------------------
(1) The contingent common stock issue rights entitle the holder to receive
common stock based upon market performance beginning 90 days after this
offering. Approximately one-half of the shares are issuable when the common
stock reaches a 10-day average of $16.00 per share. The remaining one-half
is issuable when the common stock reaches a 10-day average of $21.00 per
share. The rights expire after 3 years.
(2) Each share of series B preferred stock is convertible into 10 shares of
common stock at anytime at the option of the holder. The series B preferred
stock is redeemable after 36 months out of a
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designated portion of our cash flow. If the common stock trades for an
average of $20 per share for 10 consecutive days, we may force the
conversion of the series B preferred stock into common stock.
(3) The series A preferred stock is convertible into common stock at the option
of the holder at any time after 90 days from the closing of this offering or
earlier with the consent of both OmniLynx and the representative of the
underwriters with respect to this offering. The number of shares issuable
upon conversion of the series A preferred stock is dependent on the
conversion rate which is calculated by dividing $1.00 by the lesser of the
offering price or the five-day average closing price ending on the trading
day prior to such conversion date. The series A preferred stock is to be
issued to a former affiliate of ARC in exchange for a current note payable
from ARC of $1.2 million.
For a complete description of the consideration paid, the debt repaid or assumed
or other material terms of the acquisitions, see "Management's Discussion and
Analysis of Pro Forma Financial Condition and Results of
Operations--Organization."
INDEMNIFICATION BY MTM HOLDINGS AND ITS STOCKHOLDERS. Pursuant to the AXCES
acquisition agreement, MTM Holdings and its owners have agreed to indemnify us
for any damages incurred in connection with pending litigation and
administrative proceedings on the same basis as we are indemnified for any
breaches of representations and warranties made by AXCES in the acquisition
agreement. See "Management's Discussion and Analysis of Pro Forma Financial
Condition and Results of Operations--Organization--Acquisition of AXCES."
CONDITIONS TO CLOSING AXCES AND INFOHIGHWAY ACQUSITIONS. The closing of the
AXCES and InfoHighway acquisitions are subject to customary conditions. These
conditions include, among others:
- the accuracy on the closing date of the acquisitions of the
representations and warranties made by the founding companies, their
principal stockholders and OmniLynx;
- the performance of each of their respective covenants included in the
agreements relating to the acquisitions; and
- nonexistence of a material adverse change in the result of operations,
financial condition or business of each founding company.
We can give no assurance that the conditions to the closing of all acquisitions
will be satisfied or waived or that each of the acquisitions will close.
TERMINATION OF AXCES AND INFOHIGHWAY AGREEMENTS. The acquisition agreements
for AXCES and InfoHighway may be terminated, under certain circumstances, prior
to the closing of this offering:
- by the mutual consent of our board of directors and the boards of
directors of AXCES or InfoHighway;
- by AXCES or InfoHighway, their respective stockholders or us, if the
offering and the acquisition of AXCES or InfoHighway are not closed by
October 31, 1999;
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- by us if the schedules to the acquisition agreement are amended to reflect
a material adverse change in AXCES or InfoHighway; or
- by AXCES or InfoHighway, their respective stockholders or us, if a
material breach or default under the agreement by one party occurs and is
not waived by the other party.
NON-COMPETE AGREEMENTS. Pursuant to the acquisition agreements, Peter
Parrinello, Michael Macaluso, Michael Avignon, Timothy Till, MTM Holdings, Tony
Howlett, Glenn Kramer, Don Trapp have agreed not to compete with us for a period
of two or three years commencing on the date of closing of the acquisitions. In
addition, pursuant to their employment and consulting agreements with us or
AXCES, as applicable, Joseph Gregori, Peter Parrinello, Peter Karoczkai, Charles
Garber, Michael Macaluso, Michael Avignon, Timothy Till, MTM Holdings, Tony
Howlett and Glenn Kramer have agreed not to compete with us or our subsidiaries
during their respective terms of employment and for a period of one year
thereafter. For information regarding the employment agreements to be entered
into by certain key officers of the founding companies. See
"Management--Executive Compensation; Employment Agreements" and "Real Estate and
Other Transactions--MTM Holdings Consulting Agreement; Subsidiary Employment
Agreements."
REGISTRATION RIGHTS. In connection with the acquisitions, we will grant
certain registration rights to former stockholders of the founding companies.
However, these are subject to provisions in the acquisition agreements that
restrict the transfer of certain percentages of common stock for up to two years
depending upon the performance of the common stock. See "Shares Eligible for
Future Sale."
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ACQUISITIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
Persons who are or will become directors, executive officers, or beneficial
owners of 5% or more of our common stock will receive the following
consideration in the acquisitions for their equity interests in the founding
companies.
<TABLE>
<CAPTION>
CONTINGENT COMMON
STOCK ISSUE
COMMON STOCK RIGHTS(1) PREFERRED STOCK
------------------- ----------------- ------------------------ OPTIONS,
CERTAIN OFFICERS, DIRECTORS AND VALUE OF VALUE OF VALUE OF WARRANTS,
PRINCIPAL STOCKHOLDERS SHARES SHARES SHARES SHARES SHARES SHARES OTHER
- -------------------------------------- ------- ---------- ------- -------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
ARC
Technology Acquisitions, Ltd........ 261,645 $2,354,805 102,405 -- -- -- --
Consolidated Technology Group
Ltd............................. -- -- -- -- -- -- 296,250 (2)
Peter Parrinello.................... 39,060 351,540 15,289 -- -- -- 375,000 (3)
AXCES
Michael Avignon(4).................. 262,500 2,362,500 22,500 3,375,000 100,000 (5)
Timothy Till(4)..................... 262,500 2,362,500 -- -- 22,500 3,375,000 75,000 (6)
Michael Macaluso(4)................. 175,000 1,575,000 -- -- 15,000 2,250,000 --
InfoHighway
Tony Howlett........................ 114,598 1,031,382 23,596 -- -- -- --
Glenn Kramer........................ 44,076 396,684 9,075 -- -- -- --
Trident III......................... 208,040 1,872,360 81,425 -- -- -- 150,000 (7)
</TABLE>
- --------------------------
(1) The contingent common stock issue rights entitle the holder to receive
common stock based upon market performance beginning 90 days after this
offering. Approximately one-half of the shares are issuable when the common
stock reaches a 10-day average of $16.00 per share. The remaining one-half
is issuable when the common stock reaches a 10-day average of $21.00 per
share. The rights expire after 3 years.
(2) Includes:
- 206,250 shares issuable upon conversion at $8.00 per share of a $1.65
million note issued to Consolidated Technology in exchange for outstanding
debt of ARC; and
- 90,000 shares issuable upon exercise of warrants at $8.00 per share which
were issued to Consolidated Technology in connection with the
restructuring of ARC's note to Consolidated Technology.
(3) Includes:
- 300,000 shares issuable upon exercise of options at $8.00 per share;
- 27,733 shares issuable upon exercise of options at $5.00 per share; and
- 47,267 shares issuable upon exercise of options at $10.00 per share.
(4) Represents each shareholders' proportionate interest in shares of common and
preferred stock issued to MTM Holdings. Each share of series B preferred
stock is convertible into 10 shares of common stock at anytime at the option
of the holder. The series B preferred stock is redeemable after 36 months
out of a designated portion of our cash flow. If the common stock trades for
an average of $20 per share for 10 consecutive days, we may force conversion
of the series B preferred stock into common stock.
(5) Includes:
- 36,977 shares issuable upon exercise of options at $5.00 per share; and
- 63,023 shares issuable upon exercise of options at $10.00 per share.
(6) Includes:
- 27,733 shares issuable upon exercise of options at $5.00 per share; and
- 47,267 shares issuable upon exercise of options at $10.00 per share.
(7) Represents 150,000 shares issuable upon exercise of warrants at $8.00 per
share which were issued to Trident III in connection with certain bridge
loans.
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For a complete description of the beneficial ownership of our officers,
directors and principal stockholders, see "Principal Stockholders."
REAL ESTATE AND OTHER TRANSACTIONS
ARC LEASE. ARC occupies space leased by Consolidated Technology in New York
City. There is no formal lease agreement between Consolidated Technology and
ARC. Rent is charged by SIS Capital Corp., a Delaware corporation and wholly
owned subsidiary of Consolidated Technology, to ARC which amounted to $23,153,
$27,752 and $14,066 for the years ended December 31, 1996, 1997 and 1998,
respectively.
ARC DEBT. In connection with the acquisition of ARC, $750,000 of the
outstanding balance of approximately $2.4 million on June 30, 1999 on the
revolving line of credit due to Consolidated Technology will be repaid with the
proceeds from the offering. The balance of the revolving line of credit of $1.65
million was exchanged for a 14% convertible note of which $450,000 matures in
January 2000, and the remaining $1.2 million matures in June 2000 if not
previously converted. The outstanding balance of this note is convertible into
shares of common stock at $8.00 per share at Consolidated Technology's option at
any time. In addition, Consolidated Technology has been issued five-year
exercisable warrants to purchase 90,000 shares of common stock at $8.00 per
share in exchange for the restructuring of the debt. Consolidated Technology was
granted piggy back registration rights with respect to the shares issuable upon
conversion of the note and exercise of the warrants. See "Description of Capital
Stock--Registration Rights" and "Shares Eligible for Future Sale."
AXCES PRINTING SERVICES. AXCES purchases printing services from Page/IPP
Communications, L.L.C., a company in which MTM Holdings owns a 30% interest,
from time to time. During 1998 and 1997, AXCES purchased printing services
totaling $281,660 and $284,660, respectively, from Page/IPP. Amounts due
Page/IPP at December 31, 1997 and 1998 were $16,583 and $66,265, respectively.
MTM Holdings is owned as follows: 25% by Michael Macaluso, a director and 5%
beneficial owner of OmniLynx; 37.5% by Michael Avignon, a 5% beneficial owner of
OmniLynx; and 37.5% by Timothy Till, a 5% beneficial owner of OmniLynx.
INFOHIGHWAY DEBT. In connection with the acquisition, $499,250 owed by
InfoHighway to Trident III pursuant to a loan agreement dated September 18,
1998, will be repaid from the proceeds of the offering.
MTM HOLDINGS CONSULTING AGREEMENT. AXCES entered into a consulting
agreement with MTM Holdings, the previous sole shareholder of AXCES. The
consulting agreement is effective on the closing of this offering and has a
three year term subject to early termination rights held by both parties. MTM
Holdings has been engaged to seek out acquisition targets for us in addition to
providing other services towards the consummation of these acquisitions. The
agreement provides for a $115,000 annual retainer, payable in equal monthly
installments, and a commission payable on acquisitions consummated during the
agreement term or within one year
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thereafter. The retainer is an advance of any fees earned. The fee is three
percent of the first million of the purchase price, two percent of the second
million and one percent of any amount over $2 million. The commission will be
decreased by the amount of any retainer previously paid to the owner. The
agreement terminates automatically upon the death or disability of Mr. Michael
Macaluso. Prior to the expiration of the three year term, AXCES may terminate
the agreement with or without cause, and MTM Holdings may terminate the
agreement for any reason. If the agreement is terminated due to Mr. Macaluso's
death, the retainer through the termination date and any unpaid commission must
be paid. If AXCES terminates the agreement without cause, it must pay MTM
Holdings the retainer through the termination date, any commission that is due
and payable and not previously paid, monthly installments on the retainer for
six months following the termination date, and commission on any acquisition
consummated within one year following the termination date that relates to a
potential acquisition that was the subject of a notice from the owner to the
surviving corporation given before the date of termination. The agreement also
contains certain non-competition and non-disclosure provisions that remain in
effect for a period of three years after termination.
SUBSIDIARY EMPLOYMENT AGREEMENTS. During June 1999, AXCES entered into
employment agreements with Michael Avignon and Timothy Till which provide for
the retention of Mr. Avignon and Mr. Till in the capacities of Operations
Manager and MIS Director, respectively, for a three year term commencing upon
the consummation of the offering. The agreements provide each employee an annual
base salary of $160,000 and a monthly car allowance of $1,000 together with one
year non-competition obligations, among other things. Both agreements provide
for an annual bonus payment to each employee. However, Mr. Avignon's annual
bonus is based upon the annual net income performance of AXCES, while Mr. Till's
bonus is payable in an amount at the discretion of our board. Mr. Avignon's
annual bonus is determined as follows:
- if the annual net income of AXCES is less than $3.0 million, Mr. Avignon
will receive no bonus;
- if the annual net income of AXCES is greater than $3.0 million but less
than $5.0 million, Mr. Avignon will receive an annual bonus of $90,000
plus 5% of the amount that annual net income exceeds $3.0 million; or
- if the annual net income of AXCES is greater than $5.0 million, Mr.
Avignon will receive an annual bonus of $190,000 plus 10% of the amount
that annual net income exceeds $5.0 million.
The agreements also contain certain non-competition and non-disclosure
provisions that remain in effect for a period of one year after their
termination.
OUR POLICY
We believe that all of the certain transactions described in this section
were made on terms no less favorable than could have been obtained from third
parties. In the future, any transactions with our directors, officers, employees
or affiliates are anticipated to be minimal and will, in any case, be approved
in advance by a majority of the board of directors, including a majority of
disinterested members of the board of directors.
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PRINCIPAL STOCKHOLDERS
The following table shows, immediately after giving effect to the closing of
the acquisitions and this offering, the beneficial ownership of our common stock
for:
- each person beneficially owning more than 5% of our outstanding common
stock;
- each of our directors;
- each of our executive officers; and
- all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER OFFERING
(2)
-----------------------
BENEFICIAL OWNER (1) NUMBER PERCENT
- -------------------------------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Frank M. DeLape (3)
Benchmark Equity Group, Inc................................................................. 1,533,876 29.60%
700 Gemini, Suite 100
Houston, Texas 77058
MTM Holdings Corporation (4)................................................................ 1,300,000 25.06%
2500 Wilcrest, Suite 540
Houston, Texas 77042
Technology Acquisitions, Ltd. (5)........................................................... 660,300 13.24%
Clarendon House, 2 Church Street
Hamilton, HM II
Bermuda
Michael Avignon (4)(6)...................................................................... 587,500 11.96%
2500 Wilcrest, Suite 540
Houston, Texas 77042
Timothy Till (4)(7)......................................................................... 562,500 11.51%
Joseph Gregori (8).......................................................................... 480,000 9.47%
Lighthouse Capital Insurance Company (9)
Trident Equity Management Group, Inc.
Trident III, L.L.C.......................................................................... 432,465 9.12%
c/o MeesPierson (Cayman) Ltd.
P.O. Box 2003 GT
Grand Pavilion Comm. Centre
Bougainvillea Way
802 West Bay Road
Grand Cayman BWI
Peter Parrinello (10)....................................................................... 429,349 8.63%
Michael Macaluso (4)(11).................................................................... 325,000 6.86%
2500 Wilcrest, Suite 540
Houston, Texas 77042
Consolidated Technology Group, Ltd. (12).................................................... 296,250 6.07%
700 Gemini, Suite 100
Houston, Texas 77058
Peter Karoczkai (13)........................................................................ 225,000 4.68%
</TABLE>
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<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER OFFERING
(2)
-----------------------
BENEFICIAL OWNER (1) NUMBER PERCENT
- -------------------------------------------------------------------------------------------- ---------- -----------
<S> <C> <C>
Christopher Efird (14)...................................................................... 182,672 3.92%
700 Gemini, Suite 100
Houston, Texas 77058
Tony Howlett (15)........................................................................... 138,194 3.00%
Charles Garber (16)......................................................................... 100,000 2.13%
Glenn Kramer (17)........................................................................... 53,151 1.16%
Harry Bennett (18).......................................................................... 10,000 *
35 Airport Road, Suite 120
Morristown, New Jersey 07960
[Weatherly nominee--To Be Provided by Amendment] (18)....................................... 10,000 *
[Address]
All directors and officers as a group (9 persons) (8,10,11,13-18)........................... 1,953,366 32.27%
</TABLE>
- ---------------------
(1) All persons listed have sole voting and investment power with respect to
their shares unless otherwise indicated. Unless otherwise indicated, the
address of each person listed is 1770 Motor Parkway, Suite 300, Hauppauge,
New York 11788.
(2) Assumes none of these persons intends to acquire shares directly from the
underwriters in connection with this offering. Shares shown include shares
of common stock that could be acquired on exercise of currently outstanding
options which have not vested and do not vest within 60 days hereof.
However, the share amounts do not include shares of common stock which are
issuable in connection with the contingent common stock issue rights.
(3) The number of shares beneficially owned by Mr. DeLape and Benchmark
includes:
- 579,886 shares beneficially held by Benchmark, which is wholly-owned by
Mr. DeLape;
- 261,645 shares beneficially held by Technology Acquisitions all of the
voting stock of which is owned by Benchmark, and of which Mr. DeLape is a
director;
- 296,250 shares beneficially held by Consolidated Technology of which Mr.
DeLape is a director;
- 97,260 shares beneficially held by Emerging Ventures which is managed by
Benchmark; and
- 298,836 shares issuable pursuant to the contingent stock issue rights held
by Benchmark, Emerging Ventures and Technology Acquisitions.
Does not include 358,040 shares beneficially held by Lighthouse which has
issued a variable universal life insurance contract of which Mr. DeLape and
his children are remote contingent beneficiaries. Mr. DeLape disclaims
beneficial ownership of such shares held by Lighthouse and does not have
voting or dispositive power with respect to such shares.
(4) The number of shares beneficially owned by MTM Holdings includes:
- 700,000 shares; and
- 600,000 shares issuable upon conversion of the 60,000 outstanding shares
of our series B preferred stock.
All of these shares of common and preferred were issued to MTM Holdings, the
former sole shareholder of AXCES, as consideration for the acquisition of
AXCES. MTM Holdings is owned by Mr. Till (37.5%), Mr. Avignon (37.5%) and
Mr. Macaluso (25%).
(5) The number of shares beneficially held by Technology Acquisitions includes:
- 261,645 shares held by Technology Acquisitions;
- 296,250 shares beneficially held by Consolidated Technology Group, an
affiliate of Technology Acquisitions; and
- 102,405 shares issuable pursuant to contingent common stock issue rights.
(6) The number of shares beneficially owned by Mr. Avignon includes:
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- 262,500 shares;
- 225,000 shares issuable upon conversion of 22,500 shares of our series B
preferred stock;
- 36,977 shares issuable upon exercise of options at $5.00 per share; and
- 63,023 shares issuable upon exercise of options at $10.00 per share.
The shares of common and preferred were issued to MTM, the former sole
shareholder of AXCES, as consideration for the acquisition of AXCES. The
options at $5.00 per share all vest on the closing of this offering. The
options at $10.00 per share vest ratably each month over the three-year
period following the closing of this offering.
(7) The number of shares beneficially held by Mr. Till includes:
- 262,500 shares;
- 225,000 shares issuable upon conversion of 22,500 shares of our series B
preferred stock;
- 27,733 shares issuable upon exercise of options at $5.00 per share; and
- 47,267 shares issuable upon exercise of options at $10.00 per share.
The shares of common and preferred were issued to MTM, the former sole
shareholder of AXCES, as consideration for the acquisition of AXCES. The
options at $5.00 per share all vest on the closing of this offering. The
options at $10.00 per share vest ratably each month over the three-year
period following the closing of this offering.
(8) The number of shares beneficially held by Mr. Gregori includes
- 300,000 shares issuable upon exercise of options at $8.00 per share;
- 66,557 shares issuable upon exercise of options at $5.00 per share; and
- 113,443 shares issuable upon exercise of options at $10.00 per share.
The options at $8.00 per share vested one-third in June 1999, and vest an
additional one-third in June 2000 and 2001. The options at $5.00 per share
all vest on the closing of this offering. The options at $10.00 per share
vest ratably each month over the three-year period following the closing of
this offering.
(9) The number of shares beneficially held by Lighthouse, Trident Equity
Management Group and Trident III includes:
- 208,040 shares held by Trident III;
- 150,000 shares issuable upon exercise of warrants at $8.00 per share
issued to Trident III in connection with promissory notes we issued prior
to the offering; and
- 81,425 shares issuable pursuant to contingent common stock issue rights.
Trident III is managed by Trident Equity Management Group, Inc., a Cayman
Islands exempted company and a wholly-owned subsidiary of Lighthouse.
(10) The number of shares beneficially held by Mr. Parrinello includes:
- 39,060 shares held by Mr. Parrinello and members of his immediate family
which were issued as consideration for the purchase of ARC;
- 300,000 shares issuable upon exercise of options at $8.00 per share;
- 27,733 shares issuable upon exercise of options at $5.00 per share;
- 47,267 shares issuable upon exercise of options at $10.00 per share; and
- 15,289 shares issuable pursuant to contingent common stock issue rights.
The options at $8.00 per share vested one-third in June 1999, and vest an
additional one-third in June 2000 and 2001. The options at $5.00 per share
all vest on the closing of this offering. The options at $10.00 per share
vest ratably each month over the three-year period following the closing of
this offering.
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(11) The number of shares beneficially owned by Mr. Macaluso includes:
- 175,000 shares; and
- 150,000 shares issuable upon conversion of 15,000 shares of our series B
preferred stock.
The shares of common and preferred were issued to MTM, the former sole
shareholder of AXCES, as consideration for the acquisition of AXCES.
(12) The number of shares beneficially owned by Consolidated Technology
includes:
- 206,250 shares issuable upon conversion at $8.00 per share of a $1.65
million note issued to Consolidated Technology in exchange for outstanding
debt of ARC; and
- 90,000 shares issuable upon exercise of warrants at $8.00 per share which
were issued to Consolidated Technology in connection with the
restructuring of ARC's note to Consolidated Technology.
(13) Represents shares issuable upon exercise of options at $10.00 per share.
(14) The number of shares beneficially owned by Mr. Efird include:
- 115,429 shares; and
- 67,243 shares issuable pursuant to the contingent common stock issue
rights.
(15) The number of shares beneficially owned by Mr. Howlett includes:
- 114,598 shares which were issued as consideration for the purchase of
InfoHighway; and
- 23,596 shares issuable pursuant to contingent common stock issue rights.
(16) Represents shares issuable upon exercise of options at $10.00 per share.
(17) The number of shares beneficially owned by Mr. Kramer includes:
- 44,076 shares, which were issued as consideration for the purchase of
InfoHighway; and
- 9,075 shares issuable pursuant to contingent common stock issue rights.
(18) Represents shares issuable upon exercise of options at $10.00 issued to
each of our outside directors upon appointment to the board.
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DESCRIPTION OF CAPITAL STOCK
The following description is a summary of the material terms of our capital
stock.
Upon the closing of this offering, our authorized capital stock, after
giving effect to the amendment of our certificate of incorporation, will consist
of 25,000,000 shares of common stock and 3,000,000 shares of preferred stock.
The common stock and preferred stock each have a par value of $.0001 per share.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding series of preferred stock, the holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available for
that purpose. See "Dividend Policy." In the event of a liquidation, dissolution
or winding up, the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock.
CONTINGENT COMMON STOCK ISSUE RIGHTS
As of the closing of this offering, there will be approximately 727,511
contingent common stock issue rights. These rights were issued to certain of our
founders and to the former shareholders of ARC and InfoHighway in connection
with the acquisition of those companies. The contingent common stock issue
rights entitle the holder to receive shares of our common stock based upon its
market performance beginning 90 days after the closing of this offering.
Approximately one-half of the shares are issuable when our common stock reaches
a 10-day average of $16.00 per share. The remaining one-half are issuable when
our common stock reaches a 10-day average of $21.00 per share. The rights expire
after three years. No dividends are payable with respect to the rights and the
rights are not transferrable or assignable except by the laws of descent and
distribution, by will or by operation of law. All of the 235,878 contingent
common stock issue rights issued to the former shareholders of InfoHighway,
except for 81,425 which were issued to Trident III, L.L.C, are subject to pro
rata reduction if the monthly revenues for InfoHighway for the full calendar
month prior to the closing of this offering are less than $174,064.
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PREFERRED STOCK
At the direction of our board, we may issue up to 3,000,000 shares of
preferred stock from time to time. Our board may, without any action by holders
of the common stock:
- adopt resolutions to issue preferred stock in one or more classes or
series;
- fix or change the number of shares constituting any class or series of
preferred stock; and
- establish or change the rights of the holders of any class or series of
preferred stock.
The rights that any class or series of preferred stock may evidence may include:
- general or special voting rights;
- preferential liquidation or preemptive rights;
- preferential cumulative or noncumulative dividend rights;
- redemption or put rights; and
- conversion or exchange rights.
We may issue shares of, or rights to purchase, preferred stock the terms of
which might:
- adversely affect voting or other rights evidenced by, or amounts otherwise
payable with respect to, the common stock;
- discourage an unsolicited proposal to acquire us; or
- facilitate a particular business combination involving us.
Any such action could discourage a transaction that some or a majority of our
stockholders might believe to be in their best interests or in which our
stockholders might receive a premium for their stock over its then market price.
SERIES A 10% CONVERTIBLE PREFERRED STOCK. Upon the closing of this
offering, 1,206,673 shares of our series A 10% convertible preferred stock will
be outstanding, of 1,217,000 shares authorized.
- CONVERSION RIGHTS. The series A preferred is convertible into common stock
at the option of the holder at any time after 90 days from the closing of
this offering or earlier with the consent of both us and the
representative of the underwriters with respect to this offering. The
number of shares of common stock issuable upon conversion of the series A
preferred is determined by multiplying the number of shares being
converted by the conversion rate. The conversion rate is calculated by
dividing $1.00 by the lesser of the offering price or the five-day average
closing price ending on the trading day prior to any such conversion date.
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CONVERSION EXAMPLE 1: Assuming the offering price is $10.00 per
share and the five-day closing price of our common stock prior to
conversion is $5.00 per share, the conversion rate would be $1.00
divided by $5.00 or 0.2. We would then be required to issue
approximately 241,335 shares of common stock upon conversion of
all of the 1,206,673 shares outstanding (1,206,673 X 0.2).
CONVERSION EXAMPLE 2: Assuming the offering price is $10.00 per
share and the five-day closing price of our common stock prior to
conversion is $15.00 per share, the conversion rate would be $1.00
divided by $10.00 or 0.1. We would then be required to issue
approximately 120,667 shares of our common stock upon conversion
of all of the 1,206,673 shares outstanding (1,206,673 X 0.1).
- DIVIDENDS. Annual dividends of $.10 per share are payable each March 1,
commencing on March 1, 2000, and are cumulative.
- VOTING RIGHTS. Except as otherwise required by law, the shares of series A
preferred stock have no voting rights.
- REDEMPTION. We may redeem any or all of the shares of series A preferred
stock at any time for the redemption price of $1.00 per share, plus
accrued but unpaid dividends, upon at least 5 days notice. We may also
redeem all and only all of the shares of series A preferred stock if at
any time after the closing of this offering the 5-day average closing
price of the common stock is less than one-third of the price at which the
common stock is sold to the public in this offering. In addition upon the
occurrence of the same event, any holder of series A preferred stock may
require us to redeem all of that holder's shares of series A preferred
stock at the redemption price of $1.00 per share or a total of $1,206,673.
- REGISTRATION RIGHTS. Holders of series A preferred stock have demand
registration rights with respect to the underlying common stock and may
require us to redeem the series A preferred stock at the redemption price
of $1.00 per share if we fail to register the shares within 6 months after
a demand for registration has been made by the holder or if we register
the shares but the registration statement ceases to be current and
effective for more than 30 days.
- LIQUIDATION RIGHTS. The shares of series A preferred stock have a
liquidation right of $1.00 per share, plus accrued but unpaid dividends,
and rank on parity with the series B preferred stock.
SERIES B 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK. Upon the closing of
this offering, all 60,000 authorized shares of our series B 8% cumulative
convertible preferred stock will be outstanding.
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- CONVERSION RIGHTS. Each share of the series B preferred stock is
convertible into 10 shares of common stock at any time at the option of
the holder. If our common stock trades for an average of $20.00 per share
or more for a period of 10 consecutive days, we may force a conversion of
the series B preferred stock into common stock.
- DIVIDENDS. Annual dividends of $12.00 per share are payable quarterly in
cash or in additional shares of series B preferred stock and are
cumulative. In addition, each holder of the series B preferred stock is
entitled to receive any dividend that is paid to the holders of common
stock.
- VOTING RIGHTS. The holders of series B preferred stock shall also have the
same voting rights as, and shall vote with, the holders of the common
stock on an as-converted basis.
- REDEMPTION. We may redeem any or all of the shares of series B preferred
stock at any time beginning 36 months after the closing of this offering
for cash, or assign to the holders a designated portion of our cash flow,
for the redemption price of $150.00 per share, plus accrued but unpaid
dividends, upon at least 30 days notice.
- LIQUIDATION RIGHTS. The shares of series B preferred stock have a
liquidation right of $150.00 per share plus accrued but unpaid dividends,
and rank on parity with the series A preferred stock. In the event of our
liquidation, dissolution or winding up, the holders of the series B
preferred stock, in addition to receiving a liquidation preference, are
entitled to receive liquidating distributions at the same time and on the
same basis as the holders of common stock.
REGISTRATION RIGHTS
Pursuant to certain registration rights agreements, the holders of the
securities listed below are entitled to certain registration rights for the
number of shares of common stock and as indicated below:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK TYPE OF
TYPE OF SECURITY WITH REGISTRATION RIGHTS REGISTRATION RIGHTS
- ------------------------------------------------- ---------------------------- ---------------------------------
<S> <C> <C>
Common stock..................................... 2,048,242 Piggy back
Contingent common stock issue rights............. 727,511 Piggy back
Series A preferred stock......................... 120,667 Demand and piggy back
Series B preferred stock......................... 600,000 Piggy back
Warrants......................................... 720,031 Piggy back
Underwriter warrants............................. 160,000 Demand and piggy back
Convertible promissory note...................... 206,250 Piggy back
</TABLE>
For a detailed description of these registration rights, see "Shares
Eligible for Future Sale."
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SPECIAL PROVISIONS OF OUR CHARTER, BYLAWS AND DELAWARE LAW
The following charter and bylaw provisions and provisions of Delaware law
may have the effect of delaying, deterring or preventing a change of control.
AUTHORIZATION OF PREFERRED STOCK. As noted above, our board of directors,
without stockholder approval, has the authority under our certificate of
incorporation to issue preferred stock with rights superior to the rights of the
holders of common stock. As a result, preferred stock could
- be issued quickly and easily;
- could adversely affect the rights of holders of common stock; and
- could be issued with terms calculated to delay or prevent a change of
control or make removal of management more difficult.
ELECTION AND REMOVAL OF DIRECTORS. Our charter and bylaws provide for the
division of our board of directors into three classes, as nearly equal in number
as possible, with the directors in each class serving for a three-year term, and
one class being elected each year by our stockholders. Directors may be removed
only for cause. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us and may maintain the incumbency of the board of directors,
as it generally makes it more difficult for stockholders to replace a majority
of directors. See "Management-- Classified Board."
STOCKHOLDER MEETINGS AND WRITTEN CONSENT. Under our bylaws, a special
meeting of the stockholders may be called by:
- the board of directors;
- by written order of a majority of the board;
- the Chairman of the Board;
- the Chief Executive Officer;
- the President; or
- the stockholders by the written request of not less than two-thirds of the
common stock entitled to vote at such meeting.
Our certificate of incorporation provides that stockholders may not act by
written consent and, accordingly, can only act at a meeting.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee thereof.
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INDEMNIFICATION. Delaware law authorizes Delaware corporations to limit or
eliminate the personal liability of directors for monetary damages for breach of
a director's fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors must exercise an informed business
judgment based on all material information reasonably available to them. Absent
the limitations Delaware law authorizes, directors of Delaware corporations are
accountable to those corporations and their stockholders for monetary damages
for conduct constituting gross negligence in the exercise of their duty of care.
Delaware law enables Delaware corporations to limit available relief to
equitable remedies such as injunction or rescission. Our certificate of
incorporation limits the liability of our directors to us or our stockholders to
the fullest extent Delaware law permits, and no member of our board will be
personally liable for monetary damages for breach of the member's fiduciary duty
as a director, except for liability:
- for any breach of the member's duty of loyalty to us or our stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation
Law; or
- for any transaction from which the member derived an improper personal
benefit.
This provision could have the effect of reducing the likelihood of derivative
litigation against our directors and may discourage or deter our stockholders or
management from bringing a lawsuit against our directors for breach of their
duty of care, even though such an action, if successful, might otherwise have
benefited our stockholders and us. Our bylaws provide indemnification to our
officers and directors and other specified persons with respect to their conduct
in various capacities, and we have entered into agreements with each of our
directors and executive officers which indemnify them to the fullest extent
Delaware law and our certificate of incorporation permit.
STATUTORY BUSINESS COMBINATION PROVISION. Until June 2000, we are subject
to Section 203 of the Delaware General Corporation Law. Section 203 prevents an
"interested stockholder," which is defined generally as a person owning 15% or
more of a Delaware corporation's outstanding voting stock or any affiliate or
associate of that person, from engaging in a broad range of "business
combinations" with the corporation for three years following the date that
person became an interested stockholder unless:
- before that person became an interested stockholder, the board of
directors of the corporation approved the transaction in which that person
became an interested stockholder or approved the business combination;
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- on completion of the transaction that resulted in that person's becoming
an interested stockholder, that person owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, other than stock held by:
- directors who are also officers of the corporation; or
- any employee stock plan that does not provide employees with the right
to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
- following the transaction in which that person became an interested
stockholder, both the board of directors of the corporation and the
holders of 66 2/3% of the outstanding voting stock of the corporation not
owned by that person approve the business combination.
Under Section 203, the restrictions described above also do not apply to
specific business combinations proposed by an interested stockholder following
the announcement or notification of designated extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors, if a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed those directors by a majority of those directors
approve or do not oppose that extraordinary transaction.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company is the transfer agent and
registrar for our common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect market prices prevailing from time to time. Sales
of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future. Upon the completion of this
offering, we will have 4,587,242 shares of common stock outstanding. This number
will increase to 4,827,242 if the over-allotment option is exercised. Of these
shares, the 1,600,000 shares sold in this offering will be freely tradable
without restriction under the Securities Act, unless held by our "affiliates,"
as that term is defined in Rule 144 under the Securities Act. In addition, we
have registered 165,000 shares of common stock for resale by Benchmark Equity
Group over a period of 90 days beginning 90 days after the closing of this
offering.
SALES OF RESTRICTED SECURITIES
A total of 2,822,242 shares of common stock were issued and sold by us in
reliance on exemptions from the registration requirements of the Securities Act
prior to this offering. These shares are deemed to be "restricted securities"
under Rule 144. All of these shares are eligible for sale in public, subject to
the provisions of Rule 144 under the Securities Act, upon expiration of the
lock-up agreements with representatives of the underwriters as early as one year
from the date of this offering. See "--Lock-up Agreements." In addition, there
will be approximately 3,909,410 shares which are issuable pursuant to contingent
common stock issue rights and various warrants, options, convertible notes and
convertible preferred stock. Of these shares, up to 296,250 shares could be
eligible for sale in the public market, subject to the provisions of Rule 144 on
May 19, 2000, and 120,667 will be eligible for resale beginning one year after
the date of this offering. The remaining 3,492,493 shares of which are issuable
pursuant to contingent common stock issue rights and various warrants, options,
and convertible preferred stock will be eligible for resale, subject to the
provisions of Rule 144 upon expiration of the lock-up agreements. These shares
may be sold in the public market only if registered, or pursuant to an exemption
from registration such as Rule 144, 144(k) or 701 under the Securities Act.
RULE 144. In general, under Rule 144 as currently in effect, a person who
has beneficially owned shares for at least one year is entitled to sell in a
"broker's transaction" or to market makers, within any three-month period
commencing 90 days after the date of this prospectus, a number of shares that
does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding; or
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- the average weekly trading volume of the common stock during the four
calendar weeks preceding the required filing of a Form 144 with respect to
such sale.
Sales under Rule 144 are generally subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the 90 days preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice provisions of Rule 144. Under
Rule 701 of the Securities Act, persons who purchase shares upon exercise of
options granted prior to the effective date of this offering are entitled to
sell such shares 90 days after the effective date of this offering in reliance
on Rule 144, without having to comply with the holding period requirements of
Rule 144 and, in the case of non-affiliates, without having to comply with the
public information, volume limitation or notice provisions of Rule 144.
LOCK-UP AGREEMENTS
Except for 416,917 shares not subject to the lock up, our directors,
executive officers, all other stockholders and all other option, warrant and
contingent common stock issue right holders, who in the aggregate held all of
the shares of our common stock or securities convertible into our common stock
outstanding immediately prior to the closing of this offering, are subject to
lock-up agreements. Pursuant to these agreements, they have agreed not to
directly or indirectly, offer, sell, contract to sell, grant any option to
purchase, pledge or otherwise dispose of, or, in any manner, transfer all or a
portion of the economic consequences associated with the ownership of any shares
of common stock or any securities convertible into or exercisable or
exchangeable for common stock beneficially owned by them for a period of 24
months after the date of this prospectus, without the prior written consent of
Weatherly Securities Corporation. There is no current intentions to release
shares subject to the lock-up. However, if the average of the closing prices for
our common stock during the last ten trading days of each measurement period
following the closing of this offering, as listed in the table below, is at
least $17.00 per share, then the designated
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<PAGE>
percentage of all of the shares subject to the lockup then outstanding shall be
irrevocably released from such restrictions:
<TABLE>
<CAPTION>
MEASUREMENT PERIOD PERCENTAGE RELEASED
- ------------------- ---------------------
<S> <C>
12 months 10%
15 months 20%
18 months 30%
21 months 40%
24 months All shares not
previously released
</TABLE>
During the period of lock-up agreement, we may grant options and issue stock
only in the following instances:
- under our incentive plan;
- in connection with strategic relationships;
- in connection with acquisitions of businesses, technologies or products
complementary to ours.
Provided, that we may only issue such stock if the recipients of such stock
agree to be bound by a lock-up agreement for the remainder of the lock-up
period.
Upon expiration of the lock-up agreements, approximately 6,314,784 shares of
common stock outstanding or issuable upon conversion or exercise of outstanding
securities will become eligible for immediate public resale, subject in some
cases to volume limitations pursuant to Rule 144.
REGISTRATION RIGHTS AGREEMENTS
Pursuant to certain registration rights agreements, the holders of the
securities listed below are entitled to certain registration rights for the
number of shares of common stock and as indicated below:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
WITH REGISTRATION TYPES OF
TYPE OF SECURITY RIGHTS REGISTRATION RIGHTS
- ------------------------------------------------------ ----------------------- ---------------------------------
<S> <C> <C>
Common stock.......................................... 2,048,242 Piggy back
Common stock contingent issue rights.................. 727,511 Piggy back
Series A preferred stock.............................. 120,667 Demand and piggy back
Series B preferred stock.............................. 600,000 Piggy back
Warrants.............................................. 720,031 Piggy back
Underwriter warrants.................................. 160,000 Demand and piggy back
Convertible promissory note........................... 206,250 Piggy back
</TABLE>
UNDERWRITER WARRANTS. Pursuant to a registration rights agreement entered
into with the representative of the underwriters, the representative has certain
demand and "piggy back" registration rights with respect to the 160,000 shares
of common stock issuable upon exercise of the warrants issued to the
representative in connection with the closing of the offering. The
representative is entitled to one demand registration
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<PAGE>
right during the four year period beginning one year after the closing of this
offering unless a registration statement is filed and is either withdrawn or
does not become effective in which case, the representative will not have been
deemed to exercise the "demand" registration right.
SERIES A PREFERRED STOCK. Trans Global, the holder of our series A
preferred stock, or its transferees are entitled to "piggy back" and "demand"
registration rights with respect to the shares of common stock issuable upon the
conversion of series A preferred stock. The number of securities requested to be
included in a registration involving the exercise of "piggy back" registration
rights are subject to pro rata reduction upon the request of the managing
underwriter. The managing underwriter may require that the series A holders
agree not to sell the common stock for a six-month period following the closing
of this offering. The series A holders may exercise the "piggy back"
registration rights from the closing of this offering until the underlying
common stock can be sold pursuant to Rule 144(k) of the Securities Act.
In addition, any series A holder or holders who owns 25% of the series A
preferred stock is entitled to "demand" registration rights with respect to the
shares of underlying common stock. The series A holders may exercise their
"demand" registration rights at any time beginning twelve months after the
closing of this offering, if the underlying common stock has not been previously
registered, until the underlying common stock can be sold pursuant to Rule
144(k). The series A holders are entitled to only one "demand" registration
right unless a registration statement is filed and is either withdrawn or does
not become effective. In that event, the series A holders will not have been
deemed to exercise the "demand" registration right.
OTHER SECURITIES. Pursuant to certain registration rights agreements, the
holders of the remaining 4,005,784 shares of common stock with registration
rights are entitled to "piggy back" registration rights. Except for the 296,250
shares of common stock issuable upon conversion of the convertible note issued
to Consolidated and warrants issued with the note, these shares remain subject
to the lock-up agreement even if registered pursuant to these registration
rights. The number of securities request to be included in a registration
involving the exercise of "piggy back" rights are subject to a pro rata
reduction based on the number of shares of common stock held by each such
security holder and any other security holders exercising their respective
registration rights to the extent that we are so advised by the managing
underwriter, if any, that the total number of securities requested to be
included in the underwriting is such as to materially and adversely affect the
success of the offering. The registration rights terminate as to any such
security holder at the later of:
- 3 years after the offering made hereby; or
- such time as such security holder may sell under Rule 144 in a three month
period all registrable securities then held by such holder.
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STOCK OPTIONS AND WARRANTS
As of the date of this offering, 1,375,000 shares were subject to
outstanding options under our incentive plan and 879,982 shares were subject to
outstanding warrants to purchase common stock. Except for 90,000 of these
warrants, all of these shares are subject to the lock-up agreements described
above. Approximately 90 days after the date of this prospectus, we intend to
file a registration statement on Form S-8 covering shares issuable under our
incentive plan, thus permitting the resale of such shares in the public market
without restriction under the Securities Act after expiration of the applicable
lock-up agreements. In addition, the holders of the warrants to purchase shares
of common stock are entitled to certain registration rights with respect to such
shares as described above.
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UNDERWRITING
Weatherly Securities Corporation is acting as representative for the
underwriters named below in connection with this offering. Each of the
underwriters has severally, not jointly, agreed, subject to the terms and
conditions of the underwriting agreement, among them and our company, to
purchase from us, and we have agreed to sell to them, the number of shares of
common stock set forth below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
- ----------------------------------------------------------------------- -----------------
<S> <C>
Weatherly Securities Corporation.......................................
Westport Resources Investment Services, Inc............................
-----------------
Total.................................................................. 1,600,000
-----------------
-----------------
</TABLE>
The underwriters are committed to purchase all the shares of our common
stock we sell in this offering, if they purchase any shares of our common stock,
subject to the terms and conditions of the underwriting agreement.
The underwriters initially propose to offer the shares of our common stock
to the public at the initial public offering price set forth on the cover page
of this prospectus and to certain dealers at such price less concessions not in
excess of $ per share of common stock. Such dealers may re-allow a
concession not in excess of $ per share of common stock to certain other
dealers. After the commencement of this offering, the public offering price,
concession and reallowance may be changed by the representative.
The following table shows the per share and total public offering price, the
underwriting discount we will pay to the underwriters and the proceeds, before
expenses, that we will receive. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment option
discussed below.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price................................................... $ $ $
Underwriting discount................................................... $ $ $
Proceeds, before expenses, to us........................................ $ $ $
</TABLE>
We estimate our expenses of this offering, exclusive of the underwriting
discount, will be $ .
We have agreed to pay to the representative a non-accountable expense
allowance equal to 3% of the gross proceeds derived from the sale of the common
stock, of which $ has been paid to date.
We have granted to the underwriters an over-allotment option, exercisable
during the 45 day period from the date of this prospectus, to purchase up to
240,000 shares of common stock at the initial public offering price per share of
the common stock we sell in this offering, less underwriting discounts and the
non-accountable expense
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<PAGE>
allowance. Such option may be exercised only for the purpose of covering over-
allotments, if any, incurred in the sale of the common stock we sell in this
offering. To the extent such option is exercised in whole or in part, each
underwriter will have a firm commitment, subject to certain conditions, to
purchase the number of the additional shares of our common stock proportionate
to its initial commitment.
We have also agreed to sell to the representative, for nominal
consideration, warrants to purchase up to 160,000 shares of our common stock.
The representative will receive 184,000 if the underwriters exercise their
over-allotment option in full. The representative's warrants are initially
exercisable at a price of 120% of the initial public offering price per share of
common stock. The representative's warrants may be exercised for a period of
five years, commencing one year from the date of this prospectus. The
representative's warrants provide for adjustment in the number of shares of
common stock issuable upon their exercise and in the exercise price of the
representative's warrants as a result of certain events, including subdivisions
and combinations of our common stock. The representative's warrants grant to
their holders certain demand and piggy back rights to register the common stock
issuable upon exercise of the warrants.
We have agreed for a period of three years after the date of this
prospectus, if requested by the representative, to use our best efforts to
nominate one person designated by the representative for election to our board
of directors. In the event the representative elects not to exercise such right,
it may designate a person to receive all notices of meetings of our board of
directors and all other correspondence and communications sent by us to our
board of directors and to attend all such meetings of our board of directors. We
have agreed to reimburse the representative's designee for his out-of-pocket
expenses incurred in connection with his attendance of meetings of our board of
directors.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price of our common stock has
been determined by negotiation between us and the representative and does not
necessarily bear any relationship to our asset value, net worth, or other
established criteria of value. In negotiating the price of our common stock, we
and the representative considered:
- prevailing market conditions,
- the history of and prospects for the industry in which we compete,
- an assessment of our management,
- the prospects of our company, our capital structure, the market for
initial public offerings, and
- certain other factors deemed relevant.
The common stock has been approved for quotation on the American Stock
Exchange under the symbol "OL" subject to office notice of issuance.
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Until the distribution of our common stock is completed, the underwriters
and selling group members may engage in transactions that stabilize, maintain or
otherwise affect the price of our common stock. The underwriters may create a
short position by selling more common stock than they are committed to purchase
from us. In that event, the underwriters may choose to reduce their short
position by purchasing shares of our common stock in the open market or by
exercising all or a portion of their over-allotment option.
In addition, the representative, on behalf of the underwriters, may impose
penalty bids on the underwriters. Penalty bids permit the representative to
reclaim the selling concession from the underwriter or selling group member that
sold the shares in this offering.
Selling our common stock short or purchasing shares of our common stock to
either reduce a short position or stabilize the price of our common stock could
result in the maintenance of the price of our common stock at a level higher
than that if no such transactions had occurred. None of these types of
transactions is required. Each of these transactions, if undertaken, may be
discontinued at any time.
The offering of the shares is made for delivery, when, as, and if accepted
by the underwriters and subject to prior sale and to withdrawal, cancellation,
or modification of the offering without notice. The underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The underwriters do not expect any sales of shares of common stock to be
made to discretionary accounts.
We and the underwriters have agreed to indemnify each other against, or to
contribute to losses arising out of, certain civil liabilities in connection
with this offering, including liabilities under the Securities Act.
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<PAGE>
LEGAL MATTERS
The validity of the shares of the common stock offered hereby will be passed
upon for us by Porter & Hedges, L.L.P., Houston, Texas. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Ruskin, Moscou, Evans & Faltischek, P.C., Mineola, New York.
EXPERTS
The financial statements of OmniLynx Communications Corporation included in
this prospectus and in the registration statement have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their reports appearing elsewhere herein and in the
registration statement, and are included herein in reliance upon such reports
given upon their authority as experts in auditing and accounting.
The financial statements of InfoHighway International, Inc. as of December
31, 1998 and 1997, and for each of the years in the three year period ended
December 31, 1998, have been included elsewhere in this registration statement
in reliance upon the report of KPMG LLP, independent auditors, appearing
elsewhere in the registration statement, and upon their authority as experts in
accounting and auditing.
The audited financial statements of ARC Networks, Inc. included in this
prospectus have been audited by Moore Stephens, P.C., independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon their authority as experts in giving such report.
The audited financial statements of AXCES, Inc. included in this prospectus
have been audited by Pannell Kerr Forster of Texas, P.C., independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon their authority as experts in giving such report.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus constitutes a part of a registration statement on Form S-1
that we filed with the SEC under the Securities Act. The registration statement
and its exhibits and schedules in addition to any reports, statements or other
information we file with the SEC may be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, NW, Washington,
D.C. 20594, and at the following regional offices of the SEC: New York Regional
Office, Seven World Trade Center, New York, New York 10048, and Chicago Regional
Office, 500 West Madison Street, Chicago, Illinois 60661. Copies of such reports
and other information may be obtained from the Public Reference Section of the
SEC: 450 Fifth Street, NW, Washington, D.C. 20549, upon payment of the
prescribed fees. In addition, the SEC maintains a web site that contains reports
and information statements and other information regarding registrants that file
electronically with the SEC. Copies of such documents and the registration
statement may also be obtained from the SEC's Internet address at
http://www.sec.gov.
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OMNILYNX COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
OMNILYNX COMMUNICATIONS CORPORATION AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation.................................................................................. F-2
Unaudited Pro forma Combined Balance Sheet............................................................. F-3
Unaudited Pro forma Combined Statement of Operations................................................... F-4
Notes to Unaudited Pro Forma Combined Financial Statements............................................. F-6
OMNILYNX COMMUNICATIONS CORPORATION HISTORICAL FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants..................................................... F-17
Balance Sheets......................................................................................... F-18
Statements of Loss..................................................................................... F-19
Statements of Stockholders' Equity..................................................................... F-20
Statements of Cash Flows............................................................................... F-21
Notes to Financial Statements.......................................................................... F-22
FOUNDING COMPANIES:
AXCES, INC.
Independent Auditors' Report........................................................................... F-35
Balance Sheets......................................................................................... F-36
Statements of Operations............................................................................... F-37
Statements of Stockholders' Equity..................................................................... F-38
Statements of Cash Flows............................................................................... F-39
Notes to Financial Statements.......................................................................... F-40
INFOHIGHWAY INTERNATIONAL, INC.
Independent Auditors' Report........................................................................... F-50
Balance Sheets......................................................................................... F-51
Statements of Operations............................................................................... F-52
Statements of Stockholders' Equity (Deficit)........................................................... F-53
Statements of Cash Flows............................................................................... F-54
Notes to Financial Statements.......................................................................... F-55
ARC NETWORKS, INC.
Independent Auditors' Report........................................................................... F-61
Consolidated Balance Sheets............................................................................ F-62
Consolidated Statements of Operations.................................................................. F-63
Consolidated Statements of Capital Deficit............................................................. F-64
Consolidated Statements of Cash Flows.................................................................. F-65
Notes to Consolidated Financial Statements............................................................. F-67
</TABLE>
F-1
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to the acquisitions by OmniLynx Communications Corporation ("OmniLynx") of the
outstanding capital stock of InfoHighway International, Inc. ("InfoHighway"),
ARC Networks, Inc. ("ARC"), and AXCES, Inc. ("AXCES"), (together, the "founding
companies"). OmniLynx and the founding companies are hereinafter referred to as
the Company. OmniLynx acquired ARC effective June 30, 1999; consequently, such
acquisition is reflected in the balance sheet of OmniLynx as of June 30, 1999.
Omnilynx will acquire InfoHighway and AXCES simultaneously with and as a
condition of the closing of OmniLynx's initial public offering (the "Offering").
All of the acquisitions ("the Acquisitions") have been accounted for using the
purchase method of accounting. With respect to the Acquisitions, AXCES has been
identified as the accounting acquiror for financial statement presentation
purposes. The pro forma combined financial statements also give effect to an
asset acquisition consummated during January 1999 by InfoHighway (the "Eden
Acquisition").
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and the Offering as if they had occurred on June 30, 1999. The
unaudited pro forma combined statements of operations give effect to these
transactions and the Eden Acquisition as if they had occurred on January 1,
1998.
OmniLynx has preliminarily analyzed the benefits that it expects will be
realized from reductions in salaries, bonuses and certain benefits to the owners
and key management personnel of the founding companies. To the extent the owners
and key management personnel of the founding companies have agreed prospectively
to reductions in salaries, bonuses and benefits, these reductions have been
reflected in the unaudited pro forma combined statements of operations.
Additionally, reductions in interest expense as the result of the planned
repayment of certain debt of the founding companies, as well as through the
conversion of certain debt into preferred stock, have been reflected in the
unaudited pro forma combined statements of operations. With respect to other
potential benefits, OmniLynx has not and cannot quantify these benefits until
completion of the combination of the founding companies. It is anticipated that
these benefits will be offset by costs related to OmniLynx's new corporate
management and by the costs associated with being a public company. However,
because these costs cannot be accurately quantified at this time, they have not
been included in the unaudited pro forma financial information of OmniLynx.
The purchase price of the founding companies (except AXCES, which is the
accounting acquiror) and of OmniLynx has been allocated based on the estimated
fair value of assets acquired and liabilities assumed. The pro forma adjustments
are based on estimates, available information and certain assumptions and may be
revised as additional information becomes available. The pro forma financial
data do not purport to represent what OmniLynx's financial position or results
of operations would actually have been if such transactions in fact had occurred
on the dates stated above and are not necessarily representative of OmniLynx's
financial position or results of operations for any future period. The unaudited
pro forma combined financial statements should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus. Also see "Risk Factors" included elsewhere herein.
F-2
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
BASIS PRO FORMA PRO FORMA
AXCES INFOHIGHWAY OMNILYNX COMBINED ADJUSTMENTS COMBINED
----------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........... $ 2,607 $ -- $ 984 $ 3,591 $ (2,600) $ 991
Accounts receivable, net............ 2,500 298 3,764 6,562 -- 6,562
Receivable from related parties..... 1,734 -- 170 1,904 (170) 1,734
Federal income tax receivable....... 59 -- -- 59 -- 59
Costs and estimated earnings in
excess of billings on uncompleted
contracts......................... -- -- 481 481 -- 481
Prepaid expenses and other current
assets............................ 455 32 513 1,000 -- 1,000
----------- ------------- ----------- ----------- ------------- -----------
Total current assets.............. 7,355 330 5,912 13,597 (2,770) 10,827
PROPERTY AND EQUIPMENT, net........... 361 783 128 1,272 -- 1,272
GOODWILL AND OTHER INTANGIBLE
ASSETS.............................. -- 391 10,451 10,842 18,364 29,206
OTHER ASSETS.......................... 99 22 86 207 -- 207
----------- ------------- ----------- ----------- ------------- -----------
TOTAL ASSETS.......................... $ 7,815 $ 1,526 $ 16,577 $ 25,918 $ 15,594 $ 41,512
----------- ------------- ----------- ----------- ------------- -----------
----------- ------------- ----------- ----------- ------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
CURRENT LIABILITIES:
Notes payable....................... $ -- $ 200 $ 800 $ 1,000 $ 2,900 $ 3,900
Notes payable to related parties.... -- 1,181 4,397 5,578 (230) 5,348
Capital lease payables.............. -- 34 22 56 -- 56
Accounts payable.................... 571 844 5,174 6,589 -- 6,589
Accrued liabilities................. 356 113 1 470 -- 470
Billings in excess of costs and
estimated earnings on uncompleted
contracts......................... -- -- 402 402 -- 402
Disputed amounts under contract..... -- -- 1,290 1,290 -- 1,290
Current income taxes payable........ -- -- -- -- 1,600 1,600
Other current liabilities........... 13 349 -- 362 -- 362
----------- ------------- ----------- ----------- ------------- -----------
Total current liabilities......... 940 2,721 12,086 15,747 4,270 20,017
LONG-TERM DEBT, net of current
maturities.......................... -- -- 5 5 -- 5
NOTES PAYABLE TO RELATED PARTIES...... -- -- 1,147 1,147 (1,147) --
OTHER LONG-TERM LIABILITIES........... 32 -- -- 32 -- 32
REDEEMABLE PREFERRED STOCK............ -- -- -- -- 1,207 1,207
STOCKHOLDERS' EQUITY (CAPITAL
DEFICIT):
Preferred stock..................... -- -- -- -- -- --
Common stock........................ 1 2,601 -- 2,602 (2,602) --
Additional paid in capital.......... 13 -- 3,534 3,547 17,075 20,622
Retained earnings (deficit)......... 6,829 (3,796) (195) 2,838 (3,209) (371)
----------- ------------- ----------- ----------- ------------- -----------
Stockholders' equity (capital
deficit)........................ 6,843 (1,195) 3,339 8,987 11,264 20,251
----------- ------------- ----------- ----------- ------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (CAPITAL DEFICIT)............ $ 7,815 $ 1,526 $ 16,577 $ 25,918 $ 15,594 $ 41,512
----------- ------------- ----------- ----------- ------------- -----------
----------- ------------- ----------- ----------- ------------- -----------
<CAPTION>
POST- PRO FORMA
ACQUISITION AS
ADJUSTMENTS ADJUSTED
------------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........... $ 7,164 $ 8,155
Accounts receivable, net............ -- 6,562
Receivable from related parties..... -- 1,734
Federal income tax receivable....... -- 59
Costs and estimated earnings in
excess of billings on uncompleted
contracts......................... -- 481
Prepaid expenses and other current
assets............................ (513) 487
------------- -----------
Total current assets.............. 6,651 17,478
PROPERTY AND EQUIPMENT, net........... -- 1,272
GOODWILL AND OTHER INTANGIBLE
ASSETS.............................. -- 29,206
OTHER ASSETS.......................... -- 207
------------- -----------
TOTAL ASSETS.......................... $ 6,651 $ 48,163
------------- -----------
------------- -----------
LIABI
CURRENT LIABILITIES:
Notes payable....................... $ (3,100) $ 800
Notes payable to related parties.... (3,569) 1,779
Capital lease payables.............. -- 56
Accounts payable.................... -- 6,589
Accrued liabilities................. -- 470
Billings in excess of costs and
estimated earnings on uncompleted
contracts......................... -- 402
Disputed amounts under contract..... -- 1,290
Current income taxes payable........ -- 1,600
Other current liabilities........... -- 362
------------- -----------
Total current liabilities......... (6,669) 13,348
LONG-TERM DEBT, net of current
maturities.......................... -- 5
NOTES PAYABLE TO RELATED PARTIES...... -- --
OTHER LONG-TERM LIABILITIES........... -- 32
REDEEMABLE PREFERRED STOCK............ -- 1,207
STOCKHOLDERS' EQUITY (CAPITAL
DEFICIT):
Preferred stock..................... -- --
Common stock........................ -- --
Additional paid in capital.......... 13,320 33,942
Retained earnings (deficit)......... -- (371)
------------- -----------
Stockholders' equity (capital
deficit)........................ 13,320 33,571
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (CAPITAL DEFICIT)............ $ 6,651 $ 48,163
------------- -----------
------------- -----------
</TABLE>
F-3
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AXCES INFOHIGHWAY ARC OMNILYNX TOTAL ADJUSTMENTS COMBINED
--------- ------------- --------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 10,095 $ 1,100 $ 8,171 $ -- $ 19,366 $ -- $ 19,366
Cost of services........................ 3,445 592 6,694 -- 10,731 -- 10,731
--------- ------ --------- ----- --------- ----------- -----------
Gross profit............................ 6,650 508 1,477 -- 8,635 -- 8,635
Selling, general and administrative
expenses.............................. 4,914 713 1,828 177 7,632 -- 7,632
Depreciation and amortization........... 112 261 219 -- 592 1,423 2,015
--------- ------ --------- ----- --------- ----------- -----------
Income (loss) from operations........... 1,624 (466) (570) (177) 411 (1,423) (1,012)
Interest income (expense), net.......... (50) (63) (302) (17) (432) 199 (233)
--------- ------ --------- ----- --------- ----------- -----------
Income (loss) before income taxes....... 1,574 (529) (872) (194) (21) (1,224) (1,245)
Provision for income taxes.............. -- -- -- -- -- 115 115
--------- ------ --------- ----- --------- ----------- -----------
Net income (loss)....................... $ 1,574 $ (529) $ (872) $ (194) $ (21) $ (1,339) $ (1,360)
--------- ------ --------- ----- --------- ----------- -----------
--------- ------ --------- ----- --------- ----------- -----------
Pro forma net loss before dividends on
preferred stock....................... $ (1,360)
Dividends on preferred stock............ 420
-----------
Pro forma net loss applicable to common
stockholders.......................... $ (1,780)
-----------
-----------
Net loss per share--basic and diluted... $ (.39)
Shares used in computing pro forma net
loss per share........................ 4,587
</TABLE>
F-4
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AXCES INFOHIGHWAY ARC OMNILYNX TOTAL ADJUSTMENTS COMBINED
--------- ------------ --------- ------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................... $ 30,280 $ 1,384 $ 13,931 $ -- $ 45,595 $ 778 $ 46,373
Cost of services....................... 9,889 995 11,651 -- 22,535 184 22,719
--------- ------------ --------- ----- --------- ----------- -----------
Gross profit........................... 20,391 389 2,280 -- 23,060 594 23,654
Selling, general and administrative
expenses............................. 17,934 1,339 3,465 -- 22,738 (1,997) 20,741
Depreciation and amortization.......... 204 261 407 -- 872 2,946 3,818
--------- ------------ --------- ----- --------- ----------- -----------
Income (loss) from operations.......... 2,253 (1,211) (1,592) -- (550) (355) (905)
Interest income (expense), net......... (208) (57) (317) -- (582) 170 (412)
--------- ------------ --------- ----- --------- ----------- -----------
Income (loss) before income taxes...... 2,045 (1,268) (1,909) -- (1,132) (185) (1,317)
Provision (benefit) for income taxes... (917) -- -- -- (917) 1,464 547
--------- ------------ --------- ----- --------- ----------- -----------
Net income (loss)...................... $ 2,962 $ (1,268) $ (1,909) $ -- $ (215) $ (1,649) $ (1,864)
--------- ------------ --------- ----- --------- ----------- -----------
--------- ------------ --------- ----- --------- ----------- -----------
Pro forma net loss before dividends on
preferred stock...................... $ (1,864)
Dividends on preferred stock........... 841
-----------
Pro forma net loss applicable to common
stockholders......................... $ (2,705)
-----------
-----------
Net loss per share--basic and
diluted.............................. $ (.59)
Shares used in computing pro forma net
loss per share....................... 4,587
</TABLE>
F-5
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL
OmniLynx Communications Corporation ("OmniLynx") was incorporated in
December 1996 in the state of Delaware. OmniLynx was formed to become a leading
provider of unified Internet, data and telecommunications solutions to niche
markets representing the high and low end of the telecommunications marketplace.
Prior to the acquisition of ARC, OmniLynx had conducted no operations. The
acquisition of ARC was consummated on June 30, 1999. InfoHighway and AXCES will
be acquired concurrently with and as a condition of the closing of the Offering.
The historical financial statements represent the financial position and
results of operations of the founding companies and were derived from the
respective founding companies' financial statements. The periods included in
these pro forma combined financial statements for the individual founding
companies are as of and for the six months ended June 30, 1999 and for the year
ended December 31, 1998. The historical financial statements included elsewhere
herein have been included in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES
OmniLynx acquired ARC effective June 30, 1999; consequently, such
acquisition is reflected in the balance sheet of OmniLynx as of June 30, 1999.
OmniLynx will acquire InfoHighway and AXCES simultaneously with and as a
condition of the closing of this Offering. The Acquisitions were accounted for
using the purchase method of accounting with AXCES treated as the accounting
acquiror.
The consideration paid or to be paid in the Acquisitions includes (a) common
stock, (b) contingent common stock, and (c) Series A and Series B convertible
redeemable preferred stock. In addition, OmniLynx will be assuming certain of
the debt of all of the founding companies. For purposes of computing the
estimated purchase price for accounting purposes, the value of the common shares
issued has been determined using an estimated fair value of $9.00 per share,
which represents a discount of 10% from the assumed initial public offering
price of $10.00 per share (the midpoint of the range of estimated initial public
offering prices set forth on the cover page of this Prospectus) due to
restrictions on the sale and transferability of the shares issued. The estimated
purchase price for the Acquisitions is based upon preliminary estimates and is
subject to certain purchase price adjustments at and following closing. In the
opinion of management, the final allocation of the purchase price will not
materially differ from these preliminary estimates.
ACQUISITION OF INFOHIGHWAY
The acquisition consideration to be received by the stockholders of
InfoHighway consists of 958,166 shares of common stock of OmniLynx and 235,878
shares of contingent common stock of OmniLynx (including 85,397 shares of common
stock of OmniLynx and 17,584 shares of contingent common stock of OmniLynx
earmarked for the Eden Acquisition). Issuances of contingent common stock is
conditional upon achievement of certain share price targets; 50% of the
contingent common stock shall be issued when the price of the common stock
reaches a 10-day average of $16 per share. The remaining 50% of the contingent
common stock reaches a 10-day average of $21 per share. For accounting purposes,
no value has been allocated to the contingent common stock. Additionally, the
Company is assuming some of InfoHighway's outstanding debt, which totaled $1.4
million at June 30, 1999.
F-6
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION OF FOUNDING COMPANIES (CONTINUED)
During January 1999, InfoHighway acquired the operations of Eden Matrix, an
Internet service provider based in Austin, Texas operated by AMICI Online
Investments, L.L.C. (the "Eden Acquisition"). The acquisition consideration
approximated $1.0 million, consisting of a $50,000 cash down payment and a
short-term note payable for $0.9 million. During the second quarter of 1999,
$0.8 million of the short-term note payable was converted into 968,750 common
shares of InfoHighway.
ACQUISITION OF ARC
The acquisition consideration received by the stockholders of ARC consists
of 390,076 shares of common stock of OmniLynx and 152,672 shares of contingent
common stock of OmniLynx. Issuances of contingent common stock are conditional
upon achievement of certain share price targets; 50% of the contingent common
stock shall be issued when the price of the common stock reaches a 10-day
average of $16 per share. The remaining 50% of the contingent common stock shall
be issued when the price of the common stock reaches a 10-day average of $21 per
share. For accounting purposes, no value has been allocated to the contingent
common stock.
The merger agreement also provides for the exchange of $1.2 million of an
existing ARC note payable to an affiliated company for Series A 10% Convertible
Preferred Stock, ("Series A Preferred Stock") of OmniLynx valued at $1.2
million. The preferred stock is convertible into common stock at the option of
the holder at any time after 90 days from the closing of this offering or
earlier with the consent of both OmniLynx and the representative of the
underwriters with respect to this offering. The number of shares issuable upon
conversion of the series A preferred stock is dependent on the conversion rate
which is calculated by dividing $1.00 by the lesser of the offering price or the
five-day average closing price ending on the trading day prior to such
conversion date. The preferred stock is redeemable by the holder at $1.00 per
share in the event the Company's common stock declines over 67% of the initial
public offering price.
Additionally, the Company assumed all debt outstanding of ARC upon
consummation of the acquisition effective June 30, 1999, which totaled $3.2
million at June 30, 1999, with the exception of the ARC note payable which will
be exchanged for preferred stock as discussed in the aforementioned paragraph.
The merger agreement also provides for: (a) the repayment of $0.8 million of the
outstanding balance on the revolving line of credit due to the parent of ARC
from proceeds of the Offering, (b) the exchange of $0.45 million of the
revolving line of credit for a note payable due on January 31, 2000 that is
convertible at the holder's option into 56,250 common shares of OmniLynx, and
(c) the balance of the revolving line of credit being exchanged for a note
payable maturing in June 2000 unless converted earlier by the holder into
150,000 common shares of OmniLynx. The balance outstanding under the revolving
line of credit was $2.4 million at June 30, 1999.
ACQUISITION OF AXCES
The acquisition consideration to be received by the stockholders of AXCES
consists of 700,000 shares of common stock of OmniLynx and $9.0 million, 60,000
shares valued at $150 per share, of Series B 8% Cumulative Convertible Preferred
Stock ("Series B Preferred Stock") of OmniLynx. The Series B Preferred Stock is
convertible into 600,000 shares of common stock at the holder's option and is
redeemable at the Company's option after 36 months out of a designated portion
of the Company's
F-7
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION OF FOUNDING COMPANIES (CONTINUED)
cash flow. If the common stock trades for an average of $20 per share for 10
consecutive days, the Company may force the conversion of the preferred stock
into common stock.
In connection with the acquisition of AXCES, OmniLynx has agreed to assume
up to $3.0 million of indebtedness to be incurred by AXCES prior to the Offering
for distribution to its shareholder. AXCES may distribute up to $6.5 million in
cash to its shareholder prior to the closing of the acquisition, including
proceeds from this indebtedness, provided that the distributions do not decrease
AXCES' working capital below a minimum level.
The following table sets forth the components for accounting purposes of the
consideration with respect to the Acquisitions, including 85,397 common shares
and 17,584 contingent common shares earmarked for the Eden Acquisition. The
table does not reflect the S Corporation Distribution and other distributions
noted above to the stockholders of AXCES.
<TABLE>
<CAPTION>
CONTINGENT
COMMON STOCK COMMON STOCK(1) PREFERRED STOCK
------------------------- ---------------------- -------------------------
VALUE OF VALUE OF VALUE OF
ACQUISITION SHARES SHARES SHARES SHARES SHARES SHARES
- ------------------------------------------ ---------- ------------- --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
InfoHighway............................... 958,166 $ 8,623,494 235,878 $ -- -- $ --
ARC....................................... 390,076 3,510,684 152,672 -- 1,206,673(2) 1,206,673
AXCES..................................... 700,000 6,300,000 -- -- 60,000(3) 9,000,000
---------- ------------- --------- ----- ---------- -------------
2,048,242 $ 18,434,178 388,550 $ -- 1,266,673 $ 10,206,673
---------- ------------- --------- ----- ---------- -------------
---------- ------------- --------- ----- ---------- -------------
</TABLE>
- ------------------------
(1) The contingent common stock issue rights entitle the holder to receive
shares of our common stock based upon its market performance beginning 90
days after the closing of this offering. Approximately one-half of the
shares are issuable if and when the common stock reaches a 10-day average of
$16.00 per share. The remaining one-half are issuable if and when the common
stock reaches a 10-day average of $21.00 per share. The rights expire after
three years.
(2) Shares of Series A 10% Convertible Preferred Stock.
(3) Shares of Series B 8% Convertible Preferred Stock.
For accounting purposes, AXCES is treated as the accounting acquiror, and
accordingly, its financial statements are presented on a historical basis.
F-8
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
JUNE 30, 1999
(IN THOUSANDS)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The following table represents the unaudited pro forma combined balance
sheet adjustments for OmniLynx Communication Corporation and the founding
companies:
<TABLE>
<CAPTION>
TOTAL
PRO FORMA
(A) (B) ADJUSTMENTS (C) (D)
--------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ (2,600) $ -- $ (2,600) $ 13,833 $ (6,669)
Accounts receivable, net...................................... -- -- -- -- --
Receivable from related parties............................... -- (170) (170) -- --
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... -- -- -- -- --
Prepaid expenses and other current assets..................... -- -- -- (513) --
--------- --------- ------------- --------- ---------
Total current assets........................................ (2,600) (170) (2,770) 13,320 (6,669)
PROPERTY AND EQUIPMENT, net..................................... -- -- -- -- --
GOODWILL AND OTHER INTANGIBLE ASSETS............................ -- 18,364 18,364 -- --
OTHER ASSETS.................................................... -- -- -- -- --
--------- --------- ------------- --------- ---------
TOTAL ASSETS.................................................... $ (2,600) $ 18,194 $ 15,594 $ 13,320 $ (6,669)
--------- --------- ------------- --------- ---------
--------- --------- ------------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
CURRENT LIABILITIES:
Notes payable................................................. $ 3,000 $ (100) $ 2,900 $ -- $ (3,100)
Notes payable to related parties.............................. -- (230) (230) -- (3,569)
Capital lease payables........................................ -- -- -- -- --
Accounts payable.............................................. -- -- -- -- --
Accrued liabilities........................................... -- -- -- -- --
Billings in excess of costs and estimated earnings on
uncompleted contracts....................................... -- -- -- -- --
Disputed amounts under contract............................... -- -- -- -- --
Payable to founding company shareholders...................... -- -- -- -- --
Current income taxes payable.................................. 1,600 -- 1,600 -- --
Other current liabilities..................................... -- -- -- -- --
--------- --------- ------------- --------- ---------
Total current liabilities................................... 4,600 (330) 4,270 -- (6,669)
LONG-TERM DEBT, net of current maturities....................... -- --
NOTES PAYABLE TO RELATED PARTIES................................ -- (1,147) (1,147) -- --
OTHER LONG-TERM LIABILITIES..................................... -- -- -- -- --
REDEEMABLE PREFERRED STOCK...................................... -- 1,207 1,207 -- --
STOCKHOLDERS' EQUITY (CAPITAL DEFICIT):
Preferred stock............................................... -- -- -- -- --
Common stock.................................................. -- (2,602) (2,602) -- --
Additional paid in capital.................................... -- 17,075 17,075 13,320 --
Retained earnings (capital deficit)........................... (7,200) 3,991 (3,209) -- --
--------- --------- ------------- --------- ---------
Stockholders' equity (capital deficit)...................... (7,200) 18,464 11,264 13,320 --
--------- --------- ------------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT).... $ (2,600) $ 18,194 $ 15,594 $ 13,320 $ (6,669)
--------- --------- ------------- --------- ---------
--------- --------- ------------- --------- ---------
<CAPTION>
TOTAL
POST-ACQUISITION
ADJUSTMENTS
-----------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 7,164
Accounts receivable, net...................................... --
Receivable from related parties............................... --
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... --
Prepaid expenses and other current assets..................... (513)
-------
Total current assets........................................ 6,651
PROPERTY AND EQUIPMENT, net..................................... --
GOODWILL AND OTHER INTANGIBLE ASSETS............................ --
OTHER ASSETS.................................................... --
-------
TOTAL ASSETS.................................................... $ 6,651
-------
-------
LIABILITIES AND STOCKHOLDERS'
CURRENT LIABILITIES:
Notes payable................................................. $ (3,100)
Notes payable to related parties.............................. (3,569)
Capital lease payables........................................ --
Accounts payable.............................................. --
Accrued liabilities........................................... --
Billings in excess of costs and estimated earnings on
uncompleted contracts....................................... --
Disputed amounts under contract............................... --
Payable to founding company shareholders...................... --
Current income taxes payable.................................. --
Other current liabilities..................................... --
-------
Total current liabilities................................... (6,669)
LONG-TERM DEBT, net of current maturities.......................
NOTES PAYABLE TO RELATED PARTIES................................ --
OTHER LONG-TERM LIABILITIES..................................... --
REDEEMABLE PREFERRED STOCK...................................... --
STOCKHOLDERS' EQUITY (CAPITAL DEFICIT):
Preferred stock............................................... --
Common stock.................................................. --
Additional paid in capital.................................... 13,320
Retained earnings (capital deficit)........................... --
-------
Stockholders' equity (capital deficit)...................... 13,320
-------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT).... $ 6,651
-------
-------
</TABLE>
F-9
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
JUNE 30, 1999
(IN THOUSANDS)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
(a) Reflects the estimated distributions of $5.6 million based upon cash
balances of $2.6 million at June 30, 1999 at AXCES and $3.0 million of
projected short-term borrowings, and $1.6 million of current income taxes
related to the S corporation assuming C Corporation treatment. These
short-term borrowings are expected to be repaid with proceeds from the
Offering.
(b) Records the purchase of the remaining founding companies. The
acquisition of ARC was consummated effective June 30, 1999 and is
appropriately included in OmniLynx's historical balance sheet as of June
30, 1999 included herein. The combined purchase of the remaining founding
companies will result in goodwill of $18.4 million over the fair value of
the identifiable net assets acquired of all founding companies, excluding
AXCES, since as accounting acquiror no purchase price allocation is
recorded for AXCES. The excess cost has been preliminarily allocated to
an undifferentiated pool of intangible assets to be amortized over a
period of 10 years for pro forma purposes.
(c) Records the cash proceeds from the issuance of 1.6 million shares of
common stock, net of estimated offering costs. Offering costs primarily
consist of underwriting discounts and commissions, accounting fees, legal
fees and printing expenses.
(d) Records the payment of certain debt of the founding companies which is
expected to be paid from the proceeds of the Offering, and the exchange
of the remaining balance under the revolving line of credit debt into
convertible notes payable.
F-10
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
JUNE 30, 1999
(IN THOUSANDS)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS (CONTINUED)
The following table provides a description of such debt including the
interest rate and maturity of such indebtedness.
<TABLE>
<CAPTION>
ANNUAL PRINCIPAL
INTEREST BALANCE PRINCIPAL
DEBT DESCRIPTION RATE @ 6/30/99 REPAYMENT MATURITY DATE
- ----------------------------------- ---------------- --------- ---------- -----------------------------------
<S> <C> <C> <C> <C>
INFOHIGHWAY--
Unit Offering Subordinated 10.0% $ 369,750 $ 369,750 Matures at the sooner of March 31,
Notes.......................... 2003 or within 90 days of the sale
of the company.
Promissory Note with Robert 10.0% 200,000 100,000 Matures at the sooner of February
Mokterian...................... 28, 2000 or within 90 days of the
sale of the company; $100,000 to be
converted into equity of
InfoHighway prior to the
acquisition, the balance due at
time of Offering.
Promissory Note with Trident 12.0% 499,250 499,250 Matures at the sooner of September
III............................ 30, 1999 or (i) the earliest of:
(a) one or more debt or equity
financings of $1.0 million or more,
(b) the merger of the company into
a public company, or (c) the date
of an occurrence of an event of
default.
AXCES--
Projected short-term borrowing... N/A 3,000,000 3,000,000 AXCES may borrow up to $3.0 million
to fund distributions to its
owners, subject to an operating
cash flow minimum requirement. Such
borrowing, if any, would be repaid
with proceeds from the Offering.
OMNILYNX--AND SUBSIDIARY
Revolving Line of Credit......... prime rate + 2% 2,399,724 750,000 Matures as follows: (a) $750,000 at
time of Offering, (b) $450,000 at
January 31, 2000 unless converted
at holder's option into 56,250
common shares of OmniLynx, and (c)
the balance exchangeable into a
note payable due June 2000 unless
converted earlier by holder into
150,000 common shares of OmniLynx.
Bridge financing from a group of
accredited investors........... 13.0% 1,500,000 1,500,000 Matures at time of Offering.
Bridge financing from a group of
accredited investors........... 13.0% 250,000 250,000 Matures at time of Offering.
Bridge financing from Halcyon, an
independent party.............. 13.0% 200,000 200,000 Matures at time of Offering.
----------
$6,669,000
----------
----------
</TABLE>
F-11
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
The following table summarizes the unaudited pro forma combined statement of
operations adjustments (in thousands):
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) ADJUSTMENTS
------- ---- ------- -----------
<S> <C> <C> <C> <C>
Revenues.................................................... $ -- $ -- $ -- $ --
Cost of services............................................ -- -- -- --
------- ---- ------- -----------
Gross profit................................................ -- -- -- --
Selling, general and administrative expenses................ -- -- --
Depreciation and amortization............................... 1,423 -- -- 1,423
------- ---- ------- -----------
Income (loss) from operations............................... (1,423) -- -- (1,423)
Interest income (expense), net.............................. -- 199 -- 199
------- ---- ------- -----------
Income (loss) before income taxes........................... (1,423) 199 -- (1,224)
Provision (benefit) for income taxes........................ -- -- 115 115
------- ---- ------- -----------
Net income (loss)........................................... $(1,423) $199 $ (115) $(1,339)
------- ---- ------- -----------
------- ---- ------- -----------
</TABLE>
(a) Reflects the amortization of excess purchase price relating to the
Acquisitions which has been preliminarily allocated to an
undifferentiated pool of intangible assets to be amortized over a period
of 10 years for pro forma purposes.
F-12
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS (CONTINUED)
(b) Reflects the reduction in interest expense due to the planned repayment
and planned conversion of certain debt in connection with the
Acquisitions, and the incremental interest expense for the amortization
of original issue discounts, as provided in the following table.
<TABLE>
<CAPTION>
PRINCIPAL ANNUAL INTEREST
DEBT ISSUE BALANCE INTEREST EXPENSE
DESCRIPTION DATE TO BE REPAID RATE CALCULATION
- ------------------------------------------------------------ ------------------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
INFOHIGHWAY --
Unit Offering Subordinated Notes April 1998-August 1998 $ 369,750 10.00% $ 18,336
Promissory Note with Robert Mokterian February 23, 1999 100,000 10.00% 3,479
Promissory Note with Trident III September 1998- 499,250 12.00% 29,709
January 1999
ARC --
Trans Global Note March 1998 1,206,674(1) 10.00% 59,838
CTG Revolving Line of Credit September 17, 1998 750,000 15.9% 59,134
OMNILYNX --
Bridge financing from a group of accredited investors June 1, 1999 1,500,000 13.00% 15,493
Bridge financing from a group of accredited investors April 14, 1999 250,000 13.00% 6,856
Bridge financing from Halcyon, on independent party June 18, 1999 200,000 13.00% 855
Other debt repaid with bridge financings April 5, 1999 100,000 13.00% 2,030
Other debt repaid with bridge financings March 1, 1999 100,000 13.00% 3,277
-----------
$199,007
-----------
-----------
</TABLE>
(1) It is anticipated that this note will be exchanged for Series A 10%
Convertible Redeemable Preferred Stock upon completion of an initial
public offering by the Company.
(c) Reflects the incremental provision for federal and state income taxes
relating to the statement of operations pro forma adjustments and to
reflect income taxes on S corporation operations as if AXCES had been
taxable as a C corporation during the period presented. Assumes all
income is subject to a federal corporate tax rate of 34% and the
non-deductibility of goodwill and intangible asset amortizations.
F-13
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
------- ---- ----- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................................... $ -- $ -- $ 778 $ -- $ -- $ 778
Cost of services............................................ -- -- 184 -- -- 184
------- ---- ----- ------- ------- -----------
Gross profit................................................ -- -- 594 -- -- 594
Selling, general and administrative expenses................ -- -- 610 (2,607) -- (1,997)
Depreciation and amortization............................... 2,696 -- 250 -- -- 2,946
------- ---- ----- ------- ------- -----------
Income (loss) from operations............................... (2,696) -- (266) 2,607 -- (355)
Interest income (expense), net.............................. -- 170 -- -- -- 170
------- ---- ----- ------- ------- -----------
Income (loss) before income taxes........................... (2,696) 170 (266) 2,607 -- (185)
Provision (benefit) for income taxes........................ -- -- -- -- 1,464 1,464
------- ---- ----- ------- ------- -----------
Net income (loss)........................................... $(2,696) $170 $(266) $ 2,607 $(1,464) $(1,649)
</TABLE>
(a) Reflects the amortization of excess purchase price relating to the
Acquisitions which has been preliminarily allocated to an
undifferentiated pool of intangible assets to be amortized over a period
of 10 years for pro forma purposes.
(b) Reflects the reduction in interest expense due to the planned repayment
and planned conversion of certain debt in connection with the
Acquisitions, and the incremental interest expense for the amortization
of original issue discounts, as provided in the following table.
<TABLE>
<CAPTION>
PRINCIPAL ANNUAL INTEREST
DEBT ISSUE BALANCE INTEREST EXPENSE
DESCRIPTION DATE TO BE REPAID RATE CALCULATION
- -- ------------------------ ------------ -------- -----------
<C> <C> <C> <C>
INFOHIGHWAY
--
April 1998-August 1998 $ 369,750 10.00% $ 26,338
Unit
Offering
Subordinated
Notes
September 1998- 499,250 12.00% 17,563
Promissory January 1999
Note
with
Trident
III
ARC
--
March 1998 1,206,674(1) 10.00% 91,575
Trans
Global
Note
September 17, 1998 750,000 15.9% 34,348
CTG
Revolving
Line of
Credit
-----------
$169,824
-----------
-----------
</TABLE>
(1) It is anticipated that this note will be exchanged for Series A 10%
Convertible Redeemable Preferred Stock upon completion of an initial
public offering by the Company.
(c) Reflects the operating results for the Eden Acquisition for the year
ended December 31, 1998. Also reflects the amortization of the customer
list from the Eden Acquisition which is being amortized over a period of
three years and depreciation of property and equipment acquired which is
being recognized over the average useful life of the property and
equipment of five years.
(d) Adjusts salaries, bonuses and benefit amounts to reflect those
established in contractual agreements between the Company and the owners
and key management personnel of the founding companies.
(e) Reflects the incremental provision for federal and state income taxes
relating to the statement of operations pro forma adjustments and to
reflect income taxes on S corporation operations as if AXCES
F-14
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
5. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS (CONTINUED)
had been taxable as a C corporation during the period presented. Assumes
all income is subject to a federal corporate tax rate of 34% and the
non-deductibility of goodwill and intangible asset amortizations.
6. PRO FORMA LOSS PER SHARE
The following table summarizes shares used in computing pro forma loss per
share:
<TABLE>
<S> <C>
OmniLynx Founders................................................ 939,000
Founding Companies:
InfoHighway.................................................... 872,769
ARC............................................................ 390,076
AXCES.......................................................... 700,000
Eden Acquisition................................................. 85,397
Offering......................................................... 1,600,000
Effect of assumed exercise of common stock warrants and options
(see Note 7)................................................... --
---------
Shares used in computing pro forma loss per share................ 4,587,242
---------
---------
</TABLE>
7. COMMON STOCK WARRANTS AND OPTIONS
During the first quarter of 1999, OmniLynx entered into an agreement with an
independent consultant for services to be rendered in conjunction with the
Offering. The agreement, as amended, provided for, among other things, the
granting of five-year exercisable warrants to purchase 86,844 common shares of
the Company at $5.71 per share in exchange for services rendered. The warrants
vest ratably over a period of twelve months from February 17, 1999. The Company
estimated the fair value of the warrants issued during the first quarter of 1999
using the Black-Scholes option pricing model with the following assumptions:
dividend yield of 0%, expected volatility of 46.1%, and a risk free interest
rate of 5.39%. The fair value of the warrants were nominal and recorded as
deferred offering costs.
During the first quarter of 1999, OmniLynx borrowed $100,000 from Trident
III, L.L.C. under a 13% promissory note. In conjunction with this financing,
Trident III, L.L.C. also received warrants to acquire 100,000 shares of common
stock at an initial exercise price per share of $8.00. Such warrants expire
during March 2004. This loan was repaid from the proceeds of the $1.5 million
financing entered into by OmniLynx in the second quarter of 1999.
During the second quarter of 1999, OmniLynx borrowed $100,000 from Trident
III, L.L.C. under a 13% promissory note. In conjunction with this financing,
Trident III, L.L.C. also received warrants to acquire 50,000 shares of common
stock at an initial exercise price per share of $8.00. Such warrants expire
during April 2004. This loan was repaid from the proceeds of the $1.5 million
financing entered into by OmniLynx in the second quarter of 1999.
During the second quarter of 1999, OmniLynx borrowed $250,000 from a group
of accredited investors under a 13% promissory note. In conjunction with this
financing, the accredited investors also
F-15
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
received warrants to acquire 83,333 shares of common stock at an initial
exercise price of $8.00. Such warrants expire during April 2004.
During the second quarter of 1999, OmniLynx borrowed $1.5 million from a
group of accredited investors under a 13% promissory note. In conjunction with
this financing, the accredited investors also received warrants to acquire
300,000 shares of common stock at an initial exercise price of $8.00. Such
warrants expire during June 2004.
During the second quarter of 1999, OmniLynx borrowed $200,000 from Halcyon
Investment Company, a British Virgin Islands corporation, under a 13% promissory
note. In conjunction with this financing, Halcyon also received warrants to
acquire 40,000 shares of common stock at an initial exercise price of $8.00.
Such warrants expire during June 2004.
During the second quarter of 1999, OmniLynx issued warrants to the parent of
ARC to acquire 90,000 shares of common stock at an initial exercise price of
$8.00. Such warrants expire during June 2004. Additionally, in assuming certain
warrant obligations of ARC, OmniLynx issued warrants to acquire 20,513 shares of
common stock at an initial exercise price of $121.85.
The Company estimated the fair value of the warrants issued during the first
and second quarters of 1999, in connection with bridge financings, using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, expected volatility of 46.1%, and a risk free interest rate of
5.2%. The fair value of the warrants of approximately $23,000 was recorded as a
discount to notes payable and amortized over the expected lives of the warrants.
During the second quarter of 1999, OmniLynx stockholders approved the 1999
Incentive Stock Option Plan (the "Plan"), which provides for the granting of
stock options to directors, executive officers, certain other employees and
certain non-employee consultants of the Company. The Plan permits the granting
of options for up to 1,500,000 shares of common stock. The Company has granted
stock options to purchase 1,050,000 shares of common stock to certain members of
the executive management team and outside directors of the Company. The exercise
prices of the options range from $5.00 to $10.00 per share and certain options
vest at the IPO and certain options vest over a three year period.
No common stock warrants or stock options were considered exercised for
purposes of computing earnings per share because to do so would be antidilutive.
F-16
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
OmniLynx Communications Corporation
Houston, Texas
We have audited the accompanying balance sheets of OmniLynx Communications
Corporation as of December 31, 1997 and 1998, and the related statements of
loss, stockholders' equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OmniLynx Communications
Corporation at December 31, 1997 and 1998, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
May 3, 1999
Houston, Texas
F-17
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, CONSOLIDATED
-------------------- JUNE 30,
1997 1998 1999
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(NOTE 3)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....................................................... $ 940 $ 853 $ 983,914
Accounts receivable, net........................................................ -- -- 3,763,919
Receivable--related party....................................................... -- -- 170,000
Costs and estimated earnings in excess of billings on uncompleted contracts
(Note 5)...................................................................... -- -- 480,950
Deferred offering costs (Note 4)................................................ -- -- 513,403
--------- --------- -------------
Total current assets.......................................................... 940 853 5,912,186
Equipment, net (Note 6)........................................................... -- -- 127,951
Goodwill and other intangible assets.............................................. -- -- 10,451,145
Other assets...................................................................... -- -- 86,241
--------- --------- -------------
Total assets.................................................................. $ 940 $ 853 $ 16,577,523
--------- --------- -------------
--------- --------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current maturities of long-term debt (Note 7)................................... $ -- $ -- $ 800,000
Note payable (Note 7)........................................................... -- -- 200,000
Current maturities of notes payable--related parties (Notes 3 and 7)............ -- -- 4,197,038
Current maturities of capital leases payable (Note 7)........................... -- -- 21,650
Accounts payable................................................................ -- -- 5,174,196
Accrued liabilities............................................................. -- -- 1,083
Billings in excess of costs and estimated earnings on uncompleted contracts
(Note 5)...................................................................... -- -- 402,173
Disputed amounts under contract................................................. -- -- 1,289,975
--------- --------- -------------
Total current liabilities..................................................... -- -- 12,086,115
Long-term capital lease, net of current maturities (Note 7)....................... -- -- 5,141
Long-term note payable--related party, net of current maturities (Note 7)......... -- -- 1,146,674
--------- --------- -------------
Total Liabilities............................................................. -- -- 13,237,930
--------- --------- -------------
COMMITMENTS (NOTES 10, 11, 12 AND 13)
STOCKHOLDERS' EQUITY (NOTE 9):
Common stock, $.0001 par value, 25,000,000 shares authorized; 909,074, 939,000
and 1,329,076 issued and outstanding.......................................... 91 94 133
Additional paid-in capital...................................................... 909 906 3,533,951
Deficit......................................................................... (60) (147) (194,491)
--------- --------- -------------
Total stockholders' equity.................................................... 940 853 3,339,593
--------- --------- -------------
Total liabilities and stockholders' equity.................................... $ 940 $ 853 $ 16,577,523
--------- --------- -------------
--------- --------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
STATEMENTS OF LOSS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------- -----------------------
1997 1998 1998 1999
---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Selling, general and administrative expenses.................... $ 60 $ 87 $ 43 $ 177,136
Interest expense................................................ -- -- -- 17,208
---------- ---------- ---------- -----------
Net loss...................................................... $ (60) $ (87) (43) $ (194,344)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
LOSS PER SHARE:
Basic......................................................... $ 0 $ 0 $ 0 $ (.21)
Diluted(1).................................................... N/A N/A N/A N/A
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic......................................................... 909,074 939,000 939,000 939,000
Diluted(1).................................................... N/A N/A N/A N/A
</TABLE>
- ------------------------
(1) There are no securities that would have a dilutive effect at December 31,
1997 and 1998, and June 30, 1998 and 1999.
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------------- PAID-IN STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Initial capitalization of the Company at December 31,
1996.................................................... 909,074 $ 91 $ 909 $ -- $ 1,000
Net loss.................................................. -- -- -- (60) (60)
---------- ----- ------------ ----------- ------------
Balance, December 31, 1997................................ 909,074 91 909 (60) 940
Compensation related to common stock granted for services
rendered................................................ 29,926 3 (3) -- --
Net loss.................................................. -- -- -- (87) 87
---------- ----- ------------ ----------- ------------
Balance, December 31, 1998................................ 939,000 94 906 (147) 853
Issuance of common stock warrants (unaudited) (Note 4).... -- -- 22,400 -- 22,400
Issuance of common stock in connection with acquisition
(unaudited) (Note 3).................................... 390,076 39 3,510,645 -- 3,510,684
Net loss (unaudited)...................................... -- -- -- (194,344) (194,344)
---------- ----- ------------ ----------- ------------
Balance, June 30, 1999 (unaudited) (consolidated)......... 1,329,076 $ 133 $ 3,533,951 $ (194,491) $3,339,593
---------- ----- ------------ ----------- ------------
---------- ----- ------------ ----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- -----------------------
1997 1998 1998 1999
--------- --------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................................... $ (60) $ (87) $ (43) $ (194,344)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of notes payable discount......................... -- -- -- 9,714
Increase (Decrease) in Liabilities:
Accounts payable............................................. -- -- -- 900
Accrued expenses............................................. -- -- -- 1,083
--------- --------- --------- ------------
Net cash used in operating activities (60) (87) (43) (182,647)
--------- --------- --------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to related parties.................................... -- -- -- (570,000)
Cash of acquired company....................................... -- -- -- 168,776
--------- --------- --------- ------------
Net cash used in investing activities............................ -- -- -- (401,224)
--------- --------- --------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable.................................... -- -- -- 2,150,000
Payments on notes payable...................................... -- -- -- (200,000)
Increase in deferred offering costs............................ -- -- -- (383,068)
Issuance of common stock....................................... 1,000 -- -- --
--------- --------- --------- ------------
Net cash provided by financing activities........................ 1,000 -- -- 1,566,932
--------- --------- --------- ------------
Net increase (decrease) in cash.................................. 940 (87) (43) 983,061
Cash and cash equivalents at beginning of period................. -- 940 940 853
--------- --------- --------- ------------
Cash and cash equivalents at end of period....................... $ 940 $ 853 $ 897 $ 983,914
--------- --------- --------- ------------
--------- --------- --------- ------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
There were no payments of interest or taxes made during the years ended December
31, 1997 and 1998. Payments of interest totaled $17,208 for the six months ended
June 30, 1999. Noncash transactions included the recording of a $22,400 original
issue discount on notes payable during the six months ended June 30, 1999.
(unaudited)
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
OmniLynx Communications Corporation ("OmniLynx") was incorporated in
December 1996 in the State of Delaware. OmniLynx was formed, through strategic
acquisitions, to become a leading provider of unified internet, data and
telecommunications solutions to businesses and consumers.
The Company has conducted no operations to date, except in connection with
its efforts to raise equity capital through an initial public offering ("IPO")
and in completing targeted acquisitions. The Company completed the acquisition
of ARC Networks, Inc. on June 30, 1999. The companies identified for acquisition
to date and which will form the "founding companies" in the contemplated IPO are
described below:
AXCES, INC. (AXCES). AXCES is a switchless long-distance carrier that
resells long-distance service to the low-volume urban residential user,
primarily in Texas. It also offers paging service, 800 service, voice-mail and
calling cards.
INFOHIGHWAY INTERNATIONAL, INC. (INFOHIGHWAY). InfoHighway is an internet
service provider based in Houston, Texas which specializes in offering a
high-speed internet access product to high-rise office buildings, including
providing value-added internet services to the tenants.
AXCES and InfoHighway are expected to be acquired simultaneously with and as
a condition to the consummation of the IPO.
ARC ACQUISITION (ARC). ARC Networks, Inc. is a local exchange carrier based
in New York which offers local phone service, long distance, cabling and other
network services to customers primarily in the New York metropolitan area. ARC
was acquired by the Company on June 30, 1999.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheet includes the accounts of the Company and its
wholly owned subsidiary, ARC Networks, Inc. (ARC). The balances of ARC's assets
and liabilities at the date of acquisition, June 30, 1999, are based on their
fair values and are consolidated in these financial statements. Since the
acquisition is effective at June 30, 1999, there are no results from operations
of ARC reflected in the Company's statement of operations and cash flows. All
material intercompany transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
INTANGIBLES
Intangible assets consist primarily of goodwill recognized in a business
combination and is amortized on a straight line basis over the expected periods
benefitted, ten years. Management assesses the recoverability of the intangible
assets by determining whether the carrying value of the intangible
F-22
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
assets can be recovered through undiscounted future operating cash flows of the
acquired business. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of intangible
assets will be impacted if estimated future operating cash flows are not
achieved.
REVENUE RECOGNITION
For local and long distance telephone service, the Company recognizes
revenue as service is provided to customers. For telephone service provided
through the sale of prepaid debit cards the Company invoices the customer,
principally distributors, at a discount from the face amount of the debit card,
when the debit cards are distributed. The Company records the invoiced amount as
deferred revenue and recognizes revenue as telephone usage is provided.
The Company recognizes revenue from its data cable installation services
using the percentage of completion method, measured by the percentage of cost
incurred to date to the total estimated cost for each contract. Revisions in
cost estimates and recognition of losses, if any, on these contracts are
reflected in the accounting period in which the facts become known. Contract
terms provide for billing schedules that differ from revenue recognition and
give rise to costs and estimated profits in excess of interim billings, and
billings in excess of costs and estimated profits. It is reasonably possible
that the amount of costs and estimated profits in excess of billing and billings
in excess of costs and estimated profits may be subject to change in the near
term.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized differently in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement carrying amounts and tax basis of assets and liabilities using enacted
tax rates and laws in effect in the years in which the differences are expected
to reverse. Deferred tax assets are evaluated for realization based on a
more-likely-than-not criteria in determining if a valuation allowance should be
provided. Income tax expense is the tax payable for the year and the change
during the year in deferred tax assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, consisting
primarily of accounts receivable, accounts payable, notes payable and
capitalized lease obligations, approximates fair value due to the maturity of
these financial instruments and the borrowing costs to the Company.
LONG-LIVED ASSETS
Long-lived assets, which are not to be disposed of, including property and
equipment, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Assets are grouped and evaluated for impairment at the lowest level
for which there are identifiable cash flows that are largely independent of the
cash flows of other groups of assets. The Company deems an asset to be impaired
if a projection of undiscounted future operating cash flows directly related to
the asset, including disposal value if any, is less than its carrying amount. If
an asset is determined to be impaired, the loss is measured as the amount by
which the carrying
F-23
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amount of the asset exceeds fair value. The Company measures fair value by
discounting estimated cash flows.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In November 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES", which
established accounting and reporting standards for derivative instruments and
hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The provisions of this statement are effective
for all fiscal quarters of all fiscal years beginning after December 15, 1999.
The Company believes that this standard will not have a material impact on their
financial statements or disclosures thereto.
SOP 98-5, REPORTING ON THE COSTS OF START-UP ACTIVITIES, requires all
start-up and organizational costs to be expensed as incurred. It also requires
all remaining historically capitalized amounts of these costs existing at the
date of adoption to be expensed and reported as the cumulative effect of a
change in accounting principles. SOP 98-5 is effective for all fiscal years
beginning after December 31, 1998. The Company believes that the adoption of SOP
98-5 will not have a material effect on its financial statements.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The unaudited combined interim financial statements for the six month
periods ended June 30, 1998 and 1999 and as of June 30, 1999 have been prepared
on the same basis as the Company's audited financial statements as of and for
the year ended December 31, 1998. In the opinion of management, all adjustments,
consisting of normal, recurring accruals, necessary to present fairly the
financial position of the Company at June 30, 1999, and the results of
operations and cash flows for the six month period ended June 30, 1999 have been
included. The results of operations for such interim period is not necessarily
indicative of the results expected for the full year ending December 31, 1999.
CONCENTRATION OF CREDIT RISK
The Company extends credit to customers which results in accounts receivable
arising from its normal business activities. The financial strength of the
customers is routinely assessed and, based upon factors surrounding the credit
risk of the customers, the Company believes that its receivable credit risk
exposure is limited. Such estimate of the financial strength of customers may be
subject to change in the near term. The Company believes no significant
concentration of credit risk exists with respect to cash.
CASH AND CASH EQUIVALENTS
The Company considers certain highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At June 30, 1999,
the Company had no cash equivalents.
EQUIPMENT AND DEPRECIATION
Equipment is recorded at cost. Expenditures for normal repairs and
maintenance are charged to expense as incurred. When assets are retired or
otherwise disposed of, their costs and related
F-24
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accumulated depreciation are removed from the accounts and the resulting gains
and losses are included in operations. Depreciation and amortization are
recorded using the straight-line method over the estimated useful lives of the
assets. The following sets forth the Company's depreciation policy:
<TABLE>
<S> <C>
5-10
Telecommunications equipment..................................... years
Office equipment and computers................................... 5 years
</TABLE>
NOTE 3--ACQUISITION
Effective June 30, 1999, pursuant to an agreement and plan of
reorganization, the Company acquired all of the outstanding shares of ARC. ARC
is a local exchange carrier based in New York which offers local phone service,
long distance, cabling and other network services to customers primarily in the
New York metropolitan area.
Under the terms of the transaction, the Company issued 390,076 shares of
common stock valued at $9.00 per share. In addition, the Company issued 152,672
shares of contingent common stock. Issuances of the shares of the contingent
common stock are conditional upon achievement of certain share price targets;
50% of the contingent common stock shall be issued if and when the price of the
common stock reaches a 10-day average of $16 per share. The remaining 50% of the
contingent common stock shall be issued if and when the price of the common
stock reaches a 10-day average of $21 per share. At June 30, 1999, no value has
been assigned to the contingent common stock. In addition, the Company issued
warrants to purchase 20,464 shares of common stock exercisable at $122 per share
and expire in February 2007.
The merger agreement also provides for the exchange of $1.2 million of an
existing ARC note payable to an affiliated company for Series A 10% Convertible
Preferred Stock, ("Series A Preferred Stock") of OmniLynx valued at $1.2
million. The preferred stock is convertible beginning on a date 90 days after
this Offering into common stock at the lesser of the Offering price per share or
the average of the closing prices during the five day period preceding the date
of conversion. The preferred stock is redeemable by the holder at $1.00 per
share in the event the Company's common stock declines over 67% of the initial
public offering price. Dividends are payable on annual installments on the first
day of March each year beginning March 2000. The Series A Preferred Stock have
no voting rights. The Series A Preferred Stock has liquidation preference rights
in the amount of $1.00 per share plus a sum equal to all unpaid accrued
dividends before any payment or distribution upon dissolution, liquidation or
winding up shall be made on any series or class of capital stock ranking junior
to Series A Preferred Stock as to such payment or distribution, and after all
such payments or distributions have been made on any series or class of capital
stock ranking senior to the Series A Preferred Stock as to such payment or
distribution. The Series A Preferred Stock Senior rank to the Company's common
stock. (See Note 7).
The merger agreement also provides for: (a) the repayment of $0.8 million of
the outstanding balance on the revolving line of credit due to the parent of ARC
from proceeds of the Offering, (b) the exchange of $0.45 million of the
revolving line of credit for a note payable due on January 31, 2000 that is
convertible at the holder's option into 56,250 common shares of OmniLynx, and
(c) the balance of the revolving line of credit being exchanged for a note
payable maturing in June 2000 unless converted earlier by the holder into
150,000 common shares of OmniLynx.
F-25
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ACQUISITION (CONTINUED)
The acquisition was accounted for under the purchase method of accounting.
The financial position of ARC is included in the Company's consolidated balance
sheet from the effective date of the acquisition of June 30, 1999.
The consideration paid for ARC measured at the acquisition date was
$3,510,684 of common stock. The purchase price was allocated to the acquired
company's assets and liabilities based upon an estimate of their fair values at
the date of acquisition and resulted in $10,451,145 of goodwill, which is being
amortized over 10 years. The purchase price of the acquisition has been
allocated as follows:
<TABLE>
<CAPTION>
FAIR VALUE
-------------
<S> <C>
Purchase consideration..................................................... $ 3,510,684
-------------
-------------
Cash....................................................................... 168,776
Accounts receivable........................................................ 3,763,919
Other current assets....................................................... 611,285
Other long-term assets..................................................... 214,192
Notes payable and long-term debt........................................... (4,833,189)
Accounts payable and accrued expenses...................................... (6,865,444)
-------------
Fair value of net liabilities acquired..................................... (6,940,461)
-------------
-------------
Goodwill................................................................... $ 10,451,145
-------------
-------------
</TABLE>
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1997 and 1998 and for the six months
ended June 30, 1998 and 1999, as if the acquisition of ARC had occurred on
January 1, 1997:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, --------------------------
1998 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
Pro forma revenues.................................................... $ 13,930,687 $ 6,659,658 $ 8,171,286
Pro forma operations income (loss).................................... (1,591,985) (414,722) (747,208)
Pro forma net income (loss)........................................... (1,908,812) (597,223) (1,065,983)
Pro forma basic net income (loss) per share........................... (2.03) (0.64) (1.14)
Pro forma diluted net income (loss) per share(1)...................... N/A N/A N/A
</TABLE>
- ------------------------
(1) Inclusion of additional shares under a diluted analysis for the periods
ended December 31, 1997 and 1998, and June 30, 1998 and 1999 is
inappropriate due to the anti-dilutive effect.
The information is not necessarily indicative of the results of operations
and financial position of the Company as they may be in the future or as they
might have been had the business combinations been consummated as of January 1,
1998.
NOTE 4--DEFERRED OFFERING COSTS (UNAUDITED)
Subsequent to December 31, 1998 and as of June 30, 1999, the Company has
incurred expenses totaling approximately $513,403 in connection with a potential
IPO of the Company's common stock. These expenses have been deferred and will be
recognized as costs of the offering upon the completion
F-26
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--DEFERRED OFFERING COSTS (UNAUDITED) (CONTINUED)
of the initial public offering. If no offering takes place, the expenses
incurred will be charged to operations.
NOTE 5--CONTRACTS IN PROGRESS
Costs, estimated profits, and billings on uncompleted contracts are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
JUNE 30,
1999
----------
(UNAUDITED)
<S> <C> <C> <C>
Costs incurred.............................. $ -- $ -- $1,197,841
Estimated profits........................... -- -- 426,557
--------- --------- ----------
Totals...................................... -- -- 1,624,398
Billings to date............................ -- -- (1,545,621)
--------- --------- ----------
Net....................................... $ -- $ -- $ 78,777
--------- --------- ----------
--------- --------- ----------
Included in the accompanying balance sheet
under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts......... $ -- $ -- $ 480,950
Billings in excess of costs and estimated
earnings on uncompleted contracts......... -- -- (402,173)
--------- --------- ----------
Net......................................... $ -- $ -- $ 78,777
--------- --------- ----------
--------- --------- ----------
</TABLE>
At June 30, 1999, the Company reclassified certain contracts which are the
subject of litigation in "Disputed amounts under contract" in the amount of
$1,289,975 (See Note 11).
NOTE 6--EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
JUNE 30,
1999
----------
(UNAUDITED)
<S> <C> <C> <C>
Telephone switching equipment............... $ -- $ -- $ 35,935
Furniture and fixtures...................... -- -- 18,109
Computer equipment.......................... -- -- 146,571
--------- --------- ----------
-- -- 200,615
Less: Accumulated depreciation.............. -- -- (72,664)
--------- --------- ----------
Equipment, net.............................. $ -- $ -- $ 127,951
--------- --------- ----------
--------- --------- ----------
</TABLE>
F-27
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. NOTES PAYABLE AND CAPITAL LEASES
The Company's notes payable and capital lease obligations consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- --------- JUNE 30,
--------------
1999
--------------
(UNAUDITED)
<S> <C> <C> <C>
Unsecured note payable to accredited investors, bearing interest at 12% due
on demand................................................................. $ -- $ -- $ 250,000
Unsecured note payable to accredited investors, bearing interest at 8%, due
on demand................................................................. -- -- 550,000
Note payable to an independent party, bearing interest at 13%, payable at
time of offering, secured by all of the Company's assets (see discussion
below).................................................................... -- -- 200,000
Revolving line of credit agreement with a related party up to the lesser of
$2.4 million or 85% of eligible receivables, bearing interest at prime
plus 2% (9.75% at June 30, 1999), maturing through June 2000, secured by
all of the Company's assets............................................... -- -- 2,387,038
Note payable to an affiliate, bearing interest at 10%, due in monthly
installments through August 31, 2003, guaranteed by an affiliate (see
discussion below)......................................................... -- -- 1,206,674
Note payable to a group of accredited investors, bearing interest at 13%
payable at time offering, secured by all of the Company's assets (see
discussion below)......................................................... -- -- 1,500,000
Note payable to a group of accredited investors, bearing interest at 13%,
payable at time of offering, secured by all the Company's assets (see
discussion below)......................................................... -- -- 250,000
Capital lease obligations, with interest rates ranging from approximately
16% to 18%, related to the purchase of certain equipment.................. -- -- 26,791
--------- --------- --------------
Total notes payable and capital leases...................................... -- -- 6,370,503
Current portion............................................................. -- -- (5,218,688)
--------- --------- --------------
Long-term portion........................................................... $ -- $ -- $ 1,151,815
--------- --------- --------------
--------- --------- --------------
</TABLE>
During the second quarter of 1999, OmniLynx borrowed $200,000 from Halcyon
under a 13% promissory note. In conjunction with this financing, Halcyon also
received warrants to acquire 40,000 shares of common stock at an initial
exercise price of $8.00. Such warrants expire during June 2004. (Unaudited)
It is anticipated that the note payable to Trans Global in the amount of
$1.2 million will be exchanged for Series A 10% Convertible Redeemable Preferred
Stock of the Company, valued at $1.2 million, upon completion of an initial
public offering by the Company. The preferred stock is redeemable by the holder
at $1.00 per share in the event the Company's common stock declines over 67% of
the initial public offering price.
During the second quarter of 1999, OmniLynx borrowed $1.5 million from a
group of accredited investors under a 13% promissory note. In conjunction with
this financing, the accredited investors
F-28
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. NOTES PAYABLE AND CAPITAL LEASES (CONTINUED)
received warrants to acquire 300,000 shares of common stock at an initial
exercise price of $8.00. Such warrants expire during June 2004. (Unaudited)
During the second quarter of 1999, OmniLynx borrowed $250,000 from a group
of accredited investors under a 13% promissory note. In conjunction with this
financing, the accredited investors received warrants to acquire 83,333 shares
of common stock at an initial exercise price of $8.00. Such warrants expire
during April 2004. (Unaudited)
During the first quarter of 1999, OmniLynx borrowed $100,000 from Trident
III, L.L.C. under a 13% promissory note. In conjunction with this financing,
Trident III, L.L.C. also received warrants to acquire 100,000 shares of common
stock at an initial exercise price per share of $8.00. Such warrants expire
during March 2004. This loan was repaid from the proceeds of the $1.5 million
financing entered into by OmniLynx in the second quarter of 1999.
During the second quarter of 1999, OmniLynx borrowed $100,000 from Trident
III, L.L.C. under a 13% promissory note. In conjunction with this financing,
Trident III, L.L.C. also received warrants to acquire 50,000 shares of common
stock at an initial exercise price per share of $8.00. Such warrants expire
during April 2004. This note was repaid from the proceeds of the $1.5 million
financing entered into by the Company in June 1999. (Unaudited)
During the second quarter of 1999, Omnilynx issued warrants to the former
parent of ARC to
acquire 90,000 shares of common stock at an exercise price of $8.00 in
connection with the extension of a debt maturity. Such warrants expire during
June 2004. Additionally, Omnilynx assumed certain warrant obligations of ARC and
issued warrants to acquire 20,513 shares of common stock at an exercise price of
$121.85.
The Company estimated the fair value of the warrants issued during the first
and second quarters of 1999 using the Black-Scholes option pricing model with
the following assumptions: dividend yield of 0%, expected volatility of 46.1%,
and a risk free interest rate of 5.2%. The fair value of the warrants of
approximately $22,000 was recorded as a discount to notes payable and amortized
over the expected lives of the warrants.
No common stock warrants were considered exercised for purposes of computing
earnings per share because to do so would be antidilutive.
NOTE 8--INCOME TAXES
For financial reporting purposes, ARC had operating loss carryforwards of
approximately $6,400,000 at December 31, 1998, expiring in 2013. Pursuant to
Section 382 of the Internal Revenue Code of 1986, as amended, utilization of
these losses may be limited in the event of a change in control.
NOTE 9--STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue up to 3,000,000 shares of $.0001 par
value preferred stock. The Board of Directors is authorized to designate the
voting power, preferences, dividends, liquidation rights, redemption and other
features related to the Company's preferred stock. As of December 31, 1997 and
1998 and June 30, 1999, no preferred stock had been issued.
F-29
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
The Company effected a 2,055-for-one stock split in March 1999 of the
outstanding shares of common stock. In addition, the Company increased the
number of authorized shares of common stock to 25,000,000. In April 1999, the
Company effected a .52-for-one reverse stock split of the outstanding shares of
common stock. The effects of the stock split and reverse stock split and the
increase in the shares of authorized common stock have been retroactively
reflected in the accompanying balance sheets and in the notes to the financial
statements.
NOTE 10--STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
1999 INCENTIVE STOCK OPTION PLAN
During April 1999, the Company's stockholders approved the 1999 Incentive
Stock Option Plan, which provides that the Company may grant stock options to
purchase up to 1,500,000 shares of its Common Stock to the Company's employees,
directors or consultants. The terms of the options are determined by the
Company's Board of Directors.
A summary of the Company's incentive stock option plan as of June 30, 1999
(unaudited) is presented below:
<TABLE>
<CAPTION>
1999 WTD. AVG.
PLAN EXER. PRICE
--------- -----------
<S> <C> <C>
Options outstanding at December 31, 1998................................................... 0 $ 0.00
Max shares exercisable..................................................................... 0 0.00
Options granted(1)......................................................................... 600,000 8.00
Options exercised.......................................................................... 0 0.00
Options cancelled.......................................................................... 0 0.00
---------
Options outstanding at June 30, 1999....................................................... 600,000 $ 8.00
--------- -----
--------- -----
Options exercisable........................................................................ 200,000 $ 8.00
--------- -----
--------- -----
</TABLE>
- ------------------------
(1) These are incentive stock options which vested one-third in June 1999, and
vest an additional one-third in June 2000 and June 2001. These options
expire in June 2004.
SFAS No. 123 requires the Company to provide pro forma information regarding
net income (loss) applicable to common stockholders and income (loss) per share
as if compensation cost for the Company's stock options granted had been
determined in accordance with the fair value based method prescribed in that
Statement. The Company estimated the fair value of each stock option at the
grant date by using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1999: dividend yield of 0% for
all years; expected volatility of 46.10%; risk-free interest rates ranging from
6.39%; and expected lives of two years. The per share weighted average fair
value of options granted during the six months ended June 30, 1999 was $.06,
which was estimated on the grant date.
F-30
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK OPTIONS AND WARRANTS (CONTINUED)
Under the accounting provisions of SFAS No. 123, the Company's net income
(loss) applicable to common stockholders and loss per share would have been
revised to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS
ENDED JUNE 30,
DECEMBER 31, (UNAUDITED)
-------------------- ----------------------
1997 1998 1998 1999
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Net loss:
As reported................................................................. $ (60) $ (87) $ (43) $ (194,344)
Pro forma................................................................... $ (60) $ (87) $ (43) $ (206,103)
Net loss per share: Basic and Diluted
As reported................................................................. $ (0) $ (0) $ (0) $ (0.21)
Pro forma................................................................... $ (0) $ (0) $ (0) $ (0.22)
</TABLE>
F-31
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCK OPTIONS AND WARRANTS (CONTINUED)
WARRANTS
Following is a description of the Company's warrants outstanding at June 30,
1999 (unaudited):
<TABLE>
<CAPTION>
NUMBER
DESCRIPTION OF WARRANTS OUTSTANDING
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Common stock warrants (unregistered) issued in connection with services performed with the Company's
initial public offering. The warrants vest ratably over a twelve month period beginning February
17, 1999, exercisable at $5.71 per share. The Company estimated the fair value of the warrants
using the Black-Scholes option pricing model with the following assumptions; dividend yield of 0%,
expected volatility 46.1%, and a risk free interest rate of 5.39%. The fair value of the warrants
was nominal........................................................................................ 86, 844
Common stock warrants (unregistered) issued in connection with bridge financing during the first
quarter 1999 exercisable at $8.00 per share and expiring March 2004. (See
Note 7)............................................................................................ 100,000
Common stock warrants (unregistered) issued in connection with bridge financing during the second
quarter 1999 exercisable at $8.00 per share expiring April 2004. (See Note 7)...................... 50,000
Common stock warrants (unregistered) issued in connection with bridge financing during the second
quarter 1999 exercisable at $8.00 per share and expiring April 2004. (See Note 7).................. 83,333
Common stock warrants (unregistered) issued in connection with bridge financing during the second
quarter 1999 exercisable at $8.00 per share and expiring June 2004. (See Note 7)................... 300,000
Common stock warrants (unregistered) issued in connection with bridge financing during the second
quarter 1999 exercisable at $8.00 per share and expiring June 2004. (See Note 7)................... 40,000
Common stock warrants (unregistered) issued in connection with the extension of debt. The warrants
were issued during the second quarter 1999 and are exercisable at $8.00 per share and expire June
2004. (See Note 7)................................................................................. 90,000
Common stock warrants (unregistered) issued in connection with the acquisition of ARC during the
second quarter 1999 exercisable at $122.17 per share and expire February 2007...................... 20,464
-----------
Total Warrants................................................................................... 770,641
-----------
-----------
</TABLE>
Pursuant to FASB Statement No. 123, "Accounting for Stock-Based
Compensation," the Company has elected to adopt only the disclosure provision of
SFAS 123 for stock issued to employees and will account for its employee stock
option plan under APB Opinion No. 25 "Accounting for Stock Issued to Employees."
NOTE 11--COMMITMENTS
CONSULTING AGREEMENT
During the first quarter of 1999, OmniLynx entered into an agreement with an
independent consultant for services to be rendered in conjunction with the
Offering. The agreement, as amended, provided for, among other things, the
granting of five-year exercisable warrants to purchase 86,844
F-32
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--COMMITMENTS (CONTINUED)
common shares of the Company at $5.71 per share in exchange for services
rendered. The warrants vest ratably over a period of twelve months from February
17, 1999. (Unaudited)
OPERATING LEASES
The Company occupies space at two locations for use in its data cable
installation services business and to support its telephone customer service
center and corporate offices. Both leases contain renewal options and escalation
clauses.
Future minimum rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 1998 for each of the
next five years and in the aggregate are:
<TABLE>
<S> <C>
1999.............................................................. $ 103,861
2000.............................................................. 106,978
2001.............................................................. 102,823
2002.............................................................. 95,617
2003.............................................................. 56,767
---------
Total............................................................. $ 466,046
---------
---------
</TABLE>
MINIMUM PURCHASE COMMITMENTS
The Company has entered into agreements with local and long-distance
carriers (the "Carriers") from which it purchases telephone service. Such
agreements include minimum purchase obligations which require monthly payments
based on minimum service usage to the Carriers even if the minimum service is
not used. The minimums are stated in both dollar amounts and usage based on
minutes. Estimated minimum future payments due under the agreements in the
aggregate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
<S> <C>
1999........................................................................... $ 4,531,000
2000........................................................................... 6,171,000
2001........................................................................... 6,171,000
2002........................................................................... 1,671,000
2003........................................................................... 43,000
-------------
$ 18,587,000
-------------
-------------
</TABLE>
NOTE 12--LITIGATION
On January 8, 1999, the ARC was served with a summons from the State Supreme
Court of New York, County of New York, by Mitel Telecommunications Systems, Inc.
("Mitel") for a breach of contract claim in the amount of $1,715,000 relating to
cabling and installation services for which the Company has been paid in full.
The Company believes the action is without merit and filed a motion to dismiss
the action based on numerous defenses available to it and that it continues to
perform all requested services under the contract from Mitel. As of June 30,
1999, the Company believes the maximum exposure resulting from this claim will
be $1,289,975 and has recorded a liability for such
F-33
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--LITIGATION (CONTINUED)
amount, however, it is at least reasonably possible that a change in the
estimate may occur in the near term.
On March 26, 1999, ARC was served with a summons from the State Supreme
Court of New York, County of Orange, by an employee of a customer of the Company
located in Thiells, N.Y., for $1,000,000 resulting from a December 1996 fall
over wiring claimed to be negligently installed by the Company. The Company has
a liability insurance policy which provides sufficient coverage in the event the
plaintiff's claim is successful. The Company believes the action is without
merit and filed a motion to dismiss the action based on numerous defenses
available to it.
NOTE 13--SUBSEQUENT EVENTS
The Company has entered into letters of intent to acquire two of the
remaining founding companies on the date the IPO closes. The founding companies
are InfoHighway International, Inc. ("InfoHighway"), ARC Networks, Inc. ("ARC"),
and AXCES, Inc. ("AXCES"). The Company acquired ARC on June 30, 1999. The
aggregate consideration expected to be paid by the Company to acquire the
founding companies is approximately 2,048,242 shares of common stock, 1,206,674
shares of Series A 10% Convertible Redeemable Preferred stock valued at
$1,206,674 and 60,000 shares of Series B 8% Convertible Redeemable Preferred
stock valued at $9,000,000. The Company also issued 388,550 shares of common
stock which vests based on certain stock performance criteria.
The company will enter into employment agreements with five key officers and
employees of the Company to be effective upon the closing of this offering. Each
of the agreements provides for a minimum base salary, entitles the employee to
participate in all benefit plans in which other members of management
participate; and have an initial term of three years from their effective date.
In connection with the employment agreements, the Company has to issue
755,000 options at exercise prices ranging from $5.00 to $10.00, vesting notably
as follows: one-third on the closing of the offering and then one-third on each
of the first and second anniversaries of the closing of this offering, 325,000
options expire on July 2009 and 430,000 options expire five years from the
closing of this offering.
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
AXCES, Inc.
We have audited the accompanying balance sheets of AXCES, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AXCES, Inc. as of December
31, 1997 and 1998 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1998, in conformity
with generally accepted accounting principles.
April 13, 1999 Pannell Kerr Forster of Texas,
P.C.
Houston, Texas
F-35
<PAGE>
AXCES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
DECEMBER 31, DECEMBER 31, JUNE 30,
---------------------- 1998 JUNE 30, 1999
1997 1998 ------------- 1999 -------------
---------- ---------- -----------
(NOTES 1 AND (NOTES 1 AND
5) (UNAUDITED) 5)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............ $ 220,109 $ 293,376 $ 293,376 $2,606,402 $ 2,606,402
Accounts receivable, net of allowance
for doubtful accounts of $457,780
in 1997, $1,248,964 in 1998, and
$514,748 in 1999................... 3,246,686 6,227,738 6,227,738 2,500,148 2,500,148
Receivables from related parties..... -- 220,475 220,475 1,734,378 1,734,378
Federal income tax receivable........ -- 684,000 684,000 59,000 --
Prepaid expenses and other current
assets............................. 381,655 230,802 230,802 454,797 454,797
---------- ---------- ------------- ----------- -------------
Total current assets............... 3,848,450 7,656,391 7,656,391 7,354,725 7,295,725
---------- ---------- ------------- ----------- -------------
Net property and equipment............. 586,629 538,165 538,165 360,975 360,975
Other assets........................... 88,783 74,220 74,220 98,979 98,979
Notes receivable from related
parties.............................. 210,658 -- -- -- --
---------- ---------- ------------- ----------- -------------
Total assets........................... $4,734,520 $8,268,776 $ 8,268,776 $7,814,679 $ 7,755,679
---------- ---------- ------------- ----------- -------------
---------- ---------- ------------- ----------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable......................... $ -- $1,694,969 $ 1,694,969 $ -- $ --
Current portion of long-term debt.... 19,080 20,921 20,921 -- --
Current portion of prizes and
awards............................. 16,389 29,167 29,167 13,333 13,333
Accounts payable..................... 556,931 578,612 578,612 463,420 463,420
Sales tax payable.................... 469,478 421,646 421,646 107,302 107,302
Accrued distributions to
stockholders....................... -- -- 3,600,271 -- 5,727,997
Other accrued expenses............... 341,308 205,570 205,570 356,289 356,289
Current income taxes payable......... 2,249 -- 993,936 -- 499,705
Deferred income taxes................ 904,840 -- 223,440 -- 223,440
---------- ---------- ------------- ----------- -------------
Total current liabilities.......... 2,310,275 2,950,885 7,768,532 940,344 7,391,486
---------- ---------- ------------- ----------- -------------
Long-term debt, less current portion... 43,706 17,772 17,772 -- --
Deferred income taxes.................. 12,502 -- 437,035 -- 318,756
Prizes and awards, less current
portion.............................. 62,361 31,945 31,945 31,945 31,945
---------- ---------- ------------- ----------- -------------
Total liabilities.................. 2,428,844 3,000,602 8,255,284 972,289 7,742,187
---------- ---------- ------------- ----------- -------------
Commitments and contingencies
Stockholder's equity
Common stock, $1.00 par value; 1,000
shares authorized, issued and
outstanding........................ 1,000 1,000 1,000 1,000 1,000
Additional paid-in capital........... 12,492 12,492 12,492 12,492 12,492
Retained earnings.................... 2,292,184 5,254,682 -- 6,828,898 --
---------- ---------- ------------- ----------- -------------
Total stockholders' equity......... 2,305,676 5,268,174 13,492 6,842,390 13,492
---------- ---------- ------------- ----------- -------------
Total liabilities and stockholders'
equity............................... $4,734,520 $8,268,776 $ 8,268,776 $7,814,679 $ 7,755,679
---------- ---------- ------------- ----------- -------------
---------- ---------- ------------- ----------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-36
<PAGE>
AXCES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------- (UNAUDITED)
1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Sales............................. $8,467,506 $ 19,473,981 $ 30,279,621 $ 17,348,606 $ 10,095,372
Cost of sales (excluding
depreciation and
amortization)................... 3,959,087 8,002,688 9,889,028 5,307,384 3,445,554
-------------- -------------- -------------- -------------- --------------
Gross profit.................... 4,508,419 11,471,293 20,390,593 12,041,222 6,649,818
Selling, general and
administrative expenses......... 3,673,546 8,910,007 17,934,268 8,296,261 4,913,462
Depreciation and amortization..... 61,379 135,461 203,576 88,960 112,079
-------------- -------------- -------------- -------------- --------------
Operating income................ 773,494 2,425,825 2,252,749 3,656,001 1,624,277
Other income (expense)
Interest income................. 56,694 9,575 63,911 17,440 46,870
Interest expense................ (20,424) (28,529) (271,504) (165,408) (96,931)
-------------- -------------- -------------- -------------- --------------
Income before income tax
provision....................... 809,764 2,406,871 2,045,156 3,508,033 1,574,216
Income tax provision
Current expense................. 261,554 2,936 -- -- --
Deferred expense (benefit)...... 16,730 834,157 (917,342) (917,342) --
-------------- -------------- -------------- -------------- --------------
278,284 837,093 (917,342) (917,342) --
-------------- -------------- -------------- -------------- --------------
Net income...................... $ 531,480 $ 1,569,778 $ 2,962,498 $ 4,425,375 $ 1,574,216
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Basic net income per common
share........................... $ 531 $ 1,570 $ 2,962 $ 4,425 $ 1,574
Diluted net income per common
share........................... $ 531 $ 1,570 $ 2,962 $ 4,425 $ 1,574
Average common shares
outstanding..................... 1,000 1,000 1,000 1,000 1,000
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(NOTES 1 AND (NOTES 1 AND (NOTES 1 AND
5) 5) 5)
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net income as reported............ $ 2,962,498 $ 4,425,375 $1,574,216
Pro forma incremental income tax
provision....................... 1,654,412 2,115,311 1,100,901
-------------- -------------- --------------
Pro forma net income.............. $ 1,308,086 $ 2,310,064 $ 473,315
Pro forma net income per common
share........................... $ 1,308 $ 2,310 $ 473
Pro forma average common shares
outstanding..................... 1,000 1,000 1,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-37
<PAGE>
AXCES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
COMMON STOCK CAPITAL EARNINGS TOTAL
--------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995................................ $ 1,000 $ 12,492 $ 190,926 $ 204,418
Net income................................................ -- -- 531,480 531,480
------ ----------- ------------ ------------
Balance, December 31, 1996................................ 1,000 12,492 722,406 735,898
Net income................................................ -- -- 1,569,778 1,569,778
------ ----------- ------------ ------------
Balance, December 31, 1997................................ 1,000 12,492 2,292,184 2,305,676
Net income................................................ -- -- 2,962,498 2,962,498
------ ----------- ------------ ------------
Balance, December 31, 1998................................ 1,000 12,492 5,254,682 5,268,174
------ ----------- ------------ ------------
Net income (unaudited).................................... -- -- 1,574,216 1,574,216
------ ----------- ------------ ------------
Balance, June 30, 1999 (unaudited)........................ $ 1,000 $ 12,492 $ 6,828,898 $ 6,842,390
------ ----------- ------------ ------------
------ ----------- ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-38
<PAGE>
AXCES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
------------------------------------- ----------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income............................ $ 531,480 $ 1,569,778 $ 2,962,498 $4,425,375 $1,574,216
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Compensation expense recognized from
cancellation of notes receivable
from related parties................ -- -- 210,658 -- --
Loss on sale of property and
equipment......................... -- 13,146 -- -- 63,729
Depreciation and amortization....... 61,379 135,461 203,576 88,960 112,077
Provision for doubtful accounts..... 416,540 1,803,763 4,264,752 1,973,748 1,565,484
Increase (decrease) in deferred
income taxes...................... 16,730 834,157 (917,342) (917,342) --
Change in operating assets and
liabilities:
(Increase) decrease in accounts
receivable.......................... (1,108,607) (3,761,591) (7,245,803) (1,578,103) 2,246,188
Decrease in advances to officers...... 14,926 -- -- -- --
Increase in receivables from related
parties............................. -- -- (20,475) (3,278,422) (1,810,079)
(Increase) decrease in federal income
tax receivable...................... -- -- (684,000) -- 625,000
Decrease (increase) in prepaid
expenses............................ -- (381,655) 150,853 144,137 70,768
Decrease (increase) in other assets... (48,601) 4,307 7,623 (24,769) (16,136)
Increase (decrease) in accounts
payable............................. 447,448 (303,468) 21,681 79,971 (4,699)
Increase (decrease) in current income
taxes payable....................... 249,209 (259,170) (2,249) (597,301) --
Increase (decrease) in other accrued
expenses............................ 124,692 202,836 (135,738) 1,406,833 (144,046)
Increase (decrease) in sales tax
payable............................. 39,334 375,475 (47,832) (355,790) (424,833)
Increase (decrease) in awards and
prizes payable...................... 17,500 36,250 (17,639) -- (15,834)
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in)
operating activities.............. 762,030 269,289 (1,249,437) 1,367,297 3,841,835
----------- ----------- ----------- ---------- ----------
Cash flows from investing activities
Purchases of property and equipment... (259,621) (433,694) (148,172) (37,649) (97,147)
Proceeds from sale of property and
equipment........................... -- 2,000 -- -- 102,000
Proceeds from notes to related
parties............................. -- -- -- -- 200,000
Issuance of notes to related
parties............................. -- (210,658) (200,000) -- --
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in)
investing activities.............. (259,621) (642,352) (348,172) (37,649) 204,853
----------- ----------- ----------- ---------- ----------
Cash flows from financing activities
Payment on note payable to vendor..... (100,000) -- -- -- --
Proceeds from long-term notes
payable............................. -- 62,786 -- -- 67,776
Principal payments on long-term
debt................................ (10,690) (19,285) (24,093) (10,454) (106,469)
Proceeds from short-term notes
payable............................. -- -- 1,694,969 -- --
Principal payments of short-term notes
payable............................. -- -- -- -- (1,694,969)
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in)
financing activities.............. (110,690) 43,501 1,670,876 (10,454) (1,733,662)
----------- ----------- ----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents........................... 391,719 (329,562) 73,267 1,319,194 2,313,026
Cash and cash equivalents, beginning of
period................................ 157,952 549,671 220,109 220,109 293,376
----------- ----------- ----------- ---------- ----------
Cash and cash equivalents, end of
period................................ $ 549,671 $ 220,109 $ 293,376 $1,539,303 $2,606,402
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-39
<PAGE>
AXCES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION, BUSINESS AND ORGANIZATION
AXCES, Inc. (the "Company") was incorporated in Delaware on January 3, 1994.
Effective January 1, 1997, the two original stockholders of the Company entered
into a Share Exchange Agreement with MTM Holdings Corporation ("MTM"). Each
stockholder transferred and conveyed 500 shares of Company common stock to MTM
in exchange for 37,500 newly issued shares of MTM stock. The Company's assets
and liabilities at January 1, 1997 approximated their fair market values and
thus no adjustments of the carrying values of the assets and liabilities was
required as a result of this business combination.
The Company is a long distance telephone company which has contracted with
Coastal Telephone Services Limited Company ("Coastal") to provide long-haul
transmissions of its traffic. Coastal bills the Company at contractual rates for
the usage of Coastal's long distance system by the Company's residential
customers.
In September 1996, the Company entered into an agreement with Frontier
Communications of the West, Inc. ("Frontier") whereby Frontier provides network
transport and other telecommunication services for the Company's resale to
residential customers on a common carrier basis. This agreement supplements the
agreement with Coastal and allows the Company to expand its service to a wider
geographic area.
The Company has a billing and service contract with Southwestern Bell
Telephone Company ("SWBT") whereby the latter, generally, performs the billing
and collection procedures for a fee. SWBT remits revenues to the Company, net of
fees, bad debts, and other deductions.
In January 1997, the Company entered into an agreement with Ameritech of
Illinois, Indiana, Michigan, Ohio and Wisconsin ("AOCs") and Ameritech Services,
Inc. ("ASI") whereby AOCs will provide billing and collection services to the
Company for its end users. This agreement supplements the agreement with SWBT
and allows the Company to expand its service to a wider geographic area. The
agreement has an initial term of one year with written renewal options, unless
terminated earlier by either party. The agreement has been renewed through March
2000. No guaranteed minimum purchases of services are stipulated in the
contract.
The Company markets its products and services primarily to residential
customers in Texas, Oklahoma, Missouri, Kansas, Illinois, Indiana, Michigan,
Arkansas and Wisconsin. In addition, the Company has received approval of tariff
applications to operate in other mid-western and eastern seaboard states.
UNAUDITED PRO FORMA ADJUSTMENTS
During April 1999, the Company and the stockholders of MTM signed a
definitive agreement with OmniLynx Communications Corporation ("OmniLynx"),
pursuant to which all of the Company's undistributed earnings will be
distributed to the stockholders of MTM and its outstanding shares will be
exchanged for consideration as described in Note 10 to be issued upon the
consummation of an initial public offering of the common stock of OmniLynx (the
"Offering"). The Company will terminate its status as an S Corporation at the
effective date of the offering. At that time, the Company will be required to
provide deferred income taxes for cumulative temporary differences between
financial statement and income tax bases of the Company's assets and
liabilities. At December 31, 1998 and June 30, 1999, an accrual for distribution
of $3,600,271 and $5,727,997 to the MTM stockholders and a deferred tax
liability of $660,475 and $542,196, respectively, have been reflected in the pro
forma balance sheets presented.
F-40
<PAGE>
AXCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--BASIS OF PRESENTATION, BUSINESS AND ORGANIZATION (CONTINUED)
The 1998 unaudited pro forma net income data reflect adjustments for income
taxes as if the Company had been subject to federal and state income taxes based
upon a pro forma effective tax rate of 34% applied to income before income taxes
(see Note 5).
PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share is calculated in accordance with Statement of
Financial Accounting Standards No. 128 and, as such, is based on the weighted
average number of shares of Common Stock outstanding. Dilutive earnings per
share is equivalent to basic earnings per share for all periods presented as the
Company had no potentially dilutive securities in 1996, 1997 and 1998.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY AND EQUIPMENT
Property and equipment, consisting primarily of computer equipment, office
furniture and fixtures, leasehold improvements, and automobiles, is carried at
cost less accumulated depreciation. Depreciation for financial reporting
purposes is provided by the straight-line method over the estimated useful lives
of three to seven years. The cost of repairs and maintenance is charged against
income as incurred.
Property and equipment is comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Automobiles................................ $ 142,904 $ 142,904 $ --
Furniture, fixtures and equipment.......... 435,232 505,356 534,727
Leasehold improvements..................... 156,175 234,223 234,223
--------- --------- -----------
734,311 882,483 768,950
Accumulated depreciation and
amortization............................. (147,682) (344,318) 407,975
--------- --------- -----------
Net property and equipment............. $ 586,629 $ 538,165 $ 360,975
--------- --------- -----------
--------- --------- -----------
</TABLE>
REVENUE RECOGNITION
Revenue is recognized in the month the Company's customers complete their
telephone call.
PRIZE AND AWARD COSTS
The Company records as expense the amounts of awards and prizes for sales
promotions and customer contests in the year when publicly declared.
INCOME TAXES
Effective January 1, 1998, the Company and its stockholders elected to be
taxed as a qualified subchapter S subsidiary ("QSSS") of MTM under the
provisions of Subchapter S of the United States Internal Revenue Code of 1986.
Under those provisions, the Company is treated as a division of its S
corporation parent, MTM, and the stockholders of MTM are liable for individual
Federal income taxes on the Company's taxable income. As a result, no provision
for United States income taxes has
F-41
<PAGE>
AXCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
been included in the accompanying statements of operations for 1998 other than
the reversal of the deferred tax liability at the date of election of QSSS
status.
For the years ending December 31, 1997 and 1996, Federal income taxes are
provided in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "ACCOUNTING FOR INCOME TAXES", which requires the use of an asset and
liability approach for financial accounting and reporting for income taxes.
Deferred tax assets relate to the deferral of certain expenses for tax reporting
purposes. Deferred tax liabilities relate primarily to the excess of tax
depreciation over depreciation recorded for financial statement reporting
purposes, and the net effect of deferring revenues and expenses for filing the
Federal income tax return on a cash basis. Deferred tax balances are adjusted to
reflect the tax rates in effect when those amounts are expected to be payable or
refundable.
TERMINATION OF S CORPORATION ELECTION
Certain events, including the transaction with OmniLynx as described in Note
10, will automatically terminate the Company's QSSS status, thereby subjecting
future income to Federal and state income taxes at the corporate level. Due to
temporary differences in recognition of revenue and expenses, income for
financial reporting purposes has exceeded income for income tax purposes.
Accordingly, the application of the provisions of SFAS No. 109, "ACCOUNTING FOR
INCOME TAXES", will result in the recognition of deferred tax liabilities and a
corresponding charge to expense in the period in which the OmniLynx transaction
occurs (see Note 5).
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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.
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash with a major domestic bank. The amounts held
in this bank exceed the insured limit of $100,000 from time to time. The terms
of these deposits are on demand to minimize risk. The Company has not incurred
losses related to these deposits.
Financial instruments that potentially subject the Company to concentrations
of credit risk are the Company's accounts receivable billed and collected by
SWBT and AOCs. The Company's accounts generally consist of a large number of
individually small amounts which reduces the risk of significant accounts
receivable losses from any individual account write-off. The Company
continuously monitors its bad debt experience in its areas of operations and
adjusts its marketing and credit policies as necessary.
The Company's allowance for doubtful accounts is provided based upon
industry standards and its actual bad debt experience. The allowance is withheld
and uncollectible amounts deducted from
F-42
<PAGE>
AXCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
customer remittances by SWBT and AOCs as revenues are generated. The allowance
for doubtful accounts is adjusted for actual bad debt experience on a periodic
basis. Bad debts and other uncollectible amounts of accounts receivable were
$3,473,567, $1,382,888 and $401,114 for 1998, 1997 and 1996, respectively. Bad
debts and other uncollectible amounts for the six month periods ending June 30,
1998 and 1999 were $1,792,547 and $2,221,492, respectively. (unaudited)
RECLASSIFICATION OF PRIOR YEAR AMOUNTS
Certain reclassifications of 1997 and 1996 amounts have been made to conform
to the 1998 financial statement presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS",
requires that the Company disclose estimated fair values of its financial
instruments. Fair value estimates, methods and assumptions are set forth below.
The carrying amounts of cash, accounts receivable, receivables from related
parties and others, accounts payable and accrued expenses approximate fair value
at December 31, 1998 and 1997 due to the short-term nature of such accounts.
Management believes that the stated interest rates of notes payable
approximate market rates for instruments with similar credit risk. Accordingly,
the carrying value of notes payable is believed to approximate fair value.
NEW ACCOUNTING STANDARDS
In November 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES", which
established accounting and reporting standards for derivative instruments and
hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The provisions of this statement, as amended by
SFAS No. 137, are effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. In December 1998, the FASB issued SFAS 134,
"ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF
MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE", which amended
SFAS 65. This statement is effective for the first fiscal quarter beginning
after December 15, 1998. SFAS 134 will not apply to the Company. The FASB
recently issued SFAS 135, "RESCISSION OF FASB STATEMENT NO. 75 AND TECHNICAL
CORRECTIONS". SFAS 135 includes a long list of technical corrections that, among
other things, rescinds SFAS 75, "DEFERRAL OF THE EFFECTIVE DATE OF CERTAIN
ACCOUNTING REQUIREMENTS FOR PENSION PLANS OF STATE AND LOCAL GOVERNMENTAL
UNITS". The Statement is effective for financial statements issued for fiscal
years ending after February 15, 1999. The Company believes that these standards
will not have a material impact on their financial statements or disclosures
thereto.
In April 1998, the Accounting Standards Executive Committee initiated
Statement of position ("SOP") 98-5 "REPORTING ON THE COSTS OF START-UP
ACTIVITIES" requires all start-up and organizational costs to be expensed as
incurred. It also requires all remaining historically capitalized amounts of
these costs existing at the date of adoption to be expensed and reported as the
cumulative effect of a change in accounting principles. SOP 98-5 is effective
for all fiscal years beginning after December 31, 1998. The
F-43
<PAGE>
AXCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company believes that the adoption of SOP 98-5 will not have a material effect
on its financial statements.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The unaudited interim financial statements for the six month periods ended
June 30, 1998 and 1999 and as of June 30, 1999 have been prepared on the same
basis as the Company's audited financial statements as of and for the year ended
December 31, 1998. In the opinion of management, all adjustments, consisting of
normal, recurring accruals, necessary to present fairly the financial position
of the Company at June 30, 1999, and the results of operations and cash flows
for the six month periods ended June 30, 1998 and 1999 have been included. The
results of operations for such interim periods are not necessarily indicative of
the results expected for the full year ending December 31, 1999.
NOTE 3--ACCOUNTS RECEIVABLE
In 1997, the Company entered into a renewable accounts receivable sales
agreement. The agreement provides for sale, without recourse, of selected
accounts receivable generated through the billing and collection agreements with
SWBT and AOCs not to exceed an aggregate outstanding balance of $3,000,000. This
agreement was amended in April 1998 to increase the maximum aggregate
outstanding balance to $5,500,000. Advances are limited to 90% of the selected
account balances and are recorded as a reduction of accounts receivable. The
related fees are expensed. The monthly fees charged equal 1.17% of the aggregate
outstanding balance of the receivables sold. This agreement is accounted for as
a sale of accounts receivable in accordance with SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
NOTE 4--NOTES PAYABLE AND LONG-TERM DEBT
NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998 JUNE 30, 1999
---- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to a third party lender, dated December 23, 1998, bearing interest
of $10,000, entire balance of principal and interest due January 8, 1999,
secured by accounts receivable................................................ $ -- $1,000,000 $ --
$700,000 bank line of credit, dated December 11, 1998, bearing interest at prime
plus 1% (8.75% as of December 31, 1998), entire balance of principal and
accrued interest due January 5, 1999, secured by brokerage accounts held by
the stockholders of MTM....................................................... $ -- 694,969 --
---- ---------- -----
$ -- $1,694,969 $ --
---- ---------- -----
---- ---------- -----
</TABLE>
These notes were paid in full in January 1999.
F-44
<PAGE>
AXCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998 JUNE 30, 1999
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Term loan to a bank, dated December 8, 1997, due in 36
installments of $2,008 each including interest at
9.25%, commencing January 8, 1998 secured by
automotive equipment................................. $ 62,786 $ 38,693 $ --
Less current portion................................... 19,080 20,921 --
--------- --------- -----
$ 43,706 $ 17,772 $ --
--------- --------- -----
--------- --------- -----
</TABLE>
In February 1999, the Company entered into another term note agreement with
a bank due in 36 installments of $2,127 each including interest at 8% and
secured by automotive equipment.
Interest paid during 1996, 1997 and 1998 on long-term debt and short-term
borrowings amounted to $20,424, $28,529 and $271,504, respectively. Interest
paid during the six month periods ending June 30, 1998 and 1999 were $165,408
and $96,931, respectively. (unaudited)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
1999............................................................................... $ 20,921
2000............................................................................... 17,772
---------
$ 38,693
---------
---------
</TABLE>
Both term notes were paid in full in March 1999.
NOTE 5--INCOME TAXES
The reconciliation between the effective income tax rate and the U.S.
federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- -------------------------
1998 1998 1999
1996 1997 (PRO FORMA) (PRO FORMA) (PRO FORMA)
---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
U.S. federal taxes at statutory rate............ $ 275,320 $ 818,336 $ 695,354 $ 1,192,731 $ 535,233
Increase (decrease):
Book/tax basis differences on disposed
equipment................................... -- (8,547) -- -- --
Nondeductible terms........................... 9,709 20,919 48,122 11,642 17,316
Other......................................... (6,745) 6,385 (6,406) (6,404) 6,156
---------- ---------- ----------- ------------ -----------
Income tax provision............................ $ 278,284 $ 837,093 $ 737,070 $ 1,197,969 $ 558,705
---------- ---------- ----------- ------------ -----------
---------- ---------- ----------- ------------ -----------
</TABLE>
F-45
<PAGE>
AXCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES (CONTINUED)
Deferred income tax assets (liabilities) consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------ JUNE 30,
1998 1999
1997 1998 (PRO FORMA) (PRO FORMA)
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CURRENT
Net receivables--cash basis................................. $ (72,715) $ (904,840) $(223,440) $(223,440)
---------- ----------- ----------- -----------
NONCURRENT
Depreciation and amortization............................... $ (20,670) $ (17,177) $ 15,210 $ 16,404
Net receivables--cash basis................................. 10,200 4,675 (452,245) (335,160)
---------- ----------- ----------- -----------
Net deferred tax liability.................................. $ 10,470 $ (12,502) $(437,035) $(318,756)
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
Federal income taxes of $12,345, $267,590 and $684,000 were paid during the
years ended December 31, 1996, 1997 and 1998, respectively. The $684,000 paid
during 1998 is reflected as a receivable at December 31, 1998 since no federal
income taxes were due.
During 1998, the Company's 1996 federal income tax return was audited by the
Internal Revenue Service. The Company did not receive additional tax assessments
as a result of the audit.
Upon termination of its S Corporation status (SEE NOTE 1), the Company will
be required to recognize deferred income taxes for cumulative temporary
differences between income for financial and tax reporting purposes. Had the
termination occurred at December 31, 1998, the deferred income tax liability,
calculated in accordance with Statement of Financial Accounting Standards No.
109, "ACCOUNTING FOR INCOME TAXES", would have approximated $660,475.
NOTE 6--REGULATORY APPROVAL
The Company is required to obtain statutory approval to sell long distance
traffic in the states in which the Company conducts business. The Company has
filed for and received approval of all necessary tariff applications in all
states in which it operated at December 31, 1996, 1997 and 1998.
NOTE 7--COMMITMENTS AND CONTINGENCIES
CONTRACTS WITH PROVIDERS
The Company's agreement with Coastal whereby Coastal provides long-haul
transmissions for the Company's traffic has an initial term of five years ending
in the year 2000 at which time the contract is cancelable upon 30 days notice
(SEE NOTE 1).
The Company's September 1996 agreement with Frontier has an initial term of
four years with automatic renewal options, unless terminated earlier by either
party. Commencing in June 1997 the agreement requires the Company to purchase
minimum services starting at $50,000 and escalating to $250,000 minimum monthly
usage in September 1998 and beyond, for a total minimum requirement of
$7,650,000 during the initial contract period. In the event the Company is in
breach of the agreement as defined, and Frontier elects to terminate the
agreement, the total minimum requirement is reduced to $6,000,000 for the
initial four-year term. Minimum purchase requirements were met for the years
ended December 31, 1997 and 1998. The Company was assessed $20,887, the minimum
charge called
F-46
<PAGE>
AXCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
for under the agreement for the period ended June 30, 1999 as purchased services
did not meet the minimum purchase requirements.
Should the Company be unable to renew these agreements on favorable terms or
should either Coastal or Frontier be unable to provide services to the Company
at any time, the Company would be required to contract with similar providers
for these services in order to continue operations. The Company's management
believes that there are sufficient alternative providers from which similar
services could be timely acquired at competitive rates in order to avoid
interruptions of operations.
The Company also has a contract with SWBT to provide billing and account
collection services. The initial term of the contract is five years ending in
the year 2000 at which time the contract is cancelable upon ninety days notice,
or it is renewable for one year periods under amended terms. The contract calls
for guaranteed minimum purchases of services of $52,500 per year totaling
$262,500 over the five year term. The Company's management believes that there
are sufficient alternative sources, including the Company, to provide these
services without an interruption of operations should SWBT discontinue providing
them. Minimum purchase requirements were met for years ending December 31, 1997
and 1998.
LITIGATION
The Public Utility Commission of Texas ("PUC") and the Office of the
Attorney General for the state of Texas brought claims under the Texas Deceptive
Trade Practices Act alleging that the Company engaged in the practice known as
"slamming" which involves the unauthorized change of a customer's long distance
service. The Texas Attorney General sought to restrain certain marketing
practices and to assess damages. The case was settled in June 1998 for $150,000
and while the settlement did not constitute an admission of liability on the
Company's part, the Company did agree to comply with the rules promulgated by
the PUC. The settlement agreement required a payment of $50,000 on the date of
the agreement and 12 payments of $8,333 beginning June 1, 1998. Unpaid
settlement amounts are included in accrued liabilities at December 31, 1997 and
1998.
Similar claims have been brought against the Company in early 1998 by the
Attorneys General for the states of Illinois, Oklahoma and Missouri. The Company
settled with the Illinois Attorney General in March 1999 for $50,000. The
settlement amount is included in accrued liabilities at December 31, 1998.
The remaining suits request, amongst other things, fines, restitution and
loss of ability to conduct business in these states. The Company believes these
claims are without merit, that it has meritorious defenses to them and intends
to vigorously defend itself against these claims.
In addition, the Company has been named a defendant in two suits seeking
class action certification. Both suits were filed in 1998 and are in the
discovery phase. Management of the Company believes that the claims asserted are
without merit and intends to vigorously contest them.
The Company is subject to other legal proceedings which have arisen in the
ordinary course of business and have not been fully adjudicated. Although there
can be no assurance as to the ultimate disposition of these matters and the
proceedings disclosed above, in the opinion of management, based upon
information available at this time, the cost of defense or settlement of these
actions, individually or in the aggregate, will not have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
F-47
<PAGE>
AXCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING LEASES
The Company leases office space, office furniture and fixtures and equipment
under noncancellable operating lease arrangements for various periods ranging up
to five years. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
1999.............................................................................. $ 417,040
2000.............................................................................. 174,462
2001.............................................................................. 32,759
----------
Total future minimum lease payments........................................... $ 624,261
----------
----------
</TABLE>
Lease rental expenses were approximately $73,550, $151,341 and $361,646 for
the years ended December 31, 1996, 1997 and 1998, respectively. Lease rental
expenses approximated $119,373 and $156,817 for the six month periods ended June
30, 1998 and 1999, respectively.
NOTE 8--RELATED PARTY TRANSACTIONS
The notes receivable from certain stockholders of MTM at December 31, 1997
bear interest at 7% and are payable in annual installments of principal and
interest of $14,746 and $225,450 for years ending December 31, 1999 and 2000,
respectively. These notes were included in the stockholders compensation for
1998.
During the six month period ending June 30, 1999, the Company advanced the
stockholders of MTM $49,228 and $1,670,344, respectively. These amounts are
included in receivables from related parties at June 30, 1999.
The Company had the following transaction with a printing company under
common control of MTM:
In January 1998, the Company entered into a one-year agreement totaling
$500,000 with the printing company to provide management and consulting
service for the Company's advertising campaigns, public relations,
marketing, and strategic planning needs.
In November 1998, the Company loaned the printing company $200,000. The
note receivable bears interest at 7%, principal and accrued interest are
payable on March 31, 1999. Outstanding balance at December 31, 1998 is
included in receivables from related parties.
During 1998 and 1997, the Company purchased printing services totaling
$281,660 and $284,660, respectively, from the printing company. Amounts due
the printing company at December 31, 1997 and 1998 were $16,583 and $66,265,
respectively, and are included in accounts payable.
During 1998, the Company paid $20,475 of officers life insurance premiums on
behalf of MTM. This amount is included in receivables from related parties at
December 31, 1998. The Company paid $6,496 of officers' life insurance premiums
on behalf of MTM which are included in receivables from related parties at June
30, 1999. (unaudited)
F-48
<PAGE>
AXCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--401(K) PLAN
The Company established a 401(k) Profit Sharing Plan (the "Plan") effective
January 1, 1998, covering all eligible Company employees. Contributions may be
made to the Plan by an employee at a percentage of salary, but not to exceed the
maximum allowed by the Internal Revenue Code and may be matched by a
discretionary Company contribution of 50% of the employer's contribution up to
3% of total employee compensation.
The Company's contributions to the Plan for the year ended December 31, 1998
totaled $29,886. The Company's contributions to the Plan for the six month
periods ended June 30, 1998 and 1999 were $18,682 and $16,717, respectively.
(unaudited)
NOTE 10--SUBSEQUENT EVENT
In April 1999, the Company and the stockholders of MTM signed a definitive
agreement with OmniLynx pursuant to which all shares of the Company will be
exchanged for the following consideration: (i) 700,000 shares of common stock,
and (ii) $9.0 million of Series B 8% Cumulative Convertible Preferred Stock. The
preferred stock is convertible into 600,000 shares of common stock at the
holder's option and is redeemable after 36 months out of a designated portion of
OmniLynx's cash flow. Additionally, the merger agreement provides for
distributions to MTM totaling $6.5 million representing (i) substantially all of
the undistributed earnings of AXCES, a QSSS under the Federal Income Tax Code of
1986, and (ii) up to $3.0 million in borrowings prior to the Offering. The
acquisition of AXCES is expected to occur during September 1999 upon the
consummation of an initial public offering of the common stock of OmniLynx.
F-49
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
InfoHighway International, Inc.:
We have audited the accompanying balance sheets of InfoHighway
International, Inc. as of December 31, 1997 and 1998 and the related statements
of operations, stockholders' equity (deficit) and cash flows for each of the
years in the three-year period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of InfoHighway International,
Inc. as of December 31, 1997 and 1998, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has suffered recurring losses and negative
cash flows from operations and has a working capital deficit and stockholders'
deficit that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG LLP
April 9, 1999
Houston, Texas
F-50
<PAGE>
INFOHIGHWAY INTERNATIONAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1998 1999
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash................................................. $ 355 $ 250 $ 398
Accounts receivable, net of allowance for doubtful
accounts of $50,638, $82,904 and $116,194 at
December 31, 1997 and 1998 and June 30, 1999,
respectively....................................... 86,992 39,260 297,490
Other current assets................................. -- 1,250 32,000
---------- ---------- ----------
Total current assets............................... 87,347 40,760 329,888
Property and equipment, net............................ 407,779 323,050 782,810
Intangible assets, net................................. 92,393 71,382 391,070
Other assets........................................... 21,399 14,469 22,018
---------- ---------- ----------
Total assets....................................... $ 608,918 $ 449,661 $1,525,786
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable........................................ $ -- $ -- $ 293,000
Note payable to related party........................ -- 475,650 669,250
Notes payable to shareholders........................ 199,900 418,942 418,942
Capital lease obligations............................ 142,477 48,896 34,255
Accounts payable..................................... 376,897 629,259 843,902
Deferred revenues.................................... 196,399 262,458 348,432
Accrued expenses..................................... -- 45,694 113,209
---------- ---------- ----------
Total current liabilities.......................... 915,673 1,880,899 2,720,990
Commitments and contingencies
Stockholders' deficit:
Common stock, no par value, authorized 20,000,000
shares; 6,236,620, 16,605,958 and 10,489,729 shares
issued and outstanding, respectively............... 1,692,778 1,836,015 2,600,788
Accumulated deficit.................................. (1,999,533) (3,267,253) (3,795,992)
---------- ---------- ----------
Total stockholders' deficit........................ (306,755) (1,431,238) (1,195,204)
---------- ---------- ----------
Total liabilities and stockholders' deficit........ $ 608,918 $ 449,661 $1,525,786
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
F-51
<PAGE>
INFOHIGHWAY INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED ENDED DECEMBER 31, JUNE 30,
--------------------------------- --------------------
1996 1997 1998 1998 1999
--------- ---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Access service revenues $ 425,561 $ 914,661 $1,384,563 $ 796,716 $1,100,091
Cost of services................... 217,086 647,172 995,524 509,349 591,696
--------- ---------- ---------- --------- ---------
Gross profit..................... 208,475 267,489 389,039 287,367 508,395
Selling, general and
administrative................... 639,204 1,481,366 1,338,859 600,344 713,206
Depreciation and amortization 52,336 175,217 260,816 141,990 260,726
--------- ---------- ---------- --------- ---------
Loss from operations............. (483,065) (1,389,094) (1,210,636) (454,967) (465,537)
Interest expense................... 4,034 28,135 57,084 28,826 63,202
--------- ---------- ---------- --------- ---------
Loss before income taxes......... (487,099) (1,417,229) (1,267,720) (483,793) (528,739)
Income taxes....................... -- -- -- -- --
--------- ---------- ---------- --------- ---------
Net loss $(487,099) $(1,417,229) $(1,267,720) $(483,793) $(528,739)
--------- ---------- ---------- --------- ---------
--------- ---------- ---------- --------- ---------
Basic and diluted loss per share:
Net loss $ (0.12) $ (0.27) $ (0.14) $ (0.07) $ (0.04)
--------- ---------- ---------- --------- ---------
--------- ---------- ---------- --------- ---------
Weighted-average common shares
outstanding 3,995,502 5,222,454 8,884,820 6,699,434 13,467,932
--------- ---------- ---------- --------- ---------
--------- ---------- ---------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
INFOHIGHWAY INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK STOCKHOLDERS'
-------------------------- ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT (DEFICIT)
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
Balances, December 31, 1995............................ 3,350,000 $ 113,670 $ (95,205) $ 18,465
Issuances of common stock for cash..................... 966,000 371,310 -- 371,310
Issuances of common stock for services performed....... 100,000 80,000 -- 80,000
Net loss............................................... -- -- (487,099) (487,099)
------------ ------------ ------------- --------------
Balances, December 31, 1996............................ 4,416,000 564,980 (582,304) (17,324)
Issuances of common stock for cash..................... 1,570,610 647,782 -- 647,782
Issuances of common stock for services performed....... 123,038 276,861 -- 276,861
Issuances of common stock for acquisition of intangible
assets............................................... 126,972 203,155 -- 203,155
Net loss............................................... -- -- (1,417,229) (1,417,229)
------------ ------------ ------------- --------------
Balances, December 31, 1997............................ 6,236,620 1,692,778 (1,999,533) (306,755)
Issuances of common stock for cash..................... 70,547 10,085 -- 10,085
Issuances of common stock for services performed....... 505,221 2,088 -- 2,088
Issuances of common stock for acquisition of intangible
assets............................................... 4,883 7,814 -- 7,814
Issuances of common stock in connection with unit
offering............................................. 308,125 123,250 -- 123,250
Issuances of common stock for consulting services
performed............................................ 7,182,244 -- -- --
Issuances of common stock in connection with note
payable to related party............................. 2,298,318 -- -- --
Net loss............................................... -- -- (1,267,720) (1,267,720)
------------ ------------ ------------- --------------
Balances, December 31, 1998............................ 16,605,958 1,836,015 (3,267,253) (1,431,238)
Issuance of common stock in satisfaction of notes
payable for acquisition.............................. 968,750 768,753 -- 768,753
Stock re-purchase...................................... (4,375) (7,000) -- (7,000)
Exercise of option..................................... 101,640 3,200 -- 3,200
Re-acquisition of shares issued for consulting
services............................................. (7,182,244) (180) -- (180)
Net loss (unaudited)................................... -- -- (528,739) (528,739)
------------ ------------ ------------- --------------
Balances, June 30, 1999 (unaudited).................... 10,489,729 $ 2,600,788 $ (3,795,992) $ (1,195,204)
------------ ------------ ------------- --------------
------------ ------------ ------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
INFOHIGHWAY INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- --------------------
1996 1997 1998 1998 1999
--------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(487,099) $(1,417,229) $(1,267,720) $(483,793) $(528,739)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 52,336 175,217 260,816 141,990 260,726
Issuances of common stock for services
performed..................................... 80,000 276,861 2,088 -- --
Changes in assets and liabilities:
Accounts receivable........................... (71,965) (15,027) 47,732 (52,675) (258,230)
Other current assets.......................... -- -- (1,250) (850) (30,750)
Other assets.................................. (4,782) (15,415) 6,930 (34,458) (7,549)
Accounts payable.............................. 77,485 299,412 252,362 246,715 214,643
Deferred revenues............................. 103,827 92,572 66,059 98,942 85,974
Accrued expenses.............................. -- -- 45,694 6,032 67,515
--------- ----------- ----------- --------- ---------
Net cash used in operating activities....... (250,198) (603,609) (587,289) (78,097) (196,410)
--------- ----------- ----------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment............... (121,184) (216,251) (130,825) (96,950) (80,282)
Acquisition of intangible assets.................. -- -- (16,437) (28,464) (41,318)
--------- ----------- ----------- --------- ---------
Net cash used in investing activities....... (121,184) (216,251) (147,262) (125,414) (121,600)
--------- ----------- ----------- --------- ---------
Cash flows from financing activities:
Proceeds from unit offering....................... -- -- 493,000 -- --
Proceeds from note payable to related party....... -- -- 475,650 -- 193,600
Proceeds from notes payable to shareholders....... -- 269,500 117,463 143,782 143,000
Payments of notes payable to shareholders......... (17,533) (97,067) (268,171) -- --
Payments of capital lease obligations............. -- -- (93,581) (46,521) (14,641)
Issuances of common stock for cash................ 371,310 647,782 10,085 106,250 (3,801)
--------- ----------- ----------- --------- ---------
Net cash provided by financing activities....... 353,777 820,215 734,446 203,511 318,158
--------- ----------- ----------- --------- ---------
Net increase (decrease) in cash................. (17,605) 355 (105) -- 148
Cash at beginning of period......................... 17,605 -- 355 355 250
--------- ----------- ----------- --------- ---------
Cash at end of period............................... $ -- $ 355 $ 250 $ 355 $ 398
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Supplemental disclosure of cash flow
information--cash paid for interest............... $ 4,034 $ 28,228 $ 34,273 $ 11,988 $ 8,188
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Supplemental disclosure of noncash activities:
Issuance of common stock for acquisition of
customer lists.................................. $ -- $ 203,155 $ 7,814 $ -- $ --
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Equipment acquired under capital leases........... $ 100,369 $ 42,108 $ -- $ -- $ --
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Issuance of notes payable for acquisition......... $ -- $ -- $ -- $ -- $ 918,573
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
Issuance of common stock in payment of notes
payable......................................... $ -- $ -- $ -- $ -- $ 768,753
--------- ----------- ----------- --------- ---------
--------- ----------- ----------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
INFOHIGHWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND ORGANIZATION
InfoHighway International, Inc. (the Company) is an Internet service
provider whose customers consist primarily of small to medium-sized businesses.
The Company was founded in 1994 and is based in Houston, Texas.
(2) LIQUIDITY
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Since its inception, the Company has
suffered losses and negative cash flows from operations and has a working
capital deficit and stockholders' deficit that raise substantial doubt about its
ability to continue as a going concern. In addition, the Company's operations
are subject to certain risks and uncertainties including the following: (i)
risks associated with technology and regulatory trends; (ii) evolving industry
standards; (iii) dependence on its network infrastructure and suppliers; (iv)
growth and acquisitions; (v) actual and prospective competition by entities with
greater financial and other resources; and (vi) the development of the Internet
market. Inability to obtain additional financing or refinancing on acceptable
terms could necessitate changes in the Company's operating plans.
As discussed further in note 10, management has entered into a stock
purchase agreement with OmniLynx Communications Corporation (OmniLynx) whereby
the Company will be acquired by OmniLynx and included in the proposed initial
public offering of OmniLynx. Ultimately, the Company's ability to generate
positive cash flows depends on factors which may be beyond the Company's
control. There can be no assurance that the proposed initial public offering of
OmniLynx will be successful.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) INTERIM FINANCIAL INFORMATION (UNAUDITED)
The unaudited financial statements as of June 30, 1999 and for the six-month
periods ended June 30, 1998 and 1999 have been prepared on the same basis as the
audited financial statements, and, in the opinion of management, include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations of such
interim periods in accordance with generally accepted accounting principles.
Results for the six months ended June 30, 1999 are not necessarily indicative of
results to be expected for the full year.
(B) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets of three to
five years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the remaining lease term.
The Company leases certain of its data communication and other equipment
under agreements accounted for as capital leases. The assets and liabilities
under capital leases are recorded at the lesser of the present value of
aggregate future minimum lease payments, including estimated bargain purchase
options, or the fair value of the assets under lease. Assets under capital lease
are depreciated over the shorter of their estimated useful lives or the related
lease term.
F-55
<PAGE>
INFOHIGHWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) INTANGIBLE ASSETS
Intangible assets consist primarily of capitalized costs incurred for the
purchase of subscriber bases from other Internet service providers, and are
being amortized on a straight-line basis over the expected periods to be
benefitted of 3 to 4 years. Accumulated amortization on intangible assets
amounted to $39,946, $85,016 and $177,732 at December 31, 1997 and 1998, and
June 30, 1999 (unaudited), respectively. The Company assesses the recoverability
of intangible assets by determining whether the carrying value of the intangible
assets can be recovered through undiscounted future operating cash flows of the
purchased subscriber bases. The amount of impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of intangible
assets will be impacted if estimated future operating cash flows are not
achieved.
(D) REVENUE RECOGNITION
Revenues derived from the providing of access services are recognized as the
services are provided. In some instances, the Company bills its subscribers in
advance for direct access to the Internet, but defers recognition of these
revenues until the services have been provided.
(E) SOURCE OF SUPPLIES
The Company relies on certain telecommunication companies to provide data
communications capacity. Although management believes alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
The Company attempts to maintain multiple vendors for its modems, terminal
servers and high-performance routers, which are important components of its
network. If the suppliers are unable to meet the Company's needs as it expands
its network infrastructure, the Company may experience delays and increased
costs, which would adversely affect operating results.
(F) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(G) LOSS PER SHARE
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding for the
period, and excludes the effect of potentially dilutive securities (such as
options, warrants and convertible securities) which are convertible into common
stock. Dilutive loss per share is equivalent to basic loss per share for all
periods presented as the Company had no potentially dilutive securities
outstanding in 1996, 1997, 1998 or during the six months ended June 30, 1999.
F-56
<PAGE>
INFOHIGHWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS, requires the disclosure of estimated fair values
for financial statement instruments. Fair value estimates are made at discrete
points in time based on relevant market information. These estimates may be
subjective in nature and involve uncertainties and matters of significant
judgment and therefore, cannot be determined with precision. The Company
believes that the carrying amounts of its financial instrument current assets
and current liabilities approximate the fair value of such items due to their
short-term nature. The carrying amounts of notes payable and capital lease
obligations approximate their fair value because the interest rates approximate
market.
(I) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities 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.
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Data communications equipment $ 556,499 $ 654,027 $ 1,132,174
Office equipment...................................... 42,608 69,113 213,225
Other................................................. 12,314 19,106 24,616
----------- ----------- ------------
611,421 742,246 1,370,015
Less accumulated depreciation and amortization........ (203,642) (419,196) (587,206)
----------- ----------- ------------
$ 407,779 $ 323,050 $ 782,810
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
(5) NOTE PAYABLE TO RELATED PARTY
In September 1998, the Company entered into a $500,000 loan agreement with
Trident III, L.L.C. (Trident III). Under the terms of the loan agreement, the
Company has borrowed $475,650 from Trident III. These borrowings incur interest
at 12% annually and are payable at the earlier of September 30, 1999, the
Company's receipt of $1,000,000 or more from one or more debt or equity
financings or the merger of the Company into a publicly-traded company. The
borrowings are secured by substantially all of the assets of the Company.
In connection with the borrowings, the Company issued a total of 2,298,318
shares of common stock to Trident III. These shares were issued with a
repurchase right that gave the Company the right to repurchase all of the shares
for total cash of $1 if the Company was not merged into or had become a
publicly-traded company by March 31, 1999. In connection with additional
borrowings granted to the Company and OmniLynx by Trident III subsequent to
March 31, 1999, the Company forfeited its right
F-57
<PAGE>
INFOHIGHWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) NOTE PAYABLE TO RELATED PARTY (CONTINUED)
to repurchase these shares. Due to the nominal repurchase right, no value was
given to the issuance of these shares.
(6) UNIT OFFERING
In 1998 the Company sold units in a private placement offering for cash
proceeds of $493,000. Each unit was sold for $16,000 and consisted of a $12,000
note payable and 10,000 shares of the Company's common stock. The notes payable
bear interest at 10% and mature at the sooner of March 31, 2003 or within 90
days of the sale of the Company. In connection with the unit offering, the
Company issued 308,125 shares of common stock.
(7) ISSUANCES OF COMMON STOCK
During 1998 the Company sold 70,547 shares of common stock to various
investors for cash proceeds of $10,085. In addition, the Company issued 4,883
shares of common stock in connection with the purchases of subscriber bases from
other Internet service providers. The Company also issued 505,221 shares of
common stock to certain employees and consultants of the Company in exchange for
services performed. For the year ended December 31, 1998, the Company recorded
$2,088 in compensation expense related to the issuances of common stock to
certain employees and consultants based on management's estimate of the fair
value of the stock on the date of issuance.
Additionally during 1998, the Company issued 7,182,244 shares of common
stock to Benchmark Equity Group (Benchmark) in exchange for consulting and
advisory services provided in connection with the anticipated merger with
OmniLynx. These shares were issued with a repurchase right that gave the Company
the right to repurchase the shares for total cash of $1 if the Company was not
merged into or had become a publicly-traded company by March 31, 1999. This
repurchase right was exercised by the Company and the shares owned by Benchmark
were forfeited in 1999. Due to the nominal repurchase right, no value was given
to the issuance of these shares.
During 1997 the Company sold 1,570,610 shares of common stock to various
investors for cash proceeds of $647,782. In addition, the Company issued 126,972
shares of common stock in connection with the purchases of subscriber bases from
other Internet service providers. The Company also issued 123,038 shares of
common stock to certain employees and consultants of the Company in exchange for
services performed. For the year ended December 31, 1997, the Company recorded
$276,861 in compensation expense related to the issuances of common stock to
certain employees and consultants based on management's estimate of the fair
value of the stock on the date of issuance.
During 1996 the Company sold 966,000 shares of common stock to various
investors for cash proceeds of $371,310. The Company also issued 100,000 shares
of common stock to certain employees and consultants of the Company in exchange
for services performed. For the year ended December 31, 1996, the Company
recorded $80,000 in compensation expense related to the issuances of common
stock to certain employees and consultants based on management's estimate of the
fair value of the stock on the date of issuance.
F-58
<PAGE>
INFOHIGHWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES
No income tax expense or benefit was recognized for the years ended December
31, 1996, 1997 or 1998. Income tax benefit attributable to losses from
operations differed from the amounts computed by applying the U.S. federal
income tax rate to pretax loss from operations as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax benefit........................ $ (165,614) $ (481,858) $ (431,025)
Increase in valuation allowance........................ 137,390 385,287 430,315
Nondeductible expenses................................. 28,224 96,571 710
----------- ----------- -----------
$ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................................. $ 550,074 $ 886,002
Accounts receivable............................................... -- 28,187
----------- -----------
Total deferred tax assets....................................... 550,074 914,189
Less valuation allowance.......................................... (550,074) (914,189)
----------- -----------
Net deferred tax asset.......................................... $ -- $ --
----------- -----------
----------- -----------
</TABLE>
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $2,606,000 which are available to
offset future federal taxable income, if any, through 2018. These net operating
loss carryforwards are subject to limitations in the event of a change of
ownership of the Company.
(9) LEASES
The Company is obligated under various noncancellable operating and capital
leases, primarily for the lease of office space and data communications
equipment. Future minimum lease payments under noncancellable operating leases
(with initial or remaining lease terms in excess of one year) as of December 31,
1998 are:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
- -------------------------------------------------------------------------------- ------------
<S> <C>
1999............................................................................ $ 100,365
2000............................................................................ 100,365
2001............................................................................ 105,027
2002............................................................................ 107,291
2003............................................................................ 42,485
------------
$ 455,533
------------
------------
</TABLE>
F-59
<PAGE>
INFOHIGHWAY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) LEASES (CONTINUED)
Rent expense for the years ended December 31, 1996, 1997 and 1998 was
$51,000, $70,000 and $80,000, respectively.
(10) SUBSEQUENT EVENTS (UNAUDITED)
The Company has entered into a stock purchase agreement with OmniLynx. In
exchange for all of the issued and outstanding shares of the company,
shareholders of the Company will receive shares of OmniLynx on a pro rata basis.
Additional shares of OmniLynx will be issued to the shareholders of the Company
upon achievement of certain share price targets of OmniLynx common stock.
During January 1999, the Company acquired certain assets, including customer
lists and property and equipment from an Internet service provider (the "Eden
Acquisition"). The purchase price consisted of $50,000 in cash; a $150,000 note,
accruing interest at 9% per annum, due March 15, 1999; and a $768,573 note
redeemable in 968,750 shares of the Company's common stock on March 15, 1999.
The Company and Eden extended the due date of the notes pending completion of
the Company's stock purchase agreement with OmniLynx. The note for $768,573 was
redeemed in June, 1999 by issuance of 968,750 shares of common stock. Payments
totalling $107,000.00 had been paid on the $150,000 note as of June 30, 1999;
the balance is to be paid with proceeds from the initial public offering of
OmniLynx. The purchase price was allocated $547,486 to property and equipment
and $421,087 to customer lists. The customer lists are being amortized on a
straight-line basis over 3 years.
(11) YEAR 2000 COMPLIANCE (UNAUDITED)
Many software applications, computer hardware and related equipment and
systems that use embedded technology, such as microprocessors, rely on two
digits rather than four digits to represent years in performing computations and
decision-making functions. These programs, hardware items and systems may fail
on January 1, 2000 or earlier because they misinterpret "00" as the year 1900
rather than 2000. These failures could have an adverse effect on the Company
because of its direct dependence on its own applications, equipment and systems
and its indirect dependence on those of third parties.
F-60
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
ARC Networks, Inc.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of ARC
Networks, Inc. and Subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, capital deficit, and cash flows for each
of the three years in the period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ARC Networks, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in the
consolidated financial statements and as discussed in Note 3 to the consolidated
financial statements, the Company has suffered recurring losses since its
inception in 1993, and has a deficit at December 31, 1998 of $6,425,265. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 3. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
February 16, 1999
F-61
<PAGE>
ARC NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PREDECESSOR
------------------------
SUCCESSOR
DECEMBER 31, -----------
------------------------ JUNE 30,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and Equivalents.................................... $ 68,712 $ 192,992 $ 168,776
Accounts Receivable, net of Allowance for Doubtful
Accounts of $85,200, $443,196, and $355,470........... 2,386,072 2,991,554 3,763,919
Costs and Estimated Profits in Excess of Interim
Billings.............................................. 100,149 158,355 480,950
Prepaid Expenses and Other Current Assets............... 32,737 97,805 130,335
----------- ----------- -----------
Total Current Assets........................................ 2,587,670 3,440,706 4,543,980
Equipment - net............................................. 84,970 125,675 127,951
----------- ----------- -----------
Other Assets:
Deferred Financing Costs................................ 70,742 248,730 --
Customer list, net...................................... -- 53,125 --
Goodwill................................................ -- 239,566 10,451,145
Deposits................................................ 50,100 86,241 86,241
----------- ----------- -----------
Total Other Assets.......................................... 120,842 627,662 10,537,386
----------- ----------- -----------
Total Assets................................................ $ 2,793,482 $ 4,194,043 $15,209,317
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current Maturities of Long Term Debt.................... $ 106,000 $ -- $ --
Current Maturities of Capitalized Leases................ 15,507 20,350 21,650
Current Maturities of Notes Payable..................... 650,000 250,000 800,000
Notes Payable--Related Parties.......................... 100,000 2,044,724 2,859,724
Loan Payable--Asset Based Lender........................ 231,064 -- --
Accounts Payable........................................ 3,098,480 3,817,657 5,173,296
Disputed Amounts Under Contract......................... -- 1,518,971 1,289,975
Deferred Salary--Officer................................ -- 52,336 --
Deferred Revenue........................................ 110,326 -- --
Interim Billings in Excess of Costs and Estimated
Profits............................................... 1,166,283 462,605 402,173
----------- ----------- -----------
Total Current Liabilities................................... 5,477,660 8,166,643 10,546,818
----------- ----------- -----------
Long-Term Liabilities:
Long Term Debt.......................................... 123,740 -- --
Capitalized Leases...................................... 33,777 15,319 5,141
Notes Payable........................................... -- 550,000 --
Notes Payable--Related Parties.......................... 1,155,095 1,171,674 1,146,674
----------- ----------- -----------
Total Long-Term Liabilities................................. 1,312,612 1,736,993 1,151,815
----------- ----------- -----------
Commitments and Contingencies...............................
Capital Deficit:
Common Stock - par value $.01, Authorized: 15,000,000
Shares; 3,000,000, 9,530,760 and 9,530,760 issued and
outstanding........................................... 30,000 95,307 95,307
Additional Paid-in Capital.............................. 489,750 620,365 3,415,377
Deficit................................................. (4,516,540) (6,425,265) --
----------- ----------- -----------
Total Capital Deficit....................................... (3,996,790) (5,709,593) 3,510,684
----------- ----------- -----------
Total Liabilities and Capital Deficit....................... $ 2,793,482 $ 4,194,043 $15,209,317
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-62
<PAGE>
ARC NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------------------------------------------------
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Sales.................................. $ 5,256,498 $ 9,110,364 $ 13,624,320 $ 6,353,291 $ 8,171,286
Sales - Related Parties................ 326,237 537,837 306,367 306,367 --
------------- ------------- -------------- ------------ ------------
Total Sales............................ 5,582,735 9,648,201 13,930,687 6,659,658 8,171,286
------------- ------------- -------------- ------------ ------------
Cost of Sales.......................... 4,773,279 8,410,293 11,374,867 5,398,770 6,694,203
Cost of Sales - Related Parties........ 300,138 484,810 276,159 291,890 --
------------- ------------- -------------- ------------ ------------
Total Cost of Sales.................... 5,073,417 8,895,103 11,651,026 5,690,660 6,694,203
------------- ------------- -------------- ------------ ------------
Gross Profit........................... 509,318 753,098 2,279,661 968,998 1,477,083
------------- ------------- -------------- ------------ ------------
Expenses:
Selling, General and Administrative
Expenses......................... 1,248,496 2,277,290 3,104,603 1,151,476 1,610,501
Provision for Bad Debts............ 109,989 36,179 345,500 55,141 200,600
Administrative Expenses - Related
Parties.......................... 80,119 28,579 14,066 11,664 16,813
Depreciation and Amortization...... 17,222 436,538 407,390 165,396 219,241
Loss on Impaired Asset............. -- 352,847 -- -- --
------------- ------------- -------------- ------------ ------------
Total Expenses......................... 1,455,826 3,131,433 3,871,559 1,383,677 2,047,155
------------- ------------- -------------- ------------ ------------
Loss from Operations................... (946,508) (2,378,335) (1,591,898) (414,679) (570,072)
------------- ------------- -------------- ------------ ------------
Other Expenses:
Interest Expense................... (59,903) (205,164) (134,732) (123,412) (113,754)
Interest Expense - Related
Parties.......................... (106,910) (120,912) (182,095) (59,089) (187,813)
------------- ------------- -------------- ------------ ------------
Total Other Expenses................... (166,813) (326,076) (316,827) (182,501) (301,567)
------------- ------------- -------------- ------------ ------------
Net Loss............................... $ (1,113,321) $ (2,704,411) $ (1,908,725) $ (597,180) $ (871,639)
------------- ------------- -------------- ------------ ------------
------------- ------------- -------------- ------------ ------------
BASIC EARNINGS PER SHARE:
Net Loss per Share................. $ (0.37) $ (0.90) $ (0.39) $ (0.20) $ (0.09)
------------- ------------- -------------- ------------ ------------
------------- ------------- -------------- ------------ ------------
Weighted Average Number of
Shares........................... 3,000,000 3,000,000 4,860,819 3,000,000 9,530,760
------------- ------------- -------------- ------------ ------------
------------- ------------- -------------- ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-63
<PAGE>
ARC NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT
<TABLE>
<CAPTION>
PREDECESSOR
-----------------------------------------------------------------
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN CAPITAL
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
---------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.................... 3,000,000 $ 30,000 $ (17,750) $ (698,808) $ (686,558)
Allocated related party administrative
expenses.................................... -- -- 18,000 -- 18,000
Net loss...................................... -- -- -- (1,113,321) (1,113,321)
---------- --------- ------------ ------------- -------------
Balance, December 31, 1996.................... 3,000,000 30,000 250 (1,812,129) (1,781,879)
Allocated related party administrative
expenses.................................... -- -- 4,500 -- 4,500
Issuance of warrants related to debt.......... -- -- 485,000 -- 485,000
Net loss...................................... -- -- -- (2,704,411) (2,704,411)
---------- --------- ------------ ------------- -------------
Balance, December 31, 1997.................... 3,000,000 30,000 489,750 (4,516,540) (3,996,790)
Issuance of shares related to refinancing..... 6,530,760 65,307 130,615 -- 195,922
Net loss...................................... -- -- -- (1,908,725) (1,908,725)
---------- --------- ------------ ------------- -------------
Balance, December 31, 1998.................... 9,530,760 95,307 620,365 (6,425,265) (5,709,593)
Net loss...................................... -- -- -- (871,639) (871,639)
---------- --------- ------------ ------------- -------------
Balance, June 30, 1999 (unaudited)............ 9,530,760 $ 95,307 $ 620,365 $ (7,296,904) $ (6,581,232)
-------------------------------------------------------------------------------------------
SUCCESSOR
-----------------------------------------------------------------
Eliminate predecessor retained deficit........ 7,296,904 7,296,904
Purchase price adjustment..................... 2,795,012 2,795,012
---------- --------- ------------ ------------- -------------
Balance, June 30, 1999 (unaudited)............ 9,530,760 $ 95,307 $ 3,415,477 -- $ 3,510,684
---------- --------- ------------ ------------- -------------
---------- --------- ------------ ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-64
<PAGE>
ARC NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------------------------------------
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------------------- --------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................ $(1,113,321) $(2,704,411) $(1,908,725) $(597,180) $(871,639)
Adjustments to reconcile net loss to net Cash used
in operating activities
Provision for doubtful accounts..................... 109,989 36,179 345,500 55,141 200,600
Depreciation........................................ 17,222 46,488 30,539 11,187 37,050
Amortization........................................ -- 390,050 376,850 154,208 182,192
Loss on impaired asset.............................. -- 352,847 -- -- --
Cost of shares issued in refinancing................ -- -- 195,923 -- --
(Increase) Decrease in assets:
Accounts receivable--trade.......................... (549,490) (1,329,865) (800,565) (767,772) (684,639)
Amounts charged to allowance for doubtful
accounts.......................................... -- (5,979) (150,417) (35,171) (288,326)
Costs and estimated profits in excess of interim
billings.......................................... 129,760 (94,411) (58,207) (85,038) (322,595)
Notes receivable--officer........................... -- 22,500 -- -- --
Prepaid expenses and other assets................... (11,264) (6,835) (65,068) (24,862) 12,035
Deposits............................................ (225) (49,875) (36,141) (22,741) --
Increase (Decrease) in Liabilities:
Accounts payable and accrued expenses............... 765,591 1,841,481 719,176 603,120 1,355,639
Deferred salary--officer............................ -- -- 52,336 -- (52,336)
Deferred revenue.................................... 6,115 104,211 (110,326) (110,326) --
Disputed amounts under contract..................... -- -- 1,518,971 -- (228,996)
Interim billings in excess of costs and earnings.... 221,520 918,588 (703,677) 1,211,748 (60,432)
---------- ---------- ---------- --------- ---------
Cash flows used in operating activities............. (424,103) (479,032) (593,831) 392,314 (721,447)
---------- ---------- ---------- --------- ---------
INVESTING ACTIVITIES:
Acquisition of long distance customer base.......... -- -- (413,266) (413,054) --
Capital expenditures................................ (416,466) (82,579) (71,243) (33,192) (39,326)
---------- ---------- ---------- --------- ---------
Cash flows used in investing activities............. (416,466) (82,579) (484,509) (446,246) (39,326)
---------- ---------- ---------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds (repayment) asset based lender......... 79,742 151,322 (231,064) 106,235 --
Proceeds from notes payable, due April 1, 1998...... -- 495,000 -- -- --
Proceeds from demand notes.......................... -- 250,000 -- -- --
Note payable--parent................................ (67,496) (429,389) (106,277) -- --
Proceeds of notes payable--affiliate................ 427,126 223,692 67,855 47,565 400,000
Repayments of notes payable--affiliate.............. -- -- -- -- (10,000)
Proceeds of Line of Credit.......................... -- -- 1,999,724 -- 400,000
Proceeds of capitalized leases...................... 114,085 52,950 -- -- --
(Repayments) of capitalized leases.................. -- (3,666) (13,615) (7,438) (8,878)
Proceeds of note payable--equipment loan............ 350,000 -- -- -- --
(Repayment) of note payable--equipment loan......... -- (102,000) (229,740) (44,001) --
Deferred financing costs............................ -- (70,742) (284,263) (1,052) (44,565)
---------- ---------- ---------- --------- ---------
Cash flows provided by financing activities......... 903,457 567,167 1,202,620 101,309 736,557
---------- ---------- ---------- --------- ---------
Net increase in cash and equivalents................ 62,888 5,556 124,280 47,377 (24,216)
Cash and equivalents--beginning balance............. 268 63,156 68,712 68,712 192,992
---------- ---------- ---------- --------- ---------
Cash and equivalents--ending balance.................. $ 63,156 $ 68,712 $ 192,992 $ 116,089 $ 168,776
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Supplemental disclosures:
Cash paid during the period for:
Interest.............................................. $ 27,536 $ 40,941 $ 233,748 $ 123,413 $ 120,757
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Income taxes.......................................... $ -- $ -- $ -- $ -- $ --
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
F-65
<PAGE>
ARC NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the twelve months ended December 31, 1998, 1997 and 1996 the following
non-cash items occurred:
In February 1997, in connection with the issuance of $550,000 of notes, the
Company issued Series B Warrants to purchase 1,000,000 shares of common stock at
$1.00 per share and Series C Warrants to purchase 500,000 shares of common stock
at $5.00 per share. The Company has valued the Series B Warrants, using the
Black-Scholes method, at $485,000 and the Series C Warrants at $0. Such amount
is being amortized over the life of the notes which matured April 1, 1998.
Amortization recorded for the twelve month period ended December 31, 1998 and
1997 was $150,000 and $335,000.
In connection with the issuance of $550,000 interim notes payable, the
Company paid to the placement agent a fee of $55,000 which was amortized in
1997. In 1998, the Company arranged for the sale of these notes to a friendly
party. (See below)
In September 1998, the Company paid certain debts and refinanced others by
obtaining a $2,000,000 line of credit, secured by all assets of the Company,
with Consolidated Technology Group, Ltd. in exchange for the issuance of
4,500,760 shares of Common Stock valued at $135,000. In conjunction with the
refinancing, the Company renegotiated the employment contract of its President
and CEO and issued 1,280,000 shares valued at $38,400. In conjunction with the
refinancing of the $550,000 in notes referred to above, 750,000 shares of Common
Stock were issued to the new note holder valued at $22,500. The total cost of
the refinancing was deferred at September 1998 and is being amortized over 2
years. A summary of the deferral is presented below:
<TABLE>
<S> <C>
Cost of issuing shares............................................ $ 195,922
Origination fee................................................... 15,000
Legal costs....................................................... 73,341
---------
Total deferral.................................................... 284,263
Amortization...................................................... (35,533)
---------
Net deferral...................................................... $ 248,730
---------
---------
</TABLE>
The Note Receivable-Officer in the amount of $22,500 was forgiven and
recorded as additional compensation in 1997.
See Notes to Consolidated Financial Statements.
F-66
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] PRINCIPLES OF ORGANIZATION AND BUSINESS
ARC Networks, Inc., a Delaware corporation (the "Company") was incorporated
in January 1997. The Company was formed for the purpose of acquiring all of the
outstanding stock of A.R.C. Networks, Inc., a New York corporation ("ARC-New
York"). On January 17, 1997, all of the stockholders of ARC-New York transferred
their stock to ARC Networks, Inc. for 100% ownership in the Company (the
"Recapitalization"). The accompanying consolidated financial statements reflect
the financial position and the results of operations and cash flows of the
Company and its subsidiary as if the Recapitalization occurred January 1, 1994.
The Company was a majority owned subsidiary of SIS Capital Corp. ("SISC")
through June 30, 1999. SISC is a wholly-owned subsidiary of Consolidated
Technology Group Ltd. ("CTG" and "Parent"), a public company. On June 30, 1999,
the Company was acquired by Omnilynx Communications Corp. "Successor Company"
See Note 23[A].
The Company offers local and long-distance telephone services to commercial
telephone users, and also provides data cable installation services primarily in
the New York metropolitan area.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company and its subsidiary after elimination of intercompany
balances and transactions through June 30, 1999 (the "predecessor company"). The
consolidated balance sheet as of June 30, 1999 reflects the acquisition of ARC
(the "Successor Company"). See Note 23[A].
UNAUDITED INTERIM FINANCIAL STATEMENTS--The financial statements as of June
30, 1998 and 1999 and for the six months ended June 30, 1998 and 1999 are
unaudited; however, in the opinion of management, all adjustments (consisting
solely of normal recurring adjustments) necessary to a fair presentation of the
financial statements for the interim periods have been made. The results of the
interim periods are not necessarily indicative of the results to be obtained for
a full fiscal year.
USE OF ESTIMATES--The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK--The Company extends credit to customers which
results in accounts receivable arising from its normal business activities. The
financial strength of the customers is routinely assessed and, based upon
factors surrounding the credit risk of the customers, the Company believes that
its receivable credit risk exposure is limited. Such estimate of the financial
strength of customers may be subject to change in the near term. At December 31,
1998, cash balances of $308,000 were held at a financial institution in excess
of the federally insured limits. The Company believes no significant
concentration of credit risk exists with respect to cash.
CASH AND EQUIVALENTS--The Company considers certain highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. At December 31, 1998, the Company had no cash equivalents.
EQUIPMENT AND DEPRECIATION--Equipment is recorded at cost. Expenditures for
normal repairs and maintenance are charged to expense as incurred. When assets
are retired or otherwise disposed of, their costs and related accumulated
depreciation are removed from the accounts and the resulting gains
F-67
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and losses are included in operations. Depreciation and amortization are
recorded using the straight-line method over the estimated useful lives of the
assets. The following sets forth the Company's depreciation policy:
<TABLE>
<S> <C>
5-10
Telecommunications equipment..................................... years
Office equipment and computers................................... 5 years
</TABLE>
INTANGIBLES--Intangible assets consist primarily of capitalized costs
incurred for the purchase of a customer base and are amortized on a straight
line basis over the expected periods to be benefitted, twenty four months.
Management assesses the recoverability of the intangible assets by determining
whether the carrying value of the intangible assets can be recovered through
undiscounted future operating cash flows of the acquired customer base. The
amount of impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of intangible assets will be impacted if estimated
future operating cash flows are not achieved.
REVENUE RECOGNITION--For local and long distance telephone service, the
Company recognizes revenue as service is provided to customers. For telephone
service provided through the sale of prepaid debit cards the Company invoices
the customer, principally distributors, at a discount from the face amount of
the debit card, when the debit cards are distributed. The Company records the
invoiced amount as deferred revenue and recognizes revenue as telephone usage is
provided.
The Company recognizes revenue from its data cable installation services
using the percentage of completion method, measured by the percentage of cost
incurred to date to the total estimated cost for each contract. Revisions in
cost estimates and recognition of losses, if any, on these contracts are
reflected in the accounting period in which the facts become known. Contract
terms provide for billing schedules that differ from revenue recognition and
give rise to costs and estimated profits in excess of interim billings, and
billings in excess of costs and estimated profits. It is reasonably possible
that the amount of costs and estimated profits in excess of billing and billings
in excess of costs and estimated profits may be subject to change in the near
term.
INCOME TAXES--The Company utilizes the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the period that includes the enactment date.
STOCK OPTIONS AND SIMILAR EQUITY INSTRUMENTS--On January 1, 1996, the
Company adopted the disclosure requirements, but not the fair value based method
of valuation, of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", for stock options and similar equity
instruments (collectively, "Options") issued to employees. The Company will
continue to apply the intrinsic value based method of accounting for Options
issued to employees prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." However, SFAS No. 123
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees. Those transactions are accounted
for
F-68
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
EARNINGS (LOSS) PER SHARE--Loss per share for the 1998 and 1999 periods is
based upon the weighted average shares outstanding for the period. Loss per
share for 1997 and 1996 are based on 3,000,000 shares issued in the
Recapitalization as if they were outstanding for both 1997 and 1996. Potential
common share equivalents are included in the calculation if they are dilutive.
Loss per share for all periods have been recalculated pursuant to SFAS No 128,
"Earnings per Share."
DEFERRED FINANCING COSTS--The Company accounts for the value of warrants
associated with the issuance of debt as a reduction of the principal balance and
amortizes such amounts over the life of the debt utilizing the straight line
method. Costs associated with the issuance of debt are deferred and amortized
over the term of the debt. Amounts paid or accrued for costs associated with an
anticipated public offering are deferred until the completion of the offering at
which time they are charged to paid in capital or are charged to expense if the
offering is not consummated.
[3] GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has sustained losses
since inception, and its accumulated deficit at December 31, 1998 and June 30,
1999 was $6,425,265 and $7,296,904, respectively. Its ability to continue as a
going concern is dependent upon the success of its marketing efforts, its
ability to produce sufficient margins to cover operating and overhead expenses
and its access to sufficient funding to enable it to continue operations. The
Company has been funded through December 31, 1998 by loans from its principal
stockholder and affiliated entities. The Company's plans for its transition to
profitability include obtaining financing, possibly through additional private
equity or through the merger of its operations with another entity in order to
provide the necessary working capital to expand its operations profitably and by
instituting stringent cost controls. While there can be no assurance that
additional equity capital can be raised or that its cost control efforts will be
successful, the Company recognizes that it must generate revenues at a level in
excess of its ongoing expenses or consider the prospect of reducing or ceasing
operations. Management also plans to increase revenues by marketing its services
and products to geographic markets throughout the United States and to increase
the products available to its customers.
[4] RECEIVABLES AND LOAN PAYABLE--ASSET-BASED LENDER (PREDECESSOR)
In 1994, the Company entered into an agreement with an asset-based lender to
finance its accounts receivable. The maximum availability of funds was
$3,000,000. The base interest rate was equal to 8.25% throughout 1998, 1997 and
1996, plus 2% and a commission of 0.3% of the receivables financed. The weighted
average interest rate for 1998 was 20.4%. The balance of the loan, $178,476, was
repaid in September 1998 from the proceeds of the Line of Credit received from
CTG (See Note 8). As of December 31, 1997 the balance of the loan was $231,064.
F-69
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[5] CONTRACTS IN PROGRESS
Costs, estimated profits, and billings on uncompleted contracts are
summarized as follows:
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------
DECEMBER 31,
----------------------------
1997 1998
------------- ------------- SUCCESSOR
-------------
JUNE 30,
-------------
1999
-------------
(UNAUDITED)
<S> <C> <C> <C>
Costs Incurred....................................................... $ 1,368,827 $ 991,835 $ 1,197,841
Estimated Profits.................................................... 405,586 368,807 426,557
------------- ------------- -------------
Totals............................................................... 1,774,413 1,360,642 1,624,398
Billings to Date..................................................... (2,840,547) (1,664,892) (1,545,621)
------------- ------------- -------------
Net.............................................................. $ (1,066,134) $ (304,250) $ 78,777
------------- ------------- -------------
------------- ------------- -------------
Included in the accompanying balance sheet under the following
captions:
Costs and Estimated Profits in Excess of Interim Billings............ $ 100,149 $ 158,355 $ 480,950
Interim Billings in Excess of Costs and Estimated Profits............ (1,166,283) (462,605) (402,173)
------------- ------------- -------------
Net.................................................................. $ (1,066,134) $ (304,250) $ 78,777
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At December 31, 1998 and June 30, 1999, the Company reclassified certain
contracts which are the subject of litigation in "Disputed Amounts Under
Contract" in the amounts of $1,518,971 and $1,289,975, respectively. See Notes
21 and 23.
At December 31, 1998, the Company had a backlog of firm orders for data
cabling and wiring services of approximately $2,000,000, of which substantially
all is expected to be completed during 1999.
[6] EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------- -----------
DECEMBER 31, JUNE 30,
--------------------- -----------
1997 1998 1999
--------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Telephone switching equipment............................ $ 33,558 $ 34,735 $ 35,935
Furniture and fixtures................................... 13,351 17,450 18,109
Computer equipment....................................... 43,136 109,104 146,571
--------- ---------- -----------
90,045 161,289 200,615
Less: Accumulated Depreciation........................... (5,075) (35,614) (72,664)
--------- ---------- -----------
Equipment--net........................................... $ 84,970 $ 125,675 $ 127,951
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
Depreciation expense was $17,222, $46,488 and $30,539 for the years ended
December 31, 1996, 1997 and 1998, respectively, and $11,187 and $37,050 for the
six months ended June 30, 1998 and 1999, respectively.
F-70
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[7] INTANGIBLES (PREDECESSOR)
In June 1998, the Company purchased for cash a long distance customer base
for $413,266 of which $338,266 was allocated to goodwill and $75,000 was
allocated to customer lists. The total purchase price is being amortized over 24
months. Amortization amounted to $120,575 for the twelve months December 31,
1998 and $111,125 for the six months ended June 30, 1999.
[8] DEBT
[A] LONG TERM DEBT--EQUIPMENT LOAN (PREDECESSOR)
In September 1996, the Company entered into a term loan agreement with an
asset-based lender to borrow up to $350,000 for the purpose of purchasing
equipment. The loan agreement provided for weekly principal payments of $2,000.
Interest was charged monthly at a rate equal to the highest prime interest
charged in New York City plus 12%. The loan was collateralized by the Company's
accounts receivable and equipment.
The security interest granted to this lender was junior to the security
interest granted to the Company's other asset-based lender as to all assets,
except for the equipment being financed under this loan. SISC, CTG, and Lewis
Schiller, the Company's former Chairman and Chief Executive Officer, guaranteed
the Company's obligations under this agreement. The outstanding balance of this
loan, $189,156, was repaid in September 1998, plus a $12,500 prepayment penalty
from the proceeds of the Company's new $2,000,000 Line of Credit with CTG. As of
December 31, 1997 $106,000 was classified as Current Maturities of Long Term
Debt and the balance, $123,740 was shown as Long Term Debt. The weighted average
interest rate was 32.7% for 1998, including the prepayment penalty.
[B] NOTES PAYABLE--LISTED BELOW IS A SUMMARY OF NOTES PAYABLE
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------------------ ------------
DECEMBER 31, JUNE 30,
------------------------ ------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
(UNAUDITED)
12% Demand Notes...................................... $ 250,000 $ 250,000 $ 250,000
8% Notes.............................................. 550,000 550,000 550,000
Less: Debt discount on 8% Notes....................... (150,000) -- --
----------- ----------- ------------
Sub-total........................................... 650,000 800,000 800,000
Less: Current Portion................................. (650,000) (250,000) 800,000
----------- ----------- ------------
Total Long-Term Notes................................. $ -- $ 550,000 $ --
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
[I] 12% DEMAND NOTES (PREDECESSOR)
In September 1997, the Company borrowed $250,000 from two accredited
investors and issued its 12% Demand Notes. No fee was incurred in connection
with the issuance of such Demand Notes. The first interest payment is due
January 1, 1999 and the weighted average interest rate was 12% for 1998 and
1997. See Notes 21 and 23.
F-71
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[8] DEBT (CONTINUED)
[II] 8% NOTES PAYABLE (PREDECESSOR)
In February 1997, the Company issued 8% promissory notes in the principal
amount of $550,000, from which it received net proceeds of approximately
$495,000 after deducting a $55,000 commission paid to the placement agent, and,
in connection therewith, issued Series B Common Stock Purchase Warrants ("Series
B") to purchase an aggregate of 1,000,000 shares of Common Stock at $1.00 per
share and Series C Common Stock Purchase Warrants ("Series C") to purchase an
aggregate of 500,000 shares of Common Stock at $5.00 per share. The Company has
valued the Series B Warrants, using the Black-Scholes method, at $485,000. The
Series C Warrants were valued at $0. Amortization of $335,000 was recorded in
1997 and $150,000 in 1998. Such notes were originally due April 1, 1998.
In conjunction with the Line of Credit obtained from CTG in September 1998
(see below), the Company arranged for the sale of the $550,000 notes and
renegotiated the terms as follows. The Series B Warrants were cancelled and
400,000 of the 500,000 Series C Warrants were transferred to the new note
holder. The maturity date of the notes was extended to January 1, 2001, subject
to certain prepayment conditions should the Company raise in excess of $3
million or more in financings. All interest due under the note was forgiven and
the note became non-interest bearing. CTG guaranteed the note and the Company
issued 750,000 shares of its Common Stock to the new note holder, which was
valued at $22,500. (See Note 23).
[C] NOTES TO RELATED PARTIES
A summary of notes to related parties is summarized as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
--------------------------- -------------
DECEMBER 31, JUNE 30,
--------------------------- -------------
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Accounts payable--CTG............................. $ 106,277 $ -- $ --
Revolving Line of Credit--CTG..................... -- 1,999,724 2,399,724
Trans Global Services, Inc........................ 1,148,818 1,216,674 1,206,674
OmniLynx Communication Corp....................... -- -- 400,000
------------ ------------- -------------
Sub-total....................................... 1,255,095 3,216,398 4,006,398
Less: Current Maturities.......................... (100,000) (2,044,724) (2,859,724)
------------ ------------- -------------
Notes Payable--long term.......................... $ 1,155,095 $ 1,171,674 $ 1,146,674
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
[I] REVOLVING LINE OF CREDIT WITH CTG (PREDECESSOR)
In September 1998, the Company obtained a $2,000,000 line of credit from CTG
in exchange for the issuance of 4,500,760 shares of its Common Stock, valued at
$135,000. The terms of this line of credit allow the Company to borrow up to 85%
of eligible receivables as defined in the agreement and is collateralized by all
assets of the Company. Interest on the outstanding balance is prime plus 2% and
a monthly maintenance fee of $1,500. The weighted average interest rate was
15.9% for 1998. (See Notes 14 and 22)
The proceeds of the CTG Line of Credit were used, in part, to repay the Loan
Payable--Asset Based Lender, in the amount of $178,476, and the Equipment Loan
in the amount of $189,156. The
F-72
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[8] DEBT (CONTINUED)
balance was used for working capital. At December 31, 1998 and June 30, 1999,
the outstanding balances under the line were $1,999,724 and $2,399,724,
respectively.
[II] DEFERRED FINANCING COSTS (PREDECESSOR)
As a condition to receiving the Line of Credit in September 1998, the
Company paid at closing to CTG a $15,000 origination fee and the attorney's fees
for both the Company and CTG in the amount of $73,341. In addition, the Company
renegotiated the employment contract with its President and CEO and issued to
him 1,280,000 shares of Common Stock valued at $38,400 (See Note 16). All such
amounts have been deferred and are being amortized over 24 months. A summary of
the 1998 activity regarding this deferral is presented below:
<TABLE>
<CAPTION>
PREDECESSOR
----------------------
SHARES AMOUNT
---------- ----------
<S> <C> <C>
Cost of share issuance:
CTG Line of Credit................................................... 4,500,760 $ 135,022
Employment Contract.................................................. 1,280,000 38,400
Shares in lieu of interest--$550,000 Notes........................... 750,000 22,500
---------- ----------
Sub-total........................................................ 6,530,760 195,922
Origination Fee to CTG............................................... 15,000
Legal Costs.......................................................... 73,341
----------
Gross Deferral....................................................... 284,263
Amortization......................................................... (35,533)
----------
Deferred Financing Costs............................................. $ 248,730
----------
----------
</TABLE>
For the six months ended June 30, 1999 amortization totaled $71,066.
[III] NOTES PAYABLE AND TRANSACTIONS--AFFILIATED COMPANY (PREDECESSOR)
During 1996, 1997 and 1998, Trans Global Services, Inc. ("Trans Global"), an
affiliate through common ownership by CTG, made loans and advances to the
Company. Interest is charged at 10% annually on amounts owed to Trans Global.
Such amounts were $78,167, $104,968, and $119,935 for the years ended December
31, 1996, 1997 and 1998, respectively. In addition, Trans Global allocated
certain amounts for shared expenses such as certain payroll, payroll taxes,
employee benefits, professional fees and rents. Such amounts allocated totaled
$38,966, $21,245 and $0 for the years ended December 31, 1996, 1997 and 1998,
respectively, and bear interest at 10% per annum. Offsetting these items, the
Company provided to Trans Global phone services during 1997 totaling $24,918. As
of December 31, 1996 and 1997, respectively, such loans amounted to $973,411 and
$1,148,818, including interest. On September 30, 1997, the Company issued its
10% promissory note to Trans Global in the principal amount of $1,139,000,
representing the amount due to Trans Global on such date, including accrued
interest. In September 1998, the Company renegotiated this note in the amount of
$1,216,674, including all previously deferred interest. Interest on the new note
is payable monthly and, beginning in April 1999, monthly principal payments of
$5,000 are due until August 31, 2003, when a balloon payment for the balance is
due. The note is subject to certain prepayment conditions in the event the
F-73
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[8] DEBT (CONTINUED)
Company raises additional financings of at least $5,000,000, or, in the event of
a sale of the Company or a change of control occurs, as defined in the
agreement. See Note 23[A].
Scheduled payments related to this note for the next five years are as
follows:
<TABLE>
<S> <C>
1999............................................................ $ 45,000
2000............................................................ 60,000
2001............................................................ 60,000
2002............................................................ 60,000
2003............................................................ 991,674
---------
Total........................................................... $1,216,674
---------
---------
</TABLE>
[9] CAPITAL LEASES
During 1997, the Company purchased certain equipment with a value of $52,950
through the issuance of four capitalized leases. Accumulated depreciation
through December 31, 1997, 1998 and June 30, 1999 was $3,005, $10,445 and
$24,610, respectively. Depreciation expense on equipment under capitalized
leases is included in depreciation expense. Interest rates on the leases range
from approximately 16% to 18%. Future minimum lease payments for the remaining
years of the leases as of December 31, 1998 and June 30, 1999 are as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------ -----------
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
<S> <C> <C>
(UNAUDITED)
1999.............................................................. $ 25,243 $ 22,023
2000.............................................................. 16,478 6,120
------------ -----------
Total minimum payments............................................ 41,721 28,143
Less: amounts representing interest............................... (6,052) (1,352)
------------ -----------
Net present value of lease payments............................... $ 35,669 $ 26,791
------------ -----------
------------ -----------
</TABLE>
[10] INCOME TAXES
The tax effects of significant items comprising the Company's net deferred
tax asset as of December 31, 1997 and 1998 and June 30, 1999 are as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
---------------------------- -------------
DECEMBER 31, JUNE 30,
---------------------------- -------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Deferred Tax Asset:
Loss Carryforwards............................. $ 1,800,000 $ 2,500,000 $ 2,900,000
Less: Valuation Allowance...................... (1,800,000) (2,500,000) (2,900,000)
------------- ------------- -------------
Net Deferred Tax Asset......................... $ -- $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The Valuation Allowance increased by approximately $1,120,000 in 1997,
$700,000 in 1998, and $200,000 and $400,000 for the six months ended June 30,
1998 and 1999, respectively. The provision for
F-74
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[10] INCOME TAXES (CONTINUED)
income taxes varies from the amount computed by applying statutory rates for the
reasons summarized below for all periods presented:
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------------
DECEMBER 31, JUNE 30,
------------------ -----------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Provision based on statutory rates.......................... (34)% (34)% (34)% (34)% (34)%
State taxes, net of federal tax benefit..................... (6) (6) (6) (6) (6)
Losses for which there is no current tax benefit............ 40 40 40 40 40
---- ---- ---- ---- ----
Total....................................................... --% --% --% --% --%
---- ---- ---- ---- ----
---- ---- ---- ---- ----
</TABLE>
For financial reporting purposes, at December 31, 1998 and June 30, 1999,
the Company had net operating loss carryforwards of approximately $6,400,000 and
$6,800,000, respectively, expiring in 2013 and 2014. Pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended, utilization of these losses may
be limited in the event of a substantial change in the Company's ownership.
Based on this and the operating losses generated through December 31, 1998 and
June 30, 1999, the deferred tax asset of approximately $2,500,000 and $2,900,000
is offset by an allowance of $2,500,000 and $2,900,000, respectively.
The expiration dates of net operating loss carryforwards are as follows:
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
------------ ------------
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
<S> <C> <C>
(UNAUDITED)
2009............................................................. $ 125,000 $ 125,000
2010............................................................. 525,000 525,000
2011............................................................. 1,050,000 1,050,000
2012............................................................. 2,800,000 2,800,000
2018............................................................. 1,900,000 1,900,000
2019............................................................. -- 400,000
------------ ------------
$6,400,000 $ 6,800,000
------------ ------------
------------ ------------
</TABLE>
[11] STOCK OPTIONS (PREDECESSOR)
In January 1997, the Company, by action of the Board of Directors and
shareholders, adopted the 1997 Stock Option Plan (the "1997 Plan"). The 1997
Plan provides for the awards of stock options, non-qualified options, stock
appreciation rights, restricted stock, deferred stock, stock purchase rights and
other stock based awards to purchase up to 500,000 shares of Common Stock of the
Company. If shares subject to an option under the 1997 Plan cease to be subject
to such option, or if shares awarded are later forfeited or otherwise terminated
without a payment being made to the participant in the form of stock, such
shares will again be available for future issuance under the 1997 Plan. Awards
under the 1997 Plan may be made to key employees, including officers of and
consultants to the Company, its subsidiaries and affiliates, but may not be
granted to any director unless the director is also an employee of or consultant
to the Company or any subsidiaries or affiliates. The 1997 Plan
F-75
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[11] STOCK OPTIONS (PREDECESSOR) (CONTINUED)
imposes no limit on the number of officers and other key employees to whom
awards may be made. The exercise price of each option is equal to the market
price of the Company's stock on the date of grant.
In January 1997, the Company granted options to purchase 200,000 shares of
Common Stock at $5.00 per share, which was in excess of the fair market value of
the Common Stock on the date of grant, to the Company's President. Such options
are immediately exercisable as to 20,000 shares and become exercisable
cumulatively as to an additional 20,000 shares on January 1st of each year from
1998 through 2006. All other options, when granted, become cumulatively
exercisable as to 50% of shares granted, one year from the date of grant and an
additional 25% on the second and third anniversaries of the date of grant. All
options have a term of ten years from the date of grant. Based on current
vesting requirements, the Company estimates that 100% of the options granted to
date will eventually vest. A summary of activity in the 1997 option plan is as
follows:
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- -----------------
<S> <C> <C>
Outstanding, December 31, 1996................................... -- --
Granted.......................................................... 200,000 $ 5.00
Exercised........................................................ -- --
Expired/Forfeited................................................ -- --
--------- -----
Outstanding at December 31, 1997................................. 200,000 $ 5.00
Granted.......................................................... -- --
Exercised........................................................ -- --
Expired/Forfeited................................................ -- --
--------- -----
Outstanding, December 31, 1998................................... 200,000 $ 5.00
Granted.......................................................... -- --
Exercised........................................................ -- --
Expired/Forfeited................................................ -- --
--------- -----
Outstanding, June 30, 1999 (unaudited)........................... 200,000 $ 5.00
--------- -----
--------- -----
Exercisable at December 31, 1998................................. 40,000 $ 5.00
--------- -----
--------- -----
Exercisable at June 30, 1999 (unaudited)......................... 60,000 $ 5.00
--------- -----
--------- -----
</TABLE>
The following table summarizes option information as of December 31, 1998
and 1997, and June 30, 1999:
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------------------------------------------------------------------
OUTSTANDING OPTIONS
---------------------------------------------------------- EXERCISABLE OPTIONS
RANGE OF WEIGHTED AVG --------------------------
EXERCISE REMAINING WEIGHTED AVG WEIGHTED AVG
DATE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------------------ ----------- --------- ----------------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997................... $ 5.00 200,000 9 yrs. $ 5.00 20,000 $ 5.00
December 31, 1998................... $ 5.00 200,000 8 yrs. $ 5.00 40,000 $ 5.00
June 30, 1999 (unaudited)........... $ 5.00 200,000 7 yrs. $ 5.00 60,000 $ 5.00
</TABLE>
F-76
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[11] STOCK OPTIONS (PREDECESSOR) (CONTINUED)
The Company applies APB Opinion 25 in accounting for its stock option plan.
No compensation has been recognized for the plan in 1997, 1998 or 1999. If the
Company had accounted for the issuance of options pursuant to the fair value
method of SFAS No. 123, the Company would have recorded additional compensation
expense in 1997 of $596,400 and the Company's net loss and net loss per share
would have been:
<TABLE>
<CAPTION>
PREDECESSOR
-------------
DECEMBER 31,
1997
-------------
<S> <C>
Net loss, as reported.......................................................... $ (2,704,411)
-------------
-------------
Net loss, as adjusted.......................................................... $ (3,300,811)
-------------
-------------
Net loss per share, as reported................................................ $ (.90)
-------------
-------------
Net loss per share, as adjusted................................................ $ (1.10)
-------------
-------------
</TABLE>
The per share weighted average fair value of options granted during 1997 was
$2.98, which was estimated on the grant date using the Black-Scholes method. The
following assumptions were made in estimating the fair value:
<TABLE>
<CAPTION>
PREDECESSOR
-----------
1997
-----------
<S> <C>
Dividend yield................................................................... --%
Risk free interest rate.......................................................... 5.50%
Expected life.................................................................... 10 yrs
Expected volatility.............................................................. 37.85%
</TABLE>
[12] WARRANTS (PREDECESSOR)
In February 1997, the Company issued 8% promissory notes in the principal
amount of $550,000, from which it received net proceeds of approximately
$495,000 after deducting a $55,000 commission paid to the placement agent, and,
in connection therewith, issued Series B Common Stock Purchase Warrants to
purchase an aggregate of 1,000,000 shares of Common Stock at $1.00 per share and
Series C Common Stock Purchase Warrants to purchase an aggregate of 500,000
shares of Common Stock at $5.00 per share. The Company valued the Series B
Warrants, using the Black-Scholes method, at $485,000 and valued the Series C
Warrants at $0. Amortization of $335,000 was recorded in 1997 and $150,000 in
1998. Such notes were originally due April 1, 1998.
In conjunction with the Line of Credit obtained from CTG in September 1998,
the Company arranged for the sale of the $550,000 notes and renegotiated the
terms as follows. The Series B Warrants were cancelled and 400,000 of the
500,000 Series C Warrants were sold to a new note holder. The maturity date of
the notes was extended to January 1, 2001, subject to certain prepayment
conditions should the Company raise in excess of $3 million or more in
financings. All interest due under the note was forgiven and the note is now
non-interest bearing. CTG guaranteed the note and
F-77
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[12] WARRANTS (PREDECESSOR) (CONTINUED)
the Company issued 750,000 shares of its Common Stock to the new note holder,
which was valued at $22,500 (See Note 8). A summary of activity for all warrants
is as follows:
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------
WEIGHTED AVG
WARRANTS EXERCISE PRICE
----------- ---------------
<S> <C> <C>
Outstanding, December 31, 1996................................... -- --
Granted.......................................................... 1,500,000 $ 2.33
Exercised........................................................ -- --
Expired/Cancelled................................................ -- --
----------- -----
Outstanding, December 31, 1997................................... 1,500,000 $ 2.33
Granted.......................................................... -- --
Exercised........................................................ -- --
Expired/Cancelled................................................ (1,000,000) $ 1.00
----------- -----
Outstanding, December 31, 1998................................... 500,000 $ 5.00
Granted.......................................................... -- --
Exercised........................................................ -- --
Expired/Cancelled................................................ -- --
----------- -----
Outstanding, June 30, 1999 (unaudited)........................... 500,000 $ 5.00
----------- -----
----------- -----
</TABLE>
The following table summarizes warrant information as of December 31, 1997
and 1998 and June 30, 1999:
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------------------------------------------------------------------
OUTSTANDING WARRANTS
---------------------------------------------------------
WEIGHTED AVG EXERCISABLE WARRANTS
RANGE OF REMAINING ---------------------------
EXERCISE CONTRACTUAL WEIGHTED AVG WEIGHTED AVG
DATE PRICES SHARES LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ----------------------------------- ----------- ---------- --------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997.................. $ 5.00 500,000 10 yrs $ 5.00 500,000 $ 5.00
$ 1.00 1,000,000 10 yrs $ 1.00 1,000,000 $ 1.00
December 31, 1998.................. $ 5.00 500,000 9 yrs $ 5.00 500,000 $ 5.00
June 30, 1999 (unaudited).......... $ 5.00 500,000 8 yrs $ 5.00 500,000 $ 1.00
</TABLE>
The Company accounted for the issuance of warrants and recorded compensation
pursuant to the fair value method of SFAS No. 123, which produced additional
compensation expense of $485,000, of which $150,000 and $335,000 was amortized
in 1998 and 1997, respectively. See Note 11 for the assumptions made in
estimating the fair value of warrants.
[13] ECONOMIC DEPENDENCY
For the six months ended June 30, 1999, one customer accounted for
$1,785,000, or 22% of total revenues and $803,200 in accounts receivable. For
the six months ended June 30, 1998, one customer accounted for $1,890,000, or
28% of total revenues. No customer accounted for more than 10% of accounts
receivable. For the twelve months ended December 31, 1998, no customer accounted
for more than 10% of total revenues, however, one customer accounted for 12% of
accounts receivable.
F-78
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[13] ECONOMIC DEPENDENCY (CONTINUED)
Revenues from two customers in 1996 and 1997, respectively, amounted to
$1,046,238 and $1,835,382, or 11% and 19%, and $710,097 and $869,195, or 13% and
16% of total revenues, respectively. Accounts receivable for these two customers
was $224,904 and $241,393 at December 31, 1996 and 1997, respectively. At
December 31, 1998, the Company had a backlog of firm orders for data cabling and
wiring services of approximately $2,000,000, of which substantially all is
expected to be completed during 1999. There is no backlog for telephone
services.
[14] TRANSACTIONS WITH RELATED PARTIES (PREDECESSOR)
[A] NOTES PAYABLE--PARENT (CTG) AND TELEVEND
During the years ended December 31, 1995 and 1996, the Company received
loans from SISC. Interest expense on the outstanding notes amounted to $28,743,
$34,033 and $62,160 for the years ended December 31, 1996, 1997 and 1998,
respectively. Such loans accrued interest at 10% per annum. As of December 31,
1996, 1997 and 1998, such loans, exclusive of the Line of Credit received in
September 1998 from CTG, were $466,117, $534,902 and $0, respectively. See Note
8 regarding the Company's Accounts Receivable Line of Credit.
During the years ended December 31, 1996 and 1997, the Company sold prepaid
debit calling cards to Televend, a wholly owned subsidiary of CTG, in the
amounts of $326,237 and $537,837, respectively. Sales to Televend were at a rate
no lower than that provided to the Company's best customers. At December 31,
1996 and 1997, Televend owed to the Company $49,236 and $428,625, respectively.
Such amounts were offset against the Company's payable to CTG at the respective
dates according to a directive issued by CTG. During 1998, Televend purchased an
additional $306,367 of prepaid debit cards from the Company and paid to the
Company $116,085, which resulted in Televend owing to the Company $618,906.
On March 31, 1998, Lewis Schiller ("Schiller"), the Company's former CEO and
CTG's and Televend's former President, CEO and Chairman, and certain other
officers and directors of the Company and CTG, agreed to terminate their
employment agreements and resign as officers and directors of the Company and
CTG, subject to certain terms and conditions, in return for a lump sum payment
by CTG of $4,000,000. As part of this agreement, CTG agreed to transfer certain
subsidiaries of CTG with a zero or negative net worth to Schiller for a nominal
consideration. Televend was one of the subsidiaries transferred to Schiller. At
this point, the Company had a receivable from a company who no longer was an
affiliate. In May 1998, with the consent of CTG, the Company reclassified the
$618,906 Televend owed to the Company against its payable to CTG, leaving a
balance of $84,004 owed to CTG by the Company.
[B] RELATED PARTY TRANSACTIONS--PARENT (PREDECESSOR)
The Company occupies space leased by CTG in New York City. There is no
formal lease agreement between CTG and the Company. Rent is charged by CTG to
the Company which amounted to $23,153, $27,752 and $14,066 for the years ended
December 31, 1996, 1997 and 1998, respectively. For the six months ended June
30, 1998 and 1999, rent charged was $11,664 and $16,813, respectively.
During 1996 and 1997, certain administrative services were performed for the
Company by CTG and its subsidiaries. The fair value of such services,
approximately $18,000 and $4,500, respectively, was charged to general and
administrative expenses and credited to additional paid-in capital since CTG
will not be reimbursed for such charges.
F-79
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[15] FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes the financial instruments by individual
balance sheet account as of December 31, 1998 and 1997 and June 30, 1999. The
fair value of the financial instruments disclosed therein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
---------------------------------------- ----------------------------------------
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
-------------------------- ------------ -------------------------- ------------
1997 1998 1999 1997 1998 1999
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
PREDECESSOR SUCCESSOR PREDECESSOR SUCCESSOR
Debt Maturing Within One
Year....................... $ 987,064 $ 250,000 $ 800,000 $ 1,137,064 $ 250,000 $ 800,000
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Notes payable--Parent &
Affiliates................. $ 1,255,095 $ 3,216,398 $ 4,006,398 $ 1,683,720 $ 3,216,398 $ 4,006,398
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
Long-Term Debt............... $ 123,740 $ 550,000 $ -- $ 123,740 $ 550,000 $ --
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
For certain financial instruments, including cash, trade receivables and
payables, and short-term debt, the carrying amount approximated fair value
because of the near term maturities of such obligations. The fair value of the
notes payable to the parent company, and affiliates, is based on current rates
at which the Company could borrow funds with similar remaining maturities and
approximates fair value. The fair value of long-term debt to non-affiliates is
based on current rates at which the Company could borrow funds with similar
terms and maturities.
[16] COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company occupies space at two locations for use in its data cable
installation services business and to support its telephone customer service
center and corporate offices. Both leases contain renewal options and escalation
clauses. Rent expense for the twelve months ended December 31, 1996, 1997 and
1998 was $29,122, $47,345 and $82,712, respectively. Rent expense for the six
months ended June, 1998 and 1999 was $32,183 and $43,279, respectively.
Future minimum rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 1998 for each of the
next five years and in the aggregate are:
<TABLE>
<CAPTION>
SUCCESSOR
----------
<S> <C>
1999.............................................................................. $ 103,861
2000.............................................................................. 106,978
2001.............................................................................. 102,823
2002.............................................................................. 95,617
2003.............................................................................. 56,767
----------
Total............................................................................. $ 466,046
----------
----------
</TABLE>
F-80
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[16] COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT CONTRACT--OFFICER (PREDECESSOR)
In September 1998, the Company revised and entered into a new five-year
employment agreement with its President and Chief Operating Officer (the
"Officer"). The agreement provides for annual compensation, as of September 30,
1998, of $204,000, subject to cost of living increases and bonuses beginning in
1999, provided the Company meets certain earnings goals. From October 1996
through 1998, the Officer deferred $52,336 of salary. During the twelve months
ended December 31, 1998 such amount was charged to expense.
MINIMUM PURCHASE COMMITMENTS
The Company has entered into agreements with local and long-distance
carriers (the "Carriers") from which it purchases telephone service. Such
agreements include minimum purchase obligations which require monthly payments
based on minimum service usage to the Carriers even if the minimum service is
not used. The minimums are stated in both dollar amounts and usage based on
minutes. Actual purchases made under unconditional purchase obligations for the
years ended December 31, 1996, 1997 and 1998 were $2,525,000, $5,583,000 and
$5,140,000, and for the six months ended June 30, 1998 and 1999 were $2,678,000
and $3,287,000, respectively. For the twelve months ended December 31, 1998, the
minimum purchase commitment with one of the Company's telephone carriers,
Frontier Communications, was not met and as a result, the Company was obligated
to record as additional expense $155,700. Estimated minimum future payments due
under the agreements in the aggregate are as follows:
<TABLE>
<CAPTION>
SUCCESSOR
-------------
YEAR ENDED
DECEMBER 31,
-------------
<S> <C>
1999........................................................................... $ 4,531,000
2000........................................................................... 6,171,000
2001........................................................................... 6,171,000
2002........................................................................... 1,671,000
2003........................................................................... 43,000
-------------
$ 18,587,000
-------------
-------------
</TABLE>
[17] LOSS ON IMPAIRED ASSET (PREDECESSOR)
In December 1997, the Company provided for the impairment of its debit card
platform due to the continuing losses and outlook for future profitability. The
platform was purchased in 1996 for $411,560. As of December 31, 1996 and 1997,
the Company had recorded depreciation of $17,301 and $41,412. The Company
accounted for debit card operations as part of Telephone Services. In October
1998, the Company began outsourcing the call processing for its debit card
operation as a means of improving its margins in this business.
F-81
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[18] INITIAL PUBLIC OFFERING (PREDECESSOR)
In 1997, the Company incurred $70,742 of costs in connection with the
anticipated initial public offering with an underwriter, which it deferred until
July 1998 when the offering was terminated. Such costs were charged to income.
In 1996, the Company had incurred $162,282 of costs associated with an
offering, which were expensed in 1997 as a result of the Company's decision to
proceed with an offering through another underwriter.
[19] SEGMENT INFORMATION
The Company's reportable segments are strategic businesses that, although
complimentary, offer different products and services. They are managed
separately because each business requires different technology and marketing
strategies. See Note 1 for descriptive information about the Company's business
segments and Note 13 for information on certain significant customers. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on results of operations before income taxes, interest and unusual items.
The Company derives 100% of its revenue from customers within the domestic
United States.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------ --------------------------
1996 1997 1998 1998 1999
------------ ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales:
Telephone Services..................... $ 4,083,343 $ 6,646,784 $ 9,516,110 $ 4,377,886 $ 6,176,528
Telephone Sales to
Related Party........................ 326,237 537,837 306,367 306,367 --
Data Cable Installation Services....... 1,173,155 2,463,580 4,108,210 1,975,405 1,994,758
------------ ------------- ------------- ------------ ------------
Totals............................... $ 5,582,735 $ 9,648,201 $ 13,930,687 $ 6,659,658 $ 8,171,286
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
Operating Loss:
Telephone Services..................... $ (951,893) $ (2,520,288) $ (2,174,694) $ (961,630) $ (957,688)
Data Cable Installation Services....... 5,385 141,953 582,796 546,951 387,616
------------ ------------- ------------- ------------ ------------
Totals............................... $ (946,508) $ (2,378,335) $ (1,591,898) $ (414,679) $ (570,072)
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
<CAPTION>
PREDECESSOR SUCCESSOR
-------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C>
Assets:
Telephone Services..................... $ 1,430,260 $ 2,303,476 $ 2,921,795 $ 3,058,927 $ 3,547,764
Data Cable Installation Services....... 136,040 343,649 804,471 620,828 1,149,819
Corporate.............................. 88,640 146,357 467,777 278,593 419,818
------------ ------------- ------------- ------------ ------------
Totals............................... $ 1,654,940 $ 2,793,482 $ 4,194,043 $ 3,958,348 $ 5,117,401
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
</TABLE>
F-82
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[19] SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------ --------------------------
1996 1997 1998 1998 1999
------------ ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Depreciation:
Telephone Services..................... $ 17,222 $ 46,488 $ 30,539 $ 11,187 $ 37,050
Data Cable Installation Services....... -- -- -- -- --
------------ ------------- ------------- ------------ ------------
Totals............................... $ 17,222 $ 46,488 $ 30,539 $ 11,187 $ 37,050
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
Additions to Equipment:
Telephone Services..................... $ 416,466 $ 82,579 $ 71,243 $ 33,192 $ 39,326
Data Cable Installation Services....... -- -- -- -- --
------------ ------------- ------------- ------------ ------------
Totals............................... $ 416,466 $ 82,579 $ 71,243 $ 33,192 $ 39,326
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
Amortization of Intangibles:
Telephone Services..................... $ -- $ 390,050 $ 376,850 $ 154,209 $ 182,191
Data Cable Installation Services....... -- -- -- -- --
------------ ------------- ------------- ------------ ------------
Totals............................... $ -- $ 390,050 $ 376,850 $ 154,209 $ 182,191
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
Acquisition of Customer Base:
Telephone Services..................... $ -- $ -- $ 413,266 $ 413,054 $ --
Data Cable Installation Services....... -- -- -- -- --
------------ ------------- ------------- ------------ ------------
Totals............................... $ -- $ -- $ 413,266 $ 413,054 $ --
------------ ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------ ------------
</TABLE>
[20] NEW AUTHORITATIVE PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued SFAS No 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and how it is designated. For example, gains or loses related to changes in the
fair value of a derivative not designated as a hedging instrument are recognized
in earnings in the period of the change, while certain types of hedges may be
initially reported as a component of other comprehensive income (outside
earnings) until the consummation of the underlying transaction.
SFAS No 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No 133.
Earlier application of all of the provisions of SFAS No 133 is encouraged, but
it is not permitted only as of the beginning of any fiscal quarter. SFAS No 133
is not to be applied retroactively to financial statements of prior periods. The
Company will evaluate the new standard to determine any required new disclosures
or accounting.
F-83
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[21] SUBSEQUENT EVENTS (PREDECESSOR)
LITIGATION
On January 8, 1999, the Company was served with a summons from the State
Supreme Court of New York, County of New York, by Mitel Telecommunications
Systems, Inc., ("Mitel") for a breach of contract claim in the amount of
$1,715,000 relating to cabling and installation services for which the Company
has been paid in full. The Company believes the action is without merit and
filed a motion to dismiss the action based on numerous defenses available to it
and that it continues to perform all requested services under the contract from
Mitel. As of December 31, 1998, the Company believes the maximum exposure
resulting from this claim will be $1,518,971 and has recorded a liability for
such amount, however, it is at least reasonably possible that a change in the
estimate may occur in the near term. See Note 23 [B].
[22] DEFAULTS (PREDECESSOR)
LINE OF CREDIT--CTG
In January 1999, the Company received an additional $250,000 advance from
CTG pursuant to Amendment #1 of the agreement. As of March 12, 1999, the Company
was in default of certain provisions of the agreement relating to $249,724 of
ineligible accounts receivable and $18,327 of interest which remained unpaid to
CTG.
DEMAND NOTES
In January 1999, the Company was obligated to make interest payments for the
period September 1997 through December 31, 1998 amounting to $38,750. Through
February 15, 1999, the Company paid $10,000.
[23] SUBSEQUENT EVENTS AFTER FEBRUARY 16, 1999--UNAUDITED (PREDECESSOR)
BASIS OF PRESENTATION
ARC was acquired by Omnilynx Corp on June 30, 1999. The acquisition has been
accounted for as a purchase utilizing push-down accounting. This push-down
adjustment has also been reflected in stockholder's equity of ARC. Accordingly,
Successor has recorded the assets and liabilities of the Predecessor at
estimated fair values. The excess of appraised fair market value of net assets
acquired over the purchase price was allocated to noncurrent assets. Because of
these adjustments, the accompanying consolidated financial statements of
Successor are not directly comparable to those of Predecessor. The values
assigned by Successor to Predecessor net assets are based upon preliminary
estimates and may be revised in the future, as additional information is
obtained.
[A] CHANGE OF CONTROL--On June 30, 1999, OmniLynx acquired all of the
outstanding capital stock of the Company. The acquisition consideration received
by the stockholders of the Company consists of 390,076 shares of common stock of
OmniLynx valued at $3,510,684 and 152,672 shares of contingent common stock of
OmniLynx. Issuance of the contingent common stock is conditional upon
achievement of certain share price targets of OmniLynx after an initial public
offering expected to be completed in 1999. Additionally, OmniLynx assumed all
outstanding debt of the Company, with the exception of the note payable to Trans
Global in the amount of $1.2 million, which, it is anticipated, will be
exchanged for Series A 10% Convertible Redeemable Preferred Stock of OmniLynx
valued at $1.2 million upon
F-84
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[23] SUBSEQUENT EVENTS AFTER FEBRUARY 16, 1999--UNAUDITED (PREDECESSOR)
(CONTINUED)
completion of an initial public offering by OmniLynx. The preferred stock is
redeemable by the holder at $1.00 per share in the event OmniLynx's common stock
declines to less than 33% of the initial public offering price.
The following table compares Predecessor and Successor June 30, 1999 balance
sheets. The changes reflect the revaluations and changes in stockholders equity
described above.
<TABLE>
<CAPTION>
ADJUSTMENT TO
HISTORICAL FAIR VALUE FAIR VALUE
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 168,776 $ $ 168,776
Accounts receivable, net.......................................... 3,763,919 3,763,919
Costs and estimated earnings in excess of billings on uncompleted
contracts....................................................... 480,950 480,950
Prepaid expenses and other current assets......................... 130,335 -- 130,335
------------- ------------- -------------
Total Current Assets............................................ 4,543,980 -- 4,543,980
Equipment, net.................................................... 127,951 127,951
Deferred financing costs.......................................... 177,664 (177,664) --
Customer list, net................................................ 32,600 (32,600) --
Goodwill.......................................................... 148,965 10,302,180 10,451,145
Deposits.......................................................... 86,241 -- 86,241
------------- ------------- -------------
Total Assets.................................................... $ 5,117,401 $ 10,091,916 $ 15,209,317
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES
Current Liabilities:
Current portion of capitalized lease obligations.................. $ 21,650 $ $ 21,650
Notes payable to related parties.................................. 800,000 800,000
Notes payable--related parties.................................... 2,859,724 2,859,724
Accounts payable.................................................. 5,173,296 5,173,296
Interim billings in excess of costs and estimated profits......... 402,173 402,173
Disputed amounts under contract................................... 1,289,975 -- 1,289,975
------------- ------------- -------------
Total Current Liabilities....................................... 10,546,818 -- 10,546,818
Capitalized leases................................................ 5,141 5,141
Note payable to related parties................................... 1,146,674 -- 1,146,674
------------- ------------- -------------
Total Liabilities............................................... 11,698,633 -- 11,698,633
Capital Deficit:
Common stock...................................................... 95,307 95,307
Additional paid in capital........................................ 620,365 2,795,012 3,415,377
Retained deficit.................................................. (7,296,904) 7,296,904 --
------------- ------------- -------------
Total Capital Deficit........................................... (6,581,232) 10,091,916 3,510,684
------------- ------------- -------------
Total Liabilities and Capital Deficit........................... $ 5,117,401 $ 10,091,916 $ 15,209,317
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-85
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[23] SUBSEQUENT EVENTS AFTER FEBRUARY 16, 1999--UNAUDITED (PREDECESSOR)
(CONTINUED)
LINE OF CREDIT--CTG
Pursuant to Amendment #3 to the Note Agreement dated September 18, 1998, as
amended, CTG will be repaid, (i) $750,000 of principal on the earlier of (a)
October 19, 1999, or (b) the receipt by OmniLynx of at least $10,000,000 in
gross proceeds from an initial public offering of debt or equity securities, or
(c) any earlier date on which ARC repays to CTG the then outstanding aggregate
amount of the note; (ii) $450,000 of principal on the earlier of (a) January 31,
2000, or (b) the date, if any, on which CTG delivers the note to ARC for
conversion into ARC or OmniLynx common stock at $8.00 per share, or (c) the
events set forth in clause (i)(c) above. Simultaneously with the execution of
Amendment #3, OmniLynx issued a warrant to purchase 90,000 shares of OmniLynx
common stock at an exercise price of $8.00 per share, subject to adjustment as
provided in the warrant agreement. OmniLynx has guaranteed payment on behalf of
ARC to CTG. In July 1999, ARC paid $50,000 towards accrued but unpaid interest
and agreed to pay the balance of all accrued and unpaid interest through July
31, 1999 on or before August 5, 1999. As of June 17, 1999 the interest rate was
changed from prime plus 2% to 14%.
In April and June 1999, the Company received $150,000 and $250,000,
respectively, from OmniLynx pursuant to a 12% note payable. The note and accrued
interest are both due on or before October 31, 1999.
[B] LITIGATION
[I] MITEL--As of June 30, 1999, the Company estimates that its maximum
exposure resulting from this claim will be $1,289,975. This represents a
decrease of $228,996 from the estimated December 31, 1998 liability and results
from the Company completing work on other jobs granted to the Company by Mitel
used to offset the contracts under dispute.
[II] On March 26, 1999, the Company was served with a summons from the State
Supreme Court of New York, County of Orange, by an employee of a customer of the
Company located in Thiells, N.Y., for $1,000,000 resulting from a December 1996
fall over wiring claimed to be negligently installed by the Company. The Company
has a liability insurance policy which provides sufficient coverage in the event
the plaintiff's claim is successful. The Company believes the action is without
merit and filed a motion to dismiss the action based on numerous defenses
available to it.
[C] DEFAULTS
[I] LINE OF CREDIT--CTG--Pursuant to Amendments 1, 2 and 3, CTG advanced an
additional $400,000. As of August 1, 1999, the Company was in default of certain
provisions of the agreement relating to approximately $4,300 of rent and $50,000
of interest owed to CTG.
[II] DEMAND NOTES--In June 1999, the Company received a demand for repayment
of the 8% $550,000 Note Payable. The Company is negotiating with the note holder
to amend the terms of the note which may include extending the maturity date and
agreeing to pay interest in the future. Towards that end, the Company accrued
approximately $54,000 as interest expense in June 1999 and paid $10,000 of such
amount in July 1999.
In June 1999, the Company also received a demand for repayment of the two
Demand Notes for $125,000 each. As of June 30, 1999, the Company was in default
related to interest to the two note
F-86
<PAGE>
ARC NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[23] SUBSEQUENT EVENTS AFTER FEBRUARY 16, 1999--UNAUDITED (PREDECESSOR)
(CONTINUED)
holders in the amount of $43,750 and paid $20,000 of such amount in July 1999.
The Company is negotiating with the note holders to amend the terms of the note
which may include extending the maturity date and agreeing to pay additional
interest in the future.
[D] INITIAL PUBLIC OFFERING
In the first six months of 1999, the Company deferred $44,565 of legal costs
in anticipation of an initial public offering by OmniLynx in mid 1999.
F-87
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE
UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT
THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE
FRONT COVER OF THIS PROSPECTUS ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND PROSPECTUS MAY HAVE CHANGED SINCE THAT DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
The Company............................................................... 25
Use of Proceeds........................................................... 27
Dividend Policy........................................................... 28
Capitalization............................................................ 29
Dilution.................................................................. 31
Selected Financial Data................................................... 33
Management's Discussion and Analysis of Pro Forma Financial Condition and
Results of Operations................................................... 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Combined and Founding Companies............................. 52
Business.................................................................. 66
Management................................................................ 94
Certain Relationships and Related Transactions............................ 106
Principal Stockholders.................................................... 115
Description of Capital Stock.............................................. 119
Shares Eligible for Future Sale........................................... 126
Underwriting.............................................................. 131
Legal Matters............................................................. 134
Experts................................................................... 134
Where You Can Find More Information....................................... 134
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1999 (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 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.
1,600,000 SHARES
OMNILYNX
COMMUNICATIONS
CORPORATION
COMMON STOCK
---------------------
PROSPECTUS
---------------------
WEATHERLY
SECURITIES
CORPORATION
WESTPORT
RESOURCES
INVESTMENT
SERVICES, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 3. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in this
Registration Statement, all of which shall be paid by us. All of such amounts
(except the SEC Registration Fee, the NASD Filing Fee and the New York Stock
Exchange Listing Fee) are estimated.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 5,627
NASD Filing Fee................................................... 6,000
American Stock Exchange Listing Fee............................... 35,000
Printing and Mailing Costs........................................ 100,000
Legal Fees and Expenses........................................... 290,000
Accounting Fees and Expenses...................................... 100,000
Transfer Agent and Registrar Fees and Expenses.................... 10,000
Miscellaneous..................................................... 53,373
---------
Total......................................................... $ 600,000
---------
---------
</TABLE>
- ------------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action. In an
action brought to obtain a judgment in the corporation's favor, whether by the
corporation itself or derivatively by a stockholder, the corporation may only
indemnify for expenses, including attorney's fees, actually and reasonably
incurred in connection with the defense or settlement of such action, and the
corporation may not indemnify for amounts paid in satisfaction of a judgment or
in settlement of the claim. In any such action, no indemnification may be paid
in respect of any claim, issue or matter as to which such person shall have been
adjudged liable to the corporation except as otherwise approved by the Delaware
Court of Chancery or the court in which the claim was brought. In any other type
of proceeding, the indemnification may extend to judgments, fines and amounts
paid in settlement, actually and reasonably incurred in connection with such
other proceeding, as well as to expenses.
The statute does not permit indemnification unless the person seeking
indemnification has acted in good faith and in a manner be reasonably believed
to be in, or not opposed to, the best interests of the corporation and, in the
case of criminal actions or proceedings, the person had no reasonable cause to
believe his conduct was unlawful. The statute contains additional limitations
applicable to criminal actions and to actions brought by or in the name of the
corporation. The determination as to whether a person seeking indemnification
has met the required standard of conduct is to be made (1) by a majority vote of
a quorum of disinterested members of the board of directors, (2) by independent
legal counsel in a written opinion, if such a quorum does not exist or if the
disinterested directors so direct, or (3) by the stockholders.
II-1
<PAGE>
Our Certificate of Incorporation and Bylaws require us to indemnify our
directors to the fullest extent permitted under Delaware law. Pursuant to
employment agreements entered into by us with our executive officers and certain
other key employees, we must indemnify such officers and employees in the same
manner and to the same extent that we are required to indemnify our directors
under our Bylaws. The Certificate of Incorporation limits the personal liability
of a director to us or our stockholders to damages for breach of the director's
fiduciary duty.
We maintain officers' and directors' indemnity insurance against expenses of
defending claims or payment of amounts arising out of good-faith conduct
believed by the officer or director to be in or not opposed to our best
interest.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our inception, we have issued and sold the following unregistered
securities:
- - In June 1999, we underwent a recapitalization which included a reverse stock
split. As adjusted for the recapitalization, we have issued and sold an
aggregate of 939,000 shares of common stock to our founders, directors and
consultants at a purchase price of $.0001 per share. In addition, we issued
certain contingent common stock issue rights to certain of these
shareholders. Sales of our common stock and related issue rights were as
follows:
<TABLE>
<CAPTION>
NUMBER CONTINGENT
OF COMMON STOCK
SHAREHOLDER SHARES ISSUE RIGHTS
- -------------------------------------------------------------------------- ------------ --------------
<S> <C> <C>
Benchmark Equity Group.................................................... 579,886 158,363
Emerging Ventures, L.L.C.................................................. 97,260 38,067
Pound Capital............................................................. 52,371 20,497
Christopher H. Efird...................................................... 115,429 67,243
Constantin J. Trezos...................................................... 40,614 23,660
Jeffrey W. Tomz........................................................... 23,514 13,699
Gary Panno................................................................ 14,963 8,716
Don Moorehead............................................................. 14,963 8,716
------------ -------
Total Common Shares................................................... 939,000 338,961
------------ -------
------------ -------
</TABLE>
The contingent common stock issue rights entitle the holder to receive
shares of our common stock based upon its market performance beginning 90
days after the closing of this offering. Approximately one-half of the
shares are issuable when the common stock reaches a 10-day average of $16.00
per share. The remaining one-half are issuable when the common stock reaches
a 10-day average of $21.00 per share. The rights expire after three years.
- - From April through June 1999, we issued a total of 573,333 warrants to
purchase common stock in connection with certain bridge loans to accredited
investors which will be repaid out of the proceeds of the offering. The
warrants are exercisable at $8.00 per share for a period of five years after
their issuance.
- - We acquired ARC in on June 30, 1999. We will acquire InfoHighway and AXCES
simultaneously, with and as a condition of this offering. In connection with
the acquisition, we issued the shares of
II-2
<PAGE>
common stock, contingent common stock issue rights and preferred stock to
accredited investors and a limited number of unaccredited investors:
<TABLE>
<CAPTION>
CONTINGENT COMMON
COMMON STOCK STOCK ISSUE RIGHTS(1) PREFERRED STOCK
--------------------- ---------------------- ---------------------
VALUE OF VALUE OF VALUE OF
ACQUISITION SHARES SHARES SHARES SHARES SHARES SHARES
- -------------------- --------- ---------- --------- ----------- --------- ----------
AXCES............... 700,000 $6,300,000 -- $ -- 60,000(2) $9,000,000
<S> <C> <C> <C> <C> <C> <C>
InfoHighway......... 958,166 8,623,494 235,878 -- -- --
ARC(3).............. 390,076 3,510,684 152,672 -- 1,206,673(4) 1,206,673
--------- ---------- --------- ----- --------- ----------
Total............... 2,048,242 $18,434,178 388,550 $ -- 1,266,673 $10,206,673
--------- ---------- --------- ----- --------- ----------
--------- ---------- --------- ----- --------- ----------
- ------------------------
</TABLE>
(1) The contingent common stock issue rights entitle the holder to receive
shares of our common stock based upon its market performance beginning 90
days after the closing of this offering. Approximately one-half of the
shares are issuable when the common stock reaches a 10-day average of
$16.00 per share. The remaining one-half are issuable when the common
stock reaches a 10-day average of $21.00 per share. The rights expire
after three years.
(2) Shares of Series B 8% Cumulative Convertible Preferred Stock. Each share
of the series B preferred stock is convertible into 10 shares of common
stock at any time at the option of the holder. If our common stock trades
for an average of $20.00 per share or more for a period of 10 consecutive
days, we may force a conversion of the series B preferred stock into
common stock.
(3) We also issued convertible promissory notes for a total of $1.65 million
to a former debt holder of ARC. The notes are convertible at $8.00 per
share for a total of 206,250. The holder of this note also received
warrants to purchase a total of 90,000 shares of common stock at an
exercise price of $8.00 per share. In addition, certain former warrant
holders of ARC received warrants to purchase a total of 20,464 shares of
common stock at an exercise price of $122.17 per share.
(4) Shares of Series A 10% Convertible Preferred Stock. The series A
preferred stock is convertible into common stock at the option of the
holder at any time after 90 days from the closing of this offering or
earlier with the consent of both us and the representative of the
underwriters with respect to this offering. The number of shares of
common stock issuable upon conversion of the series A preferred is
determined by multiplying the number of shares being converted by the
conversion rate as defined in the statement of designation. The
conversion rate is calculated by dividing $1.00 by the lesser of the
offering price or the five-day average closing price ending on the
trading day prior to any such conversion date.
- - In connection with this offering, the representative of the underwriters will
receive warrants to purchase a total of 160,000 shares of common stock of an
exercise price of $12.00 per share. If the underwriters exercise their
over-allotment option in full, the amount of shares of common stock issuable
will be increased to 184,000.
- - From February until June 1999, we issued warrants to purchase a total of
36,185 shares of common stock at $5.71 per share to John Vanderhider, our
Chief Financial Officer, for consulting work performed prior to his election
as an officer. In April 1999, we also issued 300,000 options to purchase
common stock to each of Joseph Gregori and Peter Parrinello, our Chief
Executive Officer and President, respectively, at an exercise price of $8.00
per share. In addition we intend to issue options to purchase an additional
450,000 shares of common stock to these and other officers upon the closing
of this offering at exercise prices of $5.00 and $10.00 per share.
II-3
<PAGE>
The sales of the securities described in paragraphs (1) through (5) were
deemed to be exempt from registration under the Securities Act in reliance upon
Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as
transactions by an issuer not involving a public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either receive adequate information about OmniLynx or had access, through
employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------------------------------------------------------------------------------------------
<C> <C> <S>
*1.1 -- Form of Underwriting Agreement dated , 1999 by and between OmniLynx and Weatherly
Securities Corporation.
+2.1 -- Agreement and Plan of Reorganization dated as of June 30, 1999 by and among OmniLynx, ARC
Acquisition, Inc., ARC Networks, Inc. and its Stockholders Named Therein.
+2.2 -- Agreement and Plan of Reorganization dated as of June 24, 1999 by and among OmniLynx, AXCES
Acquisition, Inc, AXCES, Inc., MTM Holdings Corporation and its Shareholders Named Therein.
+2.3 -- Agreement and Plan of Reorganization dated as of June 30, 1999 by and among OmniLynx, Info
Acquisition,Inc., InfoHighway International, Inc. and its Stockholders Named Therein.
+3.1 -- Amended and Restated Certificate of Incorporation of OmniLynx (f/k/a Gemini II, Inc.),
including the Designation, Preferences, Rights and Limitations of Series A 10% Convertible
Preferred Stock as filed on June 24, 1999.
+3.2 -- Form of Certificate of Designation, Preferences, Rights and Limitations of Series B 8%
Cumulative Convertible Preferred Stock.
+3.3 -- Amended and Restated Bylaws of OmniLynx.
*4.1 -- Form of Certificate representing common stock.
*4.2 -- Form of Certificate representing Series A 10% Convertible Preferred Stock.
*4.3 -- Form of Certificate representing Series B 8% Cumulative Convertible Preferred Stock.
*4.4 -- Form of Underwriter Representative Warrant.
+4.5 -- Warrant issued to John Vanderhider.
+4.6 -- Form of 13% Promissory Note issued by OmniLynx during March through June 1999 in connection
with the Bridge Loans.
+4.7 -- Form of Agreement of Purchase and Sale entered into during March through June 1999 in
connection with the Bridge Loans.
+4.8 -- Form of Warrants to Purchase Common Stock of OmniLynx entered into during March through June
1999 in connection with the Bridge Loans.
+4.9 -- Form of Registration Rights Agreement entered into during March through June 1999 in connection
with the Bridge Loans.
+4.10 -- Form of Registration Rights Agreements entered into between OmniLynx and each of the
shareholders of AXCES, ARC and InfoHighway in connection with the acquisitions.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <C> <S>
*4.11 -- Registration Rights Agreement to be entered into between OmniLynx and the Representative of the
Underwriter concerning the shares underlying the Underwriter Representative Warrants.
+4.12 -- Agreement by and among Trans Global Services, Inc., ARC Networks, Inc., Consolidated Technology
Group Ltd., Technology Acquisitions Ltd. and OmniLynx dated March 23, 1999.
+4.13 -- Registration Rights Agreement between OmniLynx and Consolidated Technology Group, Ltd. dated
May 19, 1999.
+4.14 -- Form of Certificate of Contingent Interest in Common Stock.
**4.15 -- Secured Promissory Note issued by ARC Networks, Inc. and A.R.C. Networks, Inc. to Consolidated
Technology Group Ltd. dated May 19, 1999.
**4.16 -- Warrant to Purchase Common Stock of OmniLynx issued to Consolidated Technology Group, Ltd.
dated May 19, 1999.
**4.17 -- Form of Series C Common Stock Purchase Warrants of ARC Networks, Inc. issued in February 1997.
*5.1 -- Opinion of Porter & Hedges, L.L.P.
+10.1 -- 1999 Stock Incentive Plan
*10.2 -- Form of Indemnification Agreement between OmniLynx and each of its directors and officers.
+10.3 -- Employment Agreement by and between OmniLynx and Joseph A. Gregori dated June 30, 1999.
+10.4 -- Employment Agreement by and between OmniLynx and Peter Parrinello dated June 30, 1999.
+10.5 -- Employment Agreement by and between OmniLynx and Tony Howlett dated June 30, 1999.
+10.6 -- Employment Agreement by and between OmniLynx and Glenn Kramer dated June 30, 1999.
+10.7 -- Employment Agreement by and between AXCES and Michael Avignon dated as of June 24, 1999.
+10.8 -- Employment Agreement by and between AXCES and Timothy Till dated as of June 24, 1999.
+10.9 -- Consulting Agreement by and between AXCES and MTM Holdings dated as of June 24, 1999.
+10.10 -- Consulting Agreement by and between OmniLynx and Benchmark dated as of September 1, 1998, as
amended on June 1, 1999, and June 24, 1999.
+10.11 -- M&A Letter Agreement by and between OmniLynx and Benchmark dated September 1, 1998, as amended
on June 1, 1999, and June 24, 1999.
**10.12 -- Agreement of Lease between FGP Islandia, Inc. and ARC Networks, Inc. dated June 1998.
**10.13 -- Employment Agreement by and between OmniLynx and Charles N. Garber dated July 19, 1999.
**10.14 -- Employment Agreement by and between OmniLynx and Peter Karoczkai dated July 7, 1999.
**10.15 -- Agreement for Billing and Collection Services between AXCES, Inc., Ameritech Long Distance
Industry Services, Ameritech Illinois, Ameritech Indiana, Ameritech Michigan and Wisconsin
Bell, Inc., d/b/a Ameritech Wisconsin effective June 26, 1996.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <C> <S>
**10.16 -- Wholesale Service Agreement by and between Frontier Communications of the West and AXCES, Inc.
executed September 7, 1999.
**10.17 -- Telecommunications Services Agreement by and between Coastal Telephone Services Limited Company
and AXCES, Inc. dated September 7, 1995.
**10.18 -- Agreement for the Provision of Billing and Collection Services between Southwestern Bell
Telephone Company and AXCES, Inc. dated November 21, 1997.
**10.19 -- Resale Agreement by and between Teleport Communications Group, Inc. and ARC Networks, Inc.
dated March 18, 1993.
**10.20 -- Switchless Wholesale Service Agreement between Frontier Communications of the West, Inc. and
ARC Networks, Inc. executed January 22, 1997, as amended August 14, 1997, October 21, 1997,
November 25, 1997, February 26, 1998, April 8, 1998, June 8, 1998 and June 18, 1998.
**10.21 -- Form of Incentive Stock Option Agreement for Employees under 1999 Stock Incentive Plan.
**10.22 -- Form of Nonstatutory Stock Option for Employees under 1999 Stock Incentive Plan.
**10.23 -- Form of Nonstatutory Stock Option for Non-Employee Director under 1999 Stock Incentive Plan.
**10.24 -- Amendment No. 3 to Loan Agreement dated September 18, 1998, as amended by and among
Consolidated Technology Group Ltd, ARC Networks, Inc., and A.R.C. Networks, Inc. dated as of
May 19, 1999.
*21.1 -- Subsidiaries of OmniLynx.
**23.1 -- Consent of BDO Seidman, LLP.
**23.2 -- Consent of Pannell Kerr Forster of Texas, P.C.
**23.3 -- Consent of KPMG LLP.
**23.4 -- Consent of Moore Stephens, P.C.
*23.5 -- Consent of Porter & Hedges, L.L.P. (contained in Exhibit 5.1)
+23.6 -- Consent of Harry Bennett as nominee for director
+23.7 -- Consent of Glenn Kramer as nominee for director.
+23.8 -- Consent of Michael Macaluso as nominee for director.
+23.9 -- Consent of Peter Parrinello as nominee for director.
*23.10 -- Consent of [Weatherly nominee] as nominee for director.
**24.1 -- Power of Attorney (included on the signature page of this Registration Statement).
*27.1 -- Financial Data Schedule.
</TABLE>
- ------------------------
* To be filed by amendment.
** Filed herewith.
+ Previously filed.
(b) Financial Statement Schedules. All schedules are omitted because they
are not applicable or because the required information is contained in the
Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters,
at the closing specified in the underwriting agreement, certificates
representing the shares of common stock offered hereby in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-6
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as a
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 of
1933, 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-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment no. 1 to this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Houston, State of Texas, on August 20, 1999.
OMNILYNX COMMUNICATIONS CORPORATION
By: /s/ JOSEPH A. GREGORI
-----------------------------------------
Joseph A. Gregori,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Joseph A. Gregori
and Christopher H. Efird, and both of them, either of whom may act without the
joinder of the other, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement and any registration
statement for the same offering filed pursuant to Rule 462 under the Securities
Act of 1933, and to file the same, with all exhibits thereto and all other
documents in connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing appropriate or necessary to be done, as fully and for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to this registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- --------------------------------------------- ------------------------------------------ ----------------------
<C> <S> <C>
/s/ JOSEPH A. GREGORI
------------------------------------ Chief Executive Officer (Principal August 20, 1999
Joseph A. Gregori Executive Officer), and Director
/s/ CHARLES GARBER
------------------------------------ Chief Financial Officer (Principal August 20, 1999
Charles Garber Financial and Accounting Officer)
*
------------------------------------ Director August 20, 1999
Christopher H. Efird
</TABLE>
<TABLE>
<S> <C>
*By: /s/ JOSEPH A. GREGORI
-------------------------
Joseph A. Gregori
CHIEF EXECUTIVE OFFICER
AND DIRECTOR AND AS
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
SECURED PROMISSORY NOTE
$2,400,000 May 19, 1999
FOR VALUE RECEIVED, the undersigned (THE "BORROWERS"), jointly and
severally, hereby promise to pay to the order of CONSOLIDATED TECHNOLOGY
GROUP LTD. (the "PAYEE"), the principal sum of TWO MILLION FOUR HUNDRED
THOUSAND ($2,400,000) DOLLARS (the "PRINCIPAL"), or such lesser sum as may,
from time to time, be outstanding under the terms of that certain Loan
Agreement dated September 18, 1998, as amended as of January 25, 1999, March
18, 1999 and May 19, 1999 between Borrowers and Payee (the "LOAN AGREEMENT"),
in lawful money of the United States of America, with interest on the unpaid
Principal balance, as follows:
1. INCORPORATION BY REFERENCE. Reference is made to the Loan
Agreement, the terms of which are incorporated herein by reference thereto.
Reference is also made to that certain Stock Purchase Agreement dated March
23, 1999 between COTG, ARC Delaware, SIS Capital Corp. and Technology
Acquisitions, Ltd. (the "PURCHASE AGREEMENT"), the terms of which are
incorporated herein by reference thereto. All capitalized terms which are
used but not defined herein shall have the meanings ascribed to them in the
Loan Agreement or the Purchase Agreement.
2. PAYMENT TERMS. Borrowers shall unconditionally and irrevocably
pay to the order of Payee, without set-off or deduction, the Principal and
interest of this Note at the rates, at the times and as otherwise provided in
the Loan Agreement. The Principal and interest of this Note will be due and
payable on the earlier of the Maturity Date or the Termination Date or as
otherwise provided in the Loan Agreement. All interest hereunder which is
accrued but not paid prior to the date on which such non-payment would result
in an Event of Default pursuant to Section 10.1 of the Loan Agreement shall
be treated as an Advance. In no event shall Payee be entitled to receive
interest in excess of the legally permissible rate of interest. In the event
that Payee receives payments under this Note that are deemed excessive
interest under applicable law, such excess will be applied first to the costs
referred to in Paragraph 7 hereof, then to the Principal of this Note and
then to all outstanding Obligations under the Loan Agreement. If such costs,
the Principal and all such other Obligations are paid in full, any remaining
excess shall be refunded to Borrowers.
3. ACCELERATION. In the event of any Event of Default under the
Loan Agreement (or other breach or default by Borrowers of this Note),
Borrowers shall be in default hereunder and the Principal and all then
accrued interest thereon shall become immediately due and payable, without
demand, notice or other action by Payee. All payments received by Payee
after a default
1
<PAGE>
under this Note will be applied first to the costs referred to in Paragraph 7
hereof, then to all accrued interest hereunder and next to the Principal of
this Note.
4. PLACE AND MANNER OF PAYMENT. All payments of Principal and
interest under this Note (and all other amounts payable hereunder) shall be
made to Payee on or before the due date thereof by wire transfer to such bank
account of Payee as shall be provided to Borrowers, in writing, prior to such
due date or, at Payee's request, to Payee at such other place, or to such
other account, or in such other manner, as Payee may, from time to time,
designate in writing. If any payment hereunder becomes due on a Saturday,
Sunday or legal holiday, such payment shall become due on the next business
day. All payments of Principal and interest under this Note shall be deemed
made only upon receipt by Payee.
5. PREPAYMENT. Borrowers shall have the right, at any time and from
time to time, to repay the Principal of this Note, or any part thereof,
without penalty or premium, ten (10) business days after receipt of notice
thereof by Payee. All such prepayments shall be applied first to all costs
referred to in Paragraph 7 hereof, then to all accrued interest hereunder,
and next to the Principal of this Note. If, at any time, the Principal of
this Note exceeds the Maximum Loan Amount under the Loan Agreement, Borrowers
shall, upon notice from Payee, be required to immediately prepay the
Principal of this Note, in an amount sufficient to reduce the then
outstanding Principal to an amount not greater than the Maximum Loan Amount.
Any failure by Borrowers to make such required prepayments shall constitute a
default under this Note.
6. SECURITY. The obligations of Borrowers under this Note are
secured by the Collateral under and as provided in the Loan Agreement and the
other Loan Documents (including the Security Documents). The terms,
obligations, covenants, conditions and provisions contained in the Loan
Agreement and the other Loan Documents with respect to the security for
Borrowers' obligations under this Note are hereby incorporated in and made a
part of this Note, to the extent and with the same effect as if fully set
forth herein, and Borrowers do hereby covenant, condition and provision set
forth in this Note, the Loan Agreement and the other Loan Documents relating
thereto.
7. COSTS OF COLLECTION. In the event that Payee shall take any
action to enforce the terms of this Note, after default by Borrowers under
this Note, including, without limitation, the commencement of any legal
action or proceeding, or the enforcement of any judgment resulting therefrom,
Payee shall be entitled to recover from Borrowers, upon demand, all costs and
expenses incurred by Payee in connection therewith (including, without
limitation, all of Payee's attorneys' fees and disbursements), together with
interest on any judgment obtained, at the then prevailing legal rate of
interest.
8. REMEDIES CUMULATIVE. The rights and remedies and of Payee
provided in this Note shall be cumulative and concurrent and exclusive of all
rights and remedies provided by law or in equity or in the Loan Agreement or
the other Loan Documents and Payee may, at its election, pursue its rights
and remedies against Borrowers hereunder or thereunder, singly,
2
<PAGE>
successively, or together, at the sole discretion of Payee, and all of such
rights and remedies may be exercised separately as often as occasion therefor
shall occur. The failure of Payee to exercise any such rights or remedy
shall in no event be construed as a waiver or release thereof.
9. WAIVER OF PRESENTMENT, DEMAND AND NOTICE. Borrowers hereby waive
presentment for payment, demand, notice of demand, notice of non-payment or
dishonor, protest and notice of protest of this Note, and all other notices
in connection with the delivery, acceptance, performance, default, or
enforcement of the terms of this Note and Borrowers hereby agree that their
liability under this Note shall be irrevocable and unconditional and shall be
without regard to the liability of any other party, including any guarantor,
and shall not be affected in any manner by any indulgence, extension of time,
renewal, waiver or modification granted or consented to by Payee. Borrowers
hereby consent to any and all extensions of time, renewals, waivers or
modifications that may be granted by Payee in writing with respect to the
payment or other provisions of this Note or with respect to any guarantor and
Borrowers hereby agree that additional Borrowers, endorsers, guarantors or
sureties may become parties hereto without notice to Borrowers and without
affecting Borrowers' liability hereunder.
10. SEVERABILITY, LAWFUL INTEREST. If any provision of this Note is
held to be invalid or unenforceable by a court of competent jurisdiction, the
other provisions of this Note shall remain in full force and effect and shall
be unaffected thereby.
11. NO WAIVER BY PAYEE. Payee shall not be deemed, by any act of
omission or commission, to have waived any of its rights or remedies
hereunder unless such waiver is in writing and signed by Payee, and then only
to the extent specifically set forth in any such writing. A waiver of one
event shall not be construed as continuing or constitute a bar to or waiver
of any right or remedy with respect to a subsequent event.
12. ASSIGNMENT BY PAYEE. Payee may, at any time prior the payment in
full of this Note, upon notice to Borrowers, assign this Note or any or all
of Payee's rights and entitlements to payments hereunder, to any third party
selected by it.
13. GOVERNING LAW. This Note and the respective rights and
obligations of Borrowers and Payee hereunder shall be governed by and
construed in accordance with the laws of the State of New York with respect
to contracts made to be fully performed therein and without regard to the
principles of conflicts of laws thereof. Any suit, action, or proceeding
instituted in connection with this Note may be commenced in a Federal or
State Court located in the City, County and State of New York and any action
to enforce any judgment obtained against Borrowers hereunder may be brought
in any court of competent jurisdiction. Borrowers waive any objection which
they may now or hereafter have to the forum of any such suit, action or
proceeding, including any objection that any such suit, action or proceeding
was brought in an inconvenient forum. Borrowers hereby irrevocably consent
and submit to the jurisdiction of the aforementioned courts in any such suit,
action or proceeding and to the manner of service of process therein as
provided in the Loan Agreement.
3
<PAGE>
14. NOTICES. All notices or other communications required or
permitted under this Note (the "NOTICES") must be in writing and shall be
required to be given in the manner provided in the Loan Agreement and all
such Notices shall be deemed given as provided therein.
15. BINDING EFFECT. This Note shall be binding upon Borrowers and
their successors and permitted assigns and shall inure to the benefit of
Payee and its successors and assigns. Borrowers shall not have the right to
assign this Note, or any of their obligations hereunder, without the written
consent of Payee, which consent shall be within Payee's sole and absolute
discretion.
16. SUPERSEDING NOTE. This Note supersedes and replaces in all
respects that certain Secured Promissory Note of Borrowers to Payee dated as
of March 18, 1999 in the maximum principal amount of $2,400,000.
17. INCONSISTENCIES. To the extent there is any inconsistency
between the provisions of this Note and the provisions of the Loan Agreement
or other Loan Documents or the Purchase Agreement, the provisions of this
Note shall control to the extent of any such inconsistency.
IN WITNESS WHEREOF, Borrowers, intending to be legally bound, have
executed this Note under seal the day and year first above written.
WITNESS: ARC NETWORKS, INC.
By: /s/ Peter Parrinello
- ------------------------------ ----------------------------------
PETER PARRINELLO
PRESIDENT
WITNESS: A.R.C. NETWORKS, INC.
By: /s/ Peter Parrinello
- ------------------------------ ----------------------------------
PETER PARRINELLO
PRESIDENT
4
<PAGE>
Exhibit 4.16
THE SECURITIES REPRESENTED BY THESE WARRANTS AND THE COMMON STOCK ISSUABLE
HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAW. THE SECURITIES
REPRESENTED BY THESE WARRANTS MAY NOT BE TRANSFERRED, EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A TRANSACTION EXEMPT FROM
REGISTRATION UNDER, THE SECURITIES ACT AND IN ACCORDANCE WITH ANY OTHER
APPLICABLE SECURITIES LAWS.
WARRANTS
to Purchase Common Stock of
Genmini II, Inc.
Expiring on May 18, 2004
This Common Stock Purchase Warrant (the "Warrant") certifies that, for
value received, Consolidated Technology Group, Ltd. (the "Holder") or its
assigns is entitled to subscribe for and purchase from the Company (as
hereinafter defined), in whole or in part. 90,000 shares of duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock (as
hereinafter defined) at an initial Exercise Price (as hereinafter defined)
per share of $8.00, subject, however, to the provisions and upon the terms
and conditions hereinafter set forth. The number of Warrants (as hereinafter
defined), the number of shares of Common Stock purchasable hereunder, and the
Exercise Price therefor are subject to adjustment as hereinafter set forth.
These Warrants and all rights hereunder shall expire at 5:00 p.m., New York
City time, on May 18, 2004 (the "Expiration Date").
ARTICLE I
Definitions
As used herein, the following terms shall have the meanings set forth
below:
1.1 "COMPANY" shall mean Gemini II, Inc., a Delaware corporation, and
shall also include any successor thereto with respect to the obligations
hereunder, by merger, consolidation or otherwise.
1.2 "COMMON STOCK" shall mean and include the Company's common stock,
par value $.0001 per share, authorized on the date of the original issue of
these Warrants and shall also include (i) in case of any reorganization,
reclassification, consolidation, merger, share exchange or sale,
1
<PAGE>
transfer or other disposition of assets, the stock or other securities
provided for herein, and (ii) any other shares of common stock of the Company
into which such shares of Common Stock may be converted.
1.3 "EXERCISE PRICE" shall mean the initial purchase price of $8.00 per
share of Common Stock payable upon exercise of the Warrants, as adjusted from
time to time pursuant to the provisions hereof.
1.4 "MARKET PRICE" for any day, when used with reference to Common
Stock, shall mean the price of said Common Stock determined by reference to
the last reported sale price for the Common Stock on such day on the
principal securities exchange on which the Common Stock is listed or admitted
to trading or if no such sale takes place on such date, the average of the
closing bid and asked prices thereof as officially reported, or, if not so
listed or admitted to trading on any securities exchange, the last sale price
for the Common Stock on the National Association of Securities Dealers
national market system on such date, or, if there shall have been no trading
on such date or if the Common Stock shall not be listed on such system, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any NASD member firm selected from time to time by the Company
for such purpose.
1.5 "WARRANT" shall mean the right upon exercise to purchase one Warrant
Share.
1.6 "WARRANT SHARES" shall mean the shares of Common Stock purchased or
purchasable by the Holder hereof upon the exercise of the Warrants.
ARTICLE II
Exercise of Warrants
2.1 METHOD OF EXERCISE. The Warrants represented hereby may be
exercised by the Holder hereof, in whole or in part, at any time and from
time to time on or after the date hereof until 5:00 p.m., New York City time,
on the Expiration Date. To exercise the Warrants, the Holder hereof shall
deliver to the Company, at the Warrant Office designated herein, (i) a
written notice in the form of the Subscription Notice attached as an exhibit
hereto, stating therein the election of such Holder to exercise the Warrants
in the manner provided in the Subscription Notice; (ii) payment in full of
the Exercise Price (A) in cash or by bank check for all Warrant Shares
purchased hereunder, or (B) through a "cashless" or "net-issue" exercise of
each such Warrant ("Cashless Exercise"); the Holder shall exchange each
Warrant subject to a Cashless Exercise for that number of Warrant Shares
determined by multiplying the number of Warrant Shares issuable hereunder by
a traction, the numerator of which shall be the difference between (x) the
Market Price and (y) the Exercise Price for each such Warrant and the
denominator of which shall be the Market Price; the Subscription Notice shall
set forth the calculation upon which the Cashless Exercise is based, or (C) a
combination of (A) and (B) above; and (iii) these Warrants. The Warrants
shall be deemed to be exercised on the date of receipt by the Company of the
Subscription Notice, accompanied by
2
<PAGE>
payment for the Warrant Shares and surrender of these Warrants, as aforesaid,
and such date is referred to herein as the "Exercise Date". Upon such
exercise, the Company shall, as promptly as practicable and in any event
within five business days, issue and deliver to such Holder a certificate or
certificates for the full number of the Warrant Shares purchased by such
Holder hereunder, and shall, unless the Warrants have expired, deliver to the
Holder hereof a new Warrant representing the number of Warrants, if any,
that shall not have been exercised, in all other respects identical to these
Warrants. As permitted by applicable law, the person in whose name the
certificates for Common Stock are to be issued shall be deemed to have become
a Holder of record of such Common Stock on the Exercise Date and shall be
entitled to all of the benefits of such Holder on the Exercise Date,
including without limitation the right to receive dividends and other
distributions for which the record date falls on or after the Exercise Date
and to exercise voting rights.
2.2 EXPENSES AND TAXES. The Company shall pay all expenses and taxes
(including, without limitation, all documentary, stamp, transfer or other
transactional taxes) other than income taxes attributable to the preparation,
issuance or delivery of the Warrants and of the shares of Common Stock
issuable upon exercise of the Warrants.
2.3 RESERVATION OF SHARES. The Company shall reserve at all times so
long as the Warrants remain outstanding, free from preemptive rights, out of
its authorized but unissued shares of Common Stock, solely for the purpose of
effecting the exercise of the Warrants, a sufficient number of shares of
Common Stock to provide for the exercise of the Warrants.
2.4 VALID ISSUANCE. All shares of Common Stock that may be issued upon
exercise of the Warrants will, upon issuance by the Company, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens
and charges with respect to the issuance thereof and, without limiting the
generality of the foregoing, the Company shall take no action or fail to take
any action which will cause a contrary result (including, without limitation,
any action that would cause the Exercise Price to be less than the par value,
if any, of the Common Stock).
2.5 NO FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares of Common Stock on the exercise of these Warrants. If more
than one Warrant shall be presented for exercise at the same time by the
same Holder, the number of full shares of Common Stock which shall be
issuable upon such exercise shall be computed on the basis of the aggregate
number of whole shares of Common Stock purchasable on exercise of the
Warrants so presented. If any fraction of a share of Common Stock would,
except for the provisions of this Section, be issuable on the exercise of
this Warrant the Company shall pay an amount in cash calculated by it to be
equal to the Market Price of one share of Common Stock at the time of such
exercise multiplied by such fraction computed to the nearest whole cent.
3
<PAGE>
ARTICLE III
Transfer
3.1 WARRANT OFFICE. The Company shall maintain an office for certain
purposes specified herein (the "Warrant Office"), which office shall
initially be the Company's offices at 700 Gemini, Suite 100, Houston, TX
77058 and may be subsequently be such other office of the Company or of any
transfer agent of the Common Stock in the continental United States as to
which written notice has previously been given to the Holder. The Company
shall maintain, at the Warrant Office, a register for the Warrants in which
the Company shall record the name and address of the person in whose name
these Warrants has been issued, as well as the name and address of each
permitted assignee of the rights of the registered owner hereof.
3.2 OWNERSHIP OF WARRANTS. The Company may deem and treat the person in
whose name the Warrants are registered as the Holder and owner hereof until
provided with notice to the contrary. The Warrants may be exercised by an
assignee for the purchase of Warrant Shares without having new Warrants
issued.
3.3 RESTRICTIONS ON TRANSFER OF WARRANTS. These Warrants may be
transferred, in whole or in part, by the Holder. The Company agrees to
maintain at the Warrant Office books for the registration and transfer of the
Warrants. The Company, from time to time, shall register the transfer of the
Warrants in such books upon surrender of this Warrant at the Warrant Office
properly endorsed or accompanied by appropriate instruments of transfer and
written instructions for transfer. Upon any such transfer and upon payment by
the Holder or its transferee of any applicable transfer taxes, new Warrants
shall be issued to the transferee and the transfer (as their respective
interests may appear) and the surrendered Warrants shall be cancelled by the
Company. The Company shall pay all taxes (other than securities transfer
taxes or income taxes) and all other expenses and charges payable in
connection with the transfer of the Warrants pursuant to this Section.
3.4 COMPLIANCE WITH SECURITIES LAWS. Notwithstanding any other
provisions contained in these Warrants, the Holder understands and agrees
that the following restrictions and limitations shall be applicable to all
Warrant Shares and to all resales or other transfers thereof pursuant to the
Securities Act:
3.4.1 The Holder hereof agrees that neither this Warrant nor the
Warrant Shares are registered under the Securities Act, and, accordingly, may
not be resold, pledged or otherwise transferred, except pursuant to an
effective registration statement under the Securities Act or in a transaction
exempt from registration under the Securities Act and in accordance with any
other applicable securities laws.
3.4.2 A legend in substantially the following form will be placed
on the certificate(s) evidencing the Warrant Shares:
4
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
OTHER APPLICABLE SECURITIES LAW AND, ACCORDINGLY, THE SECURITIES REPRESENTED
BY THIS CERTIFICATE MAY NOT BE RESOLD, PLEDGED, OR OTHERWISE TRANSFERRED,
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER, OR IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER, THE SECURITIES ACT AND IN
ACCORDANCE WITH ANY OTHER APPLICABLE SECURITIES LAWS."
3.4.3 Stop transfer instructions will be imposed with respect to
the Warrant Shares so as to restrict resale or other transfer thereof.
ARTICLE IV
Anti-Dilution
4.1 ANTI-DILUTION PROVISIONS. The Exercise Price shall be subject to
adjustment from time to time as provided herein. Upon each adjustment of the
Exercise Price, the Holder of this Warrant shall thereafter be entitled to
purchase, at the Exercise Price resulting from such adjustment, the number of
shares of Common Stock obtained by multiplying the Exercise Price in effect
immediately prior to such adjustment by the number of shares purchasable
pursuant hereto immediately prior to such adjustment and dividing the product
thereof by the Exercise Price resulting from such adjustment.
4.2 STOCK SPLITS AND REVERSE SPLITS. In the event that the Company
shall at any time subdivide its outstanding shares of Common Stock into a
greater number of shares, the Exercise Price in effect immediately prior to
such subdivision shall be proportionately reduced and the number of Warrant
Shares purchasable pursuant to this Warrant immediately prior to such
subdivision shall be proportionately increased, and conversely, in the event
that the outstanding shares of Common Stock shall at any time be combined
into a smaller number of shares, the Exercise Price in effect immediately
prior to such combination shall be proportionately increased and the number
of Warrant Shares purchasable upon the exercise of this Warrant immediately
prior to such combination shall be proportionately reduced.
4.3 REORGANIZATIONS AND ASSET SALES. If any capital reorganization or
reclassification of the capital stock of the Company, or any consolidation,
merger or share exchange of the Company with another person, or the sale,
transfer or other disposition of all or substantially all of its assets to
another person shall be effected in such a way that holders of Common Stock
shall be entitled to receive capital stock, securities or assets with respect
to or in exchange for their shares, then the following provisions shall apply:
5
<PAGE>
4.3.1 As a condition of such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer or other disposition,
lawful and adequate provisions shall be made whereby the Holder shall
thereafter have the right to purchase and receive upon the terms and
conditions specified in these Warrants and in lieu of the Warrant Shares
immediately theretofore receivable upon the exercise of the rights
represented hereby, such shares of capital stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of Warrant Shares
immediately theretofore so receivable had such reorganization,
reclassification, consolidation, merger, share exchange or sale not taken
place, and in any such case appropriate provision reasonably satisfactory to
such Holder shall be made with respect to the rights and interests of such
Holder to the end that the provisions hereof (including, without limitation,
provisions for adjustment of the Exercise Price and of the number of Warrant
Shares receivable upon the exercise) shall thereafter be applicable, as
nearly as possible, in relation to any shares of capital stock, securities or
assets thereafter deliverable upon the exercise of Warrants.
4.3.2 In the event of a merger, share exchange or consolidation
of the Company with or into another person as a result of which a number of
shares of common stock or its equivalent of the successor person greater or
lesser than the number of shares of Common Stock outstanding immediately
prior to such merger, share exchange or consolidation are issuable to holders
of Common Stock, then the Exercise Price in effect immediately prior to such
merger, share exchange or consolidation shall be adjusted in the same manner
as though there were a subdivision or combination of the outstanding shares
of Common Stock.
4.3.3 The Company shall not effect any such consolidation,
merger, share exchange, sale, transfer or other disposition unless prior to
or simultaneously with the consummation thereof the successor person (if
other than the Company) resulting from such, consolidation, share exchange or
merger or the person purchasing or otherwise acquiring such assets shall have
assumed by written instrument executed and mailed or delivered to the Holder
hereof at the last address of such Holder appearing on the books of the
Company the obligation to deliver to such Holder such shares of capital
stock, securities or assets as, in accordance with the foregoing provisions,
such Holder may be entitled to receive, and all other liabilities and
obligations of the Company hereunder. Upon written request by the Holder
hereof, such successor person will issue a new Warrant revised to reflect the
modifications in this Warrant effected pursuant to this Section.
4.3.4 If a purchase, tender or exchange offer is made to and
accepted by the holders of 50% or more of the outstanding shares of Common
Stock, the Company shall not effect any consolidation, merger, share exchange
or sale, transfer or other disposition of all or substantially all of the
Company's assets with the person having made such offer or with any affiliate
of such person, unless prior to the consummation of such consolidation,
merger, share exchange, sale, transfer or other disposition the Holder hereof
shall have been given a reasonable opportunity to then elect to receive upon
the exercise of the Warrants either the capital stock, securities or assets
then issuable with respect to the Common Stock or the capital stock,
securities or assets, or the equivalent, issued to previous holders of the
Common Stock in accordance with such offer.
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<PAGE>
4.4 ADJUSTMENT FOR ASSET DISTRIBUTION. If the Company declares a
dividend or other distribution payable to all holders of shares of Common
Stock in evidences of indebtedness of the Company or other assets of the
Company (including, cash (other than regular cash dividends declared by the
Board of Directors), capital stock (other than Common Stock, convertible
securities or options or rights thereto) or other property), the Exercise
Price in effect immediately prior to such declaration of such dividend or
other distribution shall be reduced by an amount equal to the amount of such
dividend or distribution payable per share of Common Stock, in the case of a
cash dividend or distribution, or by the fair value of such dividend or
distribution per share of Common Stock (as reasonably determined in good
faith by the Board of Directors of the Company), in the case of any other
dividend or distribution. Such reduction shall be made whenever any such
dividend or distribution is made and shall be effective as of the date as of
which a record is taken for purpose of such dividend or distribution or, if a
record is not taken, the date as of which holders of record of Common Stock
entitled to such dividend or distribution are determined.
4.5 DE MINIMIS ADJUSTMENTS. No adjustment in the number of shares of
Common Stock purchasable hereunder shall be required unless such adjustment
would require an increase or decrease of at least one share of Common Stock
purchasable upon an exercise of each Warrant and no adjustment in the
Exercise Price shall be required unless such adjustment would require an
increase or decrease of at least $0.05 in the Exercise Price; provided,
however, that any adjustments are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
shall be made to the nearest full share or nearest one hundredth of a dollar,
as applicable.
4.6 NOTICE OF ADJUSTMENT. Whenever the Exercise Price or the number of
Warrant Shares issuable upon the exercise of the Warrants shall be adjusted
as herein provided, or the rights of the Holder hereof shall change by reason
of other events specified herein, the Company shall compute the adjusted
Exercise Price and the adjusted number of Warrant Shares in accordance with
the provisions hereof and shall prepare an Officer's Certificate setting
forth the adjusted Exercise Price and the adjusted number of Warrant Shares
issuable upon the exercise of the Warrants or specifying the other shares of
stock, securities or assets receivable as a result of such change in rights,
and showing in reasonable detail the facts and calculations upon which such
adjustments or other changes are based. The Company shall cause to be mailed
to the Holder hereof copies of such Officer's Certificate and an independent
accountants' opinion together with a notice stating that the Exercise Price
and the number of Warrant Shares purchasable upon exercise of the Warrants
have been adjusted and setting forth the adjusted Exercise Price and the
adjusted number of Warrant Share purchasable upon the exercise of the
Warrants.
4.7 NOTIFICATIONS TO HOLDERS. In case at any time the Company proposes:
(i) to declare any dividend upon its Common Stock payable in
capital stock or make any special dividend or other distribution (other
than cash dividends) to the holders of its Common Stock;
7
<PAGE>
(ii) to offer for subscription pro rata to all of the holders of
its Common Stock any additional shares of capital stock of any class or
other rights;
(iii) to effect any capital reorganization, or reclassification of
the capital stock of the Company, or consolidation, merger or share
exchange of the Company with another person, or sale, transfer or other
disposition of all or substantially all of its assets; or
(iv) to effect a voluntary or involuntary dissolution,
liquidation or winding up of the Company,
then, in any one or more of such cases, the Company shall give the Holder
hereof (a) at least 10 days (but not more than 90 days) prior written notice
of the date on which the books of the Company shall close or a record shall
be taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such issuance, reorganization,
reclassification, consolidation, merger, share exchange, sale, transfer,
disposition, dissolution, liquidation or winding up, and (b) in the case of
any such issuance, reorganization, reclassification, consolidation, merger,
share exchange, sale, transfer, disposition, dissolution, liquidation or
winding up, at least 10 days (but not more than 90 days) prior written notice
of the date when the same shall take place. Such notice in accordance with
the foregoing clause (a) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders
of Common Stock shall be entitled thereto, and such notice in accordance with
the foregoing clause (b) shall also specify the date on which the holders of
Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, share exchange, sale, transfer, disposition,
dissolution, liquidation or winding up, as the case may be.
4.8 COMPANY TO PREVENT DILUTION. If any event or condition occurs as
to which other provisions of this Article are not strictly applicable or if
strictly applicable would not fairly protect the exercise or purchase rights
of the Warrants evidenced hereby in accordance with the essential intent and
principles of such provisions, or that might materially and adversely affect
the exercise or purchase rights of the Holder hereof under any provisions of
this Warrant, then the Company shall make such adjustments in the application
of such provisions, in accordance with such essential intent and principles,
so as to protect such exercise and purchase rights as aforesaid, and any
adjustments necessary with respect to the Exercise Price and the number of
Warrant Shares purchasable hereunder so as to preserve the rights of the
Holder hereunder. In no event shall any such adjustment have the effect of
increasing the Exercise Price as otherwise determined pursuant to Article
except in the event of a combination of shares.
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<PAGE>
ARTICLE V
Miscellaneous
5.1 ENTIRE AGREEMENT. These Warrants and the Registration Rights
Agreement of even date between the Company and the Holder contain the entire
agreement between the Holder hereof and the Company with respect to the
Warrant Shares purchasable upon exercise hereof and the related transactions
and supersede all prior arrangements or understandings with respect thereto.
5.2 GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THE COMPANY HEREBY
CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED
WITHIN THE STATE OF NEW YORK OR, AT THE SOLE OPTION OF HOLDER, IN ANY OTHER
COURT IN WHICH HOLDER SHALL INITIATE LEGAL OR EQUITABLE, PROCEEDINGS AND
WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. THE
COMPANY WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND VENUE. THE COMPANY
AND HOLDER EACH HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO THIS
WARRANT, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE.
5.3 WAIVER AND AMENDMENT. Any term or provision of these Warrants may
be waived at any time by the party which is entitled to the benefits thereof
and any term or provision of these Warrants may be amended or supplemented
at any time by agreement of the Holder hereof and the Company, except that
any waiver of any term or condition, or any amendment or supplementation, of
these Warrants shall be in writing and signed by the Company and the Holder.
A waiver of any breach or failure to enforce any of the terms or conditions
of these Warrants shall not in any way effect, limit or waive a party's
rights hereunder at any time to enforce strict compliance thereafter with
every term or condition of these Warrants.
5.4 ILLEGALITY. In the event that any one or more of the provisions
contained in this Warrant shall be determined to be invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in any other respect and the remaining
provisions of these Warrants shall not, at the election of the party for whom
the benefit of the provision exists, be in any way impaired.
5.5 COPY OF WARRANT. A copy of this Warrant shall be filed among the
records of the Company.
5.6 NOTICE. Except as otherwise provided, all communications to the
Company or Holder provided for herein or with reference to these Warrants
shall be deemed to have been
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<PAGE>
sufficiently given or served for all purposes on the third Business Day after
being sent by certified or registered mail, postage and charges prepaid, to
the following addresses: if to the Company: 700 Gemini, Suite 100, Houston,
Texas 77058, Attn: Chris Efird, or at any other address designated by the
Company in writing to Holder; if to Holder: ________________________________
____________________ or at any other address designated by Holder to the
Company in writing.
5.7 LIMITATION OF LIABILITY; NOT STOCKHOLDERS. No provision of these
Warrants shall be construed as conferring upon the Holder hereof the right to
vote, consent, receive dividends or receive notices (other than as herein
expressly provided) in respect of meetings of stockholders for the election
of directors of the Company or any other matter whatsoever as a stockholder
of the Company. No provision hereof, in the absence of affirmative action by
the Holder hereof to purchase shares of Common Stock, and no mere enumeration
herein of the rights or privileges of the Holder hereof, shall give rise to
any liability of such Holder for the purchase price of any shares of Common
Stock or as a stockholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
5.8 EXCHANGE, LOSS, DESTRUCTION, ETC. OF WARRANT. Upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft,
mutilation or destruction of these Warrants, and in the case of any such
loss, theft or destruction upon delivery of an appropriate affidavit in such
form as shall be reasonably satisfactory to the Company and include
reasonable indemnification of the Company, or in the event of such mutilation
upon surrender and cancellation of these Warrants, the Company will make and
deliver new Warrants of like tenor, in lieu of such lost, stolen, destroyed
or mutilated Warrants. Any Warrants issued under the provisions of this
Section in lieu of any Warrants alleged to be lost, destroyed or stolen, or in
lieu of any mutilated Warrants, shall constitute an original contractual
obligation on the part of the Company. These Warrants shall be promptly
canceled by the Company upon the surrender hereof in connection with any
exchange or replacement. The Company shall pay all taxes (other than
securities transfer taxes or income taxes) and all other expenses and charges
payable in connection with the preparation, execution and delivery of Warrants
pursuant to this Section.
5.9 HEADINGS. The Article and Section and other headings herein are for
convenience only and are not a part of this Warrant and shall not affect the
interpretation thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in
its name dated as of May 19, 1999.
GEMINI II, INC.
By: /s/ Christopher Efird
-------------------------------------
Print Name: Christopher Efird
Print Title: President
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<PAGE>
SUBSCRIPTION NOTICE
The undersigned, the Holder of the foregoing Warrants, hereby elects to
exercise purchase rights represented thereby for, and to purchase thereunder,
_________________ shares of the Common Stock covered by such Warrants, and
herewith makes payment in full for such shares and requests (a) that
certificates for such shares (and any other securities or other property
issuable upon such exercise) be issued in the name of, and delivered to,
_______________________ and (b), if such shares shall not include all of the
shares issuable as provided in such Warrants, that new Warrants of like tenor
and date for the balance of the shares issuable thereunder by delivered to
the undersigned.
--------------------------------------
Date:
--------------------
11
<PAGE>
ASSIGNMENT
For value received, __________________, hereby sells, assigns and
transfers unto __________________________ these Warrants, together with all
rights, title and interest therein, and does irrevocably constitute and
appoint _____________________________ attorney, to transfer such Warrants on
the books of the Company, with full power of substitution.
--------------------------------------
Date:
--------------------
12
<PAGE>
Warrant to Purchase
________
Shares of Common Stock
NEITHER THIS WARRANT NOR THE SHARES OF THE COMMON STOCK ISSUABLE UPON
EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AND NEITHER THIS WARRANT NOR SUCH SHARES MAY BE SOLD, ENCUMBERED OR
OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT OR AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF
AN EXEMPTION SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
VOID AFTER 5:00 P.M. NEW YORK CITY TIME ON THE LAST DAY OF THE EXERCISE
PERIOD, AS DEFINED IN THE WARRANT
SERIES C COMMON STOCK PURCHASE WARRANT
OF
ARC NETWORKS, INC.
This is to certify that, FOR VALUE RECEIVED, _______________ or assigns
("Holder"), is entitled to purchase, subject to the provisions of this Warrant,
from Arc Networks, Inc., a Delaware corporation (the "Company"), at an
exercise price per share of five and 00/100 ($5.00), subject to adjustment as
provided in this Warrant. ____________________________ (_____) shares of
common stock, par value $.01 per share ("Common Stock"), of the Company at
any time during the period (the "Exercise Period"), as hereinafter defined.
The Exercise Period shall mean the two-year period commencing on the first to
occur of (a) 180 days after the effective date of the registration statement
relating to Arc's initial public offering or (b) two years from the Closing
Date. The Exercise Period shall end at 5:00 P.M. New York City time, on the
last day of the Exercise Period; provided, however, that if such date is a day
on which banking institutions in the State of New York are authorized by law
to close, then on the next succeeding day which shall not be such a day. The
number of shares of Common Stock to be received upon the exercise of this
Warrant and the price to be paid for a share of Common Stock may also be
adjusted from time to time as hereinafter set forth. The shares of Common
Stock deliverable upon such exercise, and as adjusted from time to time, are
hereinafter sometimes referred to as "Warrant Shares," and the exercise price
for the purchase of a share of Common Stock pursuant to this Warrant in
effect at any time and as adjusted from time to time is hereinafter sometimes
referred to as the "Exercise Price." Reference in the Warrant to the "Series C
Warrants" shall mean any or all of the Series C Common Stock Purchase
Warrants issued by the Company, regardless of whether the Exercise Price of
such Series C Warrants is the same as the Exercise Price of this Warrant. The
Series C Warrants were initially issued pursuant to a private placement of
five and one-half units, each unit consisting of the 8% Subordinated Note due
April 1, 1998 issued by the Company and A.R.C. Networks, Inc., a New York
corporation ("Arc-NY"), in the principal amount of $100,000, a Series B Common
Stock Purchase Warrant to purchase 181,818 shares of Common Stock and a
Series C Warrant to purchase 90,909 shares of Common Stock. The date on which
the Company received the proceeds from the sale of such units is referred to
in this Warrant as the "Closing Date."
(a) EXERCISE OF WARRANT. This Warrant may be exercised in whole at any
time or in part from time to time during the Exercise Period by presentation
and surrender hereof to the Company at its principal office, or at the office
of its stock transfer agent, if any, with the Purchase Form annexed hereto
duly executed and accompanied by payment of the Exercise Price for the
number of shares of Common Stock specified in such form. If this Warrant
should be exercised in part only, the Company shall, upon surrender of this
Warrant for cancellation, execute and deliver a new Warrant evidencing the
rights of the Holder hereof to purchase the balance of the shares of Common
Stock purchasable hereunder. Upon receipt by the Company of this Warrant at
its office, or by stock transfer agent of the Company at its office, in
proper form for exercise, the Holder shall be deemed to be the holder of
record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the
<PAGE>
Company shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder.
(b) RESERVATION OF SHARES. The Company hereby agrees that at all
times there shall be reserved for issuance and/or delivery upon exercise of
this Warrant such number of shares of Common Stock as shall be required for
issuance and delivery upon exercise of this Warrant and that it shall not,
without the prior approval of the holders of a majority of the Warrants then
outstanding, increase the par value of the Common Stock.
(b) FRACTIONAL SHARES. No fractional shares or script
representing fractional shares shall be issued upon the exercise of this
Warrant. With respect to any fraction of a share called for upon any exercise
of this Warrant, the Company shall pay to the Holder an amount in cash equal
to such fraction multiplied by the current market value of such fractional
share, determined as follows:
(1) If the Common Stock is listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange or
listed for trading on the Nasdaq Stock Market or other automated quotation
system which provides information as to the last sale price, the current
value shall be the reported last sale price of one share of Common Stock on
such exchange or system on the last business day prior to the date of
exercise of this Warrant, or if no such sale is made on such day, the current
value shall be the average of the closing bid and asked prices for such day
on such exchange or system; or
(2) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current value shall be the mean of the
reported last bid and asked prices of one share of Common Stock as reported
by Nasdaq, the National Quotation Bureau, Inc. or other similar reporting
service, on the last business day prior to the date of the exercise of this
Warrant; or
(3) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current value of one share of Common Stock shall be an amount, not less than
book value, determined in such reasonable manner as may be prescribed by the
Board of Directors of the Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This
Warrant is exchangeable, without expense, at the option of the Holder, upon
presentation and surrender hereof to the Company or at the office of its
stock transfer agent, if any, for other Warrants of different denominations
entitling the holder thereof to purchase in the aggregate the same number of
shares of Common Stock purchasable hereunder. Subject to the provisions of
Paragraph (j) of this Warrant, upon surrender of this Warrant to the Company
or at the office of its stock transfer agent, if any, with the Assignment
Form annexed hereto duly executed and funds sufficient to pay any transfer
tax, the Company shall, without charge, execute and deliver a new Warrant in
the name of the assignee named in such instrument of assignment and this
Warrant shall promptly be canceled. This Warrant may be divided or combined
with other Warrants which carry the same rights upon presentation hereof at
the office of the Company or at the office of its stock transfer agent, if
any, together with a written notice specifying the names and denominations in
which new Warrants are to be issued and signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged. Upon receipt by the Company of evidence satisfactory to
it of the loss, theft, destruction or mutilation of this Warrant, and (in the
case of loss, theft or destruction) of reasonably satisfactory
indemnification, and upon surrender and cancellation of this Warrant, if
mutilated, the Company will execute and deliver a new Warrant of like tenor.
Any such new Warrant executed and delivered shall constitute an additional
contractual obligation on the part of the Company, whether or not this
Warrant so lost, stolen, destroyed, or mutilated shall be at any time
enforceable by anyone.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue of this
Warrant, be entitled to any rights of a stockholder in the Company, either at
law or equity, and the rights of the Holder are limited to those expressed in
the Warrant and are not enforceable against the Company except to the extent
set forth herein.
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<PAGE>
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any
time and the number and kind of securities purchasable upon exercise of each
Warrant shall be subject to adjustment as follows:
(1) In case the Company shall, subsequent to the Closing
Date, (A) pay a dividend or make a distribution on its shares of Common Stock
in shares of Common Stock (B) subdivide or reclassify its outstanding Common
Stock into a greater number of shares, or (C) combine or reclassify its
outstanding Common Stock into a smaller number of shares or otherwise effect
a reverse split, the Exercise Price in effect at the time of the record date
for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be proportionately
adjusted so that the Holder of this Warrant exercised after such date shall
be entitled to receive the aggregate number and kind of shares which, if this
Warrant had been exercised immediately prior to such time, he would have
owned upon such exercise and been entitled to receive upon such dividend,
subdivision, combination or reclassification. Such adjustment shall be made
successively whenever any event listed in this Paragraph (f)(1) shall occur.
(2) In case the Company shall, subsequent to the Closing
Date, issue rights or warrants to all holders of its Common Stock entitling
them to subscribe for or purchase shares of Common Stock (or securities
convertible into Common Stock) at a price (or having a conversion price per
share) less than the current market price of the Common Stock (as defined in
Paragraph (f)(5) of this Warrant) on the record date mentioned below, the
Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the Exercise Price in effect immediately prior to
the date of such issuance by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on the record date mentioned
below plus the number of additional shares of Common Stock which the
aggregate offering price of the total number of shares of Common Stock so
offered (or the aggregate conversion price of the securities so offered)
would purchase at such current market price per share of the Common Stock,
and of which the denominator shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of
Common Stock offered for subscription or purchased (or into which the
convertible securities so offered are convertible). Such adjustment shall be
made successively whenever such rights or warrants are issued and shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such rights or warrants; and to the extent
that shares of Common Stock or securities convertible into Common Stock are
not delivered after the expiration of such rights or warrants, the Exercise
Price shall be readjusted to the Exercise Price which would then be in effect
had the adjustments made upon the issuance of such rights or warrants been
made upon the basis of delivery of only the number of shares of Common Stock
(or securities convertible into Common Stock) actually delivered.
(3) In case the Company shall, subsequent to the Closing
Date, distribute to all holders of Common Stock evidences of its indebtedness
or assets (excluding cash dividends or distributions paid out of current
earnings and dividends or distributions referred to in Paragraph (f)(1) of
this Warrant or subscription rights or warrants (excluding those referred to
in Paragraph (f)(2) of this Warrant), then in each such case the Exercise
Price in effect thereafter shall be determined by multiplying the Exercise
Price in effect immediately prior thereto by a fraction, of which the
numerator shall be the total number of shares of Common Stock outstanding
multiplied by the current market price per share of Common Stock (as defined
in Paragraph (f)(5) of this Warrant), less the fair market value (as
determined by the Company's Board of Directors) of said assets or evidences
of indebtedness so distributed or of such rights or warrants, and of which
the denominator shall be the total number of shares of Common Stock
outstanding multiplied by such current market price per share of Common
Stock. Such adjustment shall be made successively whenever such a record date
is fixed. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such distribution.
(4) Whenever the Exercise Price payable upon exercise of
each Warrant is adjusted pursuant to Paragraphs (f)(1), (2) or (3) of this
Warrant, the number of shares of Common Stock purchasable upon exercise of
each Warrant shall simultaneously be adjusted by multiplying the number of
shares of Common Stock issuable upon
-3-
<PAGE>
exercise of each Warrant in effect on the date thereof by the Exercise Price
in effect on the date thereof and dividing the product so obtained by the
Exercise Price, as adjusted. In no event shall the Exercise Price per share
be less than the par value per share, and, if any adjustment made pursuant to
Paragraph (f)(1), (2) or (3) would result in an exercise price of less than
the par value per share, then, in such event, the Exercise Price per share
shall be the par value per share.
(5) For the purpose of any computation under Paragraphs (f)(2)
and (3) of this Warrant, the current market price per share of Common Stock
at any date shall be deemed to be the average of the daily closing prices for
30 consecutive business days commencing 45 business days before such date.
The closing price for each day shall be the reported last sale price regular
way or, in case no such reported sale takes place on such day, the average of
the reported last bid and asked prices regular way, in either case on the
principal national securities exchange on which the Common Stock is admitted
to trading or listed or on the Nasdaq Stock Market, or if not listed or
admitted to trading on such exchange or such System, the average of the
reported highest bid and reported lowest asked prices as reported by Nasdaq,
the National Quotation Bureau, Inc. or other similar organization if NASDAQ
is no longer reporting such information, or if not so available, the fair
market price as determined by the Board of Directors.
(6) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least ten cents.
($0.10) in such price; provided, however, that any adjustments which by
reason of this Paragraph (f)(6) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. All calculations
under this Paragraph (f) shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. Anything in this Paragraph (f)
to the contrary notwithstanding, the Company shall be entitled, but shall not
be required, to make such changes in the Exercise Price, in addition to those
required by this Paragraph (f), as it in its discretion shall determine to be
advisable in order that any dividend or distribution in shares of Common
Stock, subdivision, reclassification or combination of Common Stock, issuance
of warrants to purchase Common Stock or distribution of evidences of
indebtedness or other assets (excluding cash dividends) referred to herein
above in this paragraph (f) hereafter made by the Company to the holders of
its Common Stock shall not result in any tax to the holders of its Common
Stock or securities convertible into Common Stock.
(7) The Company may retain a firm of independent public
accountants of recognized standing selected by the Board of Directors (who
may be the regular accountants employed by the Company) to make any
computation required by this Paragraph (f), and a certificate signed by such
firm shall be conclusive evidence of the correctness of such adjustment.
(8) In the event that at any time, as a result of an adjustment
made pursuant to Paragraph (f)(1) of this Warrant, the Holder of any Warrant
thereafter shall become entitled to receive any shares of the Company, other
than Common Stock, thereafter the number of such other shares so receivable
of any Warrant shall be subject to adjustment from time to time in a manner
and on terms as nearly equivalent as practicable to the provisions with
respect to the Common Stock contained in Paragraphs (f)(1) to (6), inclusive,
of this Warrant.
(9) Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon exercise of Warrants. Warrants
therefore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in this and similar Warrants initially
issued by the Company.
(10) In the event that at any time, as a result of an adjustment
made pursuant to Paragraph (f)(1) of this Warrant, the Holder of any Warrant
thereafter shall become entitled to receive any shares of the Company, other
than Common Stock, thereafter the number of such other shares so receivable
upon exercise of any Warrant shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in Paragraphs (f)(1) to
(8), inclusive, of this Warrant.
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<PAGE>
(11) Notwithstanding any provisions of this Paragraph (f), there
shall be no adjustment with respect to, and this Warrant shall not be
affected by, the merger of Arc-NY into the Company or any similar transaction
whereby the stock or the business and assets of Arc-NY are acquired by the
Company with respect to which the Company issues shares of its capital stock.
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted
as required by the provisions of Paragraph (f) of this Warrant, the Company
shall forthwith file in the custody of its Secretary or an Assistant
Secretary at its principal office and with its stock transfer agent, if any,
an officer's certificate showing the adjusted Exercise Price and the adjusted
number of shares of Common Stock issuable upon exercise of each Warrant,
determined as herein provided, setting forth in reasonable detail the facts
requiring such adjustment, including a statement of the number of additional
shares of Common Stock, if any, and such other facts as shall be necessary to
show the reason for and the manner of computing such adjustment. Each such
officer's certificate shall be made available at all reasonable times for
inspection by the Holder or any holder of a Warrant executed and delivered
pursuant to Paragraph (a) and the Company shall, forthwith after each such
adjustment, mail, by certified mail, a copy of such certificate to the Holder
or any such holder's address set forth in the Company's Warrant Register.
(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (1) if the Company shall pay any dividend or make any
distribution upon Common Stock (other than a regular cash dividend payable
out of retained earnings) or (2) if the Company shall offer to the holders of
Common Stock for subscription or purchase by them any share of any class or
any other rights or (3) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger
of the Company with or into another corporation, sale, lease or transfer of
all or substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding
up of the Company shall be effected, then in any such case, the Company shall
cause to be mailed by certified mail to the Holder, at least fifteen days
prior to the date specified in clauses (i) and (ii), as the case may be, of
this Paragraph (h) a notice containing a brief description of the proposed
action and stating date on which (i) a record is to be taken for the purpose
of such dividend, distribution or rights, or (ii) such reclassification,
reorganization, consolidation, merger, conveyance, lease, dissolution,
liquidation or winding up is to take place and the date. If any is to be
fixed, as of which the holders of Common Stock or other securities shall
receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation
or winding up.
(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital, reorganization or other change of outstanding
shares of Common Stock of the Company, or in case of any consolidation or
merger of the Company with or into another corporation (other than a merger
with a subsidiary in which merger the Company is the continuing corporation
and which does not result in any reclassification, capital reorganization or
other change of outstanding shares of Common Stock of the class issuable upon
exercise of this Warrant) or in case of any sale, lease or conveyance to
another corporation of the property of the Company as an entirety, the
Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter by
exercising this Warrant, to purchase the kind and amount of shares of stock
and other securities and property receivable upon such reclassification,
capital reorganization and other change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock which might
have been purchased upon exercise of this Warrant immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance. Any such
provision shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Paragraph (i) shall similarly apply
to successive reclassifications, capital reorganizations and changes of
shares of Common Stock and to successive consolidations, mergers, sales or
conveyances. In the event that in connection with any such capital
reorganization or reclassification, consolidation, merger, sale or
conveyance, additional shares of Common Stock shall be issued in exchange,
conversion, substitution or payment, in whole in
-5-
<PAGE>
part, for a security of the Company other than Common Stock, any such issue
shall be treated as an issue of Common Stock covered by the provisions of
Paragraph (f) of this Warrant.
(j) TRANSFER TO COMPLY WITH THE SECURITIES ACT OF 1933. This Warrant
or the Warrant Shares or any other security issued or issuable upon exercise
of this Warrant may not be sold or otherwise disposed of except as follows:
(1) To a person who, in the opinion of counsel of the Company, is
a person to whom this Warrant or Warrant Shares may legally be transferred
without registration and without the delivery of a current prospectus under
the Act with respect thereto and then only against receipt of an agreement of
such person to comply with the provisions of this Paragraph (j) with respect
to any resale or other disposition of such securities which agreement shall
be satisfactory in form and substance to the Company and its counsel; or
(2) to any person upon delivery of a prospectus then meeting the
requirements of the Act relating to such securities and the offering thereof
for such sale or disposition.
Dated as of
-----------------
ARC NETWORKS, INC.
By:
-----------------------
6
<PAGE>
PURCHASE FORM
Dated: , 19
The undersigned hereby irrevocably elects to exercise the within Warrant
to the extent of purchasing ______ shares of Common Stock and hereby makes
payment of $ ______ in payment of the actual exercise price thereof.
---------------
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
----------------------------------------------
(Please typewrite or print in block letters)
Signature
-----------------------------------------
Social Security or Employer Identification No.
----------
ASSIGNMENT FORM
FOR VALUE RECEIVED,
hereby sells, assigns and transfer unto
Name
------------------------------------------------
(Please typewrite or print in block letters)
Address
---------------------------------------------
Social Security or Employer Identification No.
----------
The right to purchase Common Stock represented by this Warrant to the extent
of ______ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint _______________ attorney to transfer the
same on the books of the Company with full power of substitution.
Dated:_____________, 19__
Signature
-----------------------------------------
Signature Medallion Guaranteed:
- ------------------------
7
<PAGE>
STANDARD FORM OF OFFICE LEASE
THE REAL ESTATE BOARD OF NEW YORK, INC.
AGREEMENT OF LEASE, made as of this _____day of June, 1998 between FGP Islandia,
Inc., a New York domestic corporation with an office for the transaction of
business at c/o The RCC Group, 292 Madison Avenue, New York, New York 10017
party of the first part, hereinafter referred to as OWNER, and Arc Networks,
Inc. a New York domestic corporation with an office for the transaction of
business at 1770 Motor Parkway, Islandia, New York 11788
WITNESSETH: party of the second part, hereinafter referred to as TENANT
Owner hereby leases to Tenant and Tenant hereby hires from Owner The
premises are approximately 5,000 square feet on the third (3rd) floor,
eastern section
in the building known as 1770 Motor Parkway, Islandia, New York in the
Borough of ____________________, City of New York, for the term of five years
(or until such term shall sooner cease and expire as hereinafter provided) to
commence on the 1st day of August nineteen hundred and ninety eight, and to
end on the 31st day of July two thousand three both dates inclusive, at an
annual rental rate of as provided on Schedule A annexed hereto and made a
part hereof.
which Tenant agrees to pay in lawful money of the United States which shall
be legal tender in payment of all debts and due public and private, at the
time of payment, in equal monthly installments in advance on the first day of
each month during said term, at the office of Owner or such other place as
Owner may designate, without any set off or deduction whatsoever, except that
Tenant shall pay the first ______ monthly installment(s) on the execution
hereof (unless this lease be a renewal).
In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner
pursuant to the terms of another lease with Owner or with Owner's predecessor
in interest, Owner may at Owner's option and without notice to Tenant add
the amount of such arrears to any monthly installment of rent payable
hereunder and the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby
covenant as follows:
RENT OCCUPANCY:
1. Tenant shall pay the rent as above and as hereinafter provided.
2. Tenant shall use and occupy demised premises for the transaction
of Tenant's business only, and for no other purpose.
TENANT ALTERATIONS:
3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, and to the provisions of this article, Tenant at Tenant's
expense, may make alterations, installations, additions or improvements which
are nonstructural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved by Owner. Tenant shall, before
making any alterations, additions, installations or improvements, at its
expense, obtain all permits, approvals and certificates required by any
governmental or quasi-governmental bodies and (upon completion) certificates
of final approval thereof and shall deliver promptly duplicates of all such
permits, approvals and certificates to Owner and Tenant agrees to carry and
will cause Tenant's contractors and sub-contractors to carry such workman's
compensation, general liability, personal and property damage insurance as
Owner may require. If any mechanic's lien is filed against the demised
premises, or the building of which the same forms a part, for work claimed to
have been done for, or materials furnished to, Tenant, whether or not done
pursuant to this article, the same shall be discharged by Tenant within
thirty days thereafter, at Tenant's expense, by filing the bond required by
law. All fixtures and all paneling, partitions, railings and like
installations, installed in the premises at any time, either by Tenant or by
Owner in Tenant's behalf, shall, upon installation, become the property of
Owner and shall remain upon and be surrendered with the demised premises
unless Owner, by notice to Tenant no later than twenty days prior to the date
fixed as the termination of this lease, elects to relinquish Owner's right
thereto and to have them removed by Tenant, in which event the same shall be
removed from the premises by Tenant prior to the expiration of the lease, at
Tenant's expense. Nothing in this Article shall be construed to give Owner
title to or to prevent Tenant's removal of trade fixtures, moveable office
furniture and equipment, but upon removal of any such, from the premises or
upon removal of other installations as may be required by Owner. Tenant
shall immediately and at its expense, repair and restore the premises to the
condition existing prior to installation and repair any damage to the demised
premises or the building due to such removal. All property permitted or
required to be removed by Tenant at the end of the term remaining in the
premises after Tenant's removal shall be deemed abandoned and may, at the
election of Owner, either be retained as Owner's property or may be removed
from the premises by Owner, at Tenant's expense.
MAINTENANCE AND REPAIRS:
4. Tenant shall, throughout the term of this lease, take good care
of the demised premises and the fixtures and appurtenances therein. Tenant
shall be responsible for all damage or injury to the demised premises or any
other part of the building and the systems and equipment thereof, whether
requiring structural or nonstructural repairs caused by or resulting from
carelessness, omissions, neglect or improper conduct of Tenant, Tenant's
subtenants, agents, employees, invitees or licensees, or which arise out of
any work, labor, service or equipment done for or supplied to Tenant or any
subtenant or arising out of the installation, use or operation of the
property of equipment of Tenant or any subtenant. Tenant shall also repair
all damage to the building and the demised premises caused by the moving of
Tenant's fixtures, furniture and equipment. Tenant shall promptly make, at
Tenant's expense, all repairs in and to the demised premises for which Tenant
is responsible, using only the contractor for the trade or trades in
question, selected from a list of at least two contractors per trade
submitted by Owner. Any other repairs in or to the building or the
facilities and systems thereof for which Tenant is responsible shall be
performed by Owner at the Tenant's expense. Owner shall maintain in good
working order and repair the exterior and the structure portions of the
building, including the structural portions of the demised premises, and the
public portions of the building interior and the building plumbing,
electrical, heating and ventilating systems (to the extent such systems
presently exist) serving the demised premises. Tenant agrees to give prompt
notice of any defective condition in the premises for which Owner may be
responsible hereunder. There shall be no allowance to Tenant for diminution
of rental value and no liability on the part of Owner by reason of
inconvenience, annoyance or injury to business arising from Owner or others
making repairs, alterations, additions or improvements in or to any portion
of the building of the demised premises or in and to the fixtures,
appurtenances or equipment thereof. It is specifically agreed that Tenant
shall not be entitled to any setoff or reduction of rent by reason of any
failure of Owner to comply with the covenants of this or any other article of
this Lease. Tenant agrees that Tenant's sole remedy at law in such instance
will be by way of an action for damages for breach of contract. The
provisions of this Article 4 shall not apply in the case of or other casualty
which are dealt with in Article 9 hereof.
WINDOW CLEANING:
5. Tenant will not clean nor require, permit, suffer or allow any
window in the demised premises to be cleaned from the outside in violation of
Section 202 of the Labor Law or any other applicable law or of the Rules of
the Board of Standards and Appeals, or of any other Board of body having or
asserting jurisdiction.
REQUIREMENTS OF LAW, FIRE INSURANCE, FLOOR LOADS:
6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments,
departments, commissions and boards and any duration of any public officer
pursuant to law, and all orders, rules and regulations of the New York Board
of Fire Underwriters, Insurance Services Office, or any similar body which
shall impose any violation, order or duty upon Owner or Tenant with respect
to the demised premises, whether or not arising out of Tenant's use or manner
of use thereof, (including Tenant's permitted use) or, with respect to the
building of arising out of Tenant's
<PAGE>
use or manner of use of the premises or the building (including the use
permitted under the lease). Nothing herein shall require Tenant to make
structural repairs or alterations unless Tenant has, by its manner of use of
the demised premises or method of operation therein, violated any such laws,
ordinances, orders, rules, regulations or requirements with respect thereto.
Tenant may, after securing Owner to Owner's satisfaction against all damages,
interest, penalties and expenses, including, but not limited to, reasonable
attorney's fees, by cash deposit or by surety bond in an amount and in a
company satisfactory to Owner, contest and appeal any such laws, ordinances,
orders, rules, regulations or requirements provided same is done with all
reasonable promptness and provided such appeal shall not subject Owner to
prosecution for a criminal offense or constitute a default under any lease or
mortgage under which Owner may be obligated, or cause the demised premises or
any part thereof to be condemned or vacated. Tenant shall not do or permit
any act or thing to be done in or to the demised premises which is contrary
to law, or which will invalidate or be in conflict with public liability,
fire or other policies of insurance at any time carried by or for the benefit
of Owner with respect to the demised premises or the building of which the
demised premises form a part, or which shall or might subject Owner to any
liability or responsibility to any person or for property damage. Tenant
shall not keep anything in the demised premises except as now or hereafter
permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance
Rating Organization or other authority having jurisdiction, and then only in
such manner and such quantity so as not to increase the rate for fire
insurance applicable to the building, nor use the premises in a manner which
will increase the insurance rate for the building or any property located
therein over that in effect prior to the commencement of Tenant's occupancy.
Tenant shall pay all costs, expenses, fines, penalties, or damages, which may
be imposed upon Owner by reason of Tenant's failure to comply with the
provisions of this article and if by reason of such failure the fire
insurance rate shall, at the beginning of this lease or at any time
thereafter, be higher than it otherwise would be, then Tenant shall reimburse
Owner, as additional rent hereunder, for that portion of all fire insurance
premiums thereafter paid by Owner which shall have been charged because of
such failure by Tenant. In any action or proceeding wherein Owner and Tenant
are parties, a schedule or "make-up" of rate for the building or demised
premises issued by the New York Fire Insurance Exchange, or other body making
fire insurance rates applicable to said premises shall be conclusive evidence
of the facts therein stated and of the several items and charges in the fire
insurance rates then applicable to said premises. Tenant shall not place a
load upon any floor of the demised premises exceeding the floor load per
square foot area which it was designed to carry and which is allowed by law.
Owner reserves the right to prescribe the weight and position of all safes,
business machines and mechanical equipment. Such installations shall be
placed and maintained by Tenant, at Tenant's expense, in settings sufficient,
in Owner's judgement, to absorb and prevent vibration, noise and annoyance.
SUBORDINATION:
7. This lease is subject and subordinate to all ground or underlying
leases and to all mortgages which may now or hereafter affect such leases or
the real property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real
property of which the demised premises are a part. In confirmation of such
subordination, Tenant shall execute promptly any certificate that Owner may
request.
PROPERTY--LOSS, DAMAGE, REIMBURSEMENT, INDEMNITY:
8. Owner or its agents shall not be liable for any damage to
property of Tenant or of others entrusted to employees of the building, nor
for loss of or damage to any property of Tenant by theft or otherwise, nor
for any injury or damage to persons or property resulting from any cause of
whatsoever nature, unless caused by or due to the negligence of Owner, its
agents, servants or employees. Owner or its agents will not be liable for
any such damage caused by other tenants or persons in, upon or about said
building or caused by operations in construction of any private, public or
quasi public work.
If at any time any windows of the demised premises are temporarily closed,
darkened or bricked up (or permanently closed, darkened or bricked up, if
required by law) for any reason whatsoever including, but not limited to
Owner's own acts, Owner shall not be liable for any damage Tenant may sustain
thereby and Tenant shall not be entitled to any compensation therefor nor
abatement or diminution of rent nor shall the same release Tenant from its
obligations hereunder nor constitute an eviction. Tenant shall indemnify and
save harmless Owner against and from all liabilities, obligations, damages,
penalties, claims, costs and expenses for which Owner shall not be reimbursed
by insurance, including reasonable attorneys fees, paid, suffered or incurred
as a result of any breach by Tenant, Tenant's agents, contractors, employees,
invitees, or licensees, of any covenant or condition of this lease, or the
carelessness, negligence or improper conduct of the Tenant, Tenant's agents,
contractors, employees, invitees or licensees. Tenant's liability under this
lease extends to the acts and omissions of any sub-tenant, and any agent,
contractor, employee, invitee or licensee of any sub-tenant. In case any
action or proceeding is brought against Owner by reason of any such claim,
Tenant, upon written notice from Owner, will, at Tenant's expense, resist or
defend such action or proceeding by counsel approved by Owner in writing,
such approval not to be unreasonably withheld.
DESTRUCTION, FIRE AND OTHER CASUALTY:
9. (a) If the demised premises or any part thereof shall be damaged
by fire or other casualty, Tenant shall give immediate notice thereof to
Owner and this lease shall continue in full force and effect except as
hereinafter set forth. (b) If the demised premises are partially damaged or
rendered partially unusable by fire or other casualty, the damages thereto
shall be repaired by and at the expense of the Owner and the rent, until such
repair shall be substantially completed, shall be apportioned from the day
following the casualty according to the part of the premises which is usable.
(c) If the demised premises are totally damaged or rendered wholly unusable
by fire or other casualty, then the rent shall be proportionately paid up to
the time of the casualty and thenceforth shall cease until such date when the
premises shall have been repaired and restored by Owner, subject to Owner's
right to elect not to restore the same as hereinafter provided. (d) If the
demised premises are rendered wholly unusable or (whether or not the demised
premises are damaged in whole or in part) if the building shall be so damaged
that Owner shall decide to demolish it or to rebuild it, then, in any of such
events, Owner may elect to terminate this lease by written notice to Tenant,
given within 90 days after such fire or casualty, specifying a date for the
expiration of the lease, which date shall not be more than 60 days after the
giving of such notice, and upon the date specified in such notice the term of
this lease shall expire as fully and completely as if such date were the date
set forth above for the termination of this lease and Tenant shall forthwith
quit, surrender and vacate the premises without prejudice however, to
Landlord's rights and remedies against Tenant under the lease provisions in
effect prior to such termination, and any rent owing shall be paid up to such
date and any payments of rent made by Tenant which were on account of any
period subsequent to such date shall be returned to Tenant. Unless Owner
shall serve a termination notice as provided for herein, Owner shall make the
repairs and restorations under the conditions of (b) and (c) hereof, with all
reasonable expedition, subject to delays due to adjustment of insurance
claims, labor troubles and causes beyond Owner's control. After any such
casualty, Tenant shall cooperate with Owner's restoration by removing from
the premises as promptly as reasonably possible, all of Tenant's salvageable
inventory and movable equipment, furniture, and other property. Tenant's
liability for rent shall resume five (5) days after written notice from Owner
that the premises are substantially ready for Tenant's occupancy. (e)
Nothing contained hereinabove shall relieve Tenant from liability that may
exist as a result of damage from fire or other casualty. Notwithstanding the
foregoing, each party shall look first to any insurance in its favor before
making any claim against the other party for recovery for loss or damage
resulting from fire or other casualty, and to the extent that such insurance
is in force and collectible and to the extent permitted by law, Owner and
Tenant each hereby releases and waives all right of recovery against the
other or any one claiming through or under each of them by way of subrogation
or otherwise. The foregoing release and waiver shall be in force only if
both releasors' insurance policies contain a clause providing that such a
release or waiver shall not invalidate the insurance. If, and to the extent,
that such waiver can be obtained only by the payment of additional premiums,
then the party benefitting from the waiver shall pay such premium within ten
days after written demand or shall be deemed to have agreed that the party
obtaining insurance coverage shall be free of any further obligation under
the provisions hereof with respect to waiver of subrogation. Tenant
acknowledges that Owner will not carry insurance on Tenant's furniture and/or
furnishings or any fixtures or equipment, improvements, or appurtenances
removable by Tenant and agrees that Owner will not be obligated to repair any
damage thereto or replace the same. (f) Tenant hereby waives the provisions
of Section 227 of the Real Property Law and agrees that the provisions of
this article shall govern and control in lieu thereof.
EMINENT DOMAIN:
10. If the whole or any part of the demised premises shall be
acquired or condemned by Eminent Domain for any public or quasi public use or
purpose, then and in that event, the term of this lease shall cease and
terminate from the date of title vesting in such proceeding and Tenant shall
have no claim for the value of any unexpired term of said lease and assigns
to Owner, Tenant's entire interest in any such award.
ASSIGNMENT, MORTGAGE, ETC.:
11. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors and assigns, expressly
covenants that it shall not assign, mortgage or encumber this agreement, nor
underlet, or suffer or permit the demised premises or any part thereof to be
used by others, without the prior written consent of Owner in each instance.
Transfer of the majority of the stock of a corporate Tenant shall be deemed
an assignment. If this lease be assigned, or if the demised premises or any
part thereof be underlet or occupied by anybody other than Tenant, Owner may,
after default by Tenant, collect rent from the assignee, under-tenant or
occupant, and apply the net amount collected to the rent herein reserved, but
no such assignment, underletting, occupancy or collection shall be deemed a
waiver of this covenant, or the acceptance of the assignee, under-tenant or
occupant as tenant, or a release of Tenant from the further performance by
Tenant of covenants on the part of Tenant herein contained. The consent by
Owner to an assignment or underletting shall not in any wise be construed to
relieve Tenant from obtaining the express consent in writing of Owner to any
further assignment or underletting.
ELECTRIC CURRENT:
12. Rates and conditions in respect to submetering or rent
inclusion, as the case may be, to be added in RIDER attached hereto. Tenant
covenants and agrees that at all times its use of electric current shall not
exceed the capacity of existing feeders to the building or the risers or
wiring installation and Tenant may not use any electrical equipment which, in
Owner's opinion, reasonably exercised, will overload such installations or
interfere with the use thereof by other tenants of the building. The change
at any time of the character of electric service shall in no wise make Owner
liable or responsible to Tenant, for any loss, damages or expenses which
Tenant may sustain.
ACCESS TO PREMISES:
13. Owner or Owner's agents shall have the right (but shall not be
obligated) to enter the demised premises in any emergency at any time, and,
at other reasonable times, to examine the same and to make such repairs,
replacements and improvements as Owner may deem necessary and reasonably
desirable to the demised premises or to any other portion of the building or
which Owner may elect to perform. Tenant shall permit Owner to use and
maintain and replace pipes and conduits in and through the demised premises
and to erect new pipes and conduits therein provided they are concealed
within the walls, floor, or ceiling. Owner may, during the progress of any
work in the demised premises, take all necessary materials and equipment into
said premises without the same constituting an eviction nor shall the Tenant
be entitled to any abatement of rent while such work is in progress nor to
any damages by reason of loss or interruption of business or otherwise.
Throughout the term hereof Owner shall have the right to enter the demised
premises at reasonable hours for the purpose of showing the
<PAGE>
same to prospective purchasers or mortgagees of the building, and during the
last six months of the term for the purpose of showing the same to
prospective tenants. If Tenant is not present to open and permit an entry
into the premises, Owner or Owner's agents may enter the same whenever such
entry may be necessary or permissible by master key or forcibly and provided
reasonable care is exercised to safeguard Tenant's property, such entry shall
not render Owner or its agents liable therefor, nor in any event shall the
obligations of Tenant hereunder be affected. If during the last month of the
term Tenant shall have removed all or substantially all of Tenant's property
therefrom, Owner may immediately enter, alter, renovate or redecorate the
demised premises without limitation or abatement of rent, or incurring
liability to Tenant for any compensation and such act shall have no effect on
this lease or Tenant's obligations hereunder.
VAULT, VAULT SPACE, AREA:
14. No Vaults, vault space or area, whether or not enclosed or
covered, nor within the property line of the building is leased hereunder,
anything contained in or indicated on any sketch, blue print or plan, or
anything contained elsewhere in this lease to the contrary notwithstanding.
Owner makes no representation as to the location of the property line of
the building. All vaults and vault space and all such areas not within the
property line of the building, which Tenant may be permitted to use and/or
occupy, is to be used and/or occupied under a revocable license, and if any
such license be revoked, or if the amount of such space or area be diminished
or required by any federal, state or municipal authority or public utility,
Owner shall not be subject to any liability nor shall Tenant be entitled to
any compensation or diminution or abatement of rent, nor shall such
revocation, diminution or requisition be deemed constructive or actual
eviction. Any tax, fee or charge of municipal authorities for such vault or
area shall be paid by Tenant.
OCCUPANCY:
15. Tenant will not at any time use or occupy the demised premises
in violation of the certificate of occupancy issued for the building of which
the demised premises are a part. Tenant has inspected the premises and accepts
them as is, subject to the riders annexed hereto with respect to Owner's
work, if any. In any event, Owner makes no representation as to the
condition of the premises and Tenant agrees to accept the same subject to
violations, whether or not of record.
BANKRUPTCY:
16. (a) Anything elsewhere in this lease to the contrary
notwithstanding, this lease may be cancelled by Owner by the sending of a
written notice to Tenant within a reasonable time after the happening of any
one or more of the following events: (1) the commencement of a case in
bankruptcy or under the laws of any state naming Tenant as the debtor; or (2)
the making by Tenant of an assignment or any other arrangement for the
benefit of creditors under any state statute. Neither Tenant nor any person
claiming through or under Tenant, or by reason of any statute or order of
court, shall thereafter be entitled to possession of the premises demised
but shall forthwith quit and surrender the premises. If this lease shall be
assigned in accordance with its terms, the provisions of this Article 16
shall be applicable only to the party then owning Tenant's interest in this
lease.
(b) it is stipulated and agreed that in the event of the
termination of this lease pursuant to (a) hereof, Owner shall forthwith,
notwithstanding any other provisions of this lease to the contrary, be
entitled to recover from Tenant as and for liquidated damages an amount equal
to the difference between the rent reserved hereunder for the unexpired
portion of the term demised and the fair and reasonable rental value of the
demised premises for the same period. In the computation of such damages the
difference between any installment of rent becoming due hereunder after the
date of termination and the fair and reasonable rental value of the demised
premises for the period for which such installment was payable shall be
discounted to the date of termination at the rate of four percent (4%) per
annum. If such premises or any part thereof be relet by the Owner for the
unexpired term of said lease, or any part thereof, before presentation of
proof of such liquidated damages to any court, commission or tribunal, the
amount of rent reserved upon such reletting shall be deemed to be the fair
and reasonable rental value for the part of the whole of the premises so
re-let during the term of the re-letting. Nothing herein contained shall
limit or prejudice the right of the Owner to prove for and obtain as
liquidated damages by reason of such termination, an amount equal to the
maximum allowed by any statute or rule of law in effect at the time when, and
governing the proceedings in which, such damages are to be proved, whether or
not such amount be greater, equal to, or less than the amount of the
difference referred to above.
DEFAULT:
17. (1) If Tenant defaults in fulfilling any of the covenants of
this lease other than the covenants for the payment of rent or additional
rent; or if the demised premises becomes vacant or deserted, or if any
execution or attachment shall be issued against Tenant or any of Tenant's
property whereupon the demised premises shall be taken or occupied by someone
other than Tenant; or if this lease be rejected under Section 235 of Title 11
of the U.S. Code (bankruptcy code); or if Tenant shall fail to move into or
take possession of the premises within fifteen (15) days after the
commencement of the term of this lease, then, in any one or more of such
events, upon Owner serving a written five (5) days notice upon Tenant
specifying the nature of said default and upon the expiration of said five
(5) days, if Tenant shall have failed to comply with or remedy such default,
or if the said default or omission complained of shall be of a nature that
the same cannot be completely cured or remedied within said five (5) day
period, and if Tenant shall not have diligently commenced during such default
within such five (5) day period, and shall not thereafter with reasonable
diligence and in good faith, proceed to remedy or cure such default, then
Owner may serve a written three (3) days; notice of cancellation of this
lease upon Tenant, and upon the expiration of said three (3) days this lease
and the term thereunder shall end and expire as fully and completely as if
the expiration of such three (3) day period were the day herein definitely
fixed for the end and expiration of this lease and the term thereof and
Tenant shall then quit and surrender the demised premises to Owner but Tenant
shall remain liable as hereinafter provided.
(2) If the notice provided for in (1) hereof shall have been
given, and the term shall expire as aforesaid; or if Tenant shall make
default in the payment of the rent reserved herein or any item of additional
rent herein mentioned or any part of either or in making any other payment
herein required; then and in any of such events Owner may without notice,
re-enter the demised premises either by force or otherwise, and dispossess
Tenant by summary proceedings or otherwise, and the legal representative of
Tenant or other occupant of demised premises and remove their effects and
hold the premises as if this lease had not been made, and Tenant hereby
waives the service of notice of intention to re-enter or to institute legal
proceedings to that end. If Tenant shall make default hereunder prior to the
date fixed as the commencement of any renewal or extension of this lease,
Owner may cancel and terminate such renewal or extension agreement by written
notice.
REMEDIES OF OWNER AND WAIVER OF REDEMPTION:
18. In case of any such default, re-entry, expiration and/or
dispossess by summary proceedings or otherwise, (a) the rent shall become due
thereupon and be paid up to the time of such re-entry, dispossess and/or
expiration, (b) Owner may re-let the premises or any part or parts thereof,
either in the name of Owner or otherwise, for a term or terms, which may at
Owner's option be less than or exceed the period which would otherwise have
constituted the balance of the term of the lease and may grant concessions or
free rent or charge a higher rental than that in this lease, and/or (c)
Tenant or the legal representatives of Tenant shall also pay Owner as
liquidated damages for the failure of Tenant to observe and perform said
Tenant's covenants herein contained, any deficiency between the rent hereby
reserved and/or covenanted to be paid and the net amount, if any, of the
rents collected on account of the lease or leases of the demised premises for
each month of the period which would otherwise have constituted the balance
of the term of this lease. The failure of Owner to re-let the premises or
any part or parts thereof shall not release or affect Tenant's liability for
damages. In computing such liquidated damages there shall be added to the
said deficiency such expenses as Owner may incur in connection with
re-letting, such as legal expenses, attorneys' fees, brokerage, advertising
and for keeping the demised premises in good order or for preparing the same
for re-letting. Any such liquidated damages shall be paid in monthly
installments by Tenant on the rent day specified in this lease and any suit
brought to collect the amount of the deficiency for any month shall not
prejudice in any way the rights of Owner to collect the deficiency for any
month shall not prejudice in any way the rights of Owner to collect the
deficiency of any subsequent month by a similar proceeding. Owner, in
putting the demised premises in good order or preparing the same for
re-rental may, at Owner's option, make such alterations, repairs,
replacements, and/or decorations in the demised premises as Owner, in Owner's
sole judgement considers advisable and necessary for the purpose of
re-letting the demised premises, and the making of such alterations, repairs,
replacements, and/or decorations shall not operate or be construed to release
Tenant from liability hereunder as aforesaid. Owner shall in no event be
liable in any way whatsoever for failure to re-let the demised premises, or
in the event that the demised premises are re-let, for failure to collect the
rent thereof under such re-letting, and in no event shall Tenant be entitled
to receive any excess, if any, of such net rents collected over the sums
payable by Tenant to Owner hereunder. In the event of a breach or threatened
breach by Tenant of any of the covenants to provisions hereof, Owner shall
have the right of injunction and the right to invoke any remedy allowed at
law or in equity as if re-entry, summary proceedings and other remedies were
not herein provided for. Mention in the lease of any particular remedy,
shall not preclude Owner from any other remedy, in law or in equity. Tenant
hereby expressly waives any and all rights of redemption granted by or under
any present or future laws in the event of Tenant being evicted or
dispossessed for any cause, or in the event of Owner obtaining possession of
demised premises, by reason of the violation by Tenant of any of the
covenants and conditions of the lease, or otherwise.
FEES AND EXPENSES:
19. If Tenant shall default in the observance or performance of any
term or covenant on Tenant's part to be observed or performed under or by
virtue of any of the terms or provisions in any article of this lease, then,
unless otherwise provided elsewhere in this lease, Owner may immediately or
at any time thereafter and without notice perform the obligation of Tenant
thereunder. If Owner, in connection with the foregoing or in connection with
any default by Tenant in the covenant to pay rent hereunder, makes any
expenditures or incurs any obligations for the payment of money, including
but not limited to attorney's fees, in instituting, prosecuting or defending
any action or proceeding, then Tenant will reimburse Owner for such sums so
paid or obligations incurred with interest and costs. The foregoing expenses
incurred by reason of Tenant's default shall be deemed to be additional rent
hereunder and shall be paid by Tenant to Owner within five (5) days of
rendition of any bill or statement to Tenant therefor. If Tenant's lease
term shall have expired at the time of making of such expenditures or
incurring of such obligations, such sums shall be recoverable by Owner as
damages.
BUILDING ALTERATIONS AND MANAGEMENT:
20. Owner shall have the right at at any time without the same
constituting an eviction and without incurring liability to Tenant therefor
to change the arrangements and/or location of public entrances, passageways,
doors, doorways, corridors, elevators, stairs, toilets or other public parts
of the building and to change the name, number or designation by which the
building may be known. There shall be an allowance to Tenant for diminution
of rental value and no liabilities on the part of Owner by reason of
inconvenience, annoyance or injury to business arising from Owner or other
Tenants making any repairs in the building or any such alterations, additions
and improvements. Furthermore, Tenant shall not have any claim against Owner
by reason of Owner's imposition of such controls of the manner of access to
the building by Tenant's social or business visitors as the Owner may deem
necessary for the security of the building and its occupants.
NO REPRESENTATIONS BY OWNER:
21. Neither Owner nor Owner's agents have made any representations
or promises with respect to the physical condition of the building, the land
upon which
<PAGE>
it is erected or the demised premises, the rents, leases, expenses of operation
or any other matter or thing affecting or related to the premises except as
herein expressly set forth and no rights, easements or licenses are acquired
by Tenant by implication or otherwise except as expressly set forth in the
provisions of this lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition and agrees to take
the same "as is" and acknowledges that the taking of possession of the
demised premises by Tenant shall be conclusive evidence that the said
premises and the building of which the same form a part were in good and
satisfactory condition at the time such possession was so taken, except as to
latent defects. All understandings and agreements heretofore made between
the parties hereto are merged in this contract, which alone fully and
completely expresses the agreement between Owner and Tenant and any executory
agreement hereafter made shall be ineffective to change, modify, discharge or
effect an abandonment of it in whole or in part, unless such executory
agreement is in writing and signed by the party against whom enforcement of
the change, modification, discharge or abandonment is sought.
END OF TERM:
22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean,
in good order and condition, ordinary wear and damages which Tenant is not
required to repair as provided elsewhere in this lease excepted, and Tenant
shall remove all its property. Tenant's obligation to observe or perform
this covenant shall survive the expiration or other termination of this lease.
If the last day of the term of this Lease or any renewal thereof, falls on
Sunday, this lease shall expire at noon on the preceding Saturday unless it be
a legal holiday in which case it shall expire at noon on the preceding
business day.
OWNER ENJOYMENT:
23. Owner covenants and agrees with Tenant that upon Tenant paying the rent
and additional rent and observing and performing all the terms, covenants and
conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the premises hereby demised, subject,
nevertheless, to the terms and conditions of this lease including, but not
limited to, Article 31 hereof and to the ground leases, underlying leases and
mortgages hereinbefore mentioned.
FAILURE TO GIVE PERMISSION:
24. If Owner is unable to give possession of the demised premises on the date
of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or for any other reason, Owner shall not be subject to any
liability for failure to give possession on said date and the validity of the
lease shall not be impaired under such circumstances, nor shall the same be
construed in any wise to extend the term of this lease, but the rent payable
hereunder shall be abated (provided Tenant is not responsible for Owner's
inability to obtain possession) until after Owner shall have given Tenant
written notice that the premises are substantially ready for Tenant's occupancy
If permission is given to Tenant to enter into the possession of the demised
premises or to occupy premises other than the demised premises prior to the
date specified as the commencement of the term of this lease, Tenant
covenants and agrees that such occupancy shall be deemed to be under all the
terms, covenants, conditions and provisions of this lease, except as to the
covenant to pay rent. The provisions of this article are intended to
constitute "an express provision to the contrary" within the meaning of
Section 223-a of the New York Real Property Law.
NO WAIVER:
25. The failure of Owner to seek redress for violation of, or to insist upon
the strict performance of any covenant or condition of this lease or of any
of the Rules or Regulations, set forth or hereafter adopted by Owner, shall
not prevent a subsequent act which would have originally constituted a
violation from having all the force and effect of an original violation. The
receipt by Owner of rent with knowledge of the breach of any covenant of this
lease shall not be deemed a waiver of such breach and no provision of this
lease shall be deemed to have been waived by Owner unless such waiver be in
writing signed by Owner. No payment by Tenant or receipt by Owner of a
lesser amount than the monthly rent herein stipulated shall be deemed to be
other than on account of the earliest stipulated rent, nor shall any
endorsement or statement of any check or any letter accompanying any check or
payment as rent be deemed an accord and satisfaction, and Owner may accept
such check or payment without prejudice to Owner's right to recover the
balance of such rent or pursue any other remedy in this lease provided. No
act or thing done by Owner or Owner's agents during the term hereby demised
shall be deemed an acceptance of a surrender of said premises, and no
agreement to accept such surrender shall be valid unless in writing signed by
Owner. No employee of Owner or Owner's agent shall have any power to accept
such surrender shall be valid unless in writing signed by Owner. No employee
of Owner or Owner's agent shall have any power to accept the keys of said
premises prior to the termination of the lease and the delivery of keys to
any such agent or employee shall not operate as a termination of the lease or
a surrender of the premises.
WAIVER OF TRIAL BY JURY:
26. It is mutually agreed by and between Owner and Tenant that the respective
parties hereto shall and they hereby do waive trial by jury in any action,
proceeding or counterclaim brought by either of the parties hereto against
the other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said
premises, and any emergency statutory or any other statutory remedy. It is
further mutually agreed that in the event Owner commences any summary proceeding
for possession of the premises, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding including a counterclaim
under Article 4.
INABILITY TO PERFORM
27. This Lease and the obligation of Tenant to pay rent hereunder and perform
all of the other covenants and agreements hereunder on part of Tenant to be
performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or
delayed in supplying any service expressly or impliedly to be supplied or
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures if Owner is prevented or delayed from so doing by reason of strike or
labor troubles or any cause whatsoever including, but not limited to, government
preemption in connection with a National Emergency or by reason of any rule,
order or regulation of any department or subdivision thereof of any government
agency or by reason of conditions of supply and demand which have been or are
affected by war or other emergency.
BILLS AND NOTICES:
28. Except as otherwise in this lease provided, bill, statement, notice or
communication which Owner may desire or be required to give to Tenant, shall be
deemed sufficiently given or rendered if, in writing, delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the
aforesaid premises addressed to Tenant, and the time of the rendition such
bill or statement and of the giving of such notice or communication shall be
deemed to be the time when the same is delivered to Tenant, mailed, or left at
the premises as herein provided. Any notice by Tenant to Owner must be served
by registered or certified mail addressed to Owner at the address first
hereinabove given or at such other address as Owner shall designate by
written notice.
SERVICES PROVIDED BY OWNERS
29. As long as Tenant is not in default under any of the covenants of this
lease, Owners shall provide necessary elevator facilities on business days
from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m. to 1 p.m. and have one
elevator subject to call at all other times; (b) heat to the demised premises
when and as required by law, on business days from 8 a.m. to 6 p.m. and on
Saturdays from 8 a.m. to 1 p.m.; (c) water for ordinary lavatory purposes,
but if Tenant uses or consumes water for any other purposes or in unusual
quantities (of which fact Owner shall be the sole judge), Owner may install a
water meter at Tenant's expense which Tenant shall thereafter maintain at
Tenant's expense in good working order and repair to register such water
consumption and Tenant shall pay for water consumed as shown on said meter as
additional rent as and when bills are rendered; (d) cleaning service for
the demised premises on business days at Owner's expense provided that the
same are kept in order by Tenant. If, however, said premises are to be kept
clean by Tenant it shall be done at Tenant's sole expense, in a manner
satisfactory to Owner and no one other than persons approved by Owner shall
be permitted to enter said premises or the building of which they are a part
for such purpose. Tenant shall pay Owner the cost of removal of any of
Tenant's refuse and rubbish from the building; (e) if the demised premises is
serviced by Owner's air conditioning/cooling and ventilating system, air
conditioning/cooling will be furnished to tenant from May 15th through
September 30th on business days (Mondays through Fridays, holidays excepted)
from 8:00 a.m. to 6:00 p.m., and ventilation will be furnished on business
days during the aforesaid hours except when air conditioning/cooling is being
furnished as aforesaid. If Tenant requires air conditioning/cooling or
ventilation for more extended hours or on Saturdays, Sundays or on holidays,
as defined under Owner's contract with Operating Engineers Local 94-94A.
Owner will furnish the same at Tenant's expense. RIDER to be added in
respect to rates and conditions for such additional service; (f) Owner
reserves the right to stop services of the heating, elevators, plumbing,
air-conditioning, power systems or cleaning or other services, if any, when
necessary by reason of accident or for repairs, alterations, replacements or
improvements necessary or desirable in the judgment of Owner for as long as
may be reasonably required by reason thereof. If the building of which the
demised premises are a part supplies manually operated elevator service,
Owner at any time may substitute automatic control elevator service and upon
ten days' written notice to Tenant, proceed with alterations necessary
therefor without in any wise affecting this lease or the obligation of Tenant
hereunder. The same shall be done with a minimum of inconvenience to Tenant
and Owner shall pursue the alteration with due diligence.
CAPTIONS:
30. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provisions thereof.
DEFINITIONS:
31. The term "office", or "offices", wherever used in this lease, shall not
be construed to mean premises used as a store or stores, for the sale or
display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing. The term "Owner" means a landlord or
lessor, and as used in this lease means only the owner, or the mortgagee in
possession, for the time being of the land and building (or the owner of a
lease of the building or of the land and building) of which the demised
premises form a part, so that in the event of any sale or sales of said land
and building or of said lease, or in the event of a lease of said building,
or of the land and building, the said Owner shall be and hereby is entirely
freed and relieved of all covenants and obligations of Owner hereunder, and
it shall be deemed and construed without further agreement between the
parties or their successors in interest, or between the parties and the
purchaser, at any such sale, or the said lessee of the building, or of the
land and building, that the purchaser or the lessee of the building has
assumed and agreed to carry out any and all covenants and obligations of
Owner, hereunder. The words "re-enter" and "re-entry" as used in this lease
are not restricted to their technical legal meaning. The term "business
days" as used in this lease shall exclude Saturdays (except such portion
thereof as is covered by specific hours in Article 29 hereof), Sundays and
all days observed by the State or Federal Government as legal holidays and
those designated as holidays by the applicable building service union
employees service contract or by the applicable Operating Engineers contract
with respect to HVAC service.
- -----------------------------------
Rider to be added if necessary.
<PAGE>
ADJACENT EXTENSION -- SHORING:
32. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the
person causing or authorized to cause such excavation, license to enter upon
the demised premises for the purpose of doing such work as said person shall
deem necessary to preserve the wall of the building of which demised premises
form a part from injury or damage and to support the same by proper
foundations without any claim for damages or indemnity against Owner, or
diminution or abatement of rent.
RULES AND REGULATIONS
33. Tenant and Tenant's servants, employees, agents, visitors, and licensees
shall observe faithfully, and comply strictly with, the Rules and Regulations
and such other and further reasonable Rules and Regulations as Owner or Owner's
agents may from time to time adopt. Notice of any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter made
or adopted by Owner or Owner's agents, the parties hereto agree to submit the
question of the reasonableness of such Rule or Regulation for decision to the
New York office of the American Arbitration Association, whose determination
shall be final and conclusive upon the parties hereto. The right to dispute
the reasonableness of any additional Rule or Regulation upon Tenant's part
shall be deemed waived unless the same shall be asserted by service of a
notice, in writing upon Owner within ten (10) days after the giving of notice
thereof. Nothing in this lease contained shall be construed to impose upon
Owner any duty or obligation to enforce the Rules and Regulations or terms,
covenants or conditions in any other lease, as against any other tenant and
Owner shall not be liable to Tenant for violation of the same by any other
tenant, its servants, employees, agents, visitors or licensees.
SECURITY:
34. Tenant has deposited with Owner the sum of $12,500.00 as security for the
faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease,
including, but not limited to, the payment of rent and additional rent, Owner
may use, apply or retain the whole or any part of the security so deposited to
the extent required for the payment of any rent and additional rent or any
other sum as to which Tenant is in default or for any sum which Owner may
expend or may be required to expend by reason of Tenant's default in respect of
any of the terms, covenants and conditions of this lease, including but not
limited to, any damages or deficiency in the re-letting of the premises,
whether such damages or deficiency accrued before or after summary proceedings
or other re-entry by the Owner. In the event that Tenant shall fully and
faithfully comply with all of the terms, provisions, covenants, and conditions
of this lease, the security shall be returned to Tenant after the date fixed as
the end of the Lease and after delivery of entire possession of the demised
premises to Owner. In the event of a sale of the land and building or leasing
of the building, of which the demised premises form a part, Owner shall have
the right to transfer the security to the vendee or lessee and Owner shall
thereupon be released by Tenant from all liability for the return of such
security; and Tenant agrees to look to the new Owner solely for the return of
said security, and it is agreed that the provisions hereof shall apply to every
transfer or assignment made of the security to a new Owner. Tenant further
covenants that it will not assign or encumber or attempt to assign or encumber
the monies deposited herein as security and that neither Owner nor its
successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
ESTOPPEL CERTIFICATE
35. Tenant, at any time, and from time to time, upon at least 10 days' prior
notice by Owner, shall execute, acknowledge and deliver to Owner, and/or to any
other person, firm or corporation specified by Owner, a statement certifying
that this Lease is unmodified and in full force and effect (or, if there have
been modifications, that the same is in full force and effect as modified and
stating the modifications), stating the dates to which the rent and additional
rent have been paid, and stating whether or not there exists any default by
Owner under this Lease, and, if so, specifying each such default.
SUCCESSORS AND ASSIGNS:
36. The covenants, conditions and agreements contained in this lease shall
bind and inure to the benefit of Owner and Tenant and their respective heirs,
distributees, executors, administrators, successors, and except as otherwise
provided in this lease, their assigns.
- ----------------------------------
Space to be filled in or deleted.
IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this
lease as of the day and year first above written.
Witness for Owner:
- ----------------------------------
FGP Islandia, Inc.
- ---------------------------------[SEAL]
By: /s/ [ILLEGIBLE]
- ---------------------------------[L.S.]
Title V.P.
Witness for Tenant:
/s/ Margaret Lorin
- ----------------------------------
Arc Networks, Inc.
- ---------------------------------[SEAL]
By: /s/ Michael P. Sable, CFO/VP
- ---------------------------------[L.S.]
Title
ACKNOWLEDGMENTS
CORPORATE OWNER
STATE OF NEW YORK, ss.:
County of
On this day of , 19 , before me
personally came
to me known, who being by me duly sworn, did depose and say that he resides
in
that he is the of
the corporation described in and which executed the foregoing instrument, as
OWNER; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of
the Board of Directors of said corporation, and that he signed his name
thereto by like order.
- ------------------------------------------------------------------------------
INDIVIDUAL OWNER
STATE OF NEW YORK, ss.:
County of
On this day of , 19 , before me
personally came
to me known and known to me to be the individual
described in and who, as OWNER, executed the foregoing instrument and
acknowledged to me that he executed the same.
CORPORATE TENANT
STATE OF NEW YORK, ss.:
County of
On this day of , 19 , before me
personally came
to me known, who being by me duly sworn, did depose and say that he resides
in
that he is the of
the corporation described in and which executed the foregoing instrument, as
TENANT; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of
the Board of Directors of said corporation, and that he signed his name
thereto by like order.
- ------------------------------------------------------------------------------
INDIVIDUAL TENANT
STATE OF NEW YORK, ss.:
County of Suffolk
On this 14th day of July, 1998, before me
personally came Michael P. Sable
to me known and known to me to be the individual
described in and who, as TENANT, executed the foregoing instrument and
acknowledged to me that he executed the same.
/s/ Lorraine M. Stolarski
Lorraine M. Stolarski
Notary Public, State of New York
No. 4963922
Qualified in Suffolk County
<PAGE>
Address
Premises
==============================================================================
TO
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STANDARD FORM OF
[LOGO] OFFICE [LOGO]
LEASE
The Real Estate Board of New York, Inc.
-C- Copyright 1983. All rights Reserved.
Reproduction in whole or in part prohibited.
==============================================================================
Dated 19 .
Rent per Year
Rent per Month
Term
From
To
Drawn by ............................. Checked by ............................
Entered by ........................... Approved by ...........................
==============================================================================
GUARANTY
FOR VALUE RECEIVED, and in consideration for, and as an inducement to
Owner making the within lease with Tenant, the undersigned guarantees to Owner,
Owner's successors and assigns, the full performance and observance of all the
covenants, conditions and agreements, therein provided to be performed and
observed by Tenant, including the "Rules and Regulations" as therein provided,
without requiring any notice of non-payment, non-performance, or non-observance,
or proof, or notice, or demand, whereby to charge the undersigned therefor, all
of which the undersigned hereby expressly waives and expressly agrees that the
validity of this agreement and the obligations of the guarantor hereunder shall
in no wise be terminated, affected or impaired by reason of the assertion by
Owner against Tenant of any of the rights or remedies reserved to Owner pursuant
to the provisions of the within lease. The undersigned further covenants and
agrees that this guaranty shall remain and continue in full force and effect as
to any renewal, modification or extension of this lease and during any period
when Tenant is occupying the premises as a "statutory tenant." As a further
inducement to Owner to make this lease and in consideration thereof, Owner and
the undersigned covenant and agree that in any action or proceeding brought by
either Owner or the undersigned against the other on any matters whatsoever
arising out of, under, or by virtue of the terms of this lease or of this
guaranty that Owner and the undersigned shall and do hereby waive trial by jury.
Dated New York City ....................................... 19..........
WITNESS
.............................................................................
STATE OF NEW YORK, ) ss.:
County of )
On this day of , 19 , before me
personally came ,
to me known and known to me to be the individual described in, and who executed
the foregoing Guaranty and acknowledged to me that he executed the same.
..................................
Notary
........................................................................[L. S.]
Residence ....................................................................
Business Address .............................................................
Firm Name ....................................................................
[LOGO] IMPORTANT - PLEASE READ [LOGO]
RULES AND REGULATIONS ATTACHED TO AND
MADE A PART OF THIS LEASE
IN ACCORDANCE WITH ARTICLE 33.
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or
encumbered by any Tenant or used for any purpose other than for ingress or
egress from the demised premises and for delivery of merchandise and
equipment in a prompt and efficient manner using elevators and passageways
designated for such delivery by Owner. There shall not be used in any space,
or in the public hall of the building, either by any Tenant or by jobbers or
others in the delivery or receipt of merchandise, any hand trucks, except
those equipped with rubber tires and sideguards. If said premises are
situated on the ground floor of the building, Tenant thereof shall further,
at Tenant's expense, keep the sidewalk and curb in front of said premises
clean and free from ice, snow, dirt and rubbish.
2. The water and wash closets and plumbing fixtures shall not be used for
any purposes other than those for which they were designed or constructed and
no sweepings, rubbish, rags, acids or other substances shall be deposited
therein, and the expense of any breakage, stoppage, or damage resulting from
the violation of this rule shall be borne by the Tenant who, or whose
clerks, agents, employees or visitors, shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any window
of the building; and no Tenant shall sweep or throw or permit to be swept or
thrown from the demised premises any dirt or other substances into any of the
corridors or halls, elevators, or out of the doors or windows or stairways of
the building and Tenant shall not use, keep or permit to be used or kept any
foul or noxious gas or substance in the demised premises, or permit or suffer
the demised premises to be occupied or used in a manner offensive or
objectionable to Owner or other occupants of the buildings by reason of noise,
odors, and/or vibrations, or interfere in any way with other Tenants or those
having business therein, nor shall any animals or birds be kept in or about the
building. Smoking or carrying lighted cigars or cigarettes in the elevators of
the building is prohibited.
4. No awnings or other projections shall be attached to the outside walls
of the building without the prior written consent of Owner.
5. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of the
demised premises of the building or on the inside of the demised premises if
the same is visible from the outside of the premises without the prior
written consent of Owner, except that the name of Tenant may appear on the
entrance door of the premises. In the event of the violation of the
foregoing by any Tenant, Owner may remove same without any liability, and may
charge the expense incurred by such removal to Tenant or Tenants violating
this rule. Interior signs on doors and directory tablet shall be inscribed,
painted or affixed for each Tenant by Owner at the expense of such Tenant,
and shall be of a size, color and style acceptable to Owner.
6. No Tenant shall mark, paint, drill into, or in any way deface any part
of the demised premises or the building of which they form a part. No
boring, cutting or stringing of wires shall be permitted, except with the
prior written consent of Owner, and as Owner may direct. No Tenant shall lay
linoleum, or other similar floor covering, so that the same shall come in
direct contact with the floor of the demised premises, and, if linoleum or
other similar floor covering is desired to be used an interlining of
builder's deadening felt shall be first affixed to the floor, by a paste or
other material, soluble in water, the use of cement or other similar adhesive
material being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any Tenant, nor shall any changes be made in existing
locks or mechanism thereof. Each Tenant must, upon the termination of his
Tenancy, restore to Owner all keys of stores, offices, and toilet rooms,
either furnished to, or otherwise procured by, such Tenant, and in the event
of the loss of any keys, so furnished, such Tenant shall pay to Owner the
cost thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter of
any description shall be delivered to and removed from the premises only on
the freight elevators and through the service entrances and corridors, and
only during hours and in a manner approved by Owner. Owner reserves the
right to inspect all freight to be brought into the building and to exclude
from the building all freight which violates any of these Rules and Regulations
of the lease or which these Rules and Regulations are a part.
9. Canvassing, soliciting and peddling in the building is prohibited and
each Tenant shall cooperate to prevent the same.
10. Owner reserves the right to exclude from the building between the hours
of 6 P.M. and 8 A.M. and at all hours on Sundays, and legal holidays all
persons who do not present a pass to the building signed by Owner. Owner
will furnish passes to persons for whom any Tenant requests same in writing.
Each Tenant shall be responsible for all persons for whom he requests such
pass and shall be liable to Owner for all acts of such persons.
11. Owner shall have the right to prohibit any advertising by any Tenant
which in Owner's opinion, tends to impair the reputation of the building or
its desirability as a as a building for offices, and upon written notice from
Owner, Tenant shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the
demised premises, any inflammable, combustible or explosive fluid, material,
chemical or substance, or cause or permit any odors of cooking or other
processes, or any unusual or other objectionable odors to permeate in or
emanate from the demised premises.
13. If the building contains central air conditioning and ventilation, Tenant
agrees to keep all windows closed at all times and to abide by all rules and
regulations issued by the Owner with respect to such services. If Tenant
requires air conditioning or ventilation after the usual hours, Tenant shall
give notice in writing to the building superintendent prior to 3:00 P.M. in the
case of services required on week days, and prior to 3:00 P.M. on the day prior
in the case of after hours service required on weekends or on holidays.
14. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky
matter, or fixtures into or out of the building without Landlord's prior
written consent. If such safe, machinery, equipment, bulky matter or
fixtures requires special handling, all work in connection therewith shall
comply with the Administrative Code of the City of New York and all other
laws and regulations applicable thereto and shall be done during such hours
as Owner may designate.
<PAGE>
RIDER TO LEASE DATED JULY , 1998
BETWEEN FGP ISLANDIA, INC., LANDLORD
AND ARC NETWORKS, INC., TENANT
In the event of a conflict between the terms, covenants, conditions,
and provisions of this Rider with those of the Standard Form of Lease or any
of the Exhibits or Schedules attached hereto, the terms, covenants,
conditions and provisions of this Rider shall govern and control the rights
and obligations of the parties hereto.
SECTION 1
INDEMNITY, LIABILITY, INSURANCE
(a) Tenant at its sole cost and expense shall, during the Term
hereof, procure, pay for and keep in full force and effect:
(i) Commercial general liability insurance, or
comprehensive general liability insurance with
broad form endorsement, with respect to the Demised
Premises and the operations of Tenant and any
concessionaires, contractors or subtenants of Tenant in,
on or about the Demised Premises in which the limits of
coverage shall be not less than Three Million Dollars
($3,000,000.00), combined single limit, per occurrence;
(ii) Statutory workers' compensation coverage and employers'
liability as required by state law;
(iii) All risk property insurance insuring against the perils
of fire, extended coverage, theft vandalism, malicious
mischief and, if applicable, boiler and machinery
coverage, written at "replacement cost" value in an
adequate amount to avoid coninsurance and a replacement
cost endorsement insuring property owned by Tenant, for
which Tenant is legally liable or which was installed at
Tenant's expense, or at Tenant's direction and which is
located in the Building, including, without limitation,
furniture and furnishings, equipment, trade fixtures
(other than Tenant improvements installed by Landlord),
Tenant's merchandise, and all items of property of
Tenant, including property of Tenant's customers located
in, on or upon the Demised Premises;
(iv) With respect to alterations, improvements and the like
required or permitted to be made by Tenant hereunder,
contingent liability and builder's risk insurance,
in amounts reasonably satisfactory to Landlord. Tenant
will require Tenant's contractors to carry appropriate
insurance naming Landlord and
<PAGE>
any designees or the Landlord as additional insureds;
(v) Business interruption insurance for a period of not
less than one (1) year and such other insurance as
Tenant deems necessary to protect its property and its
business against all perils commonly insured against by
prudent tenants; and
(vi) Such other insurance with respect to the Demised
Premises, and in such amounts, as Landlord may from time
to time reasonably require against such other insurable
hazards or risks which at the time are commonly insured
against in the case of property similar to the Demised
Premises and used as provided herein.
(b) The foregoing limits shall be increased from time to time in
the event that Landlord, in its sole reasonable judgement, shall determine
that the amounts of insurance are inadequate to pay any claims that may be
brought under the foregoing policies. All policies shall be written on an
"occurrence" basis and shall include coverage for continual or repeated
exposure to conditions which results in bodily injury or property damage
neither expected nor intended from the standpoint of the insured. Such
policies are to be written by a company having a general policyholder's
rating equal to not less than "A", and a rating equal in financial size of
"Category XI", as rated in the most current "Best's" insurance reports, and
authorized and licensed to issue such policies in the State of New York. Any
such insurance required of Tenant hereunder may be furnished by Tenant under
any blanket policy carried by it, providing the policy properly allocates the
required limits to the Property, or under a separate policy thereof.
(c) Each policy evidencing insurance as required to be carried by
Tenant pursuant to this Section shall contain the following provisions and/or
clauses:
(i) INTENTIONALLY OMITTED; and
(ii) A provision that such policy and the coverage evidenced
thereby shall be primary and non-contributing with
respect to any policies carried by Landlord, and that
any coverage carried by Landlord shall be excess
insurance; and
(iii) A provision including Landlord, Landlord's managing
agent and any other parties (including mortgagees)
designated by Landlord as additional insureds (except
with respect to Workers' Compensation insurance); and
(iv) A waiver by the insurer of any right of subrogation
against Landlord, its agents, employees and
representatives which arises or might arise by reason
of any payment under such policy or by reason of any
act or omission of Landlord, its
agents, employees or representatives; and
<PAGE>
(v) A severability clause; and
(vi) A provision that the insurer will not cancel,
materially change, reduce coverage or fail to renew the
coverage provided by such policy without first giving
Landlord and all additional insureds thirty (30) days'
prior written notice thereof.
(d) A copy of each paid-up policy or certificate of insurance,
with evidence of payment and appropriately authenticated by the insurer or
its authorized agent certifying that such policy has been issued providing
the coverage required by this Section and containing provisions specified
herein, shall be delivered to Landlord fifteen (15) days prior to the
Commencement Date and, upon renewals, not less than thirty (30) days prior to
the expiration of such coverage.
(e) If Tenant fails to procure, maintain and/or pay for, at the
times and for the durations specified in this Section, any insurance required
by this Section, or fails to carry insurance required by law or governmental
regulations, Landlord may (but without obligation to do so) at any time or
from time to time, and without notice, procure such insurance and pay the
premiums therefor, in which event Tenant shall repay to Landlord all sums so
paid by Landlord and any costs or expense incurred by Landlord in connection
therewith, within ten (10) days following Landlord's written demand to Tenant
for such payment.
(f) Tenant shall not carry any stock of goods or do anything in or
about the Demised Premises which will in any way tend to increase the
insurance rates on the Demised Premises and/or the Building and/or the
contents thereof. Tenant agrees that it will not keep or allow in or upon the
Demised Premises any article which may be prohibited by any insurance policy
in force from time to time covering the building. Tenant shall promptly
comply with all reasonable requirements of the insurance authority or of any
insurer now or hereafter in effect relating to the Demised Premises. If
Tenant installs any electrical equipment that overloads the lines in the
Demised Premises, Tenant shall at its own expense make whatever changes are
necessary to comply with the requirements of the insurance underwriters and
governmental authorities having jurisdiction.
(g) Landlord shall, during the Term hereof, provide to the extent
the same is available from Landlord's insurance carrier, in amounts and
coverage reasonably determined by Landlord, with or without deductibles,
insurance coverage against such risks as are from time to time included in a
standard extended coverage endorsement, insuring the improvements to the
Demised Premises provided by Tenant pursuant to this Lease (exclusive of
Tenant's merchandise trade fixtures, furnishings, equipment, plate glass,
signs and personal property of Tenant). Landlord may also carry at its option
special extended coverage endorsements. Tenant shall submit within thirty
(30) days of request (made not more than one (1) per year) to Landlord an
itemized statement setting forth the
<PAGE>
cost of such improvements and Tenant shall provide to Landlord a written
estimate of the then current replacement value of the leasehold improvements
to the Demised Premises. If Tenant fails to provide such itemized statement
or any such appraisal within said thirty (30) days, Landlord approximation
thereof shall be binding upon Tenant. Tenant shall pay Landlord for the total
cost of so insuring such improvements, such payments to be made in equal
monthly installments on the first day of each calendar month, in advance, in
an amount estimated by Landlord; provided, however, that Landlord may elect
to bill Tenant for such costs on a basis less frequent than monthly.
Subsequent to the receipt by Landlord of an invoice for such insurance
premium, Landlord shall furnish Tenant with a written statement setting forth
such cost. If the total amount paid by Tenant under this Section for any
calendar, lease or fiscal year (at Landlord's option) shall be less than the
actual amount due from Tenant for such year as shown on such statement,
Tenant shall pay to Landlord the difference between the amount paid by Tenant
and the actual amount due, such deficiency to be paid with ten (10) days
after the furnishing of each such statement, and if the total amount paid by
Tenant hereunder for any such calendar year shall exceed such actual amount
due from Tenant for such calendar year, such excess shall be credited against
the next installment of rent due from Tenant to Landlord, or paid to Tenant
within ten (10) days if at the end of the Term.
(h) Tenant covenants to indemnify Landlord, its officers,
directors, stockholders, beneficiaries, partners, representatives, agents
and employees, and save them harmless (except for loss or damage resulting
solely from the negligence of Landlord) from and against any and all claims,
actions, damages, liability, cost and expense, including attorneys' fees, in
connection with all losses, including loss of life, personal injury and/or
damage to property, arising from or out of any occurrence in, upon or at the
Demised Premises or the occupancy or use by Tenant of the Demised Premises or
any part thereof, or arising from or out of the acts or omissions of Tenant's
concessionaires, agents, contractors, suppliers, employees, servants,
customers or licensees. For the purpose hereof, the Demised Premises shall
include the service areas adjoining the same and any adjacent sidewalks. If
Landlord or any other party so indemnified shall, without fault, be made a
party to any litigation commenced by or against Tenant, or if Landlord or any
such party shall, in its sole discretion, determine that it must intervene in
such litigation to protect its interest in connection with relief of Tenant
ordered pursuant to the Bankruptcy Code (11 USC D101 et. seq.), then Tenant
shall protect and hold them harmless and shall pay all costs, expenses and
reasonable attorneys' fees incurred or paid by such party in connection with
such litigation.
SECTION 2
TAX INCREASES
(a) Within the meaning of this Section, the expression
"Impositions" shall mean the aggregate of all taxes, special or otherwise,
charges, transfer taxes, excises, levies, assessments and other governmental
charges of any kind or nature, general or
<PAGE>
special, ordinary or extraordinary presently existing or created hereafter,
foreseen or unforeseen, and any personal property taxes imposed upon the
fixtures, machinery, equipment, apparatus, systems and appurtenances in, upon
or used in connection with the Building of which the Demised Premises is a
part for the operation thereof, which in any fiscal year may be assessed,
levied, confirmed, imposed upon or become due and payable out of or become a
lien upon the Land and Building (herein collectively called the "Property")
of which the Demised Premises are a part or any appurtenances thereto,
provided that if because of any change in the method of taxation of real
estate any other or additional tax or assessment is imposed upon Landlord
and/or the owner of the Land and/or Building, or upon or with respect to the
Building and/or Land or the rents or income therefrom, or are substituted for
or in lieu of or in addition to any taxes or assessments which would
otherwise be a real estate tax of the type referred to above, such other tax
or assessment shall also be deemed an Imposition. The expression "Base
Impositions" means the Impositions levied or imposed against the Property for
the:
Base Year Village: 1998 - $ 5,789.30
Base Year General: 1997/1998 - $104,238.98
(b) Tenant agrees to pay Landlord, throughout the Term of this Lease as
additional rental, a sum equal to Seventeen and 09/100 (17.09%) percent (as
used in this Section 2, the foregoing percent shall be referred to as
Tenant's "Proportionate Share") of the amount by which the Impositions levied
against the Property in each fiscal tax year exceeds the Base Impositions.
(c) Any amount due to Landlord under the provisions of this Section
shall be payable in equal monthly installments commencing with the first day
of the month on which Landlord shall submit to Tenant a bill therefor.
Landlord shall, at the written request of Tenant, submit to Tenant a copy of
the tax bill from the taxing authorities, or an electrostatic copy thereof,
as conclusive evidence of the Impositions for the prior fiscal year.
Notwithstanding the requirement of monthly payments, Tenant shall pay to
Landlord upon rendition of the first such bill, pursuant to this Section, the
entire amount of Tenant's Proportionate Share of the Impositions for the
fiscal tax year prior to the date of the rendition of the first such bill but,
thereafter, such payments shall be made in equal monthly installments based
on the Impositions for the prior fiscal year, and when the Impositions shall
be ascertained for the current fiscal tax year, the installment then due
shall be increased by an amount sufficient to compensate Landlord for any
previous deficiencies in installments and thereafter the installments shall
be pro rata increases based on the Impositions for the current fiscal tax
year so that one (1) month prior to the end of such fiscal tax year Tenant's
Proportionate Share of the Impositions levied against the Property shall be
paid in full. No interest shall be paid by Landlord to Tenant on the monthly
installments by Tenant of Tenant's Proportionate Share of such Impositions
and if an Imposition is payable in full before the expiration of the fiscal
tax year in question, whether in installments or by a lump sum payment, the
<PAGE>
monthly payments by Tenant shall be in such amounts that there will be a fund
in the Landlord's hands sufficient to make payment of the total Imposition
one (1) month prior to the date or which it falls due. Any increase in
Impositions for the fiscal tax year in which this Lease falls shall be
apportioned so that Tenant shall pay its Proportionate Share of only that
portion of the increase for such tax year which corresponds with that portion
of the tax year as falls within the Term. The Impositions for any fiscal tax
year in respect to which Tenant is obligated to pay a portion of the increase
as above set forth in this Section shall be the amount of such Impositions as
finally determined to be legally payable, by legal proceedings or otherwise.
In no event shall Tenant be obligated to pay any interest or penalties
imposed upon Landlord for late payment.
(d) The Landlord reserves the sole right, through available legal
remedies, to contest the validity of any Impositions or the amount of the
assessed valuation of the Property for any fiscal tax year. If Landlord
shall receive any tax refund, remission or abatement in respect to the
Impositions for any fiscal tax year which the Tenant has paid its
Proportionate Share of the Impositions as herein provided, then Landlord shall
reimburse Tenant for its Proportionate Share thereof, after first deducting
therefrom the share of Landlord's cost and expense in procuring such refund,
remission or abatement proportionately attributed to the reimbursement due to
Tenant. If Landlord shall be required to pay any increase in Impositions for
such fiscal tax year, the amount of Tenant's Proportionate Share of
Impositions for such fiscal tax year shall be increased and Tenant, on
Landlord's demand, shall pay its Proportionate Share of the increase within
thirty (30) days from the date of notice thereof.
SECTION 3
AUTHORITY
This Lease is presented to the Tenant for signature by Landlord's
designee solely in said designee's capacity as a representative of Landlord
and is hereby made expressly subject to the Landlord's acceptance, and
approval, by execution by Landlord and delivery to Tenant. This Lease is not
to be construed as an offer to lease and shall not in any way bind the
Landlord or its designee until such time as the Landlord has executed and
delivered the Lease as aforesaid.
SECTION 4
COMMENCEMENT OF TERM
If construction of the Demised Premises to be occupied is in progress as
of the date of commencement of this Lease as elsewhere set forth in this
Lease, the Term of this Lease shall commence on a date which shall be the
earlier of (a) the date which is fifteen (15) days following the date
Landlord notifies Tenant that the Demised Premises are substantially
completed; or (b) the day Tenant shall occupy or take possession of any
portion of the Demised Premises (the earlier of the two (2) said dates being
herein
<PAGE>
referred to as the "Commencement Date"). Regardless of any delay in the
Commencement Date of this Lease because of new construction, this Lease will
terminate five (5) years after the Commencement Date in accordance with this
paragraph. Tenant acknowledges and agrees that inasmuch as the date of
substantial completion of the Demised Premises shall be Landlord's reasonable
approximation thereof, Landlord shall have no liability to Tenant in the
event the Demised Premises shall not be substantially completed on that date.
SECTION 5
OVERTIME CHARGES
(a) If Tenant uses the Demised Premises outside the Normal Working
Hours, as defined herein, Tenant agrees to pay to Landlord an overtime charge
to cover Landlord's expenses for electricity for lighting and normal
equipment and extra Building maintenance, Building employee overtime,
furnishing water for lavatories, air cooling, heat, ventilation, wear and
tear, etc. As used herein, the term "Normal Working Hours" shall mean only
those between the hours of 8 a.m. to 6 p.m. Monday through Friday, 9 a.m. to
1 p.m. Saturday, exclusive of Sundays, National and State holidays.
(b) Landlord shall furnish such service to Tenant provided that (i)
Tenant pays to Landlord as additional rent a special overtime charge therefor
which shall be at standard building rates, along with Tenant's next monthly
installment of fixed rent if such service shall have been furnished to Tenant
prior to the 15th day of the month or along with the subsequent monthly
installment of fixed rent if such service shall have been furnished to Tenant
after the 15th day of the month, (ii) that Tenant's request shall be
received by Landlord by 2:00 p.m. on the day on which after hours' service
is requested (and by 2:00 p.m. on the day preceding any requested before
hours service), and (iii) that Landlord shall not be required to furnish such
overtime services to Tenant for more than twenty (20) hours in any one (1)
week. Notwithstanding anything contained herein to the contrary, Landlord
shall not provide overtime services to Tenant unless Tenant specifically
requests such services.
SECTION 6
BROKERAGE
Landlord and Tenant represent to each other that there was no broker
other than Fairfield Property Services, L.P. instrumental in consummating
this Lease. Landlord and Tenant agree to indemnify and hold each other
harmless from and against any and all claims or demands for brokerage
commissions arising out of or in connection with the execution of this Lease,
or any conversations or negotiations thereto with any broker other than the
above-named broker. Landlord agrees to pay any commission earned by said
broker pursuant to separate agreement therewith.
<PAGE>
SECTION 7
ADDENDA TO ARTICLE 29
Except for the supply of heat or any other utility or service expressly
provided herein to be supplied by Landlord, nothing in Article 29 or any
other portion of this Lease shall be deemed to require Landlord to supply
any service or utility to the Demised Premises.
SECTION 8
DEFINITION OF LANDLORD
(a) As used in this Lease, the term "Landlord" shall mean only the owner
or the mortgagee in possession for the time being of the Building in which
the Demised Premises are located or the holder of a lease on both said
Building and the Land thereunder, so that in the event of any sale of said
Building or an assignment of this Lease or any underlying Lease or a demise
of both said Building and Land, Landlord shall be and hereby is entirely
released and discharged from any and all further liability and obligations of
Landlord hereunder, except any that may have theretofore accrued.
(b) Notwithstanding anything to the contrary provided in this Lease, it
is specifically understood and agreed, such agreement being a primary
consideration of this Lease, that there shall be absolutely no personal
liability on the part of Landlord, its successors, assigns or any mortgagee
in possession (for the purposes of this paragraph collectively referred to as
"Landlord"), with respect to any of the terms, covenants and conditions of
this Lease, and that Tenant shall look solely to the equity of Landlord in
the Demised Premises for the satisfaction of each and every remedy of Tenant
in the event of any breach by Landlord of any of the terms, covenants and
conditions of this Lease to be performed by Landlord, such exculpation of
liability to be absolute and without any exceptions whatsoever.
SECTION 9
OWNERSHIP
In the event that the Tenant hereunder is a corporation, Tenant
represents that the ownership and power to vote its entire outstanding
capital stock belongs to five (5) parties, one (1) of which is a corporation.
Tenant agrees to give Landlord written notice of any proposed change in the
ownership of the majority of the outstanding capital stock of Tenant or any
change in the ownership of the majority of the assets of Tenant. Failure of
Tenant to give notice provided for in the preceding sentence shall be deemed
a non-curable default by Tenant pursuant to this Lease (that is, a default
which has already extended beyond the applicable grace period, if any,
following notice from Landlord), giving Landlord the right, at its option, to
cancel and terminate this Lease or to exercise any and all other remedies
available to Landlord hereunder or as shall exist at law or in equity. The
foregoing provision shall not apply to an initial public offering
<PAGE>
of the common stock of the Tenant.
SECTION 10
TENANT'S CERTIFICATE
Tenant shall, without charge at any time and from time to time, within
ten (10) days after request by Landlord, certify by written instrument,
duly executed, acknowledged and delivered, to any mortgagee, assignee of any
mortgage or purchaser, or any proposed mortgagee, assignee of any mortgage or
purchaser, or any other person, firm or corporation specified by Landlord:
(a) That this Lease is unmodified and in full force and effect (or, if
there has been modification, that the same is in full force and effect as
modified and stating the modifications);
(b) Whether or not there are then existing any set-offs or defenses
against the enforcement of any of the agreements, terms, covenants or
conditions hereof upon the part of Tenant to be performed or complied with
(and, if so, specifying the same); and
(c) The dates, if any, to which the rental and other charges hereunder
have been paid in advance and/or to which Landlord may have consented,
released or relieved Tenant from Tenant's obligations fully to perform all of
the terms, covenants and conditions of the Lease on Tenant's part to be
performed.
SECTION 11
UTILITIES
(a) In addition to the Minimum Annual Rent to be paid by Tenant pursuant
to this Lease, Tenant agrees to pay to Landlord, on the first day of each and
every month during the Term of this Lease, as additional rent, the sum of Two
and 25/100 ($2.25) Dollars per square foot of the Demised Premises, as said
square footage is set forth on the front page of the printed portion of this
Lease, per annum, for the base electricity charge which the Landlord supplies
to the Tenant for HVAC and for normal office consumption (hereinafter
referred to as the "Base Electric Charge"). Landlord shall not be liable in
any way to Tenant for any failure of defect in the supply or character of
electric energy furnished to the Demised Premises by reason of any
requirement, act or omission of the public utility serving the Building with
electricity or for any other reason not attributable to Landlord. Landlord
shall furnish and install all replacement lighting tubes, lamps, bulbs and
ballasts required in the Demised Premises, all at Tenant's sole cost and
expense.
(b) Tenant's use of electric energy in the Demised Premises shall not at
any time exceed the capacity of any of the electrical conductors and
equipment in or otherwise serving the Demised Premises. In order to insure
that such capacity is not exceeded and to avert possible adverse effect upon
the Building electric service, Tenant shall not, without Landlord's prior
written consent in each instance make any alteration or addition to the
electric system of the Demised Premises existing on the Commencement Date.
<PAGE>
Should Landlord grant such consent, all additional risers or other equipment
required therefor shall be provided by Landlord and the cost thereof shall be
paid by Tenant upon Landlord's demand. As a condition to granting such
consent, Landlord may require Tenant to agree to an increase in the Base
Electric Charge which will reflect the value to Tenant of the additional
service to be furnished by Landlord, that is, the potential additional
electrical energy to be made available to Tenant based upon the estimated
additional capacity of such additional risers or other equipment.
(c) In addition to the Base Electric Charge, Tenant shall pay as
additional rent any percentage increase in the electric rate charged by the
public utility to the Landlord subsequent to the rate established and used by
the public utility for the Building for the calendar year 1998, i.e. if the
current rate is $.05 per kilowatt hour for 1998 and increases to $.07 per
kilowatt hour for 1999, Tenant shall pay 100% of the increase over the Base
Electric Charge, per annum. If there is more than one rate increase during a
calendar year, said increase shall be pro-rated accordingly. Notwithstanding
the foregoing, Tenant shall not be entitled to a credit in the event the
electric charge shall be less than Two and 25/100 ($2.25) Dollars per square
foot at any time, except in the event same results from the performance of an
Electric Survey, as hereinafter defined. In the event the Landlord is
required to provide its own electricity or contract with a non-public
utility, a reasonable substitution for the provisions herein shall be agreed
upon by the parties hereto and upon their failure to so agree, the issues
shall be submitted to the American Arbitration Association and the decision
of the arbitrator shall be binding upon the parties hereto.
(d) Landlord may install re-registering meters, and/or submeters, and
collect any and all charges aforesaid from Tenant including, without
limitation, an administration fee to Landlord in implementing same, making
returns to the proper public utility company or governmental unit, provided
that Tenant shall not be charged more than the rates it would be charged for
the same services if furnished directly to the Demised Premises by such
companies or governmental units. At the option of Landlord, any utility or
related service which Landlord or any agent employed, or independent
contractor selected by Landlord, shall be utilized by Tenant, to the
exclusion of all other suppliers, so long as the rates charged by the
Landlord or by the supplier of such utility or related service are
competitive.
(e) Landlord reserves the right to supply electricity to Tenant through
cogeneration provided that Tenant will not be liable for payment of
electricity bills above the rate which would have been charged if electricity
were supplied through local suppliers (plus the 15% administrative fee). All
installation fees of cogeneration facilities (including wiring, meter, etc.)
shall be borne by the Tenant.
(f) Landlord reserves the right, at any time upon thirty (30) days
advance written notice to the Tenant, to terminate the furnishing of
electricity to the Tenant on a submetering or on any other basis. Landlord
shall not be liable for any failure or
<PAGE>
refusal of the Landlord, for any reason or cause whatsoever, to supply such
electric service to the Tenant, the obligations and covenants of this Lease
on the part of the Tenant to be performed shall not be affected, impaired or
in any way modified, terminated or released.
(g) At any time and from time to time, Landlord may cause a survey to
be made by an independent electrical engineer or consultant selected by
Landlord of the consumption of electric energy in the Demised Premises
(hereinafter referred to as an "Electric Survey"). The Electric Survey will
include a determination of the power requirements of Tenant's equipment
(including, but not limited to, any air conditioning equipment provided by
the Landlord) and of the lighting in the Demised Premises and a determination
of the periods of use of such air conditioning equipment and lighting. The
results of the Electric Survey will be projected with such adjustments as may
be appropriate to arrive at an estimate of the annual electric energy cost
for the Demised Premises. In the event the results of the Electric Survey
shall reveal any increase or decrease of the Base Electric Charge, the
parties agree that the Base Electric Charge shall be revised to reflect the
per square foot, per annum charge revealed by the Electric Survey. Tenant
shall be permitted to request an Electric Survey as well, provided that (i)
Tenant shall pay all costs therefor upon presentation of an invoice by
Landlord together, with an administrative charge to Landlord of fifteen (15%)
percent of such charge, as additional rent, and (ii) Tenant shall be limited
to one (1) such request during the term of this Lease.
SECTION 12
HOLDING OVER
If the Tenant retains possession of the Demised Premises or any part
thereof after the termination of the Term, by lapse of time or otherwise,
without prior written approval of Landlord or any further agreement in
writing between the parties hereto, the Tenant shall pay the Landlord rent at
double the rate specified in Article 1, unless otherwise agreed by the
parties hereto in writing, signed by both parties hereto, for the time the
Tenant thus remains in possession, and in addition thereto, shall pay the
Landlord all damages, consequential as well as direct, sustained by reason of
the Tenant's retention of possession. If the Tenant remains in possession of
the Demised Premises, or any part thereof, after the termination of the Term
by lapse of time or otherwise, such holding over shall at the election of the
Landlord expressed in a written notice to the Tenant and not otherwise,
constitute an extension of this Lease on a month-to-month basis at double the
monthly rental rate set forth in Article 1. The provisions of this Section
do not exclude the Landlord's right of re-entry or any other right hereunder.
SECTION 13
ADDITIONAL RENT
All costs, charges, adjustments and expenses which Tenant
<PAGE>
assumes or agrees to pay pursuant to this Lease shall, at Landlord's
election, be treated as additional rent and, in the event of nonpayment,
Landlord shall have the rights and remedies herein provided for in the case
of nonpayment of rent or breach of condition. If Tenant shall default in
making any payment required to be made by Tenant (other than the payment of
rent required pursuant to this Lease) or shall default in performing any
other term, covenant or condition of this Lease on the part of Tenant to be
performed hereunder, Landlord, at Landlord's option, may (but shall not be
obligated to) immediately or at any time thereafter, on five (5) days'
notice, make such payment or, on behalf of Tenant, cause the same to be
performed for the account of Tenant and expend such sum as may be necessary
to perform and fulfill such term, covenant or condition, and any and all sums
so expended by Landlord, with interest thereon at the highest legal rate per
annum from the date of such expenditure, shall be and be deeded to be
additional rent, in addition to the fixed rent, and shall be repaid by Tenant
to Landlord on demand, PROVIDED, HOWEVER, that no such payment or expenditure
by Landlord shall be deemed a waiver of Tenant's default nor shall it affect
any other remedy of Landlord by reason of such default. Tenant's obligation
to pay additional rent shall survive any termination or earlier expiration of
this Lease. Tenant acknowledges and agrees that its obligations to pay
additional rent shall include interest at the rate of the lessor of eighteen
(18%) percent per annum or the highest rate permitted by law on all
retroactive charges owed by Tenant pursuant to this Rider and Lease from a
date which is five (5) days following the retroactive respective date that
each item of additional rent shall first become due and payable.
In addition thereto, in the event Landlord is required to institute suit
against Tenant by reason of Tenant's default or to recover possession of
Demised Premises, then Tenant shall pay the Landlord's reasonable attorney's
fees, expenses and costs actually incurred in connection therewith.
SECTION 14
MECHANICS LIENS
If, because of any act or omission of Tenant or anyone claiming through
or under Tenant, any mechanics' or other lien or order for the payment of
money shall be filed against the Demised Premises or the Building, or against
Landlord (whether or not such lien or order is valid or enforceable as such),
Tenant shall, at Tenant's own cost and expense, cause the same to be
cancelled and discharged of record within ten (10) days after the date of
filing thereof, and shall also indemnify and save harmless Landlord from and
against any and all costs, expenses, claims, losses or damages, including
reasonable counsel fees, resulting therefrom or by reason thereof.
SECTION 15
RIGHTS RESERVED BY LANDLORD
Without abatement or diminution in fixed or additional rent hereunder,
Landlord reserves and shall have the following addi-
<PAGE>
tional rights:
(a) To change the street address and/or the name of the Building and/or
the location of entrances, passageways, doors, doorways, corridors,
elevators, stairs, toilets, or other public parts of the Building, without
liability to Tenant; and
(b) To approve in writing all signs and all sources furnishing sign
painting and lettering, drinking water, towels and toilet supplies or other
like services used in the Demised Premises, and to approve all sources
furnishing cleaning services, construction work, painting, decorating,
repairing, maintenance and any other work in or about the Demised Premises,
which approval shall not be unreasonably withheld; and
(c) With reasonable notice (except in the case of emergency, which
shall not require notice to Tenant), to enter the Demised Premises at all
reasonable times (1) for the making of inspections, decorations, alterations,
improvements and repairs, as Landlord may deem necessary or desirable, (2) to
exhibit the Demised Premises to prospective purchasers or lessees of the
Building at any time and to others during the last nine (9) months of the
Term of this Lease, (3) for any purpose whatsoever relating thereto or to the
safety, protection or preservation of the Demised Premises or of the Building
or of Landlord's interest, and (4) to take material into and upon said
Demised Premises in connection therewith; and
(d) At any time or times, Landlord either voluntarily or pursuant to
governmental requirement, may, at Landlord's own expense, make repairs,
alterations or improvements in or to the Building or any part thereof and
during alterations, may close entrances, doors, windows, corridors, elevators
or other facilities, provided that such acts shall not unreasonably interfere
with Tenant's use and occupancy of the Demised Premises as a whole; and
(e) To erect, use and maintain pipes and conduits in and through the
Demised Premises, provided the erection or maintenance thereof does not
unreasonably interfere with the Tenant's use of the Demised Premises; and
(f) To charge to Tenant any expense including overtime cost incurred by
Landlord in the event that repairs, alterations, decorating or other work in
the Demised Premises are made or done after ordinary business hours at
Tenant's specific request; and
(g) If during the last six (6) months of the Term Tenant shall have
removed all or substantially all of Tenant's property therefrom, Landlord may
immediately enter and alter, renovate, and re-decorate the Demised Premises
without reduction or abatement of rent or incurring any liability to Tenant
for compensation; and
(h) To grant to anyone the exclusive right to conduct any particular
business or undertaking in the Building provided same does not materially
harm the Tenant's business or profession.
Landlord may exercise any or all of the foregoing rights
<PAGE>
hereby reserved to Landlord without being deemed guilty of an eviction,
actual or constructive, or disturbance or interruption of Tenant's use or
possession and without being liable in any manner toward Tenant and without
limitation or abatement of rent or other compensation, and such acts shall
have no effect on this Lease.
SECTION 16
SPRINKLERS
If there now is or shall be installed in the Building a "sprinkler
system" and such system or any of its appliances shall be damaged or injured,
or not in proper working order by reason of any act or omission of Tenant, or
Tenant's agents, servants, employees, licensees or visitors, Tenant shall
forthwith restore the same to good working condition at its own expense; and
if the Board of Fire Underwriters or any bureau, department or official of
the state or city government having jurisdiction shall require or recommend
that any changes, modifications, alterations or additional sprinkler heads or
other equipment be made or supplied by reason of Tenant's business, or the
location of partition, trade fixtures, or other contents of the Demised
Premises, or for any such changes, modifications, alterations, additional
sprinkler heads or other equipment become necessary to prevent the imposition
of a penalty or charge against the full allowance for a sprinkler system in
the fire insurance rate as fixed by said Board, or by any Fire Insurance
Company, Tenant shall, at Tenant's expense, promptly make and supply such
changes, modifications, alterations, additional sprinkler heads or other
equipment.
SECTION 17
TENANT'S WORK
(a) The Demised Premises shall be constructed by Tenant in accordance
with the provisions of "EXHIBIT B" annexed hereto and made a part hereof
(hereinafter referred to as "Tenant's Work"). Such construction must comply
with all applicable building codes, ordinances, laws and regulations. In the
event this Lease is executed prior to the preparation of plans and
specifications, Tenant acknowledges and agrees that Tenant shall not be
permitted to commence Tenant's Work until such time as Landlord shall have
reviewed Tenant's plans and specifications therefor and, in Landlord's sole
discretion, shall have approved such plans and specifications.
Notwithstanding the foregoing, the Lease Commencement Date shall not be in
any way delayed during the pendency of Tenant's submission of plans and
specifications for Tenant's Work, or Landlord's review and approval thereof.
(b) Upon completion of Tenant's Work, Tenant shall deliver to the
Landlord the following:
(i) Lien releases from any and all contractors, laborers,
materialmen, and any other and further providers of material
and labor to and for the benefit of the Tenant and/or the
Demised Premises; and
<PAGE>
(ii) Tenant's affidavit stating that Tenant's Work has been
performed pursuant to the terms of this Lease, and
Tenant's plans and specifications therefor, and that no
security interest under the Uniform Commercial Code or
other liens are outstanding or have been filed, it being
intended that any such affidavit may be relied upon by
Landlord and that any deliberate misstatement by Tenant
shall constitute a material default pursuant to the Lease.
In support of said affidavit, Tenant shall supply
Landlord with copies of paid invoices evidencing payment
by Tenant for the Tenant's Work in an amount not less
than TWELVE THOUSAND ($12,000.00) DOLLARS. Nothing
contained in this Lease shall be deemed a consent by or
authorization by Landlord to allow Tenant to place or
cause to be placed liens of any sort upon the Building
and Landlord's interest therein; and
(iii) Tenant's written acceptance of Tenant's Work; and
(iv) Copies of all certificates and approvals with respect
to Tenant's Work performed by Tenant or on Tenant's
behalf which may be required by any governmental
authorities as a condition for the issuance of an
occupancy certificate for the Demised Premises together
with a copy of any occupancy certificate issued by the
proper governmental authority for the Demised Premises.
(c) The parties hereto acknowledge and agree that Landlord has
agreed to compensate Tenant for the performance of certain leasehold
improvements comprising a portion of Tenant's Work in the Demised Premises.
In order to accomodate Tenant for Tenant's payment of said leasehold
improvements at such time as same are performed, Landlord has agreed to
provide this compensation in the form of a partial rent concession,
subject to recission and chargeback by the Landlord in the event Tenant does
not fully comply with the terms and conditions of this Section 17.
Accordingly, in consideration for the performance of leasehold improvements
in the Demised Premises, Tenant shall be entitled to a concession, of Mimimum
Rent only, for (i) the payment of Minimum Rent for the period August 1, 1998
through August 31, 1998 in the amount of SIX THOUSAND TWO HUNDRED FIFTY
($6,250.00) DOLLARS and, in addition thereto, (ii) the payment of a portion
of Minimum Rent only for the period October 1, 1998 through October 31, 1998
in the amount of FIVE THOUSAND SEVEN HUNDRED FIFTY ($5,750.00) DOLLARS.
Notwithstanding anything contained herein to the contrary, however, in the
event Tenant shall have failed to fully comply with the provisions of this
Section 17, to the satisfaction of the Landlord, by October 31, 1998, then
and in such event, Tenant's rent concession represented subparagraphs c(i)
and (ii) above shall be rescinded, and Tenant shall pay to Landlord the sums
represented therein as Minimum Rent for such periods.
<PAGE>
SECTION 18
LANDLORD'S WORK
Tenant acknowledges and agrees that the Demised Premises are delivered
to Tenant from Landlord "As Is" and without any representation or warranty
whatsoever. Landlord shall not be obligated to perform any work to prepare
the Demised Premises for Tenant's occupancy.
SECTION 19
ESTIMATED CHARGES
Notwithstanding anything contained to the contrary in this Lease,
Landlord shall have the option, from time to time, to estimate the Tenant's
share of Additional Rent pursuant to this Lease and the Tenant shall pay in
equal monthly installments in advance on or before the first day of each
month for such next year such Estimated Charges in equal monthly
installments. Within a reasonable period of time following the end of each
year, Landlord shall submit to Tenant a statement showing such Impositions or
Additional Rent charge increases paid by the Tenant and the actual amounts
due to the Landlord and the resulting balance due thereon or overpayment
thereof, as the case may be, shall be paid and adjusted within ten (10) days
thereafter. Each statement shall be final and conclusive upon the Tenant, its
successors and assigns as to matters set forth therein if no objection is
raised with respect thereto within thirty (30) days after submission of each
respective statement to the Tenant. In the event any lease year shall be less
than twelve (12) months, the respective amounts of Impositions, Rent or
Additional Rent for such year shall be reduced by an amount computed by
multiplying each respective charge by a fraction, the numerator of which is
the difference between 360 and the actual number of days in such year and the
denominator of which is 360.
SECTION 20
INTEREST
Any payment required to be made by Tenant pursuant to this Lease
including all payments of rent, additional rent or other charges, not made by
Tenant as and when due shall thereupon be deemed to be due and payable by
Tenant to Landlord on demand with interest thereon from the date which is
fifteen (15) days from the date when the particular amount becomes due to the
date of payment thereof to Landlord at the rate of the lesser of eighteen
(18%) percent per annum or the highest rate permitted by law.
SECTION 21
PLATE GLASS
Landlord shall replace, at the expense of Tenant, any and all plate and
other glass damaged or broken from any cause whatsoever in and about the
Demised Premises excluding, however, same resulting from directly from the
sole negligence of Landlord, its agents, servants and employees. Landlord may
insure, and keep insured, at Tenant's expense, all plate and other glass in
the
<PAGE>
Demised Premises for and in the name of Landlord. Bills for the Demised
Premises therefor shall be rendered by Landlord to Tenant at such times as
Landlord may elect, and shall be due from, and payable by Tenant when
rendered, and the amount thereof shall be deemed to be, and be paid as,
additional rent.
SECTION 22
PARKING
Tenant and its employees shall be permitted to park vehicles in the
parking lot serving the Building in which the Demised Premises forms a part
in designated areas on a non-exclusive basis with the other tenants of the
Building, limited in number to the applicable code provisions of the
municipality in which the Building is located. Landlord shall have the right
to impose a validation system, barriers or gates, permits, stickers, or
other system in connection with the operation of the parking area and upon
twenty (20) days written notice from Landlord, Tenant shall furnish Landlord
or its authorized agent with the state automobile license numbers assigned to
the motor vehicles designated by the Tenant to park in such parking areas.
SECTION 23
SECURITY DEPOSIT
(a) Tenant has deposited with Landlord the amount referenced in
the printed form of this Lease as and for the security deposit of Tenant to
secure the performance by Tenant of the terms of this Lease (hereinafter
referred to as the "Security Deposit"). Landlord may use, apply on Tenant's
behalf, or retain (without liability for interest) any or all of the Security
Deposit during the Term to the extent required for the payment of any rent or
other sums which Tenant may be in default with respect to payment thereof,
including but not limited to the application thereof to any deficiency or
damage incurred in reletting the Demised Premises. The covenants in this
Section are personal covenants between Landlord and Tenant and not covenants
running with the land, and in no event will Landlord's mortgagee(s) or any
purchaser at a foreclosure sale or a sale in lieu of foreclosure be liable to
Tenant for the return of the Security Deposit. After each application from
Tenant's Security Deposit, Tenant shall upon demand replenish and deposit to
the amount set forth in the printed form of this Lease. In addition thereto,
if required by Landlord, Tenant shall proportionately increase the Security
Deposit each lease year, by payment to Landlord therefor, as additional rent,
to account for any increase in Minimum Annual Rent occurring during such
lease year as reflected on Schedule A attached hereto.
(b) Provided Tenant shall comply with all the terms of this Lease,
the Security Deposit shall be returned to Tenant upon the Expiration Date and
following the actual surrender of possession of the Demised Premises to
Landlord. In the event of a sale of the Building or assignment of this Lease
by Landlord to anyone other than a mortgagee, Landlord shall have the right
to transfer the Security Deposit to its vendee or assignee, subject to
Tenant's
<PAGE>
aforesaid rights upon expiration, and thereupon Landlord shall be released
from any liability with respect to the return of such security to Tenant,
such vendee or assignee to be solely responsible to Tenant therefor. Tenant
shall not assign or encumber its interest in the Security Deposit, and
neither Landlord nor its successors and assigns shall be bound by any
attempted assignment or encumbrance.
SECTION 24
MISCELLANEOUS PROVISIONS
(a) Tenant expressly acknowledges and agrees that Landlord and its
agents have not made and are not making, and Tenant, in executing and
delivering this Lease, is not relying upon, any warranties, representations,
promises or statements, except to the extent that the same are expressly set
forth in this Lease or in any other written agreement which may be made
between the Lease and shall expressly refer to this Lease.
(b) This Lease shall be governed in all respects by the laws of
the State of New York.
(c) If any term or provision of this Lease or the application
thereof to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such term
or provision to persons or circumstances other than those as to which it is
held invalid or enforceable, shall not be affected thereby and each term and
provision of this Lease shall be valid and be enforced to the fullest extent
permitted by law.
(d) Submission by Landlord of the within Lease for review and
execution by Tenant shall confer no rights nor impose any objections on
either party unless and until copies executed by both Landlord and Tenant
shall have been delivered to the respective parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
LANDLORD
FGP ISLANDIA, INC.
BY: /s/ [ILLEGIBLE]
-----------------------------------
Title : V.P.
TENANT
ARC NETWORKS, INC.
BY: /s/ Michael P. Sable, CFO/VP
-----------------------------------
Title:
<PAGE>
EXHIBIT A
Tenant's Work
A. Procedure:
All Tenant's Work shall be performed strictly in accordance with the
requirements of all applicable codes and ordinances, Landlord's insurance
rating organization, the National Board of Fire Underwriters, the American
Society of Heating & Air Conditioning Engineers, all public utility companies
serving the Shopping Center and Landlord's mortgagee. Tenant shall obtain all
licenses, approvals and consents from all governing authorities for Tenant's
Work including, but not limited to: Building Permit, Plumbing Permit, U.L.
Certificates, Certificate of Occupancy.
B. Definition of Work:
Tenant's Work is defined to be all work performed to the Demised
Premises. All construction shall be in accordance with plans and
specifications approved, in writing, by Landlord which plans and
specifications are either (i) attached hereto and made a part hereof or (ii)
if not yet submitted as of the date of this Lease, will be considered part
hereof when so approved by Landlord, in writing.
C. All contractors performing any of Tenant's Work shall furnish Landlord
with Certificates of Insurance evidencing coverage for Liability in the
amount of TWO MILLION ($2,000,000.00) DOLLARS, combined single limit, and
Worker's Compensation naming FGP Islandia, Inc., as Landlord, THE RCC GROUP,
and AEGON USA REALTY CORP. as managing agent, as additional insureds thereon.
<PAGE>
EXHIBIT "B"
LANDLORD'S WORK
NONE
<PAGE>
SCHEDULE "A"
MINIMUM ANNUAL RENT
August 1, 1998-July 31, 1999= $75,000.00 per annum, $6,250.00
monthly;
August 1, 1999-July 31, 2000= $77,625.00 per annum, $6,468.75
monthly;
August 1, 2000-July 31, 2001= $80,341.88 per annum, $6,695.16
monthly;
August 1, 2001-July 31, 2002= $83,153.85 per annum, $6,929.49
monthly;
August 1, 2002-July 31, 2003= $86,064.23 per annum, $7,172.02
monthly.
<PAGE>
EXHIBIT 10.13
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is made and
entered into this 19th day of July, 1999 by and between OmniLynx Communications
Corporation, a Delaware corporation having its principal executive office at
1770 Motor Parkway, Suite 300, Hauppauge, New York 11788 (hereinafter referred
to as the "Company"), and Charles N. Garber (hereinafter referred to as the
"Employee").
W I T N E S S E T H:
WHEREAS, Employee desires to serve the Company as its Chief Financial
Officer; and
WHEREAS, the parties desire to provide that the Employee be employed by
the Company under the terms of this Agreement.
NOW, THEREFORE, for and in consideration of the mutual promises,
covenants and obligations contained herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Company and the Employee hereby agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms have
the meanings prescribed below:
ANNUAL BONUS shall have the meaning assigned thereto in Section 4.3
hereof.
BASE SALARY shall have the meaning assigned thereto in Section 4.1
hereof.
CAUSE shall have the meaning assigned thereto in Section 5.3 hereof.
CODE means the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated by the Internal Revenue Service thereunder, all as
in effect from time to time during the Employment Period.
COMMON STOCK means the Company's common stock, par value $.0001 per
share.
COMPANY means OmniLynx Communications Corporation, a Delaware
corporation, the principal executive office of which is located at 1770 Motor
Parkway, Suite 300, Hauppauge, New York 11788.
CONFIDENTIAL INFORMATION shall have the meaning assigned thereto in
Section 8.2 hereof.
DATE OF TERMINATION means the earliest to occur of (i) the date of the
Employee's death, (ii) the date on which the Employee terminates this Agreement
for any reason or (iii) the date of
<PAGE>
receipt of the Notice of Termination, or such later date as may be prescribed
in the Notice of Termination in accordance with Section 5.6 hereof.
DISABILITY means an illness or other disability which prevents the
Employee from discharging his responsibilities under this Agreement for a period
of 180 consecutive calendar days, or an aggregate of 180 calendar days in any
calendar year, during the Employment Period, all as determined in good faith by
the Board of Directors of the Company.
EMPLOYEE means Charles N. Garber, an individual who resides at 26 Murray
Hill Square, New Providence, New Jersey 07974.
EMPLOYMENT PERIOD shall have the meaning assigned thereto in Section 3
hereof.
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Securities and Exchange Commission
thereunder, all as in effect from time to time during the Employment Period.
NOTICE OF TERMINATION shall have the meaning assigned thereto in
Section 5.6 hereof.
SIGNING BONUS shall have the meaning assigned thereto in Section 4.2
hereof.
START DATE shall mean July 19, 1999.
SUBSIDIARY, when used with respect to any such entity, shall mean any
corporation or other business entity a majority of whose outstanding voting
stock or the equivalent entitled to vote for the election of directors is at the
time owned by such entity and/or one or more of its subsidiaries.
WITHOUT CAUSE shall have the meaning assigned thereto in Section 5.4
hereof.
2. GENERAL DUTIES OF COMPANY AND EMPLOYEE; WORK LOCATION.
2.1 The Company agrees to employ the Employee, and the Employee agrees
to accept employment by the Company and to serve the Company as its Chief
Financial Officer. Employee shall work at the Company's offices at 160
Broadway, New York, New York or at such other offices or locations in the New
York metropolitan area as the Company may designate. The authority, duties and
responsibilities of the Employee shall include those duties of Chief Financial
Officer as are customarily attendant to such position as well as such other or
additional duties as may from time to time be assigned to the Employee by the
Board of Directors. While employed hereunder, the Employee shall devote his
full time and attention during normal business hours to the affairs of the
Company and use his best efforts to perform faithfully and efficiently his
duties and responsibilities. The Employee may (i) serve on corporate, civic or
charitable boards or committees provided that (A) such boards or committees do
not control or advise business entities that compete with the Company and
(B) all such services are promptly disclosed in writing to the Board of
Directors, (ii) deliver lectures, fulfill speaking engagements or teach at
educational institutions and (iii) manage
2
<PAGE>
personal investments, so long as such activities do not materially interfere
with the performance of the Employee's duties and responsibilities.
2.2 The Employee agrees and acknowledges that he owes a fiduciary duty
of loyalty, fidelity and allegiance to act at all times in the best interests of
the Company and to do no act and to make no statement, oral or written, which
would injure the Company's business, its interests or its reputation.
2.3 The Employee agrees to comply at all times with all applicable
policies, rules and regulations of the Company, including, without limitation,
the Company's Code of Ethics and the Company's policy regarding trading in the
Common Stock, as each is in effect from time to time during the Employment
Period.
3. TERM. Unless sooner terminated pursuant to other provisions hereof, the
Employee's period of employment under this Agreement shall be the period
beginning on the Start Date and ending on the third anniversary thereof. The
period of time beginning on the Start Date and ending on the third anniversary
thereof (notwithstanding termination of this Agreement prior to the end of such
period pursuant to other provisions hereof) is referred to elsewhere herein as
the "Employment Period."
4. COMPENSATION AND BENEFITS.
4.1 BASE SALARY. As compensation for services to the Company, the
Company shall pay to the Employee commencing on the Start Date until the Date of
Termination an annual base salary of $175,000 (the "Base Salary"). The Base
Salary shall be payable in equal semi-monthly installments or in accordance with
the Company's established policy, subject only to such payroll and withholding
deductions as may be required by law and other deductions applied generally to
employees of the Company for insurance and other employee benefit plans.
4.2 SIGNING BONUS. The Company shall pay the Employee a one-time
signing bonus ("Signing Bonus") of $25,000 on the Start Date.
4.3 ANNUAL BONUS. The Company will pay Employee an annual bonus
("Annual Bonus") of up to 50% of the Base Salary to be determined by the
Board of Directors in its sole discretion, based upon the performance of the
Employee. The Annual Bonus shall be payable at a time to be determined by the
Board of Directors in its sole discretion, consistent with the date(s) that
other executive bonuses are paid by the Company.
4.4 VACATION. Until the Date of Termination, the Employee shall be
entitled to vacation as determined by the Company's vacation policy for its
executive officers as in effect from time to time, but in no event less than
three weeks per calendar year. In addition, the Employee shall be entitled to
sick days and/or personal days consistent with the Company's policy for other
executives.
4.5 INCENTIVE, SAVINGS AND RETIREMENT PLANS. Until the Date of
Termination, the Employee shall be eligible to participate in and shall receive
all benefits under all executive
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incentive, savings and retirement plans (including 401(k) plans) and programs
currently maintained or hereinafter established by the Company for the
benefit of its executive officers and/or employees.
4.6 WELFARE BENEFIT PLANS. Until the Date of Termination, the
Employee and/or the Employee's family, as the case may be, shall be eligible to
participate in and shall receive all benefits under each welfare benefit plan of
the Company currently maintained or hereinafter established by the Company for
the benefit of its employees. Such welfare benefit plans may include, without
limitation, medical, dental, disability, group life, accidental death and travel
accident insurance plans and programs.
4.7 REIMBURSEMENT OF EXPENSES. The Employee may from time to time
until the Date of Termination incur various business expenses customarily
incurred by persons holding positions of like responsibility, including, without
limitation, travel, entertainment and similar expenses incurred for the benefit
of the Company. Subject to the Company's policy regarding the reimbursement of
such expenses as in effect from time to time during the Employment Period, the
Company shall reimburse the Employee for such expenses from time to time, at the
Employee's request, and the Employee shall account to the Company for all such
expenses.
4.8 STOCK OPTIONS. On the Start Date, the Company will grant the
Employee, as of the date of pricing of the Common Stock pursuant to the
Company's initial public offering (the "IPO"), non-qualified stock options (the
"Options") to purchase 100,000 shares of the common stock of the Company as
presently constituted, at the price per share at which shares of Common Stock
are sold in the IPO pursuant to an option agreement to be entered into (the
"Option Agreement") with the Company. The Options will vest as follows: (i)
33,333 of such shares upon the completion of the IPO, (ii) 33,333 of such shares
upon the first anniversary of the completion of the IPO, and (iii) the remaining
33,334 of such shares upon the second anniversary of the completion of the IPO.
The Options shall have a term of ten (10) years from the date of grant, and may
be exercised in whole or in part, from time to time, at any time after vesting
in accordance with the terms of the Company's 1999 Stock Incentive Plan and the
Option Agreement. Commencing with the IPO and for each partial or full calendar
year thereafter during the term hereof, provided Employee is then serving as an
employee of the Company, the Company shall grant to Employee options to purchase
such number of additional shares as the Board of Directors, in its sole
discretion, of the Company may determine, on such terms and conditions as shall
be established at such time, provided that, the additional grant of options will
be consistent with additional grants for the senior management team of the
Company based upon the Employee's performance and shall not be unreasonably
withheld.
5. TERMINATION.
5.1 DEATH. This Agreement shall terminate automatically upon the
death of the Employee.
5.2 DISABILITY. The Company may terminate this Agreement, upon
written notice to the Employee delivered in accordance with Sections 5.6
and 12.1 hereof, upon the Disability of the Employee.
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5.3 CAUSE. The Company may terminate the Employee's employment
hereunder for Cause. For purposes of this Agreement, the Company shall have
"Cause" to terminate the Employee's employment under upon (A) material breach of
this Agreement by the Employee, (B) the willful failure by the Employee to
substantially perform his duties hereunder (other than any such failure
resulting from the Employee's incapacity due to physical or mental illness) or
failure to follow the specific reasonable directives of the Board of Directors,
provided that the Employee does not cure such failure after written demand is
delivered to the Employee by the Company for substantial performance that
specifically identifies the manner in which the Company believes the Employee
has not substantially performed his duties and provides for a reasonable period
to cure such failure, or (C) the willful engaging by the Employee in misconduct
which is materially injurious to the Company, monetarily or otherwise. For
purposes of this paragraph, no act, or failure to act, on the Employee's part
shall be considered "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in the
best interest of the Company. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for Cause without (i) 15 days notice to
the Employee setting forth the reasons for the Company's intention to terminate
for Cause and (ii) delivery to the Employee of a Notice of Termination as
defined in Section 5.6 hereof, from the Board of Directors finding that, in the
good faith opinion of the Board of Directors, the Employee was guilty of conduct
set forth above in clause (B) of this Section 5.3 and specifying the particulars
thereof in detail.
5.4 WITHOUT CAUSE. The Company may terminate this Agreement Without
Cause, upon written notice to the Employee delivered in accordance with
Sections 5.6 and 12.1 hereof. For purposes of this Agreement, the Employee will
be deemed to have been terminated "Without Cause" if (A) the Employee is
terminated by the Company for any reason other than Cause, Disability of the
Employee or death of the Employee, or (B) the Company requires the Employee to
relocate permanently to any office or location outside of the New York
metropolitan area without his consent.
5.5 BY THE EMPLOYEE. The Employee may terminate this Agreement for
any reason, upon written notice to the Company delivered in accordance with
Sections 5.6 and 12.1 hereof.
5.6 NOTICE OF TERMINATION. Any termination of this Agreement by the
Company for Cause, Without Cause or as a result of the Disability of the
Employee, or by the Employee for any reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Employee's employment under the
provision so indicated and (iii) specifies the termination date, if such date is
other than the date of receipt of such notice (which termination date shall not
be more than 15 days after the giving of such notice).
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6. OBLIGATIONS OF COMPANY UPON TERMINATION.
6.1 CAUSE; BY EMPLOYEE; DISABILITY. If this Agreement shall be
terminated (i) by the Company for Cause or Death or Disability of the Employee
or (ii) by the Employee for any reason:
6.1.1 the Company shall pay to the Employee or his estate, in a
lump sum in cash within 30 days after the Date of Termination, the
aggregate of the following amounts:
(i) if not theretofore paid, the Base Salary through
the Date of Termination; and
(ii) in the case of compensation previously deferred by
the Employee, all amounts of such compensation previously
deferred and not yet paid by the Company; and
6.1.2 the Company shall, promptly upon submission by the
Employee of supporting documentation, pay or reimburse to the Employee
any costs and expenses paid or incurred by the Employee prior to the
Date of Termination which would have been payable under Section 4.7
hereof if the Employee's employment had not terminated.
6.2 WITHOUT CAUSE. If this Agreement shall be terminated by the
Company Without Cause:
6.2.1 the Company shall pay to the Employee, in a lump sum in
cash within 30 days after the Date of Termination, the aggregate of the
following amounts:
(i) if not theretofore paid, the Base Salary through the
Date of Termination; and
(ii) in the case of compensation previously deferred by
the Employee, all amounts of such compensation previously deferred
and not yet paid by the Company;
6.2.2 the Company shall, promptly upon submission by the Employee
of supporting documentation, pay or reimburse to the Employee any costs
and expenses paid or incurred by the Employee prior to the Date of
Termination which would have been payable under Section 4.7 hereof if the
Employee's employment had not terminated;
6.2.3 for a period of twelve months after the Date of
Termination, the Company shall continue benefits to the Employee and/or
the Employee's family at least equal to those which would have been
provided to them under Section 4.6 hereof if the Employee's employment
had not been terminated;
6.2.4 the Company shall pay to the Employee, in equal
semi-monthly installments, the Base Salary for a period of twelve months
after the Date of Termination; and
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6.2.5 for a period of twelve months after the Date of
Termination, the Options shall continue to vest and may be exercised
during the twelve month period in accordance with Section 4.8 hereof.
7. EMPLOYEE'S OBLIGATION TO AVOID CONFLICTS OF INTEREST. The Employee
hereby acknowledges that the Company will adopt a Code of Ethics and a conflicts
of interest policy which will apply to all of the Company's executive officers
and the Employee agrees to abide by the same. Failure of the Employee to abide
by such policy shall constitute Cause as defined in Section 5.3 of this
Agreement.
8. EMPLOYEE'S CONFIDENTIALITY OBLIGATION.
8.1 The Employee hereby acknowledges, understands and agrees that all
Confidential Information is the exclusive and confidential property of the
Company and its Subsidiaries which shall at all times be regarded, treated and
protected as such in accordance with this Section 8. The Employee acknowledges
that all such Confidential Information is in the nature of a trade secret.
8.2 For purposes of this Agreement, "Confidential Information" means
information which is used in the business of the Company or its Subsidiaries and
(i) is proprietary to or created by the Company or its Subsidiaries, (ii) gives
the Company or its Subsidiaries some competitive business advantage or the
opportunity of obtaining such advantage or the disclosure of which could be
detrimental to the interests of the Company or its Subsidiaries, (iii) is
designated as Confidential Information by the Company or its Subsidiaries, is
known by the Employee to be considered confidential by the Company or its
Subsidiaries, or from all the relevant circumstances should reasonably be
assumed by the Employee to be confidential and proprietary to the Company or its
Subsidiaries, or (iv) is not generally known by non-Company personnel; PROVIDED,
HOWEVER, that the term "Confidential Information" shall not include information
which is in the public domain through no fault of the Employee or any person
acting on his behalf. Such Confidential Information includes, without
limitation, the following types of information and other information of a
similar nature (whether or not reduced to writing or designated as
confidential):
8.2.1 Internal personnel and financial information of the Company
or its Subsidiaries, vendor information (including vendor characteristics,
services, prices, lists and agreements), purchasing and internal cost
information, internal service and operational manuals, and the manner and
methods of conducting the business of the Company or its Subsidiaries;
8.2.2 Marketing and development plans, price and cost data, price
and fee amounts, pricing and billing policies, quoting procedures, marketing
techniques, forecasts and forecast assumptions and volumes, and future plans and
potential strategies (including, without limitation, all information relating to
any acquisition prospect and the identity of any key contact within the
organization of any acquisition prospect) of the Company or its Subsidiaries
which have been or are being discussed;
8.2.3 Names of customers and their representatives, contracts
(including their contents and parties), customer services, and the type,
quantity, specifications and content of
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products and services purchased, leased, licensed or received by customers of
the Company or its Subsidiaries; and
8.2.4 Confidential and proprietary information provided to the
Company or its Subsidiaries by any actual or potential customer, government
agency or other third party (including businesses, consultants and other
entities and individuals).
8.3 As a consequence of the Employee's acquisition or anticipated
acquisition of Confidential Information, the Employee shall occupy a position of
trust and confidence with respect to the affairs and business of the Company and
its Subsidiaries. In view of the foregoing and of the consideration to be
provided to the Employee, the Employee agrees that it is reasonable and
necessary that the Employee make each of the following covenants:
8.3.1 Until the Date of Termination and for a period of three
years thereafter, the Employee shall not disclose Confidential Information to
any person or entity, either inside or outside of the Company, other than as
necessary in carrying out his duties and responsibilities as set forth in
Section 2 hereof, without first obtaining the Company's prior written consent
(unless such disclosure is compelled pursuant to court orders or subpoena, and
at which time the Employee shall give notice of such proceedings to the
Company).
8.3.2 Until the Date of Termination and for a period of three
years thereafter, the Employee shall not use, copy or transfer Confidential
Information other than as necessary in carrying out his duties and
responsibilities as set forth in Section 2 hereof, without first obtaining the
Company's prior written consent.
8.3.3 On the Date of Termination, the Employee shall promptly
deliver to the Company (or its designee) or destroy all written materials,
records and documents made by the Employee or which came into his possession on
or before the Date of Termination (even if prior to the date hereof) concerning
the business or affairs of the Company or its Subsidiaries, including, without
limitation, all materials containing Confidential Information.
9. DISCLOSURE OF INFORMATION, IDEAS, CONCEPTS, IMPROVEMENTS, DISCOVERIES AND
INVENTIONS. As part of the Employee's fiduciary duties to the Company, the
Employee agrees that during his employment by the Company and for a period of
three years following the Date of Termination, the Employee shall promptly
disclose in writing to the Company all information, ideas, concepts,
improvements, discoveries and inventions, whether patentable or not, and whether
or not reduced to practice, which are conceived, developed, made or acquired by
the Employee, either individually or jointly with others prior to the Date of
Termination, and which relate to the business, products or services of the
Company or its Subsidiaries, irrespective of whether the Employee used the
Company's time or facilities and irrespective of whether such information, idea,
concept, improvement, discovery or invention was conceived, developed,
discovered or acquired by the Employee on the job, at home, or elsewhere prior
to the Date of Termination. This obligation extends to all types of
information, ideas and concepts, including information, ideas and concepts
relating to new types of services, corporate opportunities, acquisition
prospects, the identity of key
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representatives within acquisition prospect organizations, prospective names
or service marks for the Company's business activities, and the like.
10. OWNERSHIP OF INFORMATION, IDEAS, CONCEPTS, IMPROVEMENTS, DISCOVERIES AND
INVENTIONS, AND ALL ORIGINAL WORKS OF AUTHORSHIP.
10.1 All information, ideas, concepts, improvements, discoveries and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by the Employee or which are disclosed or made known to the Employee,
individually or in conjunction with others, during the Employee's employment by
the Company and which relate to the business, products or services of the
Company or its Subsidiaries (including, without limitation, all such information
relating to corporate opportunities, research, financial and sales data, pricing
and trading terms, evaluations, opinions, interpretations, acquisition
prospects, the identity of customers or their requirements, the identity of key
contacts within the customers' organizations or within the organization of
acquisition prospects, marketing and merchandising techniques, and prospective
names and service marks) are and shall be the sole and exclusive property of the
Company. Furthermore, all drawings, memoranda, notes, records, files,
correspondence, manuals, models, specifications, computer programs, maps and all
other writings or materials of any type embodying any of such information,
ideas, concepts, improvements, discoveries and inventions are and shall be the
sole and exclusive property of the Company.
10.2 In particular, the Employee hereby specifically sells, assigns,
transfers and conveys to the Company all of his worldwide right, title and
interest in and to all such information, ideas, concepts, improvements,
discoveries or inventions, and any United States or foreign applications for
patents, inventor's certificates or other industrial rights which may be filed
in respect thereof, including divisions, continuations, continuations-in-part,
reissues and/or extensions thereof, and applications for registration of such
names and service marks. The Employee shall assist the Company and its nominee
at all times, until the Date of Termination and for a period of three years
thereafter, in the protection of such information, ideas, concepts,
improvements, discoveries or inventions, both in the United States and all
foreign countries, which assistance shall include, but shall not be limited to,
the execution of all lawful oaths and all assignment documents requested by the
Company or its nominee in connection with the preparation, prosecution, issuance
or enforcement of any applications for United States or foreign letters patent,
including divisions, continuations, continuations-in-part, reissues and/or
extensions thereof, and any application for the registration of such names and
service marks.
10.3 In the event the Employee creates, during the Employee's
employment by the Company, any original work of authorship fixed in any tangible
medium of expression which is the subject matter of copyright (such as,
videotapes, written presentations on acquisitions, computer programs, drawings,
maps, architectural renditions, models, manuals, brochures or the like) relating
to the Company's business, products or services, whether such work is created
solely by the Employee or jointly with others, the Company shall be deemed the
author of such work if the work is prepared by the Employee within the scope of
his employment; or, if the work is not prepared by the Employee within the scope
of his employment but is specially ordered by the Company as a contribution to a
collective work, as a part of a motion picture or other audiovisual work, as a
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translation, as a supplementary work, as a compilation or as an instructional
text, then the work shall be considered to be a work made for hire, and the
Company shall be the author of such work. The Employee agrees to assist the
Company and its Subsidiaries, at all times, until the Date of Termination and at
all times thereafter, in the protection of the Company's worldwide right, title
and interest in and to such work and all rights of copyright therein, which
assistance shall include, but shall not be limited to, the execution of all
documents requested by the Company or its nominee and the execution of all
lawful oaths and applications for registration of copyright in the United States
and foreign countries.
11. EMPLOYEE'S NON-COMPETITION OBLIGATION.
11.1 Until the Date of Termination, and for a period of one year
thereafter if this Agreement is not terminated by the Company Without Cause, the
Employee shall not, acting alone or in conjunction with others, directly or
indirectly, in any of the business territories in which the Company or any of
its Subsidiaries is as of the Date of Termination conducting business, invest or
engage, directly or indirectly, in any business which is competitive with that
of the Company as of the Date of Termination or accept employment with or render
services to such a competitor as a director, officer, agent, employee or
consultant, or take any action inconsistent with the fiduciary relationship of
an employee to his employer; provided, however, that the beneficial ownership by
the Employee of up to three percent of the voting stock of any corporation
subject to the periodic reporting requirements of the Exchange Act shall not
violate this Section 11.1.
11.2 In addition to the other obligations agreed to by the Employee in
this Agreement, the Employee agrees that until the Date of Termination, and for
a period of one year thereafter if this Agreement is not terminated by the
Company Without Cause, he shall not at any time, directly or indirectly, (i)
induce, entice or solicit any employee of the Company to leave his employment,
(ii) contact, communicate or solicit any customer or acquisition prospect of the
Company derived from any customer list, customer lead, mail, printed matter or
other information secured from the Company or its present or past employees or
(iii) in any other manner use any customer lists or customer leads, mail,
telephone numbers, printed material or other information of the Company relating
thereto.
11.3 The parties hereto acknowledge and agree that (i) the agreements
and covenants set forth in this Section 11 are being made for good and valuable
consideration, the receipt and sufficiency of which is acknowledged; (ii) the
covenants contained in this Section 11 are an important aspect of this
Agreement, and the Company would not have entered into this Agreement absent the
inclusion of this Section 11; and (iii) the restrictions imposed in this
Section 11, including the geographic area and duration of the covenants made
herein, are reasonable and necessary to protect the Company. If the Employee
breaches or indicates an intention to breach any term or provision of this
Section 11, the parties hereto agree that the Company shall be entitled to the
right of both temporary and permanent injunctive relief and/or specific
performance. The right of the Company to such relief shall not be construed to
prevent the Company from pursuing, either consecutively or concurrently, any and
all other legal or equitable remedies available to it for such breach or
threatened breach, specifically including, without limitation, the recovery of
monetary damages. If any court determines that any provision of this
Section 11, or any part thereof, is
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unenforceable because of the duration or geographic scope of such provision,
the parties hereto agree that such court shall have the power to reduce the
duration or geographic scope of such provision, as the case may be, and the
parties hereto agree to request the court to exercise such power, and, in its
amended form, such provision shall then be enforceable and shall be enforced.
12.. MISCELLANEOUS.
12.1 NOTICES. All notices and other communications required or
permitted hereunder or necessary or convenient in connection herewith shall be
in writing and shall be deemed to have been given when delivered by hand or
mailed by registered or certified mail, return receipt requested, as follows
(provided that notice of change of address shall be deemed given only when
received):
If to the Company to:
OmniLynx Communications Corporation
1770 Motor Parkway, Suite 300
Hauppauge, New York 11788
Attention: Joseph A. Gregori
If to the Employee to:
Charles N. Garber
26 Murray Hill Square
New Providence, New Jersey 07974
or to such other names or addresses as the Company or the Employee, as the case
may be, shall designate by notice to the other party hereto in the manner
specified in this Section 12.1.
12.2 WAIVER OF BREACH. The waiver by any party hereto of a breach of
any provision of this Agreement shall neither operate nor be construed as a
waiver of any subsequent breach by any party.
12.3 ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the Company, its successors, legal representatives and assigns, and
upon the Employee, his heirs, executors, administrators, representatives and
assigns; provided, however, the Employee agrees that his rights and obligations
hereunder are personal to him and may not be assigned without the express
written consent of the Company.
12.4 ENTIRE AGREEMENT; NO ORAL AMENDMENTS. This Agreement, together
with any exhibit attached hereto and any document, policy, rule or regulation
referred to herein, replaces and merges all previous agreements and discussions
relating to the same or similar subject matter between the Employee and the
Company and constitutes the entire agreement between the Employee and the
Company with respect to the subject matter of this Agreement. This Agreement
may not be modified in any respect by any verbal statement, representation or
agreement made by any employee,
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officer, or representative of the Company or by any written agreement unless
signed by an officer of the Company who is expressly authorized by the
Company to execute such document.
12.5 ENFORCEABILITY. If any provision of this Agreement or application
thereof to anyone or under any circumstances shall be determined to be invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
provisions or applications of this Agreement which can be given effect without
the invalid or unenforceable provision or application.
12.6 JURISDICTION; ARBITRATION. The laws of the State of New York
shall govern the interpretation, validity and effect of this Agreement without
regard to the place of execution or the place for performance thereof. Any
controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled by arbitration located in New York, New York
administered by the American Arbitration Association in accordance with its
applicable arbitration rules, and the judgment on the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof, which
judgment shall be binding upon the parties hereto.
12.7 INJUNCTIVE RELIEF. The Company and the Employee agree that a
breach of any term of this Agreement by the Employee would cause irreparable
damage to the Company and that, in the event of such breach, the Company shall
have, in addition to any and all remedies of law, the right to any injunction,
specific performance and other equitable relief to prevent or to redress the
violation of the Employee's duties or responsibilities hereunder.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first written above.
OMNILYNX COMMUNICATIONS CORPORATION
By: /s/ Joseph A. Gregori
------------------------------------------
Joseph A. Gregori, Chief Executive Officer
EMPLOYEE
/s/ Charles N. Garber
------------------------------------------------
Charles N. Garber
<PAGE>
EXHIBIT 10.14
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is made and
entered into this 7th day of July, 1999 by and between OmniLynx Communications
Corporation, a Delaware corporation having its principal executive office at
1770 Motor Parkway, Suite 300, Hauppauge, New York 11788 (hereinafter referred
to as the "Company"), and Peter Karoczkai (hereinafter referred to as the
"Employee").
W I T N E S S E T H:
WHEREAS, Employee desires to serve the Company as its Senior Vice
President of Sales and Marketing; and
WHEREAS, the parties desire to provide that the Employee be employed by
the Company under the terms of this Agreement.
NOW, THEREFORE, for and in consideration of the mutual promises,
covenants and obligations contained herein, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Company and the Employee hereby agree as follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms have
the meanings prescribed below:
ANNUAL BONUS shall have the meaning assigned thereto in Section 4.3
hereof.
BASE SALARY shall have the meaning assigned thereto in Section 4.1
hereof.
CAUSE shall have the meaning assigned thereto in Section 5.3 hereof.
CODE means the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated by the Internal Revenue Service thereunder, all as
in effect from time to time during the Employment Period.
COMMON STOCK means the Company's common stock, par value $.0001 per
share.
COMPANY means OmniLynx Communications Corporation, a Delaware
corporation, the principal executive office of which is located at 1770 Motor
Parkway, Suite 300, Hauppauge, New York 11788.
CONFIDENTIAL INFORMATION shall have the meaning assigned thereto in
Section 8.2 hereof.
<PAGE>
DATE OF TERMINATION means the earliest to occur of (i) the date of the
Employee's death, (ii) the date on which the Employee terminates this Agreement
for any reason or (iii) the date of receipt of the Notice of Termination, or
such later date as may be prescribed in the Notice of Termination in accordance
with Section 5.6 hereof.
DISABILITY means an illness or other disability which prevents the
Employee from discharging his responsibilities under this Agreement for a period
of 180 consecutive calendar days, or an aggregate of 180 calendar days in any
calendar year, during the Employment Period, all as determined in good faith by
the Board of Directors of the Company.
EFFECTIVE DATE means the date upon which the stock of the Company is
issued and sold pursuant to a registration statement filed under the Securities
Act of 1933, as amended.
EMPLOYEE means Peter Karoczkai, an individual who resides at 3 Cardinal
Lane, Westport, Connecticut 06880.
EMPLOYMENT PERIOD shall have the meaning assigned thereto in Section 3
hereof.
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Securities and Exchange Commission
thereunder, all as in effect from time to time during the Employment Period.
NOTICE OF TERMINATION shall have the meaning assigned thereto in
Section 5.6 hereof.
SIGNING BONUS shall have the meaning assigned thereto in Section 4.2
hereof.
START DATE shall mean July 19, 1999.
SUBSIDIARY, when used with respect to any such entity, shall mean any
corporation or other business entity a majority of whose outstanding voting
stock or the equivalent entitled to vote for the election of directors is at the
time owned by such entity and/or one or more of its subsidiaries.
WITHOUT CAUSE shall have the meaning assigned thereto in Section 5.4
hereof.
2. GENERAL DUTIES OF COMPANY AND EMPLOYEE.
2.1 The Company agrees to employ the Employee, and the Employee agrees
to accept employment by the Company and to serve the Company as its Senior Vice
President of Sales and Marketing. The authority, duties and responsibilities of
the Employee shall include those duties of Senior Vice President of Sales and
Marketing as specified on Schedule A hereto and such other or additional duties
as may from time to time be assigned to the Employee by the Board of Directors.
While employed hereunder, the Employee shall devote his full time and attention
during normal business hours to the affairs of the Company and use his best
efforts to perform faithfully and efficiently his duties and responsibilities.
The Employee may (i) serve on corporate, civic or charitable boards or
committees provided that (A) such boards or committees do not control or
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advise business entities that compete with the Company and (B) all such
services are promptly disclosed in writing to the Board of Directors, (ii)
deliver lectures, fulfill speaking engagements or teach at educational
institutions and (iii) manage personal investments, so long as such
activities do not materially interfere with the performance of the Employee's
duties and responsibilities.
2.2 The Employee agrees and acknowledges that he owes a fiduciary
duty of loyalty, fidelity and allegiance to act at all times in the best
interests of the Company and to do no act and to make no statement, oral or
written, which would injure the Company's business, its interests or its
reputation.
2.3 The Employee agrees to comply at all times with all applicable
policies, rules and regulations of the Company, including, without
limitation, the Company's Code of Ethics and the Company's policy regarding
trading in the Common Stock, as each is in effect from time to time during
the Employment Period.
3. TERM. Unless sooner terminated pursuant to other provisions hereof,
the Employee's period of employment under this Agreement shall be the period
beginning on the Effective Date and ending on the third anniversary thereof.
The period of time beginning on the Effective Date and ending on the third
anniversary thereof (notwithstanding termination of this Agreement prior to
the end of such period pursuant to other provisions hereof) is referred to
elsewhere herein as the "Employment Period."
4. COMPENSATION AND BENEFITS.
4.1 BASE SALARY. As compensation for services to the Company, the
Company shall pay to the Employee until the Date of Termination an annual
base salary of $175,000 (the "Base Salary"). The Base Salary shall be
payable in equal semi-monthly installments or in accordance with the
Company's established policy, subject only to such payroll and withholding
deductions as may be required by law and other deductions applied generally
to employees of the Company for insurance and other employee benefit plans.
4.2 SIGNING BONUS. The Company shall pay the Employee a one-time
signing bonus ("Signing Bonus") of $75,000. The Signing Bonus shall be
payable as follows: (i) $37,500 on the Start Date and (ii) the balance
($37,500) 120 days thereafter, provided Employee is then serving as an
employee of the Company.
4.3 ANNUAL BONUS. The Company will pay Employee an annual bonus
("Annual Bonus") of up to 50% of the Base Salary to be determined by the
Board of Directors in its sole discretion, based upon the performance of the
Employee. The Annual Bonus shall be payable at a time to be determined by the
Board of Directors in its sole discretion.
4.4 VACATION. Until the Date of Termination, the Employee shall be
entitled to vacation as determined by the Company's vacation policy for its
executive officers as in effect from time to time, but in no event less than
three weeks per calendar year.
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4.5 INCENTIVE, SAVINGS AND RETIREMENT PLANS. Until the Date of
Termination, the Employee shall be eligible to participate in and shall receive
all benefits under all executive incentive, savings and retirement plans
(including 401(k) plans) and programs currently maintained or hereinafter
established by the Company for the benefit of its executive officers and/or
employees.
4.6 WELFARE BENEFIT PLANS. Until the Date of Termination, the
Employee and/or the Employee's family, as the case may be, shall be eligible to
participate in and shall receive all benefits under each welfare benefit plan of
the Company currently maintained or hereinafter established by the Company for
the benefit of its employees. Such welfare benefit plans may include, without
limitation, medical, dental, disability, group life, accidental death and travel
accident insurance plans and programs.
4.7 REIMBURSEMENT OF EXPENSES. The Employee may from time to time
until the Date of Termination incur various business expenses customarily
incurred by persons holding positions of like responsibility, including, without
limitation, travel, entertainment and similar expenses incurred for the benefit
of the Company. Subject to the Company's policy regarding the reimbursement of
such expenses as in effect from time to time during the Employment Period, the
Company shall reimburse the Employee for such expenses from time to time, at the
Employee's request, and the Employee shall account to the Company for all such
expenses.
4.8 STOCK OPTIONS. On the Start Date, the Company will grant the
Employee, as of the date of pricing of the Common Stock pursuant to the
Company's initial public offering (the "IPO"), non-qualified stock options (the
"Options") to purchase 225,000 shares of the common stock of the Company as
presently constituted, at the price per share at which shares of Common Stock
are sold in the IPO pursuant to an option agreement to be entered into (the
"Option Agreement") with the Company. The Options will vest as follows: (i)
75,000 of such shares upon the completion of the IPO, (ii) 75,000 of such shares
upon the first anniversary of the completion of the IPO, and (iii) the remaining
75,000 of such shares upon the second anniversary of the completion of the IPO.
The Options shall have a term of ten (10) years from the date of grant, and may
be exercised in whole or in part, from time to time, at any time after vesting
in accordance with the terms of the Company's 1999 Stock Incentive Plan and the
Option Agreement. Commencing with the IPO and for each partial or full calendar
year thereafter during the term hereof, provided Employee is then serving as an
employee of the Company, the Company shall grant to Employee options to purchase
such number of additional shares as the Board of Directors, in its sole
discretion, of the Company may determine, on such terms and conditions as shall
be established at such time, provided that, the additional grant of options will
be consistent with additional grants for the senior management team of the
Company based upon the Employee's performance and shall not be unreasonably
withheld.
5. TERMINATION.
5.1 DEATH. This Agreement shall terminate automatically upon the
death of the Employee.
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5.2 DISABILITY. The Company may terminate this Agreement, upon
written notice to the Employee delivered in accordance with Sections 5.6
and 12.1 hereof, upon the Disability of the Employee.
5.3 CAUSE. The Company may terminate the Employee's employment
hereunder for Cause. For purposes of this Agreement, the Company shall have
"Cause" to terminate the Employee's employment under upon (A) breach of this
Agreement by the Employee, (B) the willful failure by the Employee to
substantially perform his duties hereunder (other than any such failure
resulting from the Employee's incapacity due to physical or mental illness) or
failure to follow the specific reasonable directives of the Board of Directors,
after written demand is delivered to the Employee by the Company for substantial
performance that specifically identifies the manner in which the Company
believes the Employee has not substantially performed his duties, or (C) the
willful engaging by the Employee in misconduct which is materially injurious to
the Company, monetarily or otherwise. For purposes of this paragraph, no act,
or failure to act, on the Employee's part shall be considered "willful" unless
done, or omitted to be done, by him not in good faith and without reasonable
belief that his action or omission was in the best interest of the Company.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for Cause without (i) 15 days notice to the Employee setting forth
the reasons for the Company's intention to terminate for Cause and (ii) delivery
to the Employee of a Notice of Termination as defined in Section 5.6 hereof,
from the Board of Directors finding that, in the good faith opinion of the Board
of Directors, the Employee was guilty of conduct set forth above in clause (B)
of this Section 5.3 and specifying the particulars thereof in detail.
5.4 WITHOUT CAUSE. The Company may terminate this Agreement Without
Cause, upon written notice to the Employee delivered in accordance with
Sections 5.6 and 12.1 hereof. For purposes of this Agreement, the Employee will
be deemed to have been terminated "Without Cause" if the Employee is terminated
by the Company for any reason other than Cause, Disability of the Employee or
death of the Employee.
5.5 BY THE EMPLOYEE. The Employee may terminate this Agreement for
any reason, upon written notice to the Company delivered in accordance with
Sections 5.6 and 12.1 hereof.
5.6 NOTICE OF TERMINATION. Any termination of this Agreement by the
Company for Cause, Without Cause or as a result of the Disability of the
Employee, or by the Employee for any reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with this Agreement.
For purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Employee's employment under the
provision so indicated and (iii) specifies the termination date, if such date is
other than the date of receipt of such notice (which termination date shall not
be more than 15 days after the giving of such notice).
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6. OBLIGATIONS OF COMPANY UPON TERMINATION.
6.1 CAUSE; BY EMPLOYEE; DISABILITY. If this Agreement shall be
terminated (i) by the Company for Cause or Death or Disability of the Employee
or (ii) by the Employee for any reason:
6.1.1 the Company shall pay to the Employee or his estate, in a
lump sum in cash within 30 days after the Date of Termination, the
aggregate of the following amounts:
(i) if not theretofore paid, the Base Salary through the
Date of Termination; and
(ii) in the case of compensation previously deferred by
the Employee, all amounts of such compensation previously deferred
and not yet paid by the Company; and
6.1.2 the Company shall, promptly upon submission by the Employee
of supporting documentation, pay or reimburse to the Employee any costs
and expenses paid or incurred by the Employee prior to the Date of
Termination which would have been payable under Section 4.7 hereof if the
Employee's employment had not terminated.
6.2 WITHOUT CAUSE. If this Agreement shall be terminated by the
Company Without Cause:
6.2.1 the Company shall pay to the Employee, in a lump sum in
cash within 30 days after the Date of Termination, the aggregate of the
following amounts:
(i) if not theretofore paid, the Base Salary through the
Date of Termination; and
(ii) in the case of compensation previously deferred by
the Employee, all amounts of such compensation previously deferred
and not yet paid by the Company;
6.2.2 the Company shall, promptly upon submission by the Employee
of supporting documentation, pay or reimburse to the Employee any costs
and expenses paid or incurred by the Employee prior to the Date of
Termination which would have been payable under Section 4.7 hereof if the
Employee's employment had not terminated;
6.2.3 for a period of twelve months after the Date of
Termination, the Company shall continue benefits to the Employee and/or
the Employee's family at least equal to those which would have been
provided to them under Section 4.6 hereof if the Employee's employment
had not been terminated;
6.2.4 the Company shall pay to the Employee, in equal
semi-monthly installments, the Base Salary for a period of twelve months
after the Date of Termination; and
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6.2.5 for a period of twelve months after the Date of
Termination, the Options shall continue to vest and may be exercised
during the twelve month period in accordance with Section 4.8 hereof.
7. EMPLOYEE'S OBLIGATION TO AVOID CONFLICTS OF INTEREST. The Employee
hereby acknowledges that the Company will adopt a Code of Ethics and a conflicts
of interest policy which will apply to all of the Company's executive officers
and the Employee agrees to abide by the same. Failure of the Employee to abide
by such policy shall constitute Cause as defined in Section 5.3 of this
Agreement.
8. EMPLOYEE'S CONFIDENTIALITY OBLIGATION.
8.1 The Employee hereby acknowledges, understands and agrees that all
Confidential Information is the exclusive and confidential property of the
Company and its Subsidiaries which shall at all times be regarded, treated and
protected as such in accordance with this Section 8. The Employee acknowledges
that all such Confidential Information is in the nature of a trade secret.
8.2 For purposes of this Agreement, "Confidential Information" means
information which is used in the business of the Company or its Subsidiaries and
(i) is proprietary to or created by the Company or its Subsidiaries, (ii) gives
the Company or its Subsidiaries some competitive business advantage or the
opportunity of obtaining such advantage or the disclosure of which could be
detrimental to the interests of the Company or its Subsidiaries, (iii) is
designated as Confidential Information by the Company or its Subsidiaries, is
known by the Employee to be considered confidential by the Company or its
Subsidiaries, or from all the relevant circumstances should reasonably be
assumed by the Employee to be confidential and proprietary to the Company or its
Subsidiaries, or (iv) is not generally known by non-Company personnel; PROVIDED,
HOWEVER, that the term "Confidential Information" shall not include information
which is in the public domain through no fault of the Employee or any person
acting on his behalf. Such Confidential Information includes, without
limitation, the following types of information and other information of a
similar nature (whether or not reduced to writing or designated as
confidential):
8.2.1 Internal personnel and financial information of the Company
or its Subsidiaries, vendor information (including vendor characteristics,
services, prices, lists and agreements), purchasing and internal cost
information, internal service and operational manuals, and the manner and
methods of conducting the business of the Company or its Subsidiaries;
8.2.2 Marketing and development plans, price and cost data, price
and fee amounts, pricing and billing policies, quoting procedures, marketing
techniques, forecasts and forecast assumptions and volumes, and future plans and
potential strategies (including, without limitation, all information relating to
any acquisition prospect and the identity of any key contact within the
organization of any acquisition prospect) of the Company or its Subsidiaries
which have been or are being discussed;
8.2.3 Names of customers and their representatives, contracts
(including their contents and parties), customer services, and the type,
quantity, specifications and content of
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products and services purchased, leased, licensed or received by customers of
the Company or its Subsidiaries; and
8.2.4 Confidential and proprietary information provided to the
Company or its Subsidiaries by any actual or potential customer, government
agency or other third party (including businesses, consultants and other
entities and individuals).
8.3 As a consequence of the Employee's acquisition or anticipated
acquisition of Confidential Information, the Employee shall occupy a position of
trust and confidence with respect to the affairs and business of the Company and
its Subsidiaries. In view of the foregoing and of the consideration to be
provided to the Employee, the Employee agrees that it is reasonable and
necessary that the Employee make each of the following covenants:
8.3.1 Until the Date of Termination and for a period of three
years thereafter, the Employee shall not disclose Confidential Information to
any person or entity, either inside or outside of the Company, other than as
necessary in carrying out his duties and responsibilities as set forth in
Section 2 hereof, without first obtaining the Company's prior written consent
(unless such disclosure is compelled pursuant to court orders or subpoena, and
at which time the Employee shall give notice of such proceedings to the
Company).
8.3.2 Until the Date of Termination and for a period of three
years thereafter, the Employee shall not use, copy or transfer Confidential
Information other than as necessary in carrying out his duties and
responsibilities as set forth in Section 2 hereof, without first obtaining the
Company's prior written consent.
8.3.3 On the Date of Termination, the Employee shall promptly
deliver to the Company (or its designee) or destroy all written materials,
records and documents made by the Employee or which came into his possession on
or before the Date of Termination (even if prior to the date hereof) concerning
the business or affairs of the Company or its Subsidiaries, including, without
limitation, all materials containing Confidential Information.
9. DISCLOSURE OF INFORMATION, IDEAS, CONCEPTS, IMPROVEMENTS, DISCOVERIES AND
INVENTIONS. As part of the Employee's fiduciary duties to the Company, the
Employee agrees that during his employment by the Company and for a period of
three years following the Date of Termination, the Employee shall promptly
disclose in writing to the Company all information, ideas, concepts,
improvements, discoveries and inventions, whether patentable or not, and whether
or not reduced to practice, which are conceived, developed, made or acquired by
the Employee, either individually or jointly with others prior to the Date of
Termination, and which relate to the business, products or services of the
Company or its Subsidiaries, irrespective of whether the Employee used the
Company's time or facilities and irrespective of whether such information, idea,
concept, improvement, discovery or invention was conceived, developed,
discovered or acquired by the Employee on the job, at home, or elsewhere prior
to the Date of Termination. This obligation extends to all types of
information, ideas and concepts, including information, ideas and concepts
relating to new types of services, corporate opportunities, acquisition
prospects, the identity of key
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representatives within acquisition prospect organizations, prospective names
or service marks for the Company's business activities, and the like.
10. OWNERSHIP OF INFORMATION, IDEAS, CONCEPTS, IMPROVEMENTS, DISCOVERIES AND
INVENTIONS, AND ALL ORIGINAL WORKS OF AUTHORSHIP.
10.1 All information, ideas, concepts, improvements, discoveries and
inventions, whether patentable or not, which are conceived, made, developed or
acquired by the Employee or which are disclosed or made known to the Employee,
individually or in conjunction with others, during the Employee's employment by
the Company and which relate to the business, products or services of the
Company or its Subsidiaries (including, without limitation, all such information
relating to corporate opportunities, research, financial and sales data, pricing
and trading terms, evaluations, opinions, interpretations, acquisition
prospects, the identity of customers or their requirements, the identity of key
contacts within the customers' organizations or within the organization of
acquisition prospects, marketing and merchandising techniques, and prospective
names and service marks) are and shall be the sole and exclusive property of the
Company. Furthermore, all drawings, memoranda, notes, records, files,
correspondence, manuals, models, specifications, computer programs, maps and all
other writings or materials of any type embodying any of such information,
ideas, concepts, improvements, discoveries and inventions are and shall be the
sole and exclusive property of the Company.
10.2 In particular, the Employee hereby specifically sells, assigns,
transfers and conveys to the Company all of his worldwide right, title and
interest in and to all such information, ideas, concepts, improvements,
discoveries or inventions, and any United States or foreign applications for
patents, inventor's certificates or other industrial rights which may be filed
in respect thereof, including divisions, continuations, continuations-in-part,
reissues and/or extensions thereof, and applications for registration of such
names and service marks. The Employee shall assist the Company and its nominee
at all times, until the Date of Termination and for a period of three years
thereafter, in the protection of such information, ideas, concepts,
improvements, discoveries or inventions, both in the United States and all
foreign countries, which assistance shall include, but shall not be limited to,
the execution of all lawful oaths and all assignment documents requested by the
Company or its nominee in connection with the preparation, prosecution, issuance
or enforcement of any applications for United States or foreign letters patent,
including divisions, continuations, continuations-in-part, reissues and/or
extensions thereof, and any application for the registration of such names and
service marks.
10.3 In the event the Employee creates, during the Employee's
employment by the Company, any original work of authorship fixed in any tangible
medium of expression which is the subject matter of copyright (such as,
videotapes, written presentations on acquisitions, computer programs, drawings,
maps, architectural renditions, models, manuals, brochures or the like) relating
to the Company's business, products or services, whether such work is created
solely by the Employee or jointly with others, the Company shall be deemed the
author of such work if the work is prepared by the Employee within the scope of
his employment; or, if the work is not prepared by the Employee within the scope
of his employment but is specially ordered by the Company as a contribution to a
collective work, as a part of a motion picture or other audiovisual work, as a
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translation, as a supplementary work, as a compilation or as an instructional
text, then the work shall be considered to be a work made for hire, and the
Company shall be the author of such work. The Employee agrees to assist the
Company and its Subsidiaries, at all times, until the Date of Termination and at
all times thereafter, in the protection of the Company's worldwide right, title
and interest in and to such work and all rights of copyright therein, which
assistance shall include, but shall not be limited to, the execution of all
documents requested by the Company or its nominee and the execution of all
lawful oaths and applications for registration of copyright in the United States
and foreign countries.
11. EMPLOYEE'S NON-COMPETITION OBLIGATION.
11.1 Until the Date of Termination, and for a period of one year
thereafter if this Agreement is not terminated by the Company Without Cause, the
Employee shall not, acting alone or in conjunction with others, directly or
indirectly, in any of the business territories in which the Company or any of
its Subsidiaries is as of the Date of Termination conducting business, invest or
engage, directly or indirectly, in any business which is competitive with that
of the Company as of the Date of Termination or accept employment with or render
services to such a competitor as a director, officer, agent, employee or
consultant, or take any action inconsistent with the fiduciary relationship of
an employee to his employer; provided, however, that the beneficial ownership by
the Employee of up to three percent of the voting stock of any corporation
subject to the periodic reporting requirements of the Exchange Act shall not
violate this Section 11.1.
11.2 In addition to the other obligations agreed to by the Employee in
this Agreement, the Employee agrees that until the Date of Termination, and for
a period of one year thereafter if this Agreement is not terminated by the
Company Without Cause, he shall not at any time, directly or indirectly, (i)
induce, entice or solicit any employee of the Company to leave his employment,
(ii) contact, communicate or solicit any customer or acquisition prospect of the
Company derived from any customer list, customer lead, mail, printed matter or
other information secured from the Company or its present or past employees or
(iii) in any other manner use any customer lists or customer leads, mail,
telephone numbers, printed material or other information of the Company relating
thereto.
11.3 The parties hereto acknowledge and agree that (i) the agreements
and covenants set forth in this Section 11 are being made for good and valuable
consideration, the receipt and sufficiency of which is acknowledged; (ii) the
covenants contained in this Section 11 are an important aspect of this
Agreement, and the Company would not have entered into this Agreement absent the
inclusion of this Section 11; and (iii) the restrictions imposed in this
Section 11, including the geographic area and duration of the covenants made
herein, are reasonable and necessary to protect the Company. If the Employee
breaches or indicates an intention to breach any term or provision of this
Section 11, the parties hereto agree that the Company shall be entitled to the
right of both temporary and permanent injunctive relief and/or specific
performance. The right of the Company to such relief shall not be construed to
prevent the Company from pursuing, either consecutively or concurrently, any and
all other legal or equitable remedies available to it for such breach or
threatened breach, specifically including, without limitation, the recovery of
monetary damages. If any court determines that any provision of this
Section 11, or any part thereof, is
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unenforceable because of the duration or geographic scope of such provision,
the parties hereto agree that such court shall have the power to reduce the
duration or geographic scope of such provision, as the case may be, and the
parties hereto agree to request the court to exercise such power, and, in its
amended form, such provision shall then be enforceable and shall be enforced.
12. MISCELLANEOUS.
12.1 NOTICES. All notices and other communications required or
permitted hereunder or necessary or convenient in connection herewith shall be
in writing and shall be deemed to have been given when delivered by hand or
mailed by registered or certified mail, return receipt requested, as follows
(provided that notice of change of address shall be deemed given only when
received):
If to the Company to:
OmniLynx Communications Corporation
1770 Motor Parkway, Suite 300
Hauppauge, New York 11788
Attention: Joseph A. Gregori
If to the Employee to:
Peter Karoczkai
3 Cardinal Lane
Westport, Connecticut 06880
or to such other names or addresses as the Company or the Employee, as the case
may be, shall designate by notice to the other party hereto in the manner
specified in this Section 12.1.
12.2 WAIVER OF BREACH. The waiver by any party hereto of a breach of
any provision of this Agreement shall neither operate nor be construed as a
waiver of any subsequent breach by any party.
12.3 ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the Company, its successors, legal representatives and assigns, and
upon the Employee, his heirs, executors, administrators, representatives and
assigns; provided, however, the Employee agrees that his rights and obligations
hereunder are personal to him and may not be assigned without the express
written consent of the Company.
12.4 ENTIRE AGREEMENT; NO ORAL AMENDMENTS. This Agreement, together
with any exhibit attached hereto and any document, policy, rule or regulation
referred to herein, replaces and merges all previous agreements and discussions
relating to the same or similar subject matter between the Employee and the
Company and constitutes the entire agreement between the Employee and the
Company with respect to the subject matter of this Agreement. This Agreement
may not be modified in any respect by any verbal statement, representation or
agreement made by any employee,
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officer, or representative of the Company or by any written agreement unless
signed by an officer of the Company who is expressly authorized by the
Company to execute such document.
12.5 ENFORCEABILITY. If any provision of this Agreement or application
thereof to anyone or under any circumstances shall be determined to be invalid
or unenforceable, such invalidity or unenforceability shall not affect any other
provisions or applications of this Agreement which can be given effect without
the invalid or unenforceable provision or application.
12.6 JURISDICTION; ARBITRATION. The laws of the State of New York
shall govern the interpretation, validity and effect of this Agreement without
regard to the place of execution or the place for performance thereof. Any
controversy or claim arising out of or relating to this Agreement, or the breach
thereof, shall be settled by arbitration located in New York, New York
administered by the American Arbitration Association in accordance with its
applicable arbitration rules, and the judgment on the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof, which
judgment shall be binding upon the parties hereto.
12.7 INJUNCTIVE RELIEF. The Company and the Employee agree that a
breach of any term of this Agreement by the Employee would cause irreparable
damage to the Company and that, in the event of such breach, the Company shall
have, in addition to any and all remedies of law, the right to any injunction,
specific performance and other equitable relief to prevent or to redress the
violation of the Employee's duties or responsibilities hereunder.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first written above.
OMNILYNX COMMUNICATIONS CORPORATION
By: /s/ Jospeh A. Gregori
---------------------------------------------
Jospeh A. Gregori, Chief Executive Officer
EMPLOYEE
/s/ Peter Karoczkai
-------------------------------------------------
Peter Karoczkai
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SCHEDULE A
The Senior Vice President of Sales and Marketing shall be the principal
executive officer overseeing the Company's sales and marketing. He shall,
subject to the Board of Directors, President and Chief Executive Officer, have
primary responsibility for the following: meeting or exceeding the Company's
business plan across all of the Company's business units; overseeing the
recruitment, training and deployment of the Company's sales staff to meet
company goals; developing a cohesive marketing strategy for the bundling of the
Company's products; developing overall product and pricing offerings; defining
overall distribution strategy across all owned and non-owned distribution
channels; establishing profitable cost of acquisition targets; participating in
the strategic development and growth of the Company; assisting in the
acquisition strategy and post-acquisitions integration process; and implementing
Competitive Local Exchange Carrier opportunities including interconnection
agreements with the Regional Bell Operating Companies.
A-1
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AGREEMENT FOR
BILLING AND COLLECTION SERVICES
BETWEEN
AXCES, INC.
CIC 5071 -- ACNA AXQ
AND
AMERITECH LONG DISTANCE INDUSTRY SERVICES
A DIVISION OF
AMERITECH SERVICES, INC.
AS AUTHORIZED REPRESENTATIVE FOR
AMERITECH ILLINOIS
AMERITECH INDIANA
AMERITECH MICHIGAN
WISCONSIN BELL, INC., d/b/a AMERITECH WISCONSIN
EFFECTIVE: JUNE 26, 1999
Revised: April 6, 1999
<PAGE>
TABLE OF CONTENTS
PRINCIPAL AGREEMENT
<TABLE>
<CAPTION>
SECTION TITLE PAGE
- ------- ----- ----
<S><C>
1. INTRODUCTION........................................................ 1
2. DEFINITIONS......................................................... 2
3. SCOPE OF SERVICES................................................... 2
4. CONTRACT DOCUMENTS.................................................. 3
5. MODIFICATIONS....................................................... 4
6. APPLICATION OF AGREEMENT............................................ 5
7. TERM................................................................ 5
8. PURCHASE OF ACCOUNTS RECEIVABLE..................................... 6
9. PAYMENT FOR BILLING AND COLLECTION SERVICES......................... 7
10. MONTHLY MINIMUM..................................................... 7
11. TREATMENT AND COLLECTION............................................ 7
12. APPLICATION OF TAXES TO END USERS................................... 7
13. TAXES IMPOSED ON SERVICES PERFORMED BY THE AOC...................... 9
14. TAX INDEMNIFICATION................................................. 9
15. LEGAL AND REGULATORY REQUIREMENTS................................... 11
16. LIMITED WARRANTIES.................................................. 11
17. LIMITATION OF LIABILITY............................................. 11
18. INDEMNIFICATION..................................................... 13
19. CONFIDENTIAL INFORMATION........................................... 14
20. FORCE MAJEURE....................................................... 17
21. TERMINATION RIGHTS.................................................. 18
22. UNAUTHORIZED MESSAGES............................................... 20
23. ADVERTISING AND PUBLICITY; MISREPRESENTATIONS....................... 22
24. LIMITATION PERIOD................................................... 23
25. SOFTWARE............................................................ 23
26. INTELLECTUAL PROPERTY.............................................. 24
27. CERTIFICATION....................................................... 24
28. AMENDMENTS; WAIVERS................................................. 24
29. ASSIGNMENT.......................................................... 24
30. NOTICES AND DEMANDS................................................. 25
31. SUSPENSION OF PERFORMANCE; OFFSET................................... 25
32. THIRD-PARTY BENEFICIARIES........................................... 26
33. GOVERNING LAW; FORUM................................................ 26
34. SEVERABILITY........................................................ 26
35. SURVIVABILITY OF OBLIGATIONS........................................ 27
36. ENTIRE AGREEMENT.................................................... 27
37. HEADINGS............................................................ 27
</TABLE>
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LIST OF EXHIBITS
<TABLE>
<S> <C>
Appendix 1 Glossary
Appendix 2 Addresses for Notices
Exhibit A Price Schedule
Exhibit B Services and Responsible for the Provision of Billing and
Collection Services
Attachment 1 Billing Services Guidelines
Exhibit C Billing and Collection Procedures
Exhibit D-1 End-User Billing From Rated Message Input Specifications
Exhibit D-2 Purchase of Accounts Receivable From Rated Message Input
Specifications
Exhibit D-3 Billing Tape and Data Transmission Specifications
Exhibit D-4 Billing Bill Format Specifications
Exhibit E Confidential Information
Exhibit F Lists of Interexchange Carriers and Types of Messages for
Which Services are Provided
Exhibit G Ameritech Billing and Collection Services Requirements For
Handling 700 NXXX XXXX, 900 NXX XXXX, NPA 976 XXXX (or
like services) Messages
</TABLE>
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AGREEMENT FOR
BILLING AND COLLECTION SERVICES
PRINCIPAL AGREEMENT
1. INTRODUCTION
1.1 AGREEMENT AND EFFECTIVE DATE
This Agreement for Billing and Collection Services (hereinafter
"Agreement") is entered into effective June 26, 1999 ("Effective
Date") between the parties (hereinafter collectively referred to as
"Parties" and each individually as "Party") identified in Section
1.2.
1.2 PARTIES
The Parties are identified as follows:
A. Axces, Inc. (hereinafter referred to as "Customer"):
CIC 5071 - ACNA AXQ
B. The Ameritech Operating Companies (hereinafter collectively
referred to as "AOCs" and each individually as "AOC"):
Ameritech Illinois,
Ameritech Indiana,
Ameritech Michigan,
Wisconsin Bell, Inc. dba Ameritech Wisconsin
C. Ameritech Long Distance Industry Services, a division of
Ameritech Services, Inc. (hereinafter referred to as "ASI"),
acting as the AOCs' authorized representative.
1.3 BACKGROUND
A. The AOCs perform billing and collection activities for their
own account with respect to end user subscribers ("End Users")
who subscribe to local exchange telecommunications services from
the AOCs in their operating territories;
B. The AOCs have offered to provide billing and collection
services ("Services") to Customer for certain permitted types of
telecommunications related messages with respect to End Users
who are also served by Customer; and
C. Customer wishes to purchase the Services from AOC(s).
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2. DEFINITIONS
The definitions contained in the Glossary attached as Appendix 1 to this
Agreement shall apply to the entire Agreement. Any terms or words used in
this Agreement which are not specifically defined in Appendix 1 or
elsewhere in the Agreement are understood by the Parties to have their
ordinary meaning.
3. SCOPE OF SERVICES
3.1 Commencing on the Effective Date, the AOC shall provide the Services
to Customer for the Carrier Identification Code ("CIC") identified in
Section 1.2 pursuant to the terms and conditions of this Agreement.
3.2 A description of the Services included under this Agreement is set
forth in Exhibit B.
3.3 Messages sent to the AOCs for billing must relate to End Users who
subscribe to local exchange telecommunications services from the AOCs
in their operating territories. Customer shall not resubmit messages
for Rebilling except as permitted in Exhibit C, Section 2.1.1.C.(4.).
3.4 Messages which may be processed for billing under this Agreement
include only the Message types identified as permitted in Exhibit F.
AOC may at any time, in its sole discretion, modify Exhibit F to add
or delete Message types which it is willing to bill for Customer
under this Agreement, or may reject any message types for billing
regardless of whether they appear on Exhibit F. Customer shall not
submit any Message types for billing under this Agreement which are
not permitted under Exhibit F or which are of a type that AOC has
otherwise indicated it will not accept for billing.
3.5 Customer may act as a clearinghouse or aggregator of billing for
other interexchange carriers (hereinafter "Client" or "Clients")
which are identified in Exhibit F by name and subCIC. If Customer
acts as an agent or aggregator for any permitted Clients, the
following requirements apply:
A. Customer shall be responsible for ensuring that any Client
Messages forwarded to AOC for billing fully conform with the
terms and conditions of this Agreement. Client Messages shall
be considered as Customer's billing for all purposes under this
Agreement.
B. Customer shall remain solely responsible to Client for all
rights and obligations under this Agreement. AOC shall have no
obligation to deal directly with the Client, nor shall Client be
a Third Party beneficiary of this Agreement or have any claim
directly against the AOC hereunder. Customer shall serve as the
sole point of contact with its Clients.
C. Customer shall impose on its Client the duty to adhere to all
applicable terms and conditions of this Agreement regarding
billing that will be processed by AOC.
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D. Customer may not add any Clients to this Agreement or forward
billing on behalf of, received from or purchased from any Third
Party not identified in Exhibit F without the prior written
approval of AOC.
E. Any request to add a Client or subCIC to Exhibit F shall be
submitted not less than sixty (60) days prior to the expected
effective date of such addition.
F. Upon request, Customer shall furnish any information in its
possession concerning any activities by its Clients which
involve violations of Section 22 - UNAUTHORIZED MESSAGES or
Section 23 - ADVERTISING AND PUBLICITY; MISREPRESENTATIONS,
including, but not limited to, violations involving local
exchange carriers in other areas of the country.
G. AOC reserves the right to reject for any reason or no reason,
in its sole discretion, the addition of any new Clients
requested by Customer for addition to Exhibit F. AOC will not
allow the addition of new Clients with a history of End User
complaints or who have unpaid balances past due on any other
agreement with the AOCs or their Affiliates.
3.6 If no permitted Clients or subCICs are identified in Exhibit F.
Customer will forward only its own billing to AOC for processing
under this Agreement.
4. CONTRACT DOCUMENTS
4.1 This Agreement encompasses the following documents:
A. This PRINCIPAL AGREEMENT, effective as of the date set forth
in Section 1.1, which sets forth the terms and conditions for
the basic contractual relationship between the Parties;
B. APPENDIX 1, which sets forth the definitions applicable to the
entire Agreement;
C. APPENDIX 2, which sets forth the addressed for notices that
may be given under this Agreement;
D. EXHIBIT A, dated February, 1999 which sets forth the rates and
charges ("Price Schedule") for Services provided under this
Agreement;
E. EXHIBIT B, dated January 14, 1998, which describes the
Services and sets forth the responsibilities of the Parties
related to the Provision of Billing and Collection Services;
F. ATTACHMENT 1 TO EXHIBIT B, dated May 1998, which sets forth
the Billing Services Guidelines applicable to Messages submitted
for billing under this Agreement;
G. EXHIBIT C, dated February, 1999, which sets forth the Billing
and Collection Services Procedures applicable to the Services;
H. Specifications for Billing and Collection Services, all dated
March, 1997, consisting of the following:
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EXHIBIT D-1: End-User Billing From Rated Message Input
Specifications;
EXHIBIT D-2: Purchase of Accounts Receivable From Rates
Message Input Specifications;
EXHIBIT D-3: Tape and Data Transmission Specifications;
EXHIBIT D-4: Bill Format Specifications;
I. EXHIBIT E, dated March, 1997, which sets forth a list of those
items which are to be treated as Confidential Information;
J. EXHIBIT F, dated February, 1999 which sets forth the List of
Interexchange Carriers and Types of Messages for which Services
are provided under this Agreement;
K. EXHIBIT G, dated December, 1997, which sets forth the
Ameritech Billing and Collection Services Requirements for
Handling 700 NXX XXXX, 900 NXX XXXX, NPA 976 XXXX (or like
services) Messages;
4.2 The term "Principal Agreement" as used herein shall refer to this
document consisting of thirty-seven (37) sections. Except where
expressly provided otherwise, the term "Agreement" as used herein
shall include the Principal Agreement and all present Appendices,
Exhibits and Attachments thereto and, upon adoption and incorporation
herein by AOC pursuant to Sections 5.1 or 5.2 or by mutual agreement
of the Parties, all future Amendments, Appendices, Exhibits, and
Attachments.
4.3 The words "shall" and "will" are used interchangeably throughout
the Agreement. The use of one or the other shall not mean a different
degree of right of obligation for either Party.
4.4 Any conflict among the documents making up this Agreement shall be
resolved as follows:
A. The Principal Agreement shall prevail over all other
Appendices, Exhibits, and Attachments;
B. Attachment 1 to Exhibit B (Billing Services Guidelines) shall
prevail over all other Appendices, Exhibits and Attachments; and
C. Any later Addenda or amendments to this Agreement or its
Appendices, Exhibits, and Attachments shall prevail over earlier
provisions.
5. MODIFICATIONS
5.1 Customer acknowledges that, from time to time, AOC may need to
modify Exhibits B through G, including their associated attachments,
or its billing and collection procedures for various reasons,
including, but not limited to, the necessity (i) to respond to End
User complaint levels or service needs, (ii) to avoid undue burdens
or negative impacts on the AOC resulting from End User complaints or
misrepresentations affecting its brand image or reputation, (iii) to
react to changing economic conditions affecting its collections, (iv)
to conform its billing and collection procedures and the exhibits so
that there is
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uniformity in their application to itself and other customers, and
(v) to address any other commercially reasonable needs for such
changes. AOC shall have the right, in its sole discretion, to modify
its billing and collection procedures and Exhibits B through G,
including their associated attachments, upon prior written notice to
Customer.
5.2 If a new law or regulation is adopted or an existing law or
regulation is modified (whether by administrative action or
administrative or judicial interpretation thereof), which
modification or adoption impacts the billing and collection services
provided hereunder, AOC(s) shall have the right, in its sole
discretion, to amend this Agreement, including without limitation the
prices contained in Exhibit A hereto, to reflect such modification or
adoption.
5.3 AOC will endeavor to give Customer at least thirty (30) days notice
of any material modifications to this Agreement or its procedures
made under Sections 5.1 or 5.2. If any modification of this Agreement
or AOC procedures will have a material adverse impact upon Customer,
it may terminate this Agreement as provided in Section 21.3C.
6. APPLICATION OF AGREEMENT
Except where expressly provided otherwise, all references in this
Agreement to "AOC" shall mean each AOC individually, as if this Agreement
constitutes a separate Agreement between Customer and each AOC identified
in Section 1.2B. If only one AOC is identified in Section 1.2B, then all
references to "AOC" shall include only the single identified AOC, and all
plural pronouns shall be deemed to include the singular. Any reference to
a "Party" shall mean Customer or any single AOC and ASI (where
applicable), and any reference to "Parties" shall mean, as the context
requires, Customer and a single AOC and ASI (where applicable), or
Customer and all AOCs and ASI (where applicable). Certain obligations
under this Agreement are or may be undertaken by ASI on behalf of AOC.
Reference herein to AOC may include ASI, whether specified or not. AOC and
ASI shall constitute a single "Party" or "Company" whenever those terms
are used herein applicable to AOC.
7. TERM
7.1 This Agreement shall be effective as to each AOC as of the
Effective Date set forth in Section 1.1 and shall continue for a
period of one (1) year, unless earlier terminated, canceled, or
withdrawn as described in Section 21 - TERMINATION RIGHTS.
7.2 Renewal after the initial term shall be by mutual agreement.
Customer shall notify ASI not less than ninety (90) days prior to the
end of the term of its intent to either discontinue services at the
end of the term or negotiate a renewal of the Agreement.
7.3 If the parties have not negotiated a renewal or new agreement by
the end of the term, then AOC may, at its option, either: (a) upon
written notice given prior to expiration of the term, terminate all
Services at the end of the term or thirty (30) days after the date of
such notice, whichever is later, (b) continue to accept the tender of
PAR from Customer and provide Services under the same terms and
conditions as if this Agreement were extended on a month-to-month
basis, subject to termination on one month's notice, or (c) provide a
written temporary extension of this Agreement pending the completion
of
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negotiations on such renewal, subject to such amended and
additional terms as AOC may deem appropriate. If AOC provides a
temporary extension as provided in subsection (c), Customer's
continued tender of PAR after receipt of a written temporary
extension shall constitute acceptance of any amended or additional
terms specified therein by AOC.
8. PURCHASE OF ACCOUNTS RECEIVABLE
8.1 The terms and conditions applicable to the purchase of accounts
receivable ("PAR") by AOC from Customer are set forth in more detail
in Exhibit C, Section 2.1. Notwithstanding Section 4.4A, in the event
of a conflict between Section 8 - PURCHASE OF ACCOUNTS RECEIVABLE and
Exhibit C, Section 2.1, the terms and conditions of Exhibit C,
Section 2.1 shall control.
8.2 In summary, the AOC will purchase from Customer its accounts
receivable that arise from Message records submitted by Customer for
Billing under this Agreement. The amount to be paid Customer for PAR
shall be based upon revenue to be billed to End Users for Message
records accepted by the AOC, plus such additions and adjustments as
are further set forth in Exhibit C, Section 2.1.
8.3 Notwithstanding anything to the contrary in this Agreement or in
any documentation utilized in connection herewith, with respect to
charges for Customer's services provided to End Users in the State of
Indiana, AOC shall at all times act hereunder as billing agent for
Customer in rendering Services and shall not be deemed to purchase
Customer's accounts receivable that arise from bills rendered by the
AOC to End Users served by Customer. Any references in this Agreement
to PAR with respect to billing for End Users in the State of Indiana
shall be deemed to refer to AOC's role as billing agent rather than
as a purchaser of accounts receivable.
8.4 [THE FOLLOWING OPTIONAL CLAUSE DOES NOT APPLY TO A RENEWAL OR
EXTENSION OF THIS AGREEMENT OR THE REPLACEMENT BY THIS AGREEMENT OF
ANY PREVIOUS BILLING AND COLLECTION SERVICES AGREEMENT BETWEEN THE
PARTIES WHERE THERE IS NO GAP IN THE SERVICES PROVIDED.]
In determining amounts owed to Customer for PAR, the AOC applies an
Uncollectible Factor, which is a percentage amount deducted during
the calculation of the Amount Due Customer to compensate for
anticipated revenue losses resulting from the failure of the End User
to pay amounts appearing on their bills. The Uncollectible Factor is
revised quarterly to reflect to actual average level of
Uncollectibles allocable to Customer. Because this Agreement is not a
renewal or continuation of an existing billing and collection
relationship with the AOC, the AOC has established in accordance with
Exhibit C, Section 2.1.1.D.1 an initial Uncollectible Factor of Ten
percent (10%). AOC may increase this initial Uncollectible Factor at
anytime during the first nine (9) months of this Agreement if actual
experience indicates a higher percentage is necessary to more
accurately reflect Uncollectibles experienced with Customer.
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9. PAYMENT FOR BILLING AND COLLECTION SERVICES
9.1 For Services provided each month during the term of this Agreement,
Customer agrees to pay the AOC, pursuant to Exhibit C, Section 2.2,
the charges set forth in Exhibit A, Price Schedule.
9.2 Monthly charges for Services shall be on the basis of usage
multiplied by the appropriate price set forth in Exhibit A, subject
to satisfaction of the Monthly Minimum amount specified in
Section 10.
10. MONTHLY MINIMUM
Customer agrees to submit to each AOC a sufficient volume of messages to
produce charges, which, along with charges for marketing messages, and
billing-related development, will total not less than three thousand
dollars ($3,000) per month per state for which the Services are provided
("Monthly Minimum"). There is no annual volume commitment.
11. TREATMENT AND COLLECTION
11.1 In collecting amounts due for services of Customer and its Clients,
AOC shall use the same treatment, collection, and (where authorized
by the appropriate regulatory authority) denial of services
procedures as AOC uses for its own services. Customer authorizes
AOC to deny service and disconnect End Users for non-payment in
accordance with such procedures.
11.2 This Agreement does not obligate AOC to terminate End User services
for non-payment. Upon completion of AOC collection procedures for
non-payment of any charges appearing on the End User Bill, AOC may
adjust, in its sole discretion, such charges with recourse to
Customer. In addition, the Parties acknowledge that changes in
applicable laws or regulations may prevent AOC from terminating or
threatening to terminate End User service for non-payment of any
Customer charges, and that such actions may require changes in AOC
procedures.
11.3 The Customer certifies, when forwarding billing charges to AOC,
that such charges are true and correct, and accurately reflect
proper charges legally owed by the End User. This Customer
certification of validity shall apply to all billing charges
forwarded to AOC under this Agreement from whatever source. Upon
request, Customer will furnish AOC any information that is
reasonably required to verify Customer's charges, including, where
appropriate, End User's authorization for the billing of such
charges.
12. APPLICATION OF TAXES TO END USERS
12.1 BILLING OF TAXES
A. In performing Services, the AOC will apply and bill to End
Users the applicable federal, state and local sales, use,
excise, gross receipts or other taxes or additional charges
imposed on End Users or imposed on Customer and collected from
End
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Users with respect to Customer's services billed hereunder by
the AOC, excluding state and local taxes for jurisdictions
outside of the areas in which the AOCs provide local exchange
services. All such taxes and charges are referred to in the
singular as "Tax" and in the plural as "Taxes." Customer shall
be responsible for applying and providing all tax information
for state and local tax jurisdictions outside of the areas in
which AOCs provide local exchange services.
B. In applying and billing Taxes on behalf of Customer, AOC will
use the same Tax procedures as it applies to its own similar
services. AOC makes no warranties or representations as to
whether its Tax procedures accurately reflect the requirements
of the applicable Tax laws. If Customer elects to have AOC
apply its Tax procedures, Customer shall have the sole
responsibility for verifying the correct application of Tax
laws to Customer's services. Customer may, upon written
request, review the AOC's Tax procedures applicable to the
billing of Customer's services. Customer shall be responsible
for advising AOC in writing of any changes in the Tax laws
affecting the taxability of Customer's services.
C. Customer may request in writing that AOC apply modified Tax
procedures to the billing of Customer's services to:
(1) Reflect changes in the Tax laws applicable to Customer's
services to be billed under this Agreement;
(2) Correct what Customer believes are errors in the AOC Tax
procedures; or
(3) Make any other changes to AOC Tax procedures applicable
to Customer's services which Customer desires to
implement.
Provided reasonable advance notice is given and no undue
burden is imposed upon AOC in implementing such changes, AOC
agrees to use reasonable efforts to implement such modified
Tax procedures on a timely basis based upon the effective
date of service, the statutory effective date of a Tax law
change or as otherwise instructed by Customer. AOC shall
charge Customer for such implementation services at the Time
and Cost ("T&C") rates specified in Exhibit A hereto. Whenever
the AOC estimates that the time required for it to implement a
change in the Tax law would preclude its implementation by the
statutory effective date, the Parties will together apply to
the taxing authority for an appropriate extension of the
effective date of a change.
D. Both Parties acknowledge that AOC is merely acting as
Customer's agent with respect to the calculation, billing and
collection of Taxes under this Agreement. The AOC shall not be
entitled to retain or receive from Customer any statutory fee
or share of Taxes to which the person collecting such Taxes is
entitled under applicable law.
E. All communications with taxing authorities regarding Taxes
applicable to Customer shall be the responsibility of Customer.
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12.2 TAX EXEMPTIONS
A. The AOC, in its performance of Services, will apply the
exemption status it has determined for the End User and
maintain exemption certificate information derived from its
exemption certificates. To the extent permitted by law, and
except as a change may be implemented pursuant to Customer's
request as provided for in Section 12.2(B), the AOC's
exemption certificate information will be used as a basis for
exempting End Users from Taxes on Customer's services billed
hereunder by AOC.
B. If a taxing authority determines that Customer cannot rely
upon the AOC's exemption certificate information, Customer may
request a listing of exempt End Users (including pertinent End
User account, End User contact and Tax status information to
the extent in AOC's possession) and may request estimates of
AOC charges for AOC to secure exemption certificates with
respect to services billed hereunder by the AOC.
12.3 FILING OF TAX RETURNS
Customer shall be solely responsible for filing all returns for
Taxes imposed on or with respect to Customer's services billed
under this Agreement and paying or remitting all such Taxes and
other items and any applicable interest or penalties. Upon
reasonable request, AOC shall furnish to Customer on a timely basis
all information in AOC's possession that is necessary for Customer
to file its Tax returns. Customer shall promptly notify AOC if such
information is not received. Requests for such information are
subject to T&C Charges in accordance with Exhibits A and C if AOC
must make multiple submissions or use customized formats for
Customer.
13. TAXES IMPOSED ON SERVICES PERFORMED BY THE AOC
Customer shall be responsible for payment of all sales, use or other
taxes of a similar nature imposed on AOC's performance of services under
this Agreement, excluding any income tax payable by the AOC on its
revenues from such services. AOC agrees to use reasonable efforts to
invoice Customer for such taxes at the time AOCs invoice Customer for
the underlying services performed; provided, however, that this
obligation shall not be deemed to prohibit AOC from invoicing for such
taxes at a later date to correct errors or omissions from the earlier
invoice. If any federal, state or local jurisdiction notifies AOC that
any additional sales, use or other taxes (including interest, penalties
and surcharges thereon) are due as a result of AOC's performance under
this Agreement, Customer shall promptly reimburse AOC for such tax,
interest, penalty and surcharge upon notice thereof; provided, however,
that Customer shall not be required to reimburse AOC for any interest,
penalties or surcharges which are due solely as a result of a negligent
act or omission of AOC.
14. TAX INDEMNIFICATION
14.1 Customer agrees to defend, indemnify and hold the AOC harmless from
and against any liability or loss, as to services billed hereunder
by the AOC to Customer's End Users,
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resulting from any Taxes, penalty, interest, additions to Tax.
Surcharges or other charges or expenses payable or incurred by the
AOC as a result of:
A. The provision by the AOC of services covered by this
Agreement, as provided in Section 13 -- TAXES IMPOSED ON
SERVICES PERFORMED BY THE AOC;
B. The delay or failure of Customer (to the extent not
attributable to any negligent act or omission of the AOC) to
pay any Tax or such other item or file any return or other
information as required by law, tariff or this Agreement;
C. The AOC complying with any of its obligations under this
Agreement, or with any determination or direction by or advice
of Customer, or using information provided by Customer in
performing any Tax-related service hereunder; or
D. A determination by the IRS, or any other taxing authority,
whether in response to a ruling request or in the course of an
audit of either Party, that the AOC is responsible for
collecting and remitting federal, state or local taxes and
filing the applicable tax returns.
14.2 Consistent with the indemnity provided in Section 14.1, Customer
shall, at its option and expense (including, if required by a
taxing authority, payment of any such Tax, penalty, interest,
addition to Tax, Surcharge, or other charges, prior to final
resolution of the issue), have the right to seek administrative
relief, a ruling, judicial review (original or appellate level) or
other appropriate review (in a manner deemed appropriate by
Customer), as to the applicability of any Tax, penalty, interest,
addition to Tax, Surcharge, or other charges or to protest any
assessment and direct any legal challenge to such assessment, but
shall be liable hereunder for any such amount ultimately determined
to be due.
14.3 AOC shall promptly notify Customer of any proposed assessment of
any additional Taxes, penalty, addition to Tax, Surcharge or
interest due by AOC in sufficient time to enable Customer the
opportunity to seek administrative relief, a ruling, judicial
review (original or appellate) or other appropriate review as to
the applicability of such other Taxes or additional charges prior
to any assessment of additional Taxes. Customer shall assume, at
its expense, the sole defense of such Claim through counsel
selected by Customer. The AOC shall, when requested by Customer and
at Customer's expense, cooperate or participate with Customer in
any such proceeding, protest or legal challenge. AOC may at its
option and expense be represented by separate counsel. Customer
shall maintain control of such defense, except that if the
settlement of a Claim would have an adverse effect on the AOC's
relevant business, the Customer may settle the Claim as to the AOC
only with its consent, which consent shall not be withheld,
conditioned or delayed unreasonably. Customer shall pay the full
amount of any judgment, award or settlement with respect to the
Claim and all other expenses related to the resolution of the
Claim. If Customer unjustifiably refuses to defend a Claim or fails
to promptly assume the defense after its tender, AOC may retain
counsel of its choosing, and Customer shall reimburse AOC for all
costs of the defense as well as the amounts specified in the
preceding sentence.
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15. LEGAL AND REGULATORY REQUIREMENTS
The Parties shall comply with all applicable legal and regulatory
requirements, including without limitation the provisions of the
Telecommunications Act of 1996. No provisions in this Agreement shall
cause to be construed to cause either Party to violate any legal or
state/federal regulatory requirement.
16. LIMITED WARRANTIES
16.1 AOC warrants that it will provide the Services to Customer at a
performance level substantially similar to and consistent with that
level which AOC uses for or applies to its own billing and
collection operations. AOC reserves the right to determine in its
sole discretion the level of performance that it will apply to
billing and collection activities. Customer acknowledges that the
level of performance may vary over time.
16.2 AOC warrants that the operating systems it uses will be capable of
processing, providing and receiving date data before, during and
after the Year 2000 in a manner that will not adversely affect the
performance of the Services; provided, however, that Customer shall
be responsible for ensuring that all software it uses and
information transmitted to the AOC will exchange accurate date data
in such formats as may be required by the AOC operating systems.
16.3 Customer's exclusive remedy and AOC's sole liability for any
failure by AOC to meet its warranty obligations under Sections 16.1
and 16.2 shall be for AOC, at its option, to either reperform the
Services or refund any charges paid to AOC for the deficient
Services. To receive these exclusive remedies, Customer must give
AOC written notice of any such deficiencies within ninety (90) days
after completion of the affected Services. Customer's notice shall
specify in detail the nature of the deficiencies, the accounts
affected, and the dates when such deficiencies occurred.
16.4 THE REMEDIES SET FORTH IN SECTION 16.3 ARE CUSTOMER'S EXCLUSIVE
REMEDIES FOR THE BREACH OF ANY WARRANTIES GIVEN UNDER THIS
AGREEMENT. THE WARRANTIES SET FORTH IN SECTIONS 16.1 AND 16.2 ARE
IN LIEU OF ALL OTHER WARRANTIES AND AOCs MAKE NO OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES WITH
RESPECT TO TAX PROCEDURES APPLIED TO BILLING AND THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
CUSTOMER SHALL NOT HAVE THE RIGHT TO MAKE OR PASS ON, AND SHALL
TAKE ALL MEASURES NECESSARY TO ENSURE THAT NEITHER IT NOR ANY OF
ITS AGENTS OR EMPLOYEES MAKE OR PASS ON, ANY SUCH WARRANTIES OR
REPRESENTATIONS ON BEHALF OF THE AOCs TO ANY CLIENT, END-USER, OR
OTHER THIRD PARTY.
17. LIMITATION OF LIABILITY
17.1 AOCs AGGREGATE LIABILITY TO CUSTOMER FOR ALL DIRECT DAMAGES,
INCLUDING WITHOUT LIMITATION CONTRACT DAMAGES AND DAMAGES
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FOR INJURIES TO PERSONS OR PROPERTY, WHETHER ARISING FROM A BREACH
OF THIS AGREEMENT, BREACH OF WARRANTY, NEGLIGENCE, STRICT
LIABILITY, OR ANY OTHER TORT WITH RESPECT TO THE SERVICES, IS
LIMITED TO AN AMOUNT NOT TO EXCEED THE CHARGES FOR THE PARTICULAR
SERVICES GIVING RISE TO THE LIABILITY DURING THE ONE YEAR CONTRACT
TERM OR RENEWAL TERM IN WHICH THE LIABILITY AROSE. CUSTOMER
RELEASES THE AOCs FROM ANY LIABILITY IN EXCESS OF THIS AMOUNT. FOR
THE PURPOSES OF THIS AGREEMENT, CUSTOMER'S "DIRECT DAMAGES" WITH
RESPECT TO ANY MESSAGES SUBMITTED FOR BILLING INCLUDE ONLY ITS OUT
OF POCKET EXPENSES, AND DO NOT INCLUDE ANY LOST PROFITS.
17.2 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY, FOR
ANY INCIDENTAL, CONSEQUENTIAL, OR SPECIAL DAMAGES, INCLUDING
WITHOUT LIMITATION LOST REVENUES, PROFITS OR SAVINGS, EVEN IF IT
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EACH PARTY
WAIVES ANY CLAIM AGAINST THE OTHER FOR PUNITIVE OR EXEMPLARY
DAMAGES EXCEPT TO THE EXTENT THE SAME SHALL FORM PART OF AN
INDEMNIFIED CLAIM.
17.3 WITH RESPECT TO INDEMNIFIED THIRD PARTY CLAIMS, NEITHER PARTY SHALL
HAVE ANY LIABILITY TO THE OTHER FOR ANY INCIDENTAL, CONSEQUENTIAL,
OR SPECIAL DAMAGES, INCLUDING WITHOUT LIMITATION LOST REVENUES,
PROFITS OR SAVINGS, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES, IF THE PARTY SEEKING INDEMNIFICATION
COULD HAVE AVOIDED INCURRING SUCH DAMAGES BY INCLUDING LIMITATION
LANGUAGE IN THAT PARTY'S CONTRACT WITH SUCH THIRD PARTY.
17.4 WITHOUT IN ANY WAY LIMITING THE APPLICATION OF SECTIONS 17.1, 17.2,
AND 17.3, THE RIGHT TO RECOVER DAMAGES WITHIN THE LIMITATIONS
SPECIFIED IN THIS SECTION 17 -- LIMITATION OF LIABILITY IS
CUSTOMER'S EXCLUSIVE ALTERNATIVE REMEDY IN THE EVENT THAT ANY OTHER
CONTRACTUAL REMEDY FAILS OF ITS ESSENTIAL PURPOSE.
17.5 The limitations on liability set forth in Sections 17.1 and 17.2
shall not apply to:
A. AOC's indemnity obligations regarding personal injury, bodily
injury, death, or loss of or damage to tangible property under
Section 18.1A; or
B. AOC's obligation to pay Customer for the PAR, subject to
Recoursed Adjustments, payment procedures and interest as set
forth in Section 2.1 of Exhibit C or to reimburse Customer for
amounts incorrectly withheld from PAR.
17.6 A breach by any AOC of any obligation under this Agreement shall
not be considered a breach by any other AOC or constitute grounds
for termination of this Agreement with respect to any other AOC,
nor shall any AOC have any liability under this Agreement for the
acts or omissions of any other AOC. Customer may not offset any
amounts due to an AOC under this Agreement against any amount due
to the same AOC under any other
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agreement or against any amounts due to any other AOCs. AOC shall
have no liability under this Agreement and Customer shall not bring
any claims hereunder for (i) obligations, products or services
covered under tariff or another agreement, or (ii) acts or
omissions which do not directly relate to the performance of
Services specifically provided for under this Agreement.
18. INDEMNIFICATION
18.1 Each Party ("Indemnifying Party") shall defend, indemnify, and hold
harmless the other Party ("Indemnified Party") from and against any
Claims:
A. By third parties, to the extent they relate to or arise from
the negligence or misconduct of Indemnifying Party
B. Related to or arising from a violation by Indemnifying Party
of any law, regulation, rule or order applicable to its
obligations under this Agreement.
18.2 Notwithstanding Section 18.1, Customer shall defend, indemnify, and
hold harmless AOC from and against any Claims, that relate to or
arise from:
A. The use of the Services by Customer or its Clients;
B. Unauthorized Messages submitted for billing under this
Agreement by Customer or its Clients;
C. Unauthorized advertising or publicity by Customer in violation
of Section 23.1 or misrepresentations by Customer in violation
of Section 23.2;
D. Any action taken by AOC on behalf of Customer or any Client in
the collection of amounts billed to End Users for services
provided by Customer or its Clients, including, but not
limited to, disconnection of End User services, or defamation,
libel or injury to credit;
E. The provision or receipt of services provided by Customer or
its Clients which are billed to End Users under this
Agreement; or
F. Assertions by Clients or other third parties of third party
beneficiary status or other rights or obligations under this
Agreement.
The Parties acknowledge that the obligation to defend and indemnify
against Claims under this Section 18.2 is intended to apply to the
fullest extent permitted by law, including where AOC is negligent
in whole or in part.
18.3 Amounts recoverable for a Claim under this Section 18 --
INDEMNIFICATION include costs, interest, and reasonable attorneys'
fees, including the cost of in-house counsel at market rates for
attorneys of similar experience in Chicago, Illinois. Where they
are the Indemnified Party, "AOC," "ASI" and "Customer" include
their officers, directors, partners, agents, Affiliates, employees,
and subcontractors, but do not include End Users billed for
services provided by or through Customer or Clients of Customer.
Where "AOC," "ASI" or "Customer" are the Indemnifying Party, such
Party's duty to
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indemnify extends to the acts or omissions of its officers,
directors, partners, agents, Affiliates, employees, and
subcontractors.
18.4 Customer shall include similar indemnity provisions in its
agreements with Clients requiring them to indemnify the AOCs and
ASI for the Claims identified in Sections 18.1 and 18.2. The AOCs
and ASI shall be made a third party beneficiary of such indemnity
obligations, and shall have the right to enforce their
indemnification rights against such Clients.
18.5 Indemnified Party shall promptly notify Indemnifying Part of any
Claim. Indemnifying Party shall assume, at its expense, the sole
defense of such Claim through counsel selected by Indemnifying
Party. The Indemnified Party shall, when requested by the
Indemnifying Party and at Indemnifying Party's expense, cooperate
or participate with the Indemnifying Party in the defense of the
Claim. Indemnified Party may, at its option and expense, retain its
own separate counsel. Indemnifying Party shall maintain control of
such defense, except that if the settlement of a Claim would have
an adverse effect on the Indemnified Party's relevant business, the
Indemnifying Party may settle the Claim as to the Indemnified Party
only with its consent, which consent shall not be withheld,
conditioned or delayed unreasonably. Indemnifying Party shall pay
the full amount of any judgment, award or settlement with respect
to the Claim and all other expenses related to the resolution of
the Claim, except that for Claims arising under Section 18.1A, a
Party shall only be liable, as between the Parties to the extent
of its negligence.
18.6 If Indemnifying Party unjustifiably refuses to defend a Claim or
fails to promptly assume the defense after its tender, Indemnified
Party may retain counsel of its choosing (including in-house
counsel) and shall be entitled to recover from Indemnifying Party
reasonable attorneys' fees and costs (including the cost of
in-house counsel at market rates for attorneys of similar
experience in Chicago, Illinois) related to the defense of the
Claim and the enforcement of its rights under this Section 18 --
INDEMNIFICATION, as well as the amounts specified in Section 18.4
19. CONFIDENTIAL INFORMATION
19.1 INDEMNIFICATION OF INFORMATION
A. In connection with the negotiation of this Agreement and the
provision of Services hereunder, AOC and Customer will have in
their possession and control information in the form of data,
records, reports, computer programs End User customer lists,
and other documentation which is confidential or proprietary
to AOC or to Customer (hereinafter "Confidential
Information"). The Confidential Information of each Party
intended to be covered by and protected under this Section 19
-- CONFIDENTIAL INFORMATION is specifically designated in
Exhibit E.
B. "Confidential Information" also includes any information or
data that (a) if in tangible form or other media that can be
converted to readable form is clearly marked as confidential,
proprietary or private when disclosed or (b) if oral or
visual, is identified as confidential, proprietary or private
when disclosed and is
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summarized in a writing so marked and delivered within ten
days following such disclosure.
19.2 PARTIES DISCLOSING OR RECEIVING INFORMATION
As used in this Section 19 -- CONFIDENTIAL INFORMATION, "Disclosing
Party" means the Party disclosing or having an interest in the
Confidential Information or which Party is otherwise identified as
having a right to protect such information against disclosure in
Exhibit E. "Receiving Party" means the party receiving or
possessing Confidential Information or which Party is otherwise
obligated to protect such information against disclosure in Exhibit
E. The terms "Disclosing Party" and "Receiving Party" include each
Party's Affiliates that disclose or receive Confidential
Information. The rights and obligations of the Parties hereto shall
therefore also inure to such Affiliates and may be directly
enforced by or against such Affiliates.
19.3 HANDLING OF CONFIDENTIAL INFORMATION
Receiving Party shall:
A. use the Confidential Information only for the purposes of the
Agreement;
B. treat the Confidential Information with the same degree of
care as it would treat its own Confidential Information;
C. restrict disclosure of the Confidential Information to
employees, agents, and contractors of the Recipient and its
affiliates with a "need to know" and not disclose it to any
other person or entity without the prior written consent of
the Disclosing Party;
D. advise those employees, agents, and contractors who have
access to the Confidential Information of their obligations
with respect thereto; and
E. copy the Confidential Information only as necessary for those
employees, agents, and contractors who are entitled to receive
it, and ensure that all confidentiality notices are reproduced
in full on such copies.
19.4 EMPLOYEES AND CONTRACTORS
A. A "need to know" means that the employees, agents or
contractors require the Confidential Information to perform
their responsibilities in connection with this Agreement.
B. The Receiving Party shall put in place and strictly enforce
procedures to ensure that its employees, contractors and
agents are aware of and fulfill the obligations under this
Section 19 -- CONFIDENTIAL INFORMATION. Confidential
Information shall only be shared with contractors or agents of
the Receiving Party who have entered into nondisclosure
agreements to protect such information upon terms no less
restrictive than those contained in this Section.
C. For the purposes of this Agreement, "employees" includes third
parties retained by the parties for temporary administrative,
clerical or programming support. A
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"need to know" means that the employee requires the
Confidential Information to perform his or her
responsibilities in connection with this Agreement.
19.5 COMMINGLED INFORMATION
Each Party acknowledges that its Confidential Information may be
commingled with Confidential Information of the other and that each
must have access to and use of its own Confidential Information in
order to conduct its business. Accordingly, each Party shall to the
extent practicable use good faith efforts to ensure that its
Confidential Information shall be masked or rendered mechanically
inaccessible to the other Party. In the event that masking is not
accomplished despite such efforts, access shall be provided
hereunder to the commingled unmasked Confidential Information and
the Receiving Party (a) shall use its best efforts to destroy or
otherwise render unusable such information, (b) will be bound by
this Section 19 -- CONFIDENTIAL INFORMATION as to such information
and (c) will not use such information for any purpose, except as
required to fulfill its obligations under this Agreement.
19.6 INFORMATION NOT SUBJECT TO RESTRICTIONS
The obligations of this section shall not apply to Confidential
Information that the Receiving Party can demonstrate:
A. is or becomes available to the public through no breach of
this Agreement;
B. was previously known by the Receiving Party without any
obligation to hold it in confidence;
C. is received from a Third Party free to disclose such
information without restriction;
D. is furnished to a Third Party without similar restriction on
the Third Party's rights;
E. is independently developed by the Receiving Party without the
use of Confidential Information of the Disclosing Party;
F. is approved for release by written authorization of the
Disclosing Party, but only to the extent of such authorization;
G. is required by law or regulation to be disclosed, but only to
the extent and for the purposes of such required disclosure; or
H. is disclosed in response to a valid order of a court or other
governmental body of the United States or any political
subdivisions thereof, but only to the extent of and for the
purposes of such order, and only if the Recipient first
notifies the Disclosing Party of the order and permits the
Disclosing Party to seek an appropriate protective order.
19.7 PERMITTED USE
Anything to the contrary notwithstanding, nothing contained herein
shall prevent:
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A. either Party from disclosing to any of its End Users, at their
request, any billing information in such Party's possession
regarding such End User; or
B. AOC from using information of the Customer, proprietary or
otherwise, to provide End User inquiry services and to estimate
facilities usage for jurisdictional separations, and for
engineering and network planning purposes.
19.8 RETURN OR DESTRUCTION
Confidential Information, including permitted copies, shall be deemed
the property of the Disclosing Party. Except where required to be
retained to comply with applicable law or regulatory requirements,
Receiving Party shall, within twenty (20) days of a written request
by the Disclosing Party, return all Confidential Information (or any
designated portion thereof), including all copies thereof, to the
Disclosing Party or, if so directed by the Disclosing Party, destroy
such Confidential Information. The Receiving Party shall also, within
ten (10) days of a written request by the Disclosing Party, certify
in writing that it has satisfied its obligations under this Section.
19.9 INJUNCTIVE RELIEF
The parties agree that an impending or existing violation of these
confidentiality provisions would cause the Disclosing Party
irreparable injury for which it would have no adequate remedy at
law, and agree that the Disclosing Party shall be entitled to obtain
immediate injunctive relief prohibiting such violation, in addition
to any other rights and remedies available to it.
19.10 APPLICABILITY OF STATUTES, DECISIONS AND RULES
Notwithstanding any other provision in this Agreement, a Party's
ability to disclose information or use disclosed information is
subject to all applicable statutes, decisions, and regulatory rules
concerning the disclosure and use of such information which, by
their express terms, mandate or permit a different handling of such
information, including, but not limited to Section 222 of the 1996
Telecommunications Act and any regulations promulgated pursuant
thereto. However, Customer expressly waives any Claims against AOC
for use of Confidential Information so long as such use is authorized
by the End User, to the extent authorization is required by the
Telecommunications Act and any regulations promulgated thereunder.
Such waiver by the Customer is made notwithstanding any state or
federal statutory provision or regulation.
20. FORCE MAJEURE
Neither Party shall be liable or deemed to be in default under this
Agreement for any delay or failure to perform resulting from (i)
accidents, fire, labor disputes, epidemics, war, terrorist acts, riots,
insurrections, power blackouts, acts of nature or other causes beyond its
reasonable control and without its fault or negligence, (ii) acts or
omissions of the other Party or of a third party (other than the
non-performing Party's own agents or contractors), or (iii) compliance
with any law, regulation, ruling, order or requirement of any federal,
state or municipal government or department or agency or court of
competent jurisdiction (a "Force Majeure Condition"). Any delay resulting
therefrom shall extend performance accordingly or excuse performance, in
whole
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or in part, as may be reasonable. In the event of such delay, the AOC
shall perform Services for Customer in the same manner as it performs
similar services for itself.
21. TERMINATION RIGHTS
21.1 Either Party shall have the right to terminate this Agreement at
any time for its convenience, with or without cause, upon sixty (60)
days prior written notice.
21.2 AOC shall have the right to terminate this Agreement:
A. Upon ten (10) days prior written notice in the event of a
default by Customer in any payment obligation, if such default
is not cured within such ten (10) day period;
B. Immediately, upon repeated failure by Customer or any of its
Clients to comply with the requirements of Section 22 -
UNAUTHORIZED MESSAGES or Section 23 - ADVERTISING AND PUBLICITY;
MISREPRESENTATIONS;
C. Upon thirty (30) days prior written notice to Customer in the
event of any other default under or breach of any material term
or condition of this Agreement by Customer or any of its
Clients, if such default or breach is not cured by Customer
within such thirty (30)-day period;
D. Upon thirty (30) days prior written notice to Customer in the
event of any default under or breach of any material term or
condition of any other Agreement between the Parties, if such
default or breach is not cured by Customer within such thirty
(30)-day period;
E. Upon thirty (30) days prior written notice to Customer in the
event of a misrepresentation under Section 23 - ADVERTISING AND
PUBLICITY; MISREPRESENTATIONS, if Customer fails to refute the
results of AOCs investigation into such misrepresentation with
proofs satisfactory to AOC within such thirty (30)-day period;
F. Immediately upon written notice to Customer in the event any
representation, report, certificate, authorization, financial
statement or other statement furnished under this Agreement
proves to be false or misleading in any material respect as of
the date on which the same was made; or
G. Immediately upon written notice to Customer if Customer
becomes or is declared insolvent or bankrupt, is the subject of
any proceedings related to its liquidation, insolvency or for
the appointment of a receiver or similar officer, makes an
assignment for the benefit of all or substantially all of its
creditors, admits its inability to pay its debts as they come
due, or enters into an agreement for the composition, extension,
or readjustment of all or substantially all of its obligations,
but only if and to the extent such termination is not prohibited
by law.
21.3 Customer shall have the right to terminate this Agreement:
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A. In the event of a default under or breach of any material term
or condition of this Agreement by AOC, upon thirty (30) days
prior written notice to AOC if the default or breach is not
cured by AOC within such thirty (30)-day period;
B. If a Force Majeure Condition occurs and results in a delay or
failure in performance of a material obligation of an AOC under
this Agreement for more than sixty (60) days, or
C. In the event of a modification of this Agreement or AOC
procedures under Section 5 - MODIFICATIONS which has a material
adverse impact upon Customer's current operations, provided that
notice of termination is given and made effective at anytime
within thirty (30) days after Customer's receipt of notice of
such modification.
21.4 A default or breach by one AOC of this Agreement shall not, by
itself, constitute a default or breach with respect to any other AOC.
If the default or breach affects only one AOC, then only the
relationship with the affected AOC may be terminated.
21.5 Wherever AOC has the right to terminate under this Agreement, it
may, in lieu of termination of this entire Agreement, elect to: (i)
terminate only a portion of this Agreement; (ii) terminate only with
respect to a particular AOC, (iii) suspend Services in whole or in
part, (iv) refuse to provide new or additional Services under this
Agreement, (v) refuse to accept certain types of Messages, (vi)
refuse to accept messages from a particular CIC or subCIC, (vii)
refuse to allow the addition of any new CIC or subCIC to this
Agreement, or (viii) take any other similar action less than
termination of the entire Agreement. Such election shall be subject
to notice and opportunity to cure, if applicable, within the same
periods as specified in Section 21.2. Any such election shall be
without prejudice to AOC's right to initiate termination of the
entire Agreement for the same breach or default, provided it gives
first gives Customer notice of its intent to terminate the entire
Agreement and affords Customer any applicable cure period before such
termination becomes effective.
21.6 Upon termination of this Agreement, Customer shall pay to the
affected AOCs the balance of the total Monthly Minimums which remain
owing through the balance of the Term at the time of termination if
(i) Customer terminates for convenience under Section 21.1 or (ii)
AOC terminates because of a breach or default by Customer under
Section 21.2.
21.7 Upon termination of this Agreement by either Party under Section
21.1, both Parties shall be responsible for paying any and all
outstanding amounts due to the other Party. With respect to Customer,
these amounts may include, but are not limited to, Customer and
Client's unbillables, post-billing adjustments, uncollectibles
moneys, and charges for Services that occur for a period of twelve
(12) months after the termination of this Agreement as provided in
Exhibit C, Section 2.1.2. With respect to AOC, these amounts may
include, but are not limited to, all outstanding net amounts due
for PAR.
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22. UNAUTHORIZED MESSAGES
22.1 Customer warrants and represents that:
A. Customer will submit only true and correct billings for
charges properly authorized by End Users;
B. Customer will establish and maintain (i) adequate procedures
for handling End User complaints consistent with industry norms
and (ii) a toll-free number which End User's may contact to
register complaints concerning the services of Customer and its
Clients, and
C. Customer and its Clients, and their employees, sales agents or
representatives do not and will not engage in any deceptive or
fraudulent practice in marketing the services for which Customer
is submitting billing to AOC.
22.2 Customer and its Clients shall be responsible for providing End
Users with understandable and appropriate information concerning the
rates, terms, and responsibilities associated with the services for
which Customer is submitting billing under this Agreement. Customer
or its Clients shall obtain End User authorization for such services
in a manner that is reasonably subject to verification and shall
retain all verification documentation or media for a period of not
less than three (3) years from the date of such End User
authorization. All Message types submitted by Customer and its
Clients and all collection and billing activities engaged in by
Customer in connection with this Agreement shall be in strict
compliance with applicable law and regulations and shall not be
fraudulent or deceptive. In addition, all Message types shall conform
with the terms and conditions of this Agreement, including the
provisions of the following Section 22.3.
22.3 For the purpose of this Agreement, "Unauthorized Messages" are
those Messages which:
A. Are not of a type listed as permitted under Exhibit F;
B. Result from "slamming," i.e., improperly switching the End
User from another carrier without proper authorization from the
End User;
C. Result from "cramming," i.e., the submission of unauthorized,
deceptive or ambiguous charges for inclusion on the End User
bill;
D. Involve deceptive or fraudulent billing activities;
E. Do not comply with the Billing Services Guidelines set forth
in Attachment 1 of Exhibit B, as periodically updated;
F. Are not directly related to intraLATA toll, interLATA or
international telecommunications services; or
G. Do not substantially involve the transmission of information
or data using telecommunications services.
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22.4 As used in this 22 - UNAUTHORIZED MESSAGES, the term "Unauthorized"
means the Messages were either not authorized by the End User or are
not authorized by AOCs' for billing under this Agreement. For the
purposes of Section 22.3, Messages or sales programs which generate
higher numbers of End User complaints that would otherwise be
anticipated by AOCs in their sole discretion shall be deemed to be
inherently deceptive, and thus constitute Unauthorized Messages upon
AOCs giving notice thereof to Customer.
22.5 Customer shall not forward to AOC for billing any Messages or
Invoice Ready Billing statements containing Unauthorized Messages.
If AOC determines it has received Unauthorized Messages from Customer
(or from any party on whose behalf Customer submits messages to AOC
for billing) or if AOC experiences a significant increase in End User
complaints about Unauthorized Messages appearing in Customer's
portion of the End User Bill, AOC will notify Customer in writing of
the claims concerning Unauthorized Messages, giving sufficient detail
for Customer to investigate such claims. Customer shall provide a
written response to such notice within ten (10) Business Days with
either sufficient detail to refute the claims of Unauthorized
Messages or a description of a plan of action Customer will
immediately take to prevent any additional similar incidents of
Unauthorized Messages. Upon request of AOC, Customer shall furnish
copies of any documentation or media which verifies the End User's
authorization of the services received from Customer or its Clients.
22.6 Upon request of an End User, Customer shall agree to block the End
User's account from receiving services or charges from Customer. If
the End User request involves the services of a Client, Customer
shall ensure that the affected Client takes action to block the End
User's account. Upon receipt of any valid End User claim regarding
Unauthorized Messages, Customer shall promptly issue a credit to the
End User account.
22.7 In the event of any End User claim regarding Unauthorized Messages
in Customer's portion of the End User Bill, AOC may immediately
adjust such charges from the End User Bill and recourse them to
Customer. If Customer fails to respond to the notice of Unauthorized
Messages under Section 22.4 or fails to immediately implement its
plan of action to prevent additional occurrences, then such failure
shall constitute a breach of this Agreement for which AOC may resort
to its termination rights under Section 21.2, including its right to
suspend performance in whole or in part or take such other action
less than complete termination as permitted under Section 21.5.
22.8 Notwithstanding anything to the contrary elsewhere in this
Agreement, AOC may disclose to federal, state, and local public and
law enforcement agencies and to other local exchange carriers any
information it may have concerning Unauthorized Messages involving
Customer or its Clients. To the fullest extent permitted by law,
Customer authorizes AOC to release such information. AOC shall have
no obligation to give Customer notice of such disclosures. Where
practical, AOC shall endeavor to give Customer prior notice of such
disclosure.
22.9 AOC reserves the right to amend this Principal Agreement or any of
its Exhibits or Attachments to implement additional measures to
prevent the occurrence of Unauthorized Messages in response to
industry or regulatory initiatives or on its own initiative.
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23. ADVERTISING AND PUBLICITY; MISREPRESENTATIONS
23.1 Neither Customer nor its Clients shall publish or use the name,
service mark or trademark of the AOCs or any AOC Affiliates in any
advertising, telemarketing, direct mail or other promotions or any
other publicity material relating to the Services provided under this
Agreement or any products or services of Customer or its Clients
billed under this Agreement without the prior written authorization
of ASI.
23.2 Neither Customer nor its Clients, nor their employees, contractors
or agents, shall make any misrepresentations concerning their
affiliation with the AOCs or any AOC Affiliates, or imply that
products or services of Customer or its Clients are associated with
or endorsed by the AOCs or AOC Affiliates.
23.3 In the event of any violation of Sections 23.1 or 23.2, Customer
shall reimburse AOC for any out of pocket expenses incurred by AOC in
investigating such violation, as well as for any lost profits or
costs associated with the loss or restoral of End User accounts.
Customer also acknowledges and agrees that any violations of Section
23.1 or 23.2 would cause damages to the reputation and business good
will of the AOCs and their Affiliates which are difficult, if not
impossible, to estimate. Accordingly, Customer agrees to pay, as
liquidated damages and not as a penalty, the following amounts as
damages for loss of reputation and business good will for each such
violation:
<TABLE>
<CAPTION>
Type of Violation Liquidated Damage Amount
----------------- ------------------------
<S> <C>
Residential customer sales $500 per customer solicited
Small business sales (10 lines or less) $1,000 per customer solicited
Large business sales (11 lines or more) $50,000 per customer solicited
Advertising or mass market promotion, $1,000,000 per advertisement
including those using electronic media or mailing
</TABLE>
23.4 Upon investigation and determination that a violation has occurred,
AOC shall notify Customer of the results of its investigation and may
also give notice of termination of this Agreement under Section
21.2E. Within thirty (30) days after the giving of such notice,
Customer shall either refute the results of the AOCs' investigation
with proofs satisfactory to the AOCs or pay the amount of liquidated
damages claimed. If Customer fails to either refute such results or
pay the damages owed within such period, then the amounts claimed by
AOCs shall be deemed conclusive as to such damages, and the AOCs may
take appropriate action to collect such damages, including, but not
limited to, offsetting them against any amounts owed to Customer or
its Clients under this Agreement.
23.5 Where liquidated and other damages recoverable under Section 23.3
relate solely to actions of a Client, the AOCs will restrict any
claims or offsets against PAR Amounts owed to Customer to amounts
relating to the involved Client if Customer (i) has inserted clauses
in its agreements with such Client substantially similar to those set
forth in this Section 23 - ADVERTISING AND PUBLICITY;
MISREPRESENTATIONS and (ii) cooperates with the AOCs in identifying
PAR Amounts allocable to such Client. Such
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restriction on claims shall apply only against Customer, and shall
not be deemed to restrict AOCs rights or remedies with respect to the
involved Client.
23.6 AOCs' acceptance of liquidated damages as provided in Section 23.3
shall not constitute authorization for Customer or its Clients to use
the name, service mark or trademark of the AOCs or any of their
Affiliates, nor shall it constitute a waiver of any other remedies
that the AOCs or their Affiliates may have at law or in equity,
including, but not limited to, the right to seek injunctive relief
for continuing violations of Sections 23.1 or 23.2. Customer agrees
that a continued violation of Sections 23.1 or 23.2 would cause the
AOCs or their Affiliates irreparable injury for which they would have
no adequate remedy at law, and that the AOCs or their Affiliates
shall be entitled to seek immediate injunctive relief prohibiting
such violation, in addition to any other rights and remedies
available to them. Customer waives any right to require that the AOCs
or their affiliates post a bond.
23.7 Customer shall include, and AOCs and their Affiliates shall be made
third party beneficiaries of, similar rights and obligations to those
set forth in this Section 23 - ADVERTISING AND PUBLICITY;
MISREPRESENTATIONS in Customer's agreements with its Clients.
24. LIMITATION PERIOD
24.1 No Claim under this Agreement may be made or brought by any Party
more than one (1) year after the date of the event that gave rise to
the Claim; provided, however, that:
A. If a Party was not aware of the event giving rise to a Claim,
then the period for bringing a Claim under this Section shall be
extended to either one (1) year from the date such Party
discovered or reasonably should have discovered such event or
two (2) years from the occurrence of such event, whichever
period is shorter;
B. A Claim for indemnification under this Agreement may be made
or brought by a Party for two years after the accrual of the
cause of action for indemnity as described in Section 18 -
INDEMNIFICATION; and
C. Any Claim in the nature of fraud may be brought within two
years of discovery of the existence of such fraud or concealment.
24.2 Any Claim for fraud shall be in writing and shall set forth in
reasonable detail the basis therefor.
25. SOFTWARE
AOC or its contractors or agents may develop specifications, drawings,
documentation, concepts, methods, techniques, processes, adaptations, and
ideas including, but not limited to, software (hereinafter "Software") for
the purpose of rendering Services to Customer under this Agreement. Unless
otherwise agreed in writing by authorized representatives of the Parties,
in advance of the creation of the Software, AOC shall own all right,
title, and interest, including copyright, in and to the Software.
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26. INTELLECTUAL PROPERTY
Except as otherwise expressly provided herein, nothing contained in this
Agreement shall be construed as conferring by implication, estoppel, or
otherwise any license or right under any patent, trademark, trade name,
copyright, or other intellectual property right of either Party.
27. CERTIFICATION
Customer warrants and represents that it has obtained and will keep
current all necessary jurisdictional certification required to conduct
the business for which it will submit charges for billing under this
Agreement. Customer certifies that all Clients forwarding charges for
billing through Customer have also obtained similar certification. Upon
request, Customer will provide satisfactory evidence of all such
certifications. AOC shall have no obligation to process any Customer
billing that is forwarded on behalf of a Client which has not obtained
proper certification or whose certification is revoked or suspended.
Failure to obtain or retain proper certification or to furnish
satisfactory proof thereof shall constitute a material default under
this Agreement for which AOC may resort to termination remedies under
Section 21.2C.
28. AMENDMENTS; WAIVERS
This Agreement (or any part thereof, including Exhibits or documents
referred to herein) may be modified or additional provisions may be
added by written agreement signed by or on behalf of Customer, and each
affected AOC or ASI, unless otherwise provided herein. No amendment or
waiver of any provision of this Agreement and no consent to any default
under this Agreement shall be effective unless the same shall be in
writing and signed by the Party against whom such amendment, waiver or
consent is claimed. In addition, no course of dealing or failure of any
Party to strictly enforce any term, right or condition of this Agreement
shall be construed as a waiver of such term, right or condition.
29. ASSIGNMENT
29.1 Neither Party shall assign any right or obligation under this
Agreement without the other Party's prior written consent. Any
attempted assignment shall be void.
29.2 Notwithstanding Section 29.1, Customer may assign money due or to
become due to it from AOC for the purchase of PAR, provided (i)
Customer gives AOC at least thirty (30) days prior written notice
of such assignment, (ii) such assignment shall not impose upon AOC
obligations to the assignee other than the payment of such moneys
and (iii) such assignment shall not result in the filing or claim
of a security interest in any PAR offered to AOC for purchase under
this Agreement.
29.3 Notwithstanding Section 29.1, either Party may assign this
Agreement, in whole or in part, to:
A. A parent corporation;
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B. Any company into which a Party may merge or consolidate or
which acquires substantially all of its assets or stock; or
C. A wholly owned Affiliate of the parent corporation which is of
a financial standing equal to or greater than that of the
assignor.
Any assignment under this Section 29.3 shall not require the
consent of the other Party, but the assigning Party shall provide
written notice to the other Party within thirty (30) days of such
assignment. An assignment under this Section shall not increase the
scope of the Services which AOC is obligated to provide by more
than ten percent (10%). If the company into which Customer merges
or consolidates or which merges and consolidates with Customer also
has a billing and collection agreement with AOC, then the more
recent of the billing and collection agreements between the Parties
will survive such merger or consolidation and govern the billing
and collection services provided thereafter by AOC to the surviving
company.
29.4 Without limiting the generality of the foregoing, this Agreement
shall be binding upon and shall inure to the benefit of the
Parties' respective successors and assigns.
30. NOTICES AND DEMANDS
30.1 Except as otherwise provided under this Agreement, all notices,
demands, or requests which may be given by any Party to the other
Party shall be in writing and shall be deemed to have been duly
given on the date delivered in person or via overnight express
deliveries service, or on the third Business Day following the date
deposited, postage prepaid, in the United States mail, to the
respective Parties and addressed as set forth in Appendix 2 --
Addresses For Notices to this Agreement.
30.2 If personal delivery is selected as the method of giving notice
under this Section, a receipt of such delivery shall be obtained.
The address to which such notices, demands, requests, elections or
other communications is to be given by any Party may be changed by
written notice given by such Party to the other Party pursuant to
this Agreement.
31. SUSPENSION OF PERFORMANCE; OFFSET
31.1 Upon notice of Customer, AOC may suspend performance of this
Agreement immediately if Customer is in breach of any other
agreement between the parties.
31.2 If Customer fails to pay when due any monthly charges for Services,
any recourse adjustments or any interest or other amounts due to AOC
under this Agreement, then in addition to any other rights AOC may
have under this Agreement, AOC may refuse to provide any further
Billing and Collection Services, directly or indirectly, to
Customer, including billing and collection services on Customer
Accounts received through an aggregator, affiliate or other agent
of Customer. If AOC does not accept any Customer accounts for
Services while Customer is past due on any amounts owing to AOC,
then AOC may deduct the amounts owed from any PAR owed to Customer
or its agent on Customer's behalf.
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<PAGE>
31.3 Notwithstanding anything to the contrary in this Agreement, if
Customer's financial condition becomes impaired or if Customer
fails to pay its obligations to the AOCs as they become due,
Customer agrees that AOC may offset any amounts owed by Customer to
AOC against any amounts AOC may owe Customer under this Agreement,
under any other agreement between the parties, or for services
provided under any applicable tariff.
31.4 Where Customer acts as an agent or aggregator of a Client or any
other Third Party and such Client or Third Party has an outstanding
balance due to the AOC, the AOC may net any amounts due to the AOC
against payments due the Customer, not to exceed the Message
revenues associated with such Client or Third Party; provided,
however, that such netting will be subject to (i) any changes,
offsets, or other claims of Customer against Client, and (ii) any
valid claims of third parties having a priority over AOC's claim
against the Client, such as an assignment of the Client's
receivables of which Customer has received prior notice. Customer
shall cooperate with AOC in determining the revenues owing to
Client which are subject to netting under this Section. If AOC nets
such amounts owed by Client against amounts due to Customer under
this Agreement, AOC will assign its claim to such revenues to
Customer upon request. AOC will indemnify and hold Customer
harmless against any claims against Customer arising from netting
under this Section.
32. THIRD-PARTY BENEFICIARIES
Except as provided in Section 18.3 -- INDEMNIFICATION, this Agreement
shall not provide any person not a party to this Agreement with any
remedy, claim, liability, reimbursement, claim of action or other right
in excess of those existing without reference to this Agreement.
33. GOVERNING LAW; FORUM
The construction and interpretation of this Agreement and any Claim
arising hereunder or related hereto, whether in contract or tort, shall
be governed by the domestic laws of the State of Illinois. Any lawsuit
instituted by either party in connection with this Agreement shall only
be brought in the Circuit Court of Cook County, Illinois or Federal
Court for the Northern District of Illinois, and both parties hereby
consent to the personal jurisdiction of such courts.
34. SEVERABILITY
If any provisions of this Agreement shall be held invalid or
unenforceable for any reason, such invalidity will affect only the
portion of the Agreement that is invalid. In all other respects this
Agreement will stand as if such invalid or unenforceable provision had
not been a part thereof, and the remainder of the Agreement shall remain
in full force and effect. Additionally, the parties shall endeavor to
replace the provision with a valid and enforceable provision acceptable
to both Parties which so far as possible achieves the same economic and
other benefits for the Parties as the severed provision was intended to
achieve.
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35. SURVIVABILITY OF OBLIGATIONS
Notwithstanding expiration or termination of this Agreement, the
provisions of this Agreement and each Party's obligations hereunder,
which by their nature or context are required or intended to survive,
shall survive and remain in full force and effect after such expiration
or termination.
36. ENTIRE AGREEMENT
This Agreement (including all Appendices, Exhibits, and/or Attachments
hereto) constitutes the entire agreement between the Parties and
supersedes all prior agreements, oral or written representations,
statements, negotiations, proposals and undertakings with respect to the
subject matter hereof. Except as otherwise provided in this Agreement,
no modification, amendment, supplement to or waiver of this Agreement or
any of its provisions shall be binding upon the Parties unless made in
writing and duly signed by authorized representatives of both Parties.
37. HEADINGS
The headings in this Agreement are for convenience and shall not be
construed to define or limit any of the terms herein or affect the
meanings or interpretation of this Agreement.
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<PAGE>
AXCES, INC.
CIC 5071 -- ACNA AXQ
/s/ Timothy J. Till
By: ____________________________________________________________
Timothy J. Till
Printed Name: __________________________________________________
President
Title: _________________________________________________________
6-7-99
Date: __________________________________________________________
AMERITECH LONG DISTANCE INDUSTRY SERVICES
a division of Ameritech Services, Inc.
For itself and as authorized representative for:
AMERITECH ILLINOIS,
AMERITECH INDIANA,
AMERITECH MICHIGAN,
WISCONSIN BELL, INC., d/b/a AMERITECH WISCONSIN
/s/ Debra L. Futris
By: ____________________________________________________________
Debra L. Futris
General Manager -- Billing and Customer Information Systems
6/21/99
Date: __________________________________________________________
28
AMERITECH CONFIDENTIAL
Subject to restrictions on first page
<PAGE>
WHOLESALE SERVICE AGREEMENT
By and Between
FRONTIER COMMUNICATIONS OF THE WEST, INC.
And
AXCES, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION
- -------
<S> <C>
1. Services; Purchaser Representations
2. Term of the Agreement
3. Billing and Payment
4. Billing Disputes
5. Termination Rights
6. Limitation of Action
7. Taxes and Assessments
8. Amendment
9. Warranties and Limitation of Liability
10. Indemnification
11. Representation
12. Force Majeure
13. Waivers
14. Assignment
15. Confidentiality
16. Integration
17. Construction
18. Governing Law
19. Notices
20. Counterparts
21. Compliance with Laws
22. Third Parties
23. Survival of Provisions
24. Unenforceable Provisions
EXHIBITS
- --------
Exhibit A General and Service Definitions
Exhibit B Ancillary Fee Schedule
Exhibit C Call Detail Records; Order Processing Procedures; Letter of
Agency Requirements
Exhibit D Tax Exemption Form
Exhibit E National Origination Service (1+)
Exhibit F National Origination Service (800 Switched & Dedicated)
Exhibit G National Origination Service (Dedicated)
Exhibit H National Origination Service - (Switched International)
Exhibit H(a) National Origination Service - (Dedicated International)
</TABLE>
2
<PAGE>
WHOLESALE SERVICE AGREEMENT
This Wholesale Service Agreement ("AGREEMENT") is entered into between the
provider of service, Frontier Communications of the West, Inc. on behalf
of itself and its affiliates ("FRONTIER"), A California corporation located
at 135 East Ortega Street, Santa Barbara, CA 93101 and Axces, Inc.
("PURCHASER"), a Delaware corporation with its principal place of business
located at 2500 Wilcrest, Suite 540, Houston, Texas 77042 (hereinafter,
Frontier and Purchaser may be referred to in the aggregate as "PARTIES", and
each singularly as a "PARTY".)
PURPOSE
The Parties are telecommunications carriers subject to the Communications Act
of 1934, as amended. Purchaser desires to purchase network transport and
other telecommunication services from Frontier for Purchaser's resale to
business and residential customers on a common carrier basis. The Parties
agree as follows:
1. SERVICES; PURCHASER REPRESENTATIONS:
-----------------------------------
(a) Frontier shall, in accordance with the rates, terms and conditions
set forth herein, provide services to Purchaser, as those services
are defined herein or identified on exhibits, schedules or other
attachments appended hereto and made a part of this Agreement from
time-to-time in accordance with the terms hereof (collectively,
"SERVICES").
(b) Purchaser agrees to provide Frontier with at least 30 days prior
written notice of Service requirements that may exceed anticipated
or normal course of Service requirements utilized by Purchaser.
Provision of Services is contingent on availability of facilities
and resources of Frontier.
(c) Purchaser shall provide Frontier with a forecast covering a good
faith estimate based on historical information (if available) of
the monthly traffic volume and geographic distribution for the
ordered Services. The estimate will be for the 3 calendar month
period following the desired activation date. The forecast is to be
in the format supplied or approved by Frontier. Frontier reserves
the right to request updated forecasts. Forecasts do not constitute
a binding commitment on the part of Purchaser.
(d) Orders for Services will be transmitted and processed in
accordance with the procedures set out in Exhibit C attached hereto
and made a part hereof as the same may be modified from time to
time by Frontier.
(e) Any Carrier Identification Code ("CIC") arrangement between the
Parties will be set out in writing as an attachment to this
Agreement. Purchaser is responsible for obtaining its own CIC.
(f) Purchaser is solely responsible for all billing, collection and
customer service activities for End-Users, except as may otherwise
be provided herein. Purchaser acknowledges and affirms that
Purchaser's financial obligations to Frontier regarding Services
provided must be satisfied in full, as hereinafter provided,
whether or not Purchaser has billed or collected from End-Users.
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<PAGE>
(g) Purchaser represents and warrants that prior to obtaining the
Services in any jurisdiction it will be qualified to do business in
such jurisdiction and will maintain good standing in such
jurisdiction during the term of this Agreement. Purchaser further
represents and warrants that prior to obtaining the Services in any
jurisdiction it will be certified by the proper regulatory agencies
to provide the Services purchased hereunder to End-Users in such
jurisdiction.
(h) Purchaser represents and warrants that it will not resell the
Services to other telecommunications carriers, resellers or
aggregators.
2. TERM OF THE AGREEMENT:
---------------------
(a) INITIAL TERM: This Agreement is effective and the Parties'
obligations commence upon the date of execution by Frontier
("EFFECTIVE DATE") and continues in effect for a period of 4 years
("INITIAL TERM") from either the day Service is first utilized by
Purchaser on Frontier's network (as determined by Frontier's
records), or the 120th day after the Effective Date, whichever date
occurs first.
(b) AUTOMATIC RENEWAL: This Agreement renews automatically for a 1 year
period at the expiration of the Initial Term, unless canceled in
accordance with the terms hereof ("SUBSEQUENT TERM"). Each
Subsequent Term renews automatically for a 1 year period upon its
expiration, unless canceled in accordance with the terms hereof.
(c) CANCELLATION: If either Party desires to terminate this Agreement
upon expiration of any term, such Party shall give the other Party
written notice of its intent to cancel at least 90 days prior to
expiration of the then current term.
3. BILLING AND PAYMENT:
--------------------
(a) The initial pre-payment shall be $10,000. With Frontier's prior
consent, Purchaser may submit some other form of security or
assurance of payment satisfactory to Frontier in lieu of a cash
payment for the initial pre-payment.
(b) Frontier invoices Purchaser via facsimile on or about the fifth
Business Day after the close of each Billing Cycle for the Services
and for any other sums due Frontier ("INVOICE"). Each invoice
details: (i) the amount due Frontier, or the credit due Purchaser,
after a reconciliation between the actual charges for the Services
for the prior Billing Cycle and any pre-payment for the prior
Billing Cycle, and (ii) any other sums due Frontier. In addition
to the amounts under (i) and (ii) above, the Invoice will provide
for a pre-payment equal to 100% of the actual charges for the
Services for the prior Billing Cycle (exclusive of any
non-recurring charges). If Purchaser has submitted a letter of
credit that has an expiration date greater than 45 days after the
Invoice date, or a cash deposit or other assurance of payment, the
pre-payment will be reduced by the amount of the security (but to
not less than zero).
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<PAGE>
(c) Each invoice shall be paid by Purchaser via wire transfer of
immediately available U.S. funds to an account designated by
Frontier so that the payment is received by Frontier no later than
seven (7) calendar days form the date of the invoice (the "DUE
DATE"). Frontier agrees that (i) the Invoice date will be the same
day the invoice is faxed to Purchaser, and (ii) the Invoice will be
faxed on a Business Day. Any Invoice not paid by the Due Date shall
bear late payment fees at the rate of 1-1/2% per month (or such
lower amount as maybe required by law) until paid.
(d) The Purchaser facsimile number and contact for purposes of this
Section 3. is 213/781-9396. Attention: Michael Avignon. Purchaser
may change the facsimile number and contact upon written notice to
Frontier.
(e) If Purchaser is delinquent in payment of an Invoice or Frontier
does not have security from Purchaser equal to Purchaser's prior
month usage charger, Frontier may demand and receive additional
security from Purchaser.
(f) FRAUDULENT USAGE:
Frontier is not responsible for, and Purchaser shall defend and
indemnify Frontier against, any fraudulent use of Service. Any
claims of fraud shall not constitute valid justification for
dispute of an Invoice, Purchaser is solely responsible for all
Services usage, allegedly fraudulent or otherwise, and for all
additional charges as may be associated with such usage. Frontier
will monitor End-User call activity for fraudulent use using the
same procedures Frontier uses for its own customers, except
Frontier will contact Purchaser, but will not directly contact and
End-User, with respect to suspected fraudulent use.
(g) Purchaser agrees to pay to Frontier any and all local exchange
carrier-assessed and governmentally imposed charges levied upon
Frontier as a result of Services provided to Purchaser, including
but not limited to:
(i) primary interexchange carrier ("PIC") change charges. Because
of the cost to Frontier associated with administering PIC
retractions, Frontier may at any time asses the administrative
fee(s) set out in Exhibit B for PIC change reversals;
(ii) assessments by the National Exchange Carrier's Association,
Inc. (NECA) including but not limited to, the Universal Service
Fund/Lifeline Assistance (USF/LA), the Telecommunications Relay
Service (TRS) Fund, and other assessments as may be assessed by
NECA in the future relative to the Services;
(iii) assessments by regulatory agencies, including but not limited
to, the Federal Communications Commission (FCC) and state
Public Utility/Service Commissions;
(iv) National Administrative Services Center assessments (including
any monthly recurring charges) for "800"/"888" service
installation;
(v) charges set out in the Schedule of Ancillary Fees attached
hereto as Exhibit B and made a part hereof.
5
<PAGE>
(h) Commencing with Purchaser's sixth invoice, Purchaser is liable for
a monthly minimum usage charge for the Services of $50,000; at the
twelfth (12th) month Invoice the monthly minimum usage charge will
be $75,000; at the eighteenth (18th) month Invoice the monthly
minimum usage charge will be $150,000; and, at the twenty-fourth
(24th) month Invoice and forward the monthly minimum usage charge
will be $250,000 (the "MINIMUM CHARGE"). If Purchaser's net charges
(after any discounts or credits) for the Services are less than the
Minimum Charge in any month, Purchaser shall pay the shortfall (the
"MONTHLY SURCHARGE"). If this Agreement is terminated prior to the
time the Minimum Charge becomes effective (other than termination
by Purchaser for an uncured breach by Frontier), Purchaser shall pay
an amount equal to the difference between: (i) the actual charges
to Purchaser for usage of the Services for the period up to the
date of termination, and (ii) the amount of charges for such usage
calculated at the applicable Frontier rates in effect at the time
the Services were provided (the "DISCOUNT MAKE-UP CHARGE").
(i) Frontier may revise the rates and monthly recurring and other
charges in this Agreement (and any exhibit, attachment or schedule)
at any time upon written notice to Purchaser. If the effective rates
for the Services are increased pursuant to this paragraph, then
Purchaser may upon 90 days written notice cancel the Service
subject to the rate increase (Purchaser understands that it may not
be able to separately cancel domestic and international Service if
only one is subject to a rate increase). In order to be effective,
Purchaser's notice of cancellation must be received by Frontier
within 30 days after Purchaser's receipt of Frontier's notice of
the rate increase. Cancellation of a Service under this paragraph
includes cancellation of any monthly minimum usage charge
associated with the canceled Service that accrues after the date of
cancellation as well as a pro-rata reduction in the Minimum Charge
to adjust for the Service being canceled. If the cancellation
notice is not received by Frontier within 90 day period, Purchaser
will have irrevocably waived its right to cancel the affected
Service for that particular rate increase. If Purchaser does not
timely provide notice of cancellation, or if any Purchaser traffic
for a canceled Service remains on Frontier's network after the
effective date of cancellation, Purchaser shall pay the increased
rates for the affected Service and such traffic.
(j) Purchaser agrees that any make up to minimum charges, shortfall
charges and surcharges for which it is liable under this Agreement
are based on agreed upon minimum commitments on its part and
corresponding rate concessions of Frontier's part, and are not
penalties or unrecoverable damages under Section 9.(d). Frontier
may charge Purchaser, and Purchaser agrees to pay, reasonable
attorneys' fees and all costs incurred by Frontier in the
collection of any unpaid amounts due form Purchaser, whether or not
suit is instituted.
6
<PAGE>
4. BILLING DISPUTES:
The parties agree that time is of essence for payment of all Invoices.
Purchaser has the affirmative obligation of providing written notice and
supporting documentation for any good-faith dispute with an Invoice
("DISPUTE") within 60 Business Days after Purchaser's receipt. If
Purchaser does not report a Dispute within the 60 Business Day period,
Purchaser shall have irrevocably waived its dispute rights for that
Invoice. Purchaser shall pay disputed amounts, subject to resolution of
the Dispute. Frontier will use reasonable efforts to resolve timely
Disputes within 30 Business Days after its receipt of the Dispute
notice. If a Dispute is not resolved within the 30 Business Day period,
then at Purchaser's request the Dispute will be referred to an executive
officer of Frontier. If the Dispute is not resolved within 10 Business
Days after the referral, then either Party may commence an action in
accordance with Section 18, provided that the prevailing Party in such
action shall be entitled to payment of its reasonable attorney fees and
costs by the other Party. The Parties agree to exercise all reasonable
efforts to resolve Disputes within the time frames established herein.
5. TERMINATION RIGHTS:
(a) REGULATORY CHANGES: If the FCC, a state PUC or a court of competent
jurisdiction issues a rule, regulation, law or order which has the
effect of cancelling, changing, or superseding any material term or
provision of this Agreement (collectively, "REGULATORY
REQUIREMENT"), then this Agreement shall be deemed modified in such a
way as the Parties mutually agree is consistent with the form,
intent and purpose of this Agreement and is necessary to comply
with such Regulatory Requirement. Should the Parties not be able to
agree on modifications necessary to comply with a Regulatory
Requirement that materially affects the rights of either Party
within 30 days after the Regulatory Requirement is effective, then
upon written notice either Party may, to the extent practicable,
terminate that portion of this Agreement impacted by the Regulatory
Requirement.
(b) Without affecting any amounts due if, Frontier may terminate this
Agreement upon (i) Purchaser's insolvency, dissolution or cessation
of business operations, or (ii) Purchaser's failure to pay any
delinquent Invoice, or to maintain any other assurance of payment
provided to Frontier by Purchaser, within 2 Business Days following
Purchaser's receipt of written notice from Frontier.
(c) In the event of a breach of any material term or condition of this
Agreement by a Party (other than a payment breach covered under (b)
above), the other Party may terminate this Agreement upon 30 days
written notice, unless the breaching Party cures the breach during
the 30 day period. A breach that cannot be reasonably cured within
a 30 day period may be addressed by a written waiver of this section
signed by the Parties.
(d) Upon any breach by Purchaser not cured after expiration of all
applicable notice, grace and cure periods, Frontier may at its sole
option do any or all of the following:
(i) cease accepting or processing orders for Service and suspend
Service;
(ii) cease all electronically and manually generated information
and reports (including any CDR not paid for by Purchaser);
(iii) draw on any letter of credit, security deposit or other
assurance of payment provided by Purchaser;
7
<PAGE>
(iv) enforce any security interest granted by Purchaser to
Frontier hereunder;
(v) terminate this Agreement and the Services without liability
to Frontier;
(vi) contact the End-Users directly to inform them that their
telecommunications service will no longer be provided
through the Purchaser, but may be continued through Frontier
directly;
(vii) bill and collect from the End-Users directly (or through its
billing agents) for services;
(viii) treat the End-Users as Frontier customers for all purposes;
(ix) collect from Purchaser for future Services that would have
been provided, but for Purchaser's breach, including but not
limited to monthly minimums not to exceed an overall
contract value of $6,000,000 during the Initial Term; and
(x) pursue such other legal or equitable remedy or relief as
may be appropriate.
(e) Exercise by Frontier of its remedies under items (v) through
(viii) above is referred to as the "END-USER PURCHASE" and is
limited to Presubscribed End-Users. As consideration for the
End-User Purchase, Frontier agrees to pay Purchaser the amount of
the net charges (tariffed charges, less governmental assessments
and discounts) billed by Frontier directly to acquired End-Users
for actual usage of Frontier services in the first full billing
cycle in which Frontier invoices such End-Users (the "TRANSFER
PRICE").
(f) The Transfer Price may be setoff by Frontier against any
outstanding amounts due Frontier from Purchaser. Frontier shall pay
any balance of the Transfer Price remaining after setoff to
Purchaser within 30 days after the close of the aforesaid Frontier
billing cycle. If the total of outstanding amounts due Frontier
exceeds the Transfer Price, Purchaser continues to be liable to
Frontier for the excess. As a condition for Purchaser's receipt or
credit of the Transfer Price, Purchaser agrees to fully cooperate
with Frontier in implementation of the transfer of the End-Users to
direct Frontier customers. Such cooperation includes without
limitation:
(i) joint correspondence to the End-Users explaining the
mechanics and impact of the transfer;
(ii) Purchaser promptly providing Frontier with all End-User
information in its possession reasonably required by
Frontier to administer End-User accounts; and
(iii) Purchaser promptly providing Frontier with all LOAs for such
End-Users and a written assignment of all Purchaser's rights
to such LOAs.
(g) Upon termination of this Agreement and in addition to its right to
convert End-Users to Frontier customers, Frontier may continue
providing services to Presubscribed End-Users in accordance with
the rates and terms Frontier and an End-User may agree upon and to
treat such continuing End-Users as Frontier customers for all
purposes.
6. LIMITATION OF ACTION:
Purchaser shall not seek legal or equitable remedies, including
without limitation, injunctive relief, that would require Frontier
to continue providing Service to Purchaser
7/15/96
8
<PAGE>
or to End-Users through Purchaser while any delinquent amounts due
Frontier remain unpaid.
7. TAXES AND ASSESSMENTS:
Purchaser is responsible for the collection and remittance of all
governmental assessments, surcharges and fees pertaining to its
resale of the Services (other than taxes on Frontier's net income)
(collectively, "TAXES"). Purchaser shall provide Frontier with valid
and properly executed certificate(s) of exemption for the Taxes, as
applicable.
8. AMENDMENT:
Except as may be otherwise provided herein, this Agreement may not
be amended or modified, in whole or in part, except by the Parties
in writing.
9. WARRANTIES AND LIMITATION OF LIABILITY:
(a) Service will be provided by Frontier in accordance with the
applicable technical standards established for call transport by
the telecommunications industry. Frontier shall provide Service in
a quality and diligent manner consistent with service Frontier
provides to its other customers. FRONTIER MAKES NO OTHER WARRANTY,
EXPRESS OR IMPLIED, WITH RESPECT TO TRANSMISSION, EQUIPMENT OR
SERVICE PROVIDED HEREUNDER, AND EXPRESSLY DISCLAIMS ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR FUNCTION.
(b) It is the express intent of the Parties that Purchaser be solely
responsible for all claims of End-Users relating to the Services.
Consequently, Purchaser agrees that it is solely responsible for
any credits or adjustments that may be issued or required to be
issued to End-Users.
(c) Purchaser's sole and exclusive remedy in the case of a breach of
the Agreement by Frontier shall be a refund of the purchase price
paid for those Services not provided in accordance with the terms
of this Agreement.
(d) In no event shall either Party be liable to the other Party for
incidental and consequential damages, loss of goodwill,
anticipated profit, or other claims for indirect damages in any
manner related to this Agreement or the Services.
10. INDEMNIFICATION:
Purchaser shall defend and indemnify Frontier and its directors,
officers, employees, representatives and agents from any and all claims
(including any claims of End-Users and regulatory agencies), Taxes,
penalties, interest, expenses, damages, lawsuits or other liabilities
(including without limitation, reasonable attorney fees and court costs)
relating to or arising out of (i) the operation of Purchaser's business;
and (ii) Purchaser's breach of this Agreement.
11. REPRESENTATION:
The Parties acknowledge and agree that the relationship between them
is solely that of independent contractors, and nothing in this Agreement
is to be construed to constitute the Parties as employer/employee,
partners, franchise/franchisee, or otherwise as participants in a joint
or common undertaking. Neither Party, nor their respective employees,
agents or representatives, has any right, power or authority to act or
create any obligation, express or implied, on behalf of the other Party.
7/15/96
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12. FORCE MAJEURE:
Other than with respect to failure to make payments due hereunder,
neither Party shall be liable under this Agreement for delays, failures
to perform, damages, losses or destruction, or malfunction of any
equipment, or any consequence thereof, caused or occasioned by, or due
to fire, earthquake, flood, water, the elements, labor disputes or
shortages, utility curtailments, power failures, explosions, civil
disturbances, governmental actions, shortages of equipment or supplies,
unavailability of transportation, acts or omissions of third parties, or
any other cause beyond their reasonable control.
13. WAIVERS:
Failure of either Party to enforce or insist upon compliance with the
provisions of this Agreement, or waive compliance with any provisions of
this Agreement in any instance, shall not be construed as a general
waiver or relinquishment of any provision or right of this Agreement.
14. ASSIGNMENT:
(a) Neither Party may assign or transfer its rights or obligations
under this Agreement without the other Party's written consent,
which consent may not be unreasonably withheld, except that
Frontier may assign this Agreement to its parent, successor in
interest, or an affiliate or subsidiary without Purchaser's
consent. Any assignment or transfer without the required consent is
void.
(b) Purchaser may not assign, sell, convey or otherwise transfer all or
a portion of its Presubscribed End-User base (collectively
"TRANSFER") without the prior written consent of Frontier, which
consent Frontier may not unreasonably withhold. Purchaser must
provide Frontier with at least 60 days prior written notice of
Purchaser's intent to initiate a Transfer. Within 30 days from the
date of receipt of Frontier of Purchaser's notice of intent,
Frontier will in writing inform Purchaser of the conditions
required by Frontier for its consent to the Transfer, which
conditions will at a minimum include compensation to Frontier to
cover charges for future Services that would have been provided but
for the Transfer, including but not limited to, any minimum charges
herein. If Frontier fails to respond and provide the required
conditions within the 30 day period, Frontier is deemed to have
consented to the Transfer. Purchaser understands and agrees that:
(i) its breach of this Section 14(b) is an incurable breach,
unless Frontier elects in writing to allow Purchaser to cure;
and
(ii) upon the occurrence of such breach Frontier may immediately
proceed with its remedies under Section 5.
15. CONFIDENTIALITY:
(a) Each Party agrees that all information furnished to and identified
by the other Party as being confidential or proprietary information
or trade secrets (collectively referred to as "PROPRIETARY
INFORMATION"), is and continuously remains, the sole and exclusive
property of the Party furnishing the same (the Party furnishing the
Proprietary Information hereinafter referred to as the "DISCLOSING
PARTY" and the other Party hereinafter referred to as the
"RECEIVING PARTY"). Each Party shall treat the Proprietary
Information and the contents of this Agreement in a confidential
manner and, except to the extent necessary in connection with the
performance of its obligations under this Agreement,
7/15/96
10
<PAGE>
neither Party may directly or indirectly disclose the same to any
third party without the written consent of the Disclosing Party.
(i) The Proprietary Information is to be used by the Receiving
Party only for the purposes contemplated in this Agreement and
the Receiving Party may not disclose the same to anyone other
than its employees on a need to know basis and who agree to be
bound by the terms of this Section. The Proprietary
Information may not be retained by the Receiving Party and all
originals and any copies or summaries shall be returned to the
Disclosing Party upon request.
(b) The confidentiality of obligations of the Section do not apply to
any portion of the Proprietary Information which:
(i) is or becomes public knowledge through no fault of the
Receiving Party;
(ii) is in the lawful possession of Receiving Party prior to
disclosure to it by the Disclosing Party (as confirmed by the
Receiving Party's records);
(iii) is disclosed to the Receiving Party without restriction on
disclosure by a person who has the lawful right to disclose
the information; or
(iv) is disclosed pursuant to the lawful requirements or formal
request of a governmental agency. If the Receiving Party is
requested or legally compelled by a governmental agency to
disclose any of the Proprietary Information of the Disclosing
Party, the Receiving Party agrees on behalf of itself and its
representatives that it will provide the Disclosing Party
with prompt written notice of such requests so that the
Disclosing Party has the opportunity to pursue its legal and
equitable remedies regarding potential disclosure.
(c) Each Party acknowledges that its breach or threatened breach of
this Section may cause the Disclosing Party irreparable harm which
would not be adequately compensated by monetary damages.
Accordingly, in the event of any such breach or threatened breach,
the Receiving Party agrees that equitable relief, including
temporary restraining orders or preliminary or permanent
injunctions, is an available remedy in addition to any legal
remedies to which the Disclosing Party may be entitled.
(d) Neither Party may use the name, logo, trade name, service marks,
trade marks, or printed materials of the other Party, in any
promotional or advertising material, statement, document, press
release or broadcast without the prior written consent of the other
Party, which consent may be granted or withheld at the other Party's
sole discretion.
(e) The Parties acknowledge the existence of a highly competitive
telecommunications marketplace and understand and agree that either
Party may offer to provide services to customers of the other Party
(including End-Users) in accordance with such rates and terms as a
Party and a customer may agree upon, provided however, a Party may
not use Proprietary Information of the other Party in soliciting
customers for services. Provided further, neither Party may, in any
marketing activities to existing customers of the other Party, use
the fact that Frontier is the Purchaser's underlying carrier as an
inducement for such customers to switch their services.
(f) Notwithstanding the restrictions set forth in this Section,
Frontier may use End-User Information in furtherance of its rights
under Section 5.
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<PAGE>
16. INTEGRATION:
This Agreement and all Exhibits, Schedules and other attachments hereto,
represent the entire agreement between the Parties with respect to the
subject matter hereof and supersede and merge all prior agreements,
promises, understandings, statements, representations, warranties,
indemnities and inducements to the making of this Agreement relied upon
by either Party, whether written or oral.
17. CONSTRUCTION:
The language used in this Agreement is deemed the language chosen by the
Parties to express their mutual intent. No rule of strict construction
shall be applied against either Party.
18. GOVERNING LAW:
This Agreement shall, in all respects, be governed by and enforced in
accordance with the laws of the State of New York, excluding its choice
of law provisions. For valuable consideration, both Parties acknowledge
and agree that any action to enforce or interpret the terms of this
Agreement shall be instituted and maintained only in the Federal Court
for the Western District of New York, or if jurisdiction is not
available in the Federal Court, then a state court located in Rochester,
New York. Purchaser hereby consents to the jurisdiction and venue of
such courts and waives any right to object to such jurisdiction and venue.
19. NOTICES:
All notices, including but not limited to, demands, requests and other
communications required or permitted hereunder (not including invoices)
shall be in writing and shall be deemed to be delivered when actually
received, whether upon personal delivery or if sent by common carrier.
All notices given by mail or other means of delivery shall be sent by
first class mail, duly addressed and with proper postage, to the
following address, or such other address as each of the Parties hereto
may notify the other:
Frontier Communications of the West, Inc.
ATTN: Peggy Palak, Contracts
135 East Ortega Street
Santa Barbara, CA 93101
Facsimile # 800-689-2395
Axces, Inc.
ATTN: Time Till, President
2500 Wilcrest, Suite 540
Houston, TX 77042
Facsimile # 713-781-9396
20. COUNTERPARTS:
This Agreement may be executed in several counterparts, each of which
shall constitute an original, but all of which shall constitute one and
the same instrument.
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<PAGE>
21. COMPLIANCE WITH LAWS:
During the term of this Agreement, the Parties shall comply with all
local, state and federal laws and regulations applicable to this
Agreement and to their respective businesses. Further, Purchaser shall
obtain, file and maintain any tariffs, permits, certifications,
authorizations, licenses or similar documentation as may be required by
the FCC, a state Public Utility or Service Commission, or any other
governmental body or agency having jurisdiction over its business. Upon
request, Purchaser will supply Frontier with copies of such tariffs,
permits, certifications, authorizations, licenses and similar
documentation.
22. THIRD PARTIES:
The provisions of this Agreement and the rights and obligations created
hereunder are intended for the sole benefit of Frontier and Purchaser,
and do not create any right, claim or benefit on the part of any person
not a Party to this Agreement, including End-Users.
23. SURVIVAL OF PROVISIONS:
Any obligations of the Parties relating to monies owed, as well as those
provisions relating to confidentiality, assurances of payment,
limitations on liability and actions and indemnification, survive
termination of this Agreement.
24. UNENFORCEABILITY OF PROVISIONS:
The illegality or unenforceability of any provision of this Agreement
does not affect the legality or enforceability of any other provision or
portion. If any provision or portion of this Agreement is deemed illegal
or unenforceable for any reason, there shall be deemed to be made such
minimum change in such provision or portion as is necessary to make it
valid and enforceable as so modified.
By its signature below, each Party acknowledges and agrees that sufficient
allowance has been made for review of this Agreement by respective counsel
and that each Party has been advised as to its legal rights, duties and
obligations under this Agreement.
FRONTIER COMMUNICATIONS OF THE WEST, INC. AXCES, INC.
By: /s/ Anthony J. Cessara By: /s/ Timothy Till
----------------------------------- ------------------------
Timothy Till, President
Dated: 9/7/96 Dated: 8/22/96
-------------------------------- ----------------------
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<PAGE>
TELECOMMUNICATIONS SERVICES AGREEMENT
This TELECOMMUNICATIONS SERVICES AGREEMENT (hereinafter referred to
as the "Agreement" or the "TSA") is entered into this 7th day of September,
1995, by and between Coastal Telephone Services Limited Company, a Texas
Limited Liability Corporation, with its principal office at 2 Riverway, Suite
800, Houston, Texas 77056, ("CTSLC") and Axces, Inc., a Delaware Corporation
with its principal office at 2500 Wilcrest, 3rd Floor, Houston, Texas, 77042
("Customer").
WITNESSETH;
CTSLC agrees to provide and Customer agrees to accept switched
telecommunications services ("Switched Services") and other associated
services (collectively the "Services"), (i) as described in the Services
Schedules identified herewith, (ii) subject to the terms and conditions
contained in this Agreement, and (iii) in conformity with each Service
Request (described below) which is accepted hereunder.
In the event of a conflict between the terms of this Agreement the
Service Schedule/Pricing Exhibit and the Service Request(s), the following
order of precedence will prevail: (1) Service Schedule/Pricing Exhibit, and
(2) the Agreement.
NOW, THEREFORE, in consideration of the above premises and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
1. TERM.
(A) EFFECTIVE DATE This Agreement shall be effective between the
parties as of the date first written above (the "Effective Date")
and shall continue for a period of five (5) years (TERM). Upon the
expiration of the Term, the Service in question will continue to be
provided subject to termination by either party upon thirty (30)
days prior written notice to the other party. Customer shall be
liable for all charges associated with actual usage of the Service
in question during the Term and any extension thereof.
(B) START OF SERVICE CTSLC's obligation to provide and Customer's
obligation to accept and pay for non-usage sensitive charges for
Service shall be binding to the extent provided for in this
Agreement upon the submission of an acceptable Service Request to
CTSLC by Customer. Customer's obligation to pay for usage sensitive
charges for Switched Services shall commence with respect to any
Service as of the date of the Service in question is used ("Start of
Service"). Start of Service for particular services shall be further
described in the Service Schedule relevant to the Switched Service
in question.
<PAGE>
(C) SERVICE SCHEDULES Services to be provided under this Agreement
shall be described in the CTSLC Service Schedule which is subscribed
to by authorized representatives of CTSLC and become a part of this
Agreement to the extent that it describes the particular Services
therefor, specific terms and other information necessary or
appropriate for CTSLC to provide such Service(s) to Customer.
(D) SERVICE REQUESTS Customer's requests to initiate or cancel
Services shall be described in an appropriate CTSLC Service Request
("Service Requests"). Service Requests may consist of machine
readable tapes, facsimiles or other means approved by CTSLC.
Further, Service Requests shall specify all reasonable information,
as determined by CTSLC, necessary or appropriate for CTSLC to
provide the Service(s) in question, which shall include without
limitation, the type, quantity and end point(s) (when necessary) of
circuits comprising a Service Interconnection as described in the
Service Request. After CTSLC's receipt and verification of a valid
Service Request for SWITCHED Service (as defined in the Service
Schedule) requiring a change in the primary interexchange carrier
("PIC"), CTSLC agrees to (i) submit the ANI(s) relevant to such
Service Requests to Local Exchange Carriers ("LECs"), with which
CTSLC currently has electronic interface capabilities, within two
(2) business days, and (ii) submit the ANI(s) relevant to such
Service Requests to those LEC's with which CTSLC does not have
electronic interface capabilities within a reasonable time, not to
exceed thirty (30) business days.
2. CANCELLATION:
(A) CANCELLATION CHARGE At any time after the Effective Date,
Customer may cancel this Agreement if Customer provides written
notification thereof to CTSLC not less than thirty (30) days prior
to the effective date of cancellation. In such case (or in the event
CTSLC terminates this Agreement as provided in Section 8), Customer
shall pay to CTSLC all charges for Service provided through the
effective date of such cancellation plus a cancellation charge (the
"Cancellation Charge") equal to the difference between the favored
price the Customer is receiving and the price the customer would
have been paying based on the term contact the Customer fulfilled at
the time of cancellation as illustrated in Exhibit A (Pricing
Schedule).
(B) CANCELLATION WITHOUT CHARGE Notwithstanding anything to the
contrary contained in Subsection 2(A) above, Customer may cancel
this Agreement without incurring any cancellation charge if (i) CTSLC
fails to provide a network as warranted in Section 9 below; (ii)
CTSLC fails to deliver call detail records promptly based on the
frequency selected by Customer (i.e., monthly, weekly or daily); or
(iii) CTSLC fails to submit ANI(s) relevant to such Service Requests
to the LECs within the time period described in Subsection 1(E)
above. Provided, however, Customer must give CTSLC written notice of
any such default and an opportunity to cure such default within five
(5) days of the notice. In the event CTSLC fails to cure any such
default within the five-day period on more than three (3) occasions
within any six (6) month period, Customer may cancel this Agreement
without incurring any cancellation charge.
<PAGE>
3. CUSTOMER'S END USERS.
(A) END USERS Customer will obtain and upon CTSLC's request provide
CTSLC (within five (5) business days of the date of the request) a
written Letter of Agency ("LOA") acceptable to CTSLC [or with any
other means approved by the Federal Communications Commission
("FCC")], for each ANI indicating the consent of the end users of
Customer ("End Users") to be served by Customer and transferred (by
way of change such End User's designated PIC) to the CTSLC network
prior to order processing. Each LOA will provide, among other
things, that the End Users have consented to the transfer being
performed by Customer, or Customer's designee. When applicable,
Customer will be responsible for notifying End Users, in writing (or
by any other means approved by the FCC) that (i) a transfer charge
will be reflected on their LEC bill for effecting a change in their
primary interexchange carrier ("PIC"), (ii) the entity name under
which their interstate, intrastate and/or operator services will be
billed (if different from Customer), and (iii) the "primary"
telephone number(s) to be used for maintenance and questions
concerning their long distance service and/or billing. Customer
agrees to send CTSLC a copy of the documentation Customer uses to
satisfy the above requirements promptly upon request of CTSLC. CTSLC
may change the foregoing requirements for Customer's confirming
orders and/or for notifying End Users regarding the transfer charge
at any time in order to conform with applicable FCC and state
regulations. Provided, however, Customer will be solely responsible
for ensuring that the transfer of End Users to the CTSLC network
conforms with applicable FCC and state regulations, including without
limitation, the regulations established by the Fcc with respect to
verification of orders for long distance service generated by
telemarketing as promulgated in 47 C.F.R., Part 64, Subpart K,
Section 64.1100 or any successor regulation(s).
(B) TRANSFER CHARGES/DISPUTED TRANSFERS Customer agrees that it is
responsible for (i) all charges exceeding one hundred U.S.Dollars
($100.00) incurred by CTSLC to change the PIC of all End Users to
the CTSLC network, (ii) all charges incurred by CTSLC to change End
Users back to their previous PIC arising from disputed transfers to
the CTSLC network and (iii) any other damages suffered by or awards
against CTSLC resulting from disputed transfers.
(C) EXCLUDED ANIS CTSLC has the right to reject any ANI supplied by
Customer for any of the following reasons: (i) CTSLC is not
authorized to provide or does not provide long distance services in
the particular jurisdiction in which the ANI is located, (ii) a
particular ANI submitted by Customer is not in proper form, (iii)
Customer is not certified to provide long distance services in the
jurisdiction in which the ANI is located, (iv) Customer is in
default of this Agreement, (v) Customer fails to cooperate with
CTSLC in implementing reasonable verification processes determined
by CTSLC to be necessary or appropriate in the conduct of business,
or (vi) any other circumstance reasonably determined by CTSLC which
would adversely affect CTSLC's performance under this Agreement or
CTSLC's general ability to transfer its other customers or other end
users to the CTSLC network, including without limitation, CTSLC's
ability to electronically effect PIC changed with LECs. In the event
CTSLC rejects an ANI, CTSLC will notify Customer as soon as possible
of its decision specifically describing the rejected
<PAGE>
ANI and the reason(s) for rejecting that ANI, and will not incur any
further liability under this Agreement with regard to that ANI.
Further, and ANI requested by Customer for Switched Service may be
deactivated by CTSLC if no Switched Service billings relevant thereto are
generated in any three (3) consecutive calendar months/billing period.
CTSLC will be under no obligation to accept ANIs within the three(3) full
calendar month period preceding the scheduled expiration of the Term.
(D) RECORDS Customer will maintain documents and records ("Records")
supporting Customer's re-sale of Switched Service, including, but not
limited to, appropriate and valid LOAs, from End Users for a period of not
less than 12 months or such other longer period as may be required by
applicable law, rule or regulation. Customer shall indemnify CTSLC for
any costs, charges or expenses incurred by CTSLC arising from disputed
PIC selections involving Switched Service to be provided to Customer for
which Customer cannot produce an appropriate LOA relevant to the ANI and
PIC charge in question, or when CTSLC is not reasonably satisfied that
the validity of a disputed LOA has been resolved.
(E) CUSTOMER SERVICE Customer will be solely responsible for billing End
Users and providing the End Users with customer service. Customer agrees
to immediately notify CTSLC in the event of End User notifies Customer of
problems associated with the Service, including with limitation, excess
noise, echo, or loss of Service.
4. CUSTOMER'S RESPONSIBILITIES.
(A) EXPEDITE CHARGES In the event Customer requests expeditious Service
and/or changes to Service Orders and CTSLC agrees to such request, CTSLC
will pass through the charges assessed by any supplying parties (e.g.,
local access providers) involved at the same rate to Customer. CTSLC may
further condition its performance of such request upon Customer's payment
of additional charges to CTSLC.
(B) FRAUDULENT CALLS Customer shall indemnify and hold CTSLC harmless
from all costs, expenses, claims or actions arising from fraudulent calls
of any nature which may comprise a portion of the Service to the extent
that the party claiming the call(s) in question to be fraudulent is (or had
been at the time of the call) an End User of the Service through Customer
or an end user of the Service through Customer's distribution channels.
Customer shall not be excused from paying CTSLC for Service provided to
Customer or any portion thereof on the basis that fraudulent calls
comprised a corresponding portion of the Service. In the event CTSLC
discovers fraudulent calls being made (or reasonably believes fraudulent
calls are being made), nothing contained herein shall prohibit CTSLC from
taking immediate action (without notice to Customer) that is reasonably
necessary to prevent such fraudulent calls from taking place, including
without limitation, denying Service to particular ANIs or terminating
Service to or from specific locations.
<PAGE>
5. CHARGES AND PAYMENT TERMS.
(A) PAYMENT Unless otherwise provided herein, CTSLC billings for Service
are made on a monthly basis (or such other basis as may be mutually agreed
to by the parties) following Start of Service. Subject to Subsection 5(D)
below, Service shall be billed at the rates set forth on the Pricing
Exhibit executed by the parties and attached hereto and incorporated
herewith, and Service Requests, as the case may be. Customer will pay each
CTSLC invoice in full for Switched Service within thirty (30) days of the
invoice date set forth on each CTSLC invoice to Customer ("Due Date"). If
payment is not received by CTSLC on or before the Due Date, Customer shall
also pay a late fee in the amount of the lesser of one and one-half percent
(1-1/2%) of the unpaid balance of the Service charges per month or the
maximum lawful rate under applicable state law.
(B) DEFINITIONS Time of day rate periods (including CTSLC Recognized
National Holidays) will be described by industry standards.
(C) TAXES Customer acknowledges and understands that CTSLC computes all
charges herein exclusive of any applicable federal, state or local use,
excise, gross receipts, sales and privilege taxes, duties, fees or similar
liabilities (other than general income or property taxes), whether charged
to or against CTSLC or Customer because of the Service furnished to
Customer ("Additional Charges"). Customer shall pay such Additional
Charges in addition to all other charges provided for herein.
(D) MODIFICATION OF CHARGES CTSLC reserves the right to eliminate
Service offerings (which charge modifications shall not exceed then-current
generally available CTSLC charges for comparable services), upon not less
than sixty (60) days prior notice to Customer, which notice will state the
effective date for the charge modification.
(E) BILLING DISPUTES Notwithstanding the foregoing, late fees shall
apply (but shall not be due and payable for a period of sixty (60) days
following the Due Date therefor) for amounts reasonably disputed by
Customer, provided Customer: (i) pays all undisputed charges on or
before the Due Date, (ii) presents a written statement of any billing
discrepancies to CTSLC in reasonable detail on or before the Due Date of
the invoice in question, and (iii) negotiates in good faith with CTSLC
for the purpose of resolving such dispute within said sixty (60) day
period. In the event such dispute is resolved in favor of Customer,
Customer will receive a credit for the disputed charges in question and
the applicable late fees within ten (10) days of the resolution. In the
event the dispute can not be resolved within such sixty (60) day period
(unless CTSLC has agreed in writing to extend such period) all disputed
amounts together with late fees shall become due and payable, and this
provision shall not be construed to prevent Customer from pursuing any
available legal remedies. CTSLC shall not be obligated to consider any
Customer notice of billing discrepancies which are received by CTSLC
more than sixty (60) days following the Due Date of the invoice in
question.
(F) SUSPENSION OF SERVICE In the event charges due pursuant to CTSLC's
invoice are not paid in full by the Due Date, CTSLC shall have the right,
after giving Customer ten
<PAGE>
(10) days prior notice, to suspend all or any portion of the Service to
Customer ("Suspension Notice") until such time (designated by CTSLC in its
Suspension Notice) as customer has paid in full ALL charges then due to
CTSLC, including any late fees. Following such payment, service to
Customer shall be reinstated ONLY when Customer provides CTSLC with
satisfactory assurance of Customer's ability to pay for Service (i.e., a
deposit, letter of credit or other means acceptable to CTSLC) and
Customer's advance payment of the cost of reinstating the Service. If
Customer fails to make the required payment by the date set forth in the
Suspension Notice, Customer will be deemed to have canceled the Service
suspended effective as of the date of suspension. Such cancellation shall
not relieve Customer for payment of applicable cancellation charges as
described in Section 2.
6. CREDIT: SEE SECURITY AGREEMENT ATTACHED.
7. CREDITWORTHINESS: If at anytime there is a material adverse change in
Customer's creditworthiness, then in addition to any other remedies available
to CTSLC, CTSLC may elect, in its sole discretion, to exercise one or more of
the following remedies: (i) cause Start of Service for Service described in a
previously executed Service Request to be withheld; (ii) cease providing
Service pursuant to a Suspension Notice; (iii) decline to accept a Service
Request or other requests from Customer to provide Service which CTSLC may
otherwise be obligated to accept and/or (iv) condition its provision of
Service or acceptance of a Service Request on a Customer's assurance of
payment which shall be a deposit or such other means to establish reasonable
assurance of payment. An adverse material change in Customer's
creditworthiness shall include, but not be limited to: (i) Customer's default
of its obligations to CTSLC under this or any other agreement with CTSLC;
(ii) failure of Customer to make full payment of charges due hereunder on or
before the Due Date on three (3) or more occasions during any period of
twelve (12) or fewer months or Customer's failure to make such payment on or
before the Due Date in any two (2) consecutive months; (iii) acquisition of
Customer (whether in whole or by a majority or controlling interest) by an
entity which is insolvent, which is subject to bankruptcy or insolvency
proceedings, which owes past due amounts to CTSLC or any entity affiliated
with CTSLC or which is a materially greater credit risk than Customer; or,
(iv) Customer's being subject to or having filed for bankruptcy or insolvency
proceedings or the legal insolvency if Customer.
8. REMEDIES FOR BREACH. In the event Customer is in breach of this Agreement,
including without limitation, failure to pay charges due hereunder by the date
stated in the Suspension Notice described in Subsection 5(F), CTSLC shall have
the right, after giving Customer five (5) days prior notice, and in addition to
foreclosing any security interest CTSLC may have, to (i) terminate this
Agreement; (ii) withhold billing information from Customer; and/or (iii) contact
the End Users (for whom calls are originated and terminated solely over
facilities comprising the CTSLC network) directly and bill each End Users
directly until such time as CTSLC has been paid in full for the amount owed by
Customer. If Customer fails to make payment by the date stated in the
Suspension Notice and CTSLC, after giving Customer five (5) days prior notice,
terminates this Agreement as provided in the Section 8, such termination shall
not relieve Customer for payment of applicable cancellation charges as described
in Section 2 above.
<PAGE>
9. WARRANTY. CTSLC will use reasonable efforts under the circumstances to
maintain its overall network quality. The quality of Service provided hereunder
shall be consistent with telecommunications common carrier industry standards,
government regulations and sound business practices. CTSLC MAKES NO OTHER
WARRANTIES ABOUT THE SERVICE PROVIDED HEREUNDER, EXPRESS OR IMPLIED, INCLUDING
BUT NOT LIMITED TO, ANY WARRANTY OR MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OR USE.
10. LIABILITY; GENERAL INDEMNITY; REIMBURSEMENT.
(A) LIMITED LIABILITY. IN NO EVENT WILL EITHER PARTY HERETO BE LIABLE TO
THE OTHER PARTY FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL
LOSSES OR DAMAGES, INCLUDING WITHOUT LIMITATION, LOSS OF REVENUE, LOSS OF
CUSTOMERS OR CLIENTS, LOSS OF GOODWILL OR LOSS OF PROFITS ARISING IN ANY
MANNER FROM THIS AGREEMENT AND THE PERFORMANCE OR NONPERFORMANCE OF
OBLIGATIONS HEREUNDER.
(B) GENERAL INDEMNITY. In the event parties other than Customer (e.g.,
Customer's End Users) shall have use of the service through Customer, then
Customer agrees to forever indemnify and hold CTSLC, its affiliated
companies and any third-party provider or operator of facilities employed
in provision of the Service harmless from and against any and all claims,
demands, suits, actions, losses, damages, assessments or payments which
those parties may assert arising out of or relating to any defect in the
Service.
(C) REIMBURSEMENT. Customer agrees to reimburse CTSLC for all reasonable
costs and expenses incurred by CTSLC due to CTSLC's direct participation
(either as a party or witness) in any administrative, regulatory or
criminal proceeding concerning Customer if CTSLC's involvement in said
proceeding is based solely on CTSLC's provision of Services to Customer.
11. FORCE MAJEURE. If CTSLC's performance of this Agreement or any obligation
hereunder is prevented, restricted or interfered with by causes beyond its
reasonable control including, but not limited to, Acts of God, fire, explosion,
vandalism, cable cut, storm or other similar occurrence, any law, order,
regulation, direction, action or request of the United States government, or
state or local governments, or any department, agency, commission, court,
bureau, corporation or other instrumentality of any one or more such
governments, or of any civil or military authority, or by national emergency,
insurrection, riot, war, strike, lockout or work stoppage or other labor
difficulties, or supplier failure, shortage, breach or delay, then CTSLC shall
be excused from such performance on a day-to-day basis to the extent of such
restriction or interference. CTSLC shall proceed to perform with reasonable
dispatch whenever such causes are removed or cease.
12. STATE CERTIFICATION. Customer warrants that in all jurisdictions in
which it provides long distance services that require certification, it has
obtained the necessary certification from the appropriate governmental
authority. Further, if required by CTSLC, Customer agrees to provide
<PAGE>
proof of such certification acceptable to CTSLC. In the event Customer is
prohibited, either on a temporary or permanent basis from conducting its
telecommunications operations in a given state, Customer shall (i)
immediately notify CTSLC by facsimile, and (ii) send written notice to CTSLC
within twenty-four (24) hours of such prohibition.
13. INTERSTATE/INTRASTATE SERVICE. Except with respect to Switched Service
specifically designated as intrastate Service or international Service, the
rates provided to Customer in a Service Schedule are applicable only to
Switched Service if such Service is used for carrying interstate
telecommunications (i.e., Service subject to FCC jurisdiction). CTSLC shall
not be obligated to provide Switched Service with end points within a single
state or Switched Service which originates/terminates at points both of which
are situated within a single state. In those states where CTSLC is
authorized to provide intrastate service (i.e., telecommunications
transmission services subject to the jurisdiction of state of state
regulatory authorities), CTSLC will, at its option, provide intrastate
Service pursuant to applicable state laws, regulations and applicable tariff,
if any, filed by CTSLC with state regulatory authorities as required by
applicable law.
14. AUTHORIZED USE OF CTSLC NAME. Without CTSLC's prior written consent,
Customer shall not (i) refer to itself as an authorized representative of
CTSLC whenever it refers to the Services in promotional, advertising or other
materials, or (ii) use CTSLC's logos, trade marks, service marks, or any
variations thereof in any of its promotional, advertising or other materials.
Additionally, Customer shall provide to CTSLC for its prior review and
written approval, all promotions, advertising or other materials or activity
using or displaying CTSLC's name or the Services to be provided by CTSLC.
Customer agrees to change or correct, at Customer's expense, any such
material or activity which CTSLC, in its sole judgment, determines to be
inaccurate, misleading or otherwise objectionable. Customer is explicitly
authorized to only use the following statements in its sales literature (i)
"Customer utilizes the CTSLC network", (ii) Customer utilizes CTSLC's
facilities", (iii) "CTSLC provides only the network facilities", and (iv)
"CTSLC is our network services provider".
15. NOTICES. Notices under this Agreement shall be in writing and delivered
to the person identified below at the offices of the parties as they appear
below or as otherwise provided for by proper notice hereunder. Customer
shall notify CTSLC in writing if Customer's billing address is different than
the address shown below. The effective date for any notice under this
Agreement shall be the date of actual receipt of such notice by the
appropriate party, notwithstanding the date of mailing.
IF TO CTSLC: IF TO CUSTOMER
Coastal Telephone Company AXCES, INC.
- --------------------------- ---------------------------------
2 Riverway Suite 800 2500 Wilcrest
- --------------------------- ---------------------------------
Houston, Texas 77056 3rd Floor
- --------------------------- ---------------------------------
ATTN: President Houston, TX 77042
- --------------------------- ---------------------------------
<PAGE>
16. NO WAIVER. No term or provision of this Agreement shall be deemed waived
and no breach or default shall be deemed excused unless such waiver or consent
shall be in writing and signed by the party claimed to have waived or consented.
A consent to waiver of or excuse for a breach or default by either party,
whether express or implied, shall not constitute a consent to, waiver of, or
excuse for any different or subsequent breach or default.
17. PARTIAL INVALIDITY; GOVERNMENT ACTION.
(A) PARTIAL INVALIDITY. If any part of any provision of this Agreement or
any other agreement, document or writing given pursuant to or in connection
with this Agreement shall be invalid or unenforceable under applicable law,
rule or regulation, that part shall be ineffective to the extent of such
invalidity only, without in any way affecting the remaining parts of that
provision or the remaining provisions of this Agreement. In such event,
Customer and CTSLC will negotiate in good faith with respect to any such
invalid or unenforceable part to the extent necessary to render such part
valid and enforceable.
(B) GOVERNMENT ACTION. Upon thirty (30) days prior notice, either party
shall have the right, without liability to the other, to cancel an affected
portion of the Service if any material rate or term contained herein and
relevant to the affected Service is substantially changed (to the detriment
of the terminating party) or found to be unlawful or the relationship
between the parties hereunder is found to be unlawful by order of the
highest court of competent jurisdiction to which the matter is appealed,
the FCC, or other local, state or federal government authority of competent
jurisdiction.
18. EXCLUSIVE REMEDIES. Except as otherwise specifically provided for herein,
the remedies set forth in this Agreement comprise the exclusive remedies
available to either party at law or in equity.
19. USE OF SERVICE. Upon CTSLC's acceptance of a Service Request hereunder,
CTSLC will provide the Service specified therein to Customer upon condition that
the Service shall not be used for any unlawful purpose. The provision of
Service will not create a partnership or joint venture between the parties or
result in a joint communications service offering to any third parties, and
CTSLC and Customer agree that this Agreement, to the extent it is subject to FCC
regulation, is an inter-carrier agreement which is not subject to the filing
requirement of Section 211(a) of the Communications Act of 1934 (47 U.S.C.
Section 211 (a)) as implemented in 47 C.F.R. Section 43.51.
20. CHOICE OF LAW; FORUM.
(A) LAW. This Agreement shall be construed under the laws of the State of
Texas without regard to choice to law principles.
(B) FORUM. Any legal action or proceeding with respect to this Agreement
may be brought in the Courts of the State of Texas in and for the county of
Harris. By execution of this Agreement, both Customer and CTSLC hereby
submit to such jurisdiction, hereby expressly waiving whatever rights may
correspond to either of them by reason of their
<PAGE>
present or future domicile. In furtherance of the foregoing, Customer and
CTSLC hereby agree to service by U.S. Mail at the notice addresses
referenced in Section 15. Such service shall be deemed effective upon the
earlier of actual receipt or seven (7) days following the date of posting.
21. PROPRIETARY INFORMATION.
(A) CONFIDENTIAL INFORMATION. The parties understand and agree that the
terms and conditions of this Agreement, all documents referenced (including
invoices to Customer for Service provided hereunder) herein, communications
between the parties regarding this Agreement or the Service to be provided
hereunder (including price quotes to Customer for any Service proposed to
be provided or actually provided hereunder), as well as such information
relevant to any other agreement between the parties (collectively
"Confidential Information"), are confidential as between Customer and
CTSLC.
(B) LIMITED DISCLOSURE. A party shall not disclose Confidential
Information unless subject to discovery or disclosure pursuant to legal
process, or to any other party other than the directors, officers, and
employees of a party or a party's agents including their respective
brokers, lenders, insurance carriers or bona fide prospective purchasers
who have specifically agreed in writing to nondisclosure of the terms and
conditions hereof. Any disclosure hereof required by legal process shall
only be made after providing the non-disclosing party with notice thereof
in order to permit the non-disclosing party to seek an appropriate
protective order or exemption. Violation by a party or its agents of the
foregoing provisions shall entitle the non-disclosing party, as its option,
to obtain injunctive relief without a showing or irreparable harm or injury
and without bond.
(C) PRESS RELEASES. The parties further agree that any press release,
advertisement or publication generated by a party regarding this Agreement,
the Service provided hereunder or in which a party desires to mention the
name of the other party or the other party's parent or affiliated
company(ies), will be submitted to the non-publishing party for its written
approval prior to publication.
(D) SURVIVAL OF CONFIDENTIALITY. The provisions of the Section 21 will be
effective as of the date of this Agreement and remain in full force and
effect for a period which will be the longer of (i) one (1) year following
the date of this Agreement, or (ii) one (1) year from the termination of
all Service hereunder.
22. SUCCESSORS AND ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors or assigns,
provided, however, that Customer shall not assign or transfer its rights or
obligations under this Agreement without the prior written consent of CTSLC,
which consent shall not be unreasonably withheld, and further provided that any
assignment or transfer without such consent shall be void.
23. GENERAL.
(A) SURVIVAL OF TERMS. The terms and provisions contained in this
Agreement that by
<PAGE>
their sense and context are intended to survive the performance thereof by
the parties hereto shall so survive the completion of performance and
termination of this Agreement, including, without limitation, provisions
for indemnification and the making of any and all payment due hereunder.
(B) HEADINGS. Descriptive heading in this Agreement are for convenience
only and shall not affect the construction of this Agreement.
(C) INDUSTRY TERMS. Words having well-known technical or trade meanings
shall be so construed, and all listings of items shall not be taken to be
exclusive, but shall include other items, whether similar or dissimilar to
those listed, as the context reasonably requires.
(D) RULE OF CONSTRUCTION. No rule of construction requiring
interpretation against the drafting party hereof shall apply in the
interpretation of this Agreement.
24. ENTIRE AGREEMENT. This Agreement consists of (i) all the terms and
conditions contained herein, and, (ii) all documents incorporated herein
specifically by reference. This Agreement constitutes the complete and
exclusive statement of the understandings between the parties and supersedes all
proposals and prior agreements (oral or written) between the parties relating to
Service provided hereunder. No subsequent agreement between the parties
concerning the Service shall be effective or binding unless it is made in
writing and subscribed to by additional representatives of Customer and CTSLC.
IN WITNESS WHEREOF, the parties have executed this Telecommunications
Services Agreement on the date first written above.
COASTAL TELEPHONE SERVICES LIMITED COMPANY AXCES, INC.
------------------------
Company Name
/s/ [Illegible] /s/ Michael Avignon
- -------------------------------- ------------------------
By By
President Chairman, CEO
- -------------------------------- -------------------------
ITS ITS
9/7/95 9/07/95
- -------------------------------- -------------------------
Date Date
<PAGE>
EX.10.18
AGREEMENT
TABLE OF CONTENTS
Page
I. Provision of Billing and Collection Services. . . . . . . . . . . . 5
II. SWBT Services . . . . . . . . . . . . . . . . . . . . . . . . . . .17
III. Rates and Charges For Services Ordered. . . . . . . . . . . . . . .20
IV. Application of Taxes to End-Users . . . . . . . . . . . . . . . . .22
V. Purchase of Accounts Receivable . . . . . . . . . . . . . . . . . .28
VI. Service Center Procedural Guidelines. . . . . . . . . . . . . . . .28
VII. Dispute Resolution and Audits . . . . . . . . . . . . . . . . . . .29
VIII. Liability and Indemnification . . . . . . . . . . . . . . . . . . .35
IX. Proprietary Information . . . . . . . . . . . . . . . . . . . . . .39
X. Amendments; Waiver. . . . . . . . . . . . . . . . . . . . . . . . .39
XI. Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
XII. Notice and Demands. . . . . . . . . . . . . . . . . . . . . . . . .40
XIII. Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . .40
XIV. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . .40
XV. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . .41
XVI. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . .41
XVII. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . .41
XVIII. Executed in Counterparts. . . . . . . . . . . . . . . . . . . . . .42
XIX. Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
XX. Termination of Service. . . . . . . . . . . . . . . . . . . . . . .42
XXI. Certification Requirements. . . . . . . . . . . . . . . . . . . . .43
XXII. End-User Service Denial . . . . . . . . . . . . . . . . . . . . . .44
XXIII. Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
XXIV. Customer Agency . . . . . . . . . . . . . . . . . . . . . . . . . .45
XXV. Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
XXVI. Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . .46
XXVII. Right to Withhold . . . . . . . . . . . . . . . . . . . . . . . . .47
XXVIII. Independent Contractors . . . . . . . . . . . . . . . . . . . . . .47
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XXIX. Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . .47
Signature Page. . . . . . . . . . . . . . . . . . . . . . . . . . .47
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<PAGE>
LIST OF SCHEDULES
Schedule I. Order for Billing and Collection Services
Schedule II. Billing and Collection Services Price List
Schedule III. Start-Up Charge
Schedule IV. Minimum Annual Purchase of Service
LIST OF EXHIBITS
Exhibit A Proprietary Information
Exhbiit B Billing and Collection Services Requirements Document
Exhibit C Billing and Collection Services Invoice Billing Requirements
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<PAGE>
AGREEMENT FOR THE
PROVISION OF BILLING AND COLLECTION SERVICES
BETWEEN SOUTHWESTERN BELL TELEPHONE COMPANY AND
AXCES INC.
----------------------------------
(Customer NAME)
This Agreement for the Provision of Billing and Collection Services (hereinafter
"Agreement") is entered into and effective this 21st day of November, 1997,
between Southwestern Bell Telephone Company (hereinafter "SWBT") a Corporation
in good standing, organized and existing under the laws of the State of Missouri
and having its principle place of business in St. Louis, Missouri and
AXCES INC.
-----------------------------------
(Customer's Name)
a CORPORATION
------------------------------------
(Corporation, Partnership, Sole Proprietorship),
in good standing, organized and existing under the laws of the State of
TEXAS
--------------------
(N/A if not a corporation)
and having its principle place of business in
HOUSTON, TEXAS
-----------------------------
(City and State)
If intrastate services are provided in the states of Kansas and/or Texas, this
Agreement shall take effect, in Kansas, upon approval of this Agreement by the
Kansas Corporation Commission, and in Texas, upon approval of this Agreement by
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<PAGE>
the Texas Public Utility Commission. The Customer shall request that SWBT file
this Agreement with the applicable state regulatory jurisdictions for approval.
It is understood by the parties that services may not be immediately initiated,
but that any time, for matters such as regulatory approval of the Agreement and
service start-up and testing, will be included within the term of this Agreement
and that the effective date of this Agreement is not delayed or affected by the
timing of actual provision of service, see: Schedule I (for term of service(s)
ordered) attached hereto.
In consideration of the Customer's agreement to make payment for services as
described herein and of SWBT's willingness to provide said services as described
herein during the term of this Agreement, the parties agree as follows:
I. Provision of Billing and Collection Services
A. SWBT's billing and collection services (B&C Services) shall be
provided in accordance with this Agreement and any applicable tariffs.
This Agreement and its Exhibits attached hereto and incorporated
herein, complement such tariffs to the extent that this Agreement is
not in conflict or inconsistent therewith. To the extent of any
conflict or inconsistency between this Agreement (and its Exhibits)
and such tariffs, the provisions of such tariffs shall control SWBT's
B&C Services in that jurisdiction, unless the Agreement (and its
Exhibits) are approved by the regulatory body which governs SWBT's B&C
Services in that jurisdiction. In the latter event, the Agreement
(and its Exhibits) shall control as authorized by any such
jurisdictional regulatory body. However, it is the intention of the
parties that this Agreement and its Exhibits, to the extent not in
conflict with the provisions of such tariffs, are to be construed to
the extent possible in harmony with any such tariffs.
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<PAGE>
B. When bill rendering services are ordered, the Customer will make an
upfront initial "start-up" payment as indicated on Schedule III. Such
payment will be included with the Customer's submission of this signed
Agreement to SWBT. A separate start-up charge is associated with
Invoice Billing as indicated on Schedule III. Notwithstanding the
above, Customers who are renewing existing bill rendering services are
not subject to additional initial start-up payments.
C. Bill rendering services Customers will make a guaranteed minimum
purchase of services from SWBT under this Agreement, see Schedule I,
paragraph 5 and Schedule IV, attached hereto.
1. Calculation of the annual (consecutive 12 months) minimum
purchase of services shall be based on the Customer's annual
billed volumes. A comparison will be made of actual amount
billed to the Customer and the minimum annual purchase of
services. This comparison will be made within ninety (90) days
after the completion of each year of the contract. The Customer
will pay no less than the applicable yearly minimum purchase of
services for that year. Should the actual annual amount billed
to the Customer be less than the stated minimum annual purchase
of service, an adjustment will be made to the Customer's purchase
of accounts receivable.
a) Minimums will be tracked on a monthly basis requiring
one-twelfth (1/12) of the annual minimum to be
satisfied each month. Any year to date monthly minimum
short fall will be calculated in the Customer's reserve
requirement as defined in Exhibit B, Section 3.1.5 of
this Agreement.
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<PAGE>
2. All annual billing and collection charges except 1) prior year
guaranteed minimum purchase of service true-up charges, 2)
Outside Collection Agency (OCA) charges and 3) quarterly
uncollectible true-up charges paid by the Customer under this
Agreement will be recognized in determining whether the Customer
has met any annual minimum purchase of services. The Customer's
billing and collection service charges shall be based on service
volumes multiplied by the appropriate price, as set forth in the
price list contained in Schedule II attached hereto, or any
applicable tariff.
3. If, during the period immediately preceding the effective date
of this Agreement, the Customer has not subscribed to Services
offered under this Agreement, a period of time for service
start-up, testing and regulatory approval of the Agreement (up
to ninety (90) calendar days) may be necessary prior to the
first bill being rendered. In such cases, a proportional
reduction, not to exceed three months, of the first year's
minimum annual purchase amount will be afforded the Customer.
If the Customer fails to submit billings within three months from
the effective date of this Agreement, Customer will be deemed to
have breached this Agreement and SWBT may elect to terminate it
pursuant to Section XX, Termination of Services.
Should the Customer fail to submit billings on a regular and
consistent basis of at least once every week after commencement
of services, Customer will be deemed to have breached this
Agreement and SWBT may elect to terminate pursuant to Section XX,
Termination of Services.
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<PAGE>
D. If the Customer has subscribed to B&C Services with SWBT during the
period immediately preceding the execution of this Agreement, revenue
amounts, credits, adjustments, realized uncollectibles and other
relevant data will be used in accordance with this Agreement and in
accord with the former Agreement to make appropriate ongoing
calculations under this Agreement to permit continuing provision of
the Service(s).
E. Billings which are submitted by the Customer to provide bi-monthly,
quarterly, or any other interval of billing greater than monthly will
not be allowed. Any such billing will be considered a breach of this
Agreement and SWBT may elect to terminate the Agreement pursuant to
Section XX, Termination of Services.
F. Billing which may be processed under the terms of this Agreement:
1. Charges for the transport of Message Toll Service (MTS) which
consists of the following messages only:
a) one-plus direct dialed long distance toll calls (DDD)
including international toll calls;
b) appropriately validated operator handled long distance toll
calls for:
1) collect calls,
2) third number calls, or
3) calling card calls;
c) directory assistance calls; and
d) appropriately validated direct dialed long distance toll
calls billed through a calling card.
-8-
<PAGE>
Notwithstanding anything contained herein to the contrary, SWBT
may, in its sole opinion, determine that the Customer's billings,
whether for services which are tariffed or not, arise out of a
pay-per-call or other information service offering including but
not limited to international calls. In that event, such billings
will be considered as coming within sections I.F.2 or I.F.3
defined below, and must be submitted to SWBT in compliance with
those sections and in record formats associated with such
billings as designated by SWBT from time to time.
The Customer represents that it will not submit billings as one
or more Message Toll Service charges if the underlying traffic is
other than a traditional long distance service. The Customer
understands that whether or not a charge is tariffed is not to be
considered determinative of whether its billings are for Message
Toll Service.
2. Charges for Pay-Per-Call service (complying with Sections I.G.
and I.H. below). As of January 1, 1998, a service charge per
message billed will apply to the Customer's pay per call services
submitted to SWBT for inclusion on the End User's bills. The
Expanded Message Billing Charge defined in I.F.5 will also apply.
The Customer acknowledges that SWBT will include a consumer
rights notification when the Customer's Pay-Per-Call services are
submitted to SWBT for billing, using SWBT's standardized wording.
The Customer agrees to pay SWBT for one five (5) line marketing
message and one marketing message
-9-
<PAGE>
over five (5) lines per bill rendered, which contains billings
for Customer's pay-per-call service.
3. Other billing, not included in I.F.1 or I.F.2 above, which is
telecommunications related, but only with specific written
approval by SWBT.
4. With respect to the billings authorized in Section I.F.2, I.F.3,
I.G.2 and I.G.11 herein, the Customer agrees that SWBT may, with
sixty days (60) written notice to the Customer, terminate any or
all such billing without cause or change the terms, conditions or
prices for the provision of such billing.
5. With respect to the billings authorized in Sections I.F.2, I.F.3,
I.G.2 and I.G.11 herein, an Expanded Message Billing Charge, per
message billed, will apply to the Customer's billings submitted
to SWBT for inclusion on End-User's bills. As of January 1,
1998, the Message Bill processing per message element will not
apply. Unless otherwise indicated, the following Customer
billings will be subject to the Expanded Message Billing Charge:
a) Billing of voice mail services which are required to be
submitted in EMI Record Types 010117, 010217, 810117 or
810217.
b) Billing of enhanced services which are required to be
submitted in EMI Record Type 010118, 010218, 801118 or
810218.
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<PAGE>
c) Billings using EMI Record Types "42XXXX" which may be
utilized for the billing of non-transmission services as
authorized in writing by SWBT. Notwithstanding the
foregoing, any such billings submitted under these record
types, which are classified by SWBT as a traditional toll
service, will not be subject to the Expanded Billing charge.
d) Billings of telegram services which are required to be
submitted in EMI Record Type 010114.
e) Other EMI record types requested by the Customer and agreed
to by SWBT in writing.
f) Billings of Pay per call and/or information services which
are required to be submitted in EMI Record Type 010116.
G. Billing which will not be processed by SWBT under the terms of this
Agreement includes:
1. All billings, other than Message Toll Services (MTS) with
objectionable content as described in Section I.H. below;
2. All billings containing charges which in whole or part relate, or
reasonably give the appearance of relating to goods or services
provided outside the message or references to telephone numbers,
unless agreed to in writing by the Director-Billing and
Collections, One Bell Center, Room 7-D-7, St. Louis, Missouri
63101, and/or other such individual(s) as SWBT may
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<PAGE>
authorize. Such authorization or notice will be provided to the
Customer in writing;
3. Charges which have been previously billed to the End-User by the
Customer or by a third Party; or new charges to an End-User who
has previously been billed by the Customer or by a third Party,
where the Customer or third Party has been unable to collect
billed charges to the End-User in a timely manner.
4. Charges which, when initially received by SWBT for billing, are
over ninety (90) days old if domestic or one hundred twenty (120)
days old if international;
5. Charges for collect calls associated with pay-per-call
information services billings, including the transport of such
calls:
6. Charges for information regarding credit cards, credit repair or
any information related to credit;
7. Charges for information regarding sweepstakes and/or giveaways;
8. Charges for services which, in SWBT's sole opinion, may result in
nuisance calls to SWBT;
9. Charges which are inconsistent with End-User subscription to
applicable Toll Billing Exceptions (TBE);
10. Charges for services billed to any geographically restricted SWBT
calling card, where the call does not meet the applicable
geographic restriction;
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<PAGE>
11. Charges for 800 Services to an originating End-User (caller as
opposed to called Party) except when the End-User has entered
into a written presubscription agreement; and
12. Charges for information provided outside the message.
13. Charges for cellular services and/or charges to NPA/NNX's
assigned to cellular carriers.
14. Charges for services billed to a SWBT WATS End-User account.
15. Charges for services billed to End-Users who subscribe to local
access services through a Local Service Provider other than SWBT.
16. Monthly Fees or fees other than a per-call fee for access to any
service in which any person provides, or purports to provide
audio information or audio entertainment produced or packaged by
such person, whether such access is provided directly or through
a voice mail box service, unless agreed to in writing by SWBT.
17. Fees for services offered on the Internet.
18. Charges for services billed to End-Users who specifically request
not to be billed for Customer services on the SWBT bill.
Customer agrees it will not forward such billing to SWBT after
notification from the End-User.
19. Charges for credit card calls placed outside of the
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<PAGE>
effective dates of the SWBT End-User account. SWBT Guidelines
and Policys will dictate acceptable dates, if any, before and
after effective date.
20. Charges which consist of combined individual call records and/or
other charges to produce bulk billed services.
H. The Customer agrees, as a condition of SWBT's performance under this
Agreement, that SWBT will not provide B&C Services which SWBT deems
harmful to its image. Customer billing to End-Users will not be
processed by SWBT under this Agreement where such billing is for or is
associated with objectionable content, including but not limited to:
- Services which explicitly or implicitly refer to sexual conduct,
- Services which contain indecent, obscene or profane language,
- Services which allude to bigotry, racism, sexism or other forms
of discrimination,
- Services which, through advertising, content or delivery, are
deceptive, or that may take unfair advantage of minors or the
general public,
- Services which are publicly accessible, multi-party connections
commonly known as "GAB" or "chat" services.
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<PAGE>
I. Customer's Responsibility to Submit Correct Billings
It is the continuing responsibility of the Customer to ensure that its
services to be billed by SWBT comply with the foregoing standards set
forth in E, F and G and H above and all statutory, legal and
regulatory requirements. The Customer will render all necessary
assistance to SWBT to enable SWBT to perform a review of the
Customer's messages, as SWBT shall determine is required, in order to
help identify objectionable or improperly formatted messages on a
timely basis. SWBT may adjust End-User charges (with recourse to the
Customer) for any such services billed, or return to the Customer any
such message billing prior to End-User billing. Nothing herein is
intended to allow the Customer to wait for notification from SWBT
before complying with SWBT's billing standards. Prior to sending
messages to SWBT for billing services, the Customer is to take
reasonable steps to screen, from the Customer's message billing files,
all billing to be sent to SWBT in order to comply with said standards.
Upon SWBT's determination that the Customer has forwarded billing for
objectionable or improperly formatted services, SWBT may decline to
process, and may return, any such billing and all other associated
services which are offered over the same call-to-telephone number, or,
to return all billings associated with the responsible service
provider, or delay processing of the Customer's billings to allow the
Customer the time necessary to establish methods, procedures, computer
programming or other reasonable steps to identify and segregate
objectionable or improperly formatted messages from the Customer's
message billing files, to ensure associated charges are not forwarded
to SWBT for billing. The Customer will pay to SWBT, for each file or
partial file returned, a Return of File charge as defined in Schedule
II. This will also apply each time SWBT is required to block an
objectionable number from billing.
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<PAGE>
Should the Customer dispute SWBT's determination of the objectionable
nature of the content of a message(s) or its proper format, SWBT may
withhold billing of said messages pending the resolution of the
dispute.
Customer forwarding of billing to SWBT of the type described in this
paragraph I or not authorized by the terms of paragraph F or G above
shall constitute a substantial and material breach of this Agreement,
and SWBT may proceed in accordance with Section XX. A, Termination of
Services.
J. Obligation for Inquiry Support Service.
If Inquiry service is not provided by SWBT, the Customer will provide
a toll-free inquiry number for the End-User and SWBT to utilize in
contacting the Customer. This toll-free number will appear on the
Customer's page of the bill. The Customer's Toll Free inquiry number
must be adequately staffed to insure that the Customer is accessible
to End-Users and SWBT during normal business hours.
Upon complaint by an End-User that he/she has been unable to reach the
Customer, through the toll free inquiry number, to inquire about
Customer's services and/or charges that have been billed by SWBT, and
SWBT has reason to believe that the number is not being answered
promptly by an individual capable of addressing the End-User's
concern, SWBT may adjust, with recourse, the End-User's charges
without further attempt to contact the Customer. All such adjustments
will be reflected on SWBT's adjustment report issued to the Customer.
The Customer will be charged a manual adjustment charge for each
adjustment issued by SWBT as defined in Schedule II.
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<PAGE>
Customer's repeated failure to be accessible to End-Users for inquiry
constitutes a substantial and material breach of this Agreement and
SWBT may proceed in accordance with Section XX, Termination of
Service.
II. SWBT Services
SWBT shall provide the following services as requested by the Customer:
A. Billing Services:
SWBT will provide Bill Processing Service for those accounts for which
SWBT provides local service in its franchised operating territory in
the states of Arkansas, Kansas, Missouri, Oklahoma and Texas. This
Agreement does not contemplate the provision of Bill Processing
Service for 1) End User accounts which subscribe to local access
service through a local service provider other than SWBT, 2) End User
accounts outside SWBT's franchised operating territory which subscribe
to local access through SWBT and 3) The provision of a separate bill
used solely for the B&C Customer.
1. Bill Processing Service consists of the preparation of bills
for message-billed or invoice ready service, and mailing of
statements of the amounts due for End-User services received
from the Customer, and the collection of moneys due from the
End-Users. Bill Processing Services include posting of rated
messages and rate elements, rendering of bills, receiving
payments, maintenance of accounts, treatment of accounts,
pre-billing message investigation, each as described in
Exhibit B and C of this Agreement.
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<PAGE>
a) SWBT will process rated messages, billable under this
Agreement, received from the Customer for message billing
and render bills to the qualified accounts as defined in
Exhibit B and C of this Agreement.
b) SWBT will purchase the Customer's receivables on message
billed accounts and render End-User bills showing a single
balance due. Accounts receivable will be purchased in a
manner described in Section 3 of Exhibit B and Exhibit C of
this Agreement.
c) SWBT will perform the collection and treatment functions, as
described herein and in Section 2.6, 2.7 and 2.8 of Exhibit
B of this Agreement. The Customer acknowledges that SWBT
exercises judgment in determining when or whether to deny
local service and is not required to deny service at the
earliest possible opportunity. SWBT, at its sole
discretion, may determine at anytime, to adjust Customer
charges with recourse rather than deny local service.
Treatment schedules may vary from state to state.
d) SWBT may collect End-User deposits at its discretion.
2. If ordered by the Customer and agreed to by SWBT, SWBT will
provide Marketing Message Service for the Customer's billed
accounts as defined in Section 2.10.9 of Exhibit B and Exhibit C
of this Agreement.
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3. SWBT will provide billing format changes, when requested by the
Customer, in accordance with SWBT administration standards for
bill format. Time and Cost request procedures described in
Section 6 of Exhibit B of this Agreement will be followed in
implementing the change.
4. Where Inquiry Service is ordered by the Customer, SWBT will
perform Inquiry Service for accounts billed by SWBT, as defined
in Section 2.9 of Exhibit B of this Agreement. Inquiry services
for transmission and non-transmission services will be provided
at rates set forth in Schedule II attached hereto. If Inquiry
Services are not ordered initially, and requested at a later
date, a start-up fee will be assessed as described in Schedule
III of this Agreement.
5. SWBT will provide Bill Processing Service in an Invoice Billing
Format if ordered by the Customer, pursuant to Exhibit C of this
Agreement.
B. BILLING INFORMATION SERVICES:
1. Billing Information Service is the provision of account and
message detail information to the Customer from SWBT maintained
record systems. The types of billing information services are
described in Exhibit B, Section 2.12 of this Agreement.
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C. Individual Case Basis Services:
1. SWBT offers a variety of Billing and Collection Services on an
individual case basis. A list of these services will be provided
at the Customer's request.
III. Rates and Charges For Services Ordered
An order form, to be separately signed by the Customer, is attached hereto
as Schedule I. SWBT will provide services selected by the Customer on said
Schedule I. Rates and charges applicable to the Billing and Collection
Services covered by this Agreement are attached hereto as Schedule II. It
is understood that applicable tariffs take precedence over any and all
rates and charges contained therein.
For the purposes of billing the Customer for SWBT services provided under
this Agreement, the determination of rates and charges and procedures for
intrastate messages originating and terminating in one state and billed to
an End-User in another state (billing state), will be based on the rates,
charges and procedures of the billing state and subject to that
jurisdiction's regulations.
As to MTS messages, the Customer may elect Standard three (3) year contract
rates or the Volume Discount three (3) year contract rates.
A. Volume Discount
1. In order to qualify for the Volume Discount rates, Customer's
submitting MTS messages must submit to SWBT for billing, 85% or
greater of the Customer's annual MTS messages (both residence and
business) as defined I.F.1, in SWBT's franchise
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territory. The Parties agree that billing other than that listed
in I.F.1 will not be considered in the calculation of the 85%
volume discount requirement. SWBT will afford the Customer up to
5% of the Customer's total billing for the following exclusions.
Such other billings may include, but are not limited to the
following:
a) WATS or WATS like services in which services are sold to the
end user based on blocks of time and individual call detail
is not provided to the end user,
b) National accounts which require a combined bill for all
billings which include services provided outside of SWBT's
operating territory, and
c) Specialized billing which can not be accommodated by SWBT's
billing product.
2. A Customer's affiliate or subsidiary will not qualify for the
Volume Discount Prices unless the combined annual residence and
business MTS messages of the Customer and the Customer's
affiliate or subsidiary, sent to SWBT for billing, total 85% or
greater of the total combined annual MTS residence and business
messages of the Customer and the Customer's affiliate or
subsidiary as defined in I.F.1, in SWBT's franchise territory.
3. In addition, MTS billings, which are under a signed contract
prior to March 1, 1997 to be billed by another billing company,
shall not be included for purposes of calculating the Customer's
annual MTS billings. Such MTS billing volumes will be included
for purposes of calculating the Customer's annual MTS billings
when the Customer is no longer contractually required to bill
such messages under the current contract. The Customer agrees to
provide SWBT, within thirty (30) days of the date of
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this Agreement, a list of such contracts with the provider of
billing services blanked out, the expiration date of the
contract, and message volumes.
4. For those Customers who have elected the Volume Discount,
should the Customer submit MTS billings on behalf of a third
party (sub-entity), each sub-entity is required to meet the
85% volume requirement. The Customer is responsible for
ensuring that the third party is submitting 85% or greater of
its annual billings through the Customer. SWBT reserves the
right to verify the 85% requirement of the Customer and all
sub-entities as described in Section XXIV, Customer Agency.
Failure of the Customer to ensure compliance of the 85%
requirement for itself or a third party will constitute a
substantial and material breach of this Agreement and SWBT may
proceed in accordance with Section XX.A, Termination of
Services.
Notwithstanding the above, the obligation to meet the 85% volume
requirement will be considered satisfied for each of the
Customer's sub-entity's billings which do not exceed one (1)
million messages submitted to SWBT for billing annually.
IV. Application of Taxes to End-Users when Bill Rendering Services are
Ordered by the Customer
A. Tax Reporting
SWBT provides End-User billing services of the Customer's revenues as
a part of the Billing and Collections Service. Unless contrary to
regulatory rule or order, SWBT will not report the Customer's billed
revenues as its own receipt for tax reporting purposes.
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B. Billing of Taxes
1. Unless specifically instructed otherwise in writing by the
Customer, SWBT will apply its existing tax procedures with
respect to the application, billing, recording and collection of
Federal, State or local sales, use, excise, gross receipts or
other taxes or tax-like fees (collectively, "Taxes") imposed on
or with respect to existing Customer services billed by SWBT.
These procedures shall be performed in compliance with the
respective federal, state and local laws. SWBT will comply with
changes in the law affecting its existing tax procedures.
2. The Customer shall have the right, upon written request, to
review SWBT's existing tax procedures and SWBT will supply the
Customer with written documentation regarding the tax procedures
(for example, taxability decision guidelines or tables, and tax
rate tables). Upon completion of its review, the Customer may
request changes through existing Time and Cost procedures defined
in Section 6, Exhibit B, of this Agreement, to SWBT's existing
tax procedures insofar as the Customer's services are concerned.
3. In instances where implementation of a change is not complete by
the agreed upon implementation date established through the Time
& Cost procedure, because of the negligence of SWBT, SWBT agrees
to hold the Customer harmless from and against any liability or
loss resulting from any tax, penalty, interest, additions to tax,
surcharges or other charges payable or incurred by the Customer
as a result of SWBT's negligent delay in implementation. In
addition, SWBT will provide a report to
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the Customer of the Customer's revenue by jurisdiction, together
with a statement of Taxes actually billed in that jurisdiction
and Taxes which would have been billed had implementation
occurred by the effective date. SWBT may back bill for any such
tax change.
4. With respect to changes in the law, SWBT will make its best
efforts to make the necessary system modification to implement
the change prior to the effective date. Whenever SWBT estimates
that the time required for it to implement a change in the law
would preclude its implementation by the statutory effective
date, SWBT will apply to the taxing authority for an appropriate
extension of the effective date of a change.
5. Where, through no negligence of SWBT, implementation of a change
is not complete by the statutory effective date, and the Customer
requests back billing to the End-Users, SWBT will undertake back
billing where feasible through existing Time and Cost procedures
defined in Section 6, Exhibit B of this Agreement.
C. Tax Exemption
1. SWBT, in its performance of services herein, will maintain
End-User provided exemption certificates. Unless the Customer
requests otherwise, SWBT will use the End-User provided
exemption certificates as a basis for exempting End-Users from
Taxes on the Customer's services. The Customer understands
that SWBT makes no warranty as to the validity of the End-User
certificates and that the Customer relies upon SWBT's use of
the certificates at the Customer's own risk.
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2. The Customer may review information relating to an End-User's
exemption status and request through the Time & Cost process that
SWBT reverse the exempt status for purposes of the Customer's
services if the Customer provides SWBT written instructions to
make the status change.
3. SWBT will be liable for any audit assessments and hold harmless
and indemnify the Customer if the exemption status of an End-User
is not reversed in accordance with instructions issued by the
Customer. To the extent SWBT complies with the Customer's
instructions, the Customer will hold harmless and indemnify SWBT
for any liability, loss, or litigation cost, expense or fees
(including reasonable attorney's fees) arising out of or relating
to the tax exempt status of an End-User aggrieved by SWBT's
compliance with the Customer's instructions.
D. Filing of Tax Returns
The Customer shall file all returns for Taxes imposed on or with
respect to the Customer's services and pay or remit all such Taxes and
other items and any applicable interest or penalties. SWBT shall
furnish to the Customer, on a timely basis, all information in SWBT's
possession reasonably necessary for the Customer to file its tax
returns. The timing for, and format of, such information shall be as
specified in Section 5 of Exhibit B of this Agreement.
E. Tax Indemnity
The Customer agrees to indemnify and hold SWBT harmless from any
liability or loss resulting from any tax, penalty, interest, additions
to
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tax, surcharges or other charges, expenses, costs (including
reasonable attorney fees) and fees payable or incurred by SWBT as a
result of:
1. The delay or failure of the Customer (not attributable to any
negligent act or omission of SWBT) to pay any Tax or such other
item or file any return or other information as required by law
or this Agreement; or
2. SWBT complying with this Agreement or with any determination or
direction by or advice of the Customer or using information
provided by the Customer in performing any tax related service.
The indemnity payable herein shall be payable in all events and
without regard to any determination that SWBT is the Party obligated
to collect and remit such taxes or file the tax returns. Such
indemnity shall be provided to SWBT on an after-tax basis.
F. TAX LIABILITY
SWBT agrees to pay and hold the Customer harmless from and against any
liability or loss resulting from tax, penalties, interest, additions
to tax, surcharges, or other charges or payable expenses incurred by
the Customer solely as a result of:
1. The willful or negligent failure of SWBT to provide the Customer
accurate information, as described in Section IV.C. and D, above,
with which to file its tax returns and remit payment; or
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2. The willful or negligent failure of SWBT to accurately calculate
and bill appropriate taxes, unless such calculations and billing
were done upon the Customer's direction or advice.
Such indemnity shall be provided to the Customer on an after-tax
basis.
G. ADDITIONAL TAXES
Should any federal, state or local jurisdiction determine that
additional sales, use, or other taxes (including interest, penalties
and surcharges thereon) are due from SWBT as a result of SWBT's
performance of any obligation under this Agreement, and when said
taxes have not been paid by the Customer, SWBT will so advise the
Customer. The Customer agrees to be liable for any such tax,
interest, penalties and surcharge, but retains the right to protest
the assessment.
If the Customer disagrees with any assessment of taxes due from SWBT
or disagrees with an assessment of any additional tax, penalty,
surcharge and interest due from SWBT as a result of SWBT's performance
of any obligation under this Agreement, the Customer may, at its
expense (including payment of any such assessment, if required, prior
to final resolution of the issue), seek a ruling as to the
applicability of any such tax or to protest any assessment and
participate in any legal challenge to such assessment, but shall be
liable for any tax, penalty, surcharge and interest ultimately
determined to be due. SWBT shall, when requested by the Customer and
at the Customer's expense, cooperate or participate with the Customer
in any such proceeding, protest or legal challenge.
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V. Purchase of Accounts Receivable
SWBT will purchase the Customer's accounts receivable that arise from
Customer's charges included in bills rendered by SWBT. SWBT's purchase of
the Customer's accounts receivable shall be with recourse (debit
uncollected charges back to the Customer). The purchase of the Customer's
accounts receivable will be as set forth in Section 3, Exhibit B of this
Agreement.
VI. Service Center Procedural Guidelines
SWBT, in its performance under this Agreement, will apply its RSC/BSC
guidelines which are used by SWBT in the conduct of its business. A copy
of the current guidelines has been provided to the Customer, the receipt of
which is hereby acknowledged. The Customer agrees that these guidelines
may be modified by SWBT from time to time in the normal course of its
business. Should these modifications substantially change these
procedures, and such changes alter this Agreement to such an extent that in
the reasonable judgment of the Customer it does not allow for the
continuation of billing and collection services as contemplated herein, the
Customer shall have the right to immediately terminate this Agreement
without liability by providing written notice to SWBT, addressed as
provided in Section XII detailing the reasons it believes the Agreement is
substantially changed. If the Customer elects to terminate this Agreement
as provided in this Section VI, written notice must be provided to SWBT
within thirty (30) business days of the date SWBT notifies the Customer of
the changes; provided, however the Customer shall not unreasonably
exercise this right for routine administrative or procedural changes.
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VII. Dispute Resolutions and Audits
A. Dispute Resolution. In the event of disputes that may arise under
this Agreement or the Tariff(s), the Parties shall:
1. Discuss and negotiate the issues between the Parties' authorized
representatives, with informal escalation within the Parties'
organizations as necessary to pursue and achieve resolution as
expeditiously as possible.
2. In the event that either Party determines that the informal
discussion and escalation process described in Subsection A(1),
above, is not achieving resolution, or is not proceeding
expeditiously, either Party may submit the issue for resolution
to an Inter-Company Review Board consisting of one representative
from each Company at the Vice-Presidential level (or at such
lower level as each Party's Vice President may delegate). The
Inter-Company Review Board may consider any material submitted to
it by either Party, which material shall be submitted within
twenty (20) business days of a Party's notification that it
desires resolution by the Board.
Thereupon, and within ten (10) additional work days, the
Inter-Company Review Board shall state in writing to the Parties
its resolution of the dispute.
B. Audits and Examinations
An audit is a review of the accounting and billing records of the
other Party directly relating to the Billing and Collection
Services purchased under this Agreement for
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the purpose of verifying the accuracy and completeness of the
records and compliance with the terms of this Agreement.
An Examination is a limited review of the accounting and billing
records of the other Party directly relating to one specific
component of the Billing and Collection Services purchased under
this Agreement for the purpose of verifying the accuracy and
completeness of the records and compliance with the terms of this
Agreement as to that component. An examination is limited to one
SWBT RAO or one data center.
1. Customer Audits and Examinations
The Customer will have the right to perform one (1) Audit during
the term of this Agreement. In addition, the Customer will have
the right to perform one (1) Examination annually if desired.
a) Auditable Components
During an Audit or Examination, the Customer, or its
authorized representative will have the right to review,
under recognized accounting practices, SWBT systems that
perform Billing and Collections functions and SWBT's
accounting and billing records which contain information
bearing upon the following auditable components: (1) the
amounts being billed to the Customer's end user by SWBT, as
part of its provision of Billing and Collection Services, or
(2) the charges to the
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Customer for services provided by SWBT pursuant to this
Agreement and 3) the amounts identified as the Customer's
for unbillables, uncollectibles, taxes and adjustments. The
Customer does not have the right to audit or examine SWBT's
methods, practices or procedures relating to these
components. Specifically, the Customer does not have the
right to audit or examine SWBT's decision and the time frame
within which such decision is made to issue or not issue an
adjustment, to deny or not deny local service for the non
payment of the Customer's charges, to write off a Customer's
charge as uncollectible or unbillable or to pursue or not
pursue collection of the Customer's charges.
2. SWBT Audits and Examinations
SWBT or its authorized representative will have the right to
perform one (1) Audit during the term of this Agreement and one
(1) Examination annually of the Customer.
a) Auditable Components
During an Audit or Examination SWBT, or its authorized
representative will have the right to review such source
documents, systems, records, and procedures as may under
recognized accounting practices contain information bearing
upon 1) the verification of data substantiating that SWBT
has in fact been provided with annual percentages of the
Customer's billings as set forth in Schedule I of this
Principal Agreement or 2) that the Customer's billings and
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performance obligations with SWBT comply with the terms of
this Agreement.
3. Terms and Conditions
The Audits or Examinations will be conducted by the Customer's or
SWBT's authorized representative, at a location mutually agreed
upon by both Parties. Audits and Examinations will be conducted
during normal business hours.
4. Expenses
Each party will bear its own expenses in connection with
performing an Audit or Examination. However, special data
extractions and any requested extraction of commingled
information will be paid for by the requesting party. For
purposes of this subsection, a "special data extraction" shall
mean the creation of an output record, from existing data files,
that is not normally created (by the party being
audited/examined) from software programs that are currently
resident of the production program library. In the event that
the Customer requests SWBT to develop an Audit or Examination
type software program(s), the cost of such program development
and CPU time will be paid by the Customer at rates and charges as
specified in Schedule II, attached hereto. If SWBT is the
requesting party for a special data extraction from the Customer,
the Customer's necessary program development and CPU time will be
paid by SWBT at rates equal to those specified in Schedule II.
In either event, the party developing the software will provide
the other party all documentation of said program(s) at the
conclusion of the Audit
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or Examination. The party receiving the program(s) may retain same
for use in later Audits or Examinations; however, any necessary
modification will involve additional cost to the requesting party.
5. Confidential Information
a) Any authorized representative of either party engaged in an
Audit or Examination may sign a joint non-disclosure agreement
with the Customer and SWBT.
b) All information received or reviewed by either party or
authorized representative is considered proprietary and
subject to Exhibit A. Its use will be limited to:
- Performance of the Audit or Examination;
- Preparation of any report(s) for the sole purpose of
providing Audit or Examination results, and the resolution
of its findings, to the Customer, SWBT or their respective
authorized representative;
- Preparation and resolution of claims; and
- No other purpose unless agreed to in writing by the Customer
and SWBT.
6. Written Notification and Time Frame Requirements
a) The party requesting an Audit or Examination will provide
written notification of its intent to perform an Audit or
Examination to the other party at a minimum of forty-five (45)
calendar days before the desired start date. Such notice shall
be directed in accordance with
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Section XII of this Agreement. This written notification must
include, at a minimum:
- The specific subject of the Audit or Examination;
- The start date of the Audit or Examination;
- The scope of the Audit or Examination;
- The requested location(s) for performing on-site activities.
Location(s) will be mutually agreed upon by the parties with
approval of a location not to be unreasonably denied; and
- The names, addresses and telephone numbers of
representatives from the requesting party expected to
conduct the Audit or Examination.
b) Within fifteen (15) calendar days of receipt of the
above-described notification, the party receiving same shall
acknowledge its receipt and may at that time, for good and
reasonable cause, change the Audit or Examination start date to
a mutually agreed-upon date. No more than one (1) Audit or
Examination of a party may take place at one time, if the
simultaneous audits or examinations would involve the same
audited party's functional group(s).
c) Within forty-five (45) calendar days of an Audit or
Examination's conclusion, the party conducting same shall
provide to the other party a final report, in writing,
identifying any deficiencies found and documenting any claims
associated with the Audit or Examination. In the event this
time frame cannot be met, the party conducting the Audit or
Examination will so advise the other party
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and the two Parties will mutually agree upon an extension.
d) Upon receipt of a final report, the audited/examined party will
investigate all findings and claims. After investigation, the
audited/examined party will provide a response, in writing,
within forty-five (45) calendar days of receipt of the final
report. In the event this time frame cannot be met, the two
parties will mutually agree upon an extension.
This report will detail the audited/examined party's
investigative actions, and may resolve that one of the
following is true: (1) no settlement is due, (2) a settlement
is due to the Customer from SWBT or (3) a settlement is due to
SWBT from the Customer.
e) The party conducting the Audit or Examination will either
concur or object to the response within forty-five (45)
calendar days of receipt of the other's written response.
Should settlement be agreed upon, payment will be made in
accordance with Exhibit B, Section 3 of this Agreement.
VIII. Liability and Indemnification
A. Limitation of Liability.
Except as otherwise provided in this Agreement, each Party's
liability to the other (as distinct from a Party's obligation to pay
for services provide pursuant to this Agreement) for any loss, cost,
claim, injury,
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liability, or expense, including reasonable attorneys' fees,
relating to or arising out of any negligent act or omission in its
performance of this Agreement (not involving knowing and willful
misconduct) shall be limited to the amount of direct damage actually
incurred. A Party shall not be liable for its inability to meet the
terms of this Agreement where such inability is caused by failure
of the other Party to provide, after receipt of a written request,
the information necessary to allow the first Party to comply with
the obligations stated herein. Absent gross negligence or knowing
and willful misconduct, neither Party shall be liable to the other
for any indirect, special, or consequential damage of any kind
whatsoever. The Customer's direct damages consist of two elements
only: (a) in the case of loss of data or information to be supplied
to the Customer, SWBT's charges for such data or information, and
(b) to the extent that SWBT's act or omission precludes any possible
rendition of End-User bills, the net revenue which may have been
due the Customer for services defined in I.F.1, I.F.2, and I.F.3
for this Agreement but for SWBT's act or omission, as calculated in
accordance with Exhibit B, Section 2.1.6. The Parties agree to use
their best efforts to mitigate damages.
B. Indemnification.
1. Except as otherwise provided in this Agreement, without regard
to whether services are provided under Tariff or contract, each
Party (the "Indemnifying Party") will indemnify and hold harmless
the other Party ("Indemnified Party") from and against any loss,
cost, claim, liability, damage or expense (including reasonable
attorney's fees) to third Parties, relating to or arising out of
negligence or misconduct by the Indemnifying Party, its
employees, agents, or contractors, and associated with this
Agreement. In addition, the Indemnifying
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Party will defend any action or suit brought by a third Party
against the Indemnified Party for any loss, cost, claim,
liability, damage or expense relating to or arising out of the
negligence or misconduct of or by the Indemnifying Party, its
employees, agents, or contractors, under this Agreement.
The Indemnified Party will notify the Indemnifying Party
promptly in writing of any written claims, lawsuits, or demand
by third Parties for which the Indemnified Party alleges that
the Indemnifying Party is responsible under this section and
tender the defense of such claim, lawsuit or demand to the
Indemnifying Party. The Indemnified Party also will cooperate
in every reasonable manner with the defense or settlement of
such claim, demand or lawsuit. The Indemnifying Party will not
be liable under this subparagraph for settlements by the
Indemnified Party of any claim, demand or lawsuit unless the
Indemnifying Party has approved the settlement in advance or
unless the defense of the claim, demand or lawsuit has been
tendered to the Indemnifying Party in writing and the
Indemnifying Party has failed promptly to undertake the defense.
(For End-User Service Denial Liability see Section XXII; For
Customer Agency Billing Liability see Section XXIV.)
2. Notwithstanding any other provision of this Section VIII, the
parties acknowledge that SWBT has no knowledge of the validity
of message payment obligations (billing charges) sent to SWBT
for billing and collections under this Agreement, and that SWBT
therefore strictly relies upon the Customer to forward only
correct billing charges that can be, if necessary, substantiated
in a court of law.
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Upon request, the Customer will provide to SWBT all evidence
needed to sustain billing charges challenged by an End-User,
and SWBT may adjust said charges with recourse if the Customer
fails to do so, or if, in SWBT's sole opinion, the circumstances
involved in the dispute, should be handled between the Customer
and the End-User. The Customer certifies, when forwarding
billing charges to SWBT, that said charges are true and correct,
and accurately reflect proper charges legally owed by the billed
Party (End-User). This Customer certification of validity shall
apply to all billing charges forwarded to SWBT under this
Agreement by the Customer from whatever source. Should SWBT
incur liability for billing and collection of any billing
charges forwarded by the Customer, or for termination of an
End-User's local phone service as part of said collection, or
for defamation or libel or injury to credit or otherwise incurs
liability arising from or resulting from SWBT's performance of
its obligations under this Agreement, the Customer will defend,
indemnify, and hold harmless SWBT for any loss, cost, claim,
damage or expense (including reasonable attorney's fees) arising
from such billing and collection.
3. INFRINGEMENT: The Customer shall indemnify SWBT for any loss,
damage, expense (including reasonable attorney's fees) or
liability that may result by reason of any infringement or
claim of infringement of any patent, trademark, copyright, trade
secret or other proprietary interest based upon SWBT's provision
of Services provided pursuant to this Agreement. However, where
such infringement or claim arises solely from the Customer's
adherence to SWBT's written instructions or
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directions, SWBT shall so indemnify the Customer for such
infringement or claim of infringement.
Each Party shall defend or settle, at its own expense, any
action or suit against the other for which it is responsible
under this clause. Each Party shall notify the other promptly
of any claim of infringement for which the other is responsible,
and shall cooperate with the other in every reasonable way to
facilitate the defense of any such claim.
IX. Proprietary Information
Attached to this Agreement as Exhibit A is the Parties' understanding
with respect to Proprietary Information.
X. Amendments: Waivers
This Agreement or any part thereof may be modified by written amendment
signed by both Parties. No amendment or waiver of any provision of this
Agreement and no consent to any default under this Agreement shall be
effective unless the same shall be in writing and signed by or on behalf
of the Party against whom such amendment, waiver or consent is claimed. In
addition, no course of dealing or failure of any Party to strictly enforce
any term, right or condition of this Agreement shall be construed as a
waiver of such term, right or condition.
XI. Assignment
Any assignment, in whole or part, by either Party, other than an
assignment by SWBT to an affiliate, of any right, obligation, or duty, or
of any other interest hereunder, without the written consent of the other
Party shall be
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void. Such written consent shall not be unreasonably withheld or
delayed. All obligations and duties of a Party to this Agreement shall
be binding on all successors in interest and assigns of such Party.
XII. Notice and Demands
Except as otherwise provided under this Agreement, all notices,
demands, or requests which may be given by a Party to the other Party
shall be in writing and shall be deemed to have been duly given 1) on
the date delivered in person or 2) on the date of the return receipt for
those sent postage prepaid, in the United States mail via Certified
Mail, return receipt requested; or, 3) on the date transmitted
electronically provided that the receiving machine delivers confirmation
to the sender and receipt is verified through a phone call. If personal
delivery is selected as the method of giving notice under this section,
a receipt of such delivery shall be obtained. Mailing addresses for
notices shall be as indicated on the Customer's current Implementation
Forms. The Parties will officially indicate their electronic notice name
and address if this method of notification will be employed.
XIII. Third-Party Beneficiaries
This Agreement shall not provide any non-party with any remedy, claim,
liability, reimbursement, claim of action or other right.
XIV. Governing Law
This Agreement shall be governed by the laws of the State of Missouri.
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XV. Force Majeure
Neither Party shall be held responsible for any delay or failure in
performance of any part of this Agreement to the extent that such delay
or failure is caused by fire, flood, epidemic, explosion, war, terrorist
acts, riots, insurrections, explosions, earthquakes, nuclear accidents,
power blackouts, strike, embargo, government requirement, civil or
military authorities, Act of God or by the public enemy, or other
causes beyond their reasonable control. If any force majeure
condition occurs, the Party delayed or unable to perform shall give
immediate written notice to the other Party. During the pendency of
the force majeure condition the duties of the Parties under this
Agreement shall be abated and shall resume without liability
thereafter.
XVI. Entire Agreement
This Agreement, together with the Schedules, Exhibits, Implementation
Forms and Guidelines referenced herein, and Amendments, if any,
attached hereto, constitute the entire understanding between the
Parties and supersedes all prior understandings, oral or written
presentations, statements, negotiations, proposals and undertakings
with respect to the subject matter hereof.
XVII. Severability
Nothing in this Agreement is intended to obligate either Party to
perform any act which is illegal or which is contrary to regulatory
rule or order, or to public policy. If any provision of this
Agreement is held invalid, unenforceable or void, the remainder of
the Agreement shall continue in full force and effect, provided the
remainder allows for implementation or continuation of Billing and
Collection Services essentially as contemplated herein.
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<PAGE>
XVIII. Executed in Counterparts
This Agreement may be executed in any number of counterparts,
each of which shall be an original, but such counterparts shall
together constitute but one and the same document.
XIX. Headings
The headings and numbering of Sections and Paragraphs in this
Agreement are for convenience and shall not be construed to define or
limit any of the terms herein or affect the meanings or
interpretation of this Agreement.
XX. Termination of Service
A. If either Party fails to perform under the terms of this
Agreement and remains in substantial and material non-compliance
after receipt of thirty (30) days written notice of
non-compliance from the non-breaching Party, this Agreement is
terminated. Notwithstanding the foregoing, any breach of sections
I.F., I.G. and I.H. defined herein must be cured within ten days.
Upon termination, minimum annual purchase of service charges for
the current year and all remaining years will not be applicable
if SWBT is the breaching Party. If the Customer is the breaching
Party, the Customer will be liable for any short fall in the
annual minimum purchase of service revenue guarantee prorated to
the date of written notice of non-compliance from SWBT, and will
be due and payable by the Customer to SWBT at the time of
termination of the Agreement.
Should the Customer breach this Agreement due to a violation of
the 85% volume requirement, all services which have been provided
to the
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<PAGE>
Customer under this Agreement will be recalculated at the
Standard 3 year contract rates and the Customer will
immediately pay SWBT the difference between the volume
discount rates and the standard rates.
B. Notwithstanding Paragraph A. above, either Party may at its sole
discretion, and with eight (8) months' notification to the
other Party, terminate this Agreement in its entirety.
1. In the event that SWBT elects to terminate this Agreement
under this Paragraph B, Customer's minimum annual
purchase of services for the current year and all
remaining contract years will not be applicable.
2. Should the Customer elect to terminate this Agreement
under this Paragraph B prior to the completion of the
term, all services which have been provided to the
Customer under this Agreement as of the date of
termination will be charged accordingly. In addition
the Customer will immediately pay any short fall in the
minimum purchase of service for the current year of the
contract prorated up through the month in which
termination completes. The terminating Customer will
not be responsible for minimum purchase of services
in subsequent months and years.
XXI. Certification Requirements
The Customer states that it has obtained all necessary
jurisdictional certification required in those jurisdictions in
which the Customer has ordered Billing and Collection service(s).
The Customer certifies that, if the Customer should forward to SWBT
any billing originating from a third Party (whether the Customer has
purchased said billing or is acting as a billing
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<PAGE>
agent), the Customer will insure that the originating service
provider has obtained all required certification for those
jurisdictions in which said End-User billing will be processed. The
Customer will provide evidence of all such certifications at the
request of SWBT. SWBT is not required to process any Customer
billing or billing that is forwarded on behalf of a third party if the
Customer or third Party has not obtained proper certification.
The Customer will provide upon SWBT's request, the name, address and
contact number of all originating service providers.
Failure of the Customer to obtain or retain proper jurisdictional
certification may result in service termination as described in
Section XX. A. of this Agreement.
XXII. End-User Service Denial
This Agreement does not obligate SWBT to terminate End-User services
for non-payment. Upon completion of SWBT collection procedures for
non-payment of either transmission or non-transmission charges, SWBT
may adjust, at its sole discretion, such charges with recourse to
the Customer. In addition, the parties acknowledge that changes in
applicable laws and/or regulations may prevent SWBT from terminating
or threatening to terminate End User service for non-payment of any
Customer charges, and that such actions may require changes to SWBT
procedures.
XXIII. Term
The term of this Agreement is three (3) years. Billing and
Collection services will be extended on a month-to-month basis
thereafter. Billing and Collection services shall not be extended if
either Party gives notice, no less than ninety (90) days prior to
the completion of the term. If such notice is
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<PAGE>
not given, the terms and conditions under which Billing and
Collection services are provided to other Customers at that time,
including applicable contract rates and minimum purchase of service
charges available at that time to other Customers, will be applied to
this Agreement.
XXIV. Customer Agency
The Customer will forward only its billing for SWBT processing unless
the Customer notifies SWBT to the contrary in writing. For the
purposes of this paragraph, should the Customer forward billing of a
third Party, such billing will be considered the Customer's billing.
Should a Customer act as an agent for a third Party and forward said
billing to SWBT or should the Customer purchase billing from a third
Party and forward said billing to SWBT, the Customer shall remain
solely responsible to such third parties. The Customer agrees to
protect, indemnify, and hold harmless SWBT for any and all claims by
third parties regarding such third parties' billing forwarded to SWBT
by the Customer.
Customer further agrees to impose on the third Party the duty to
adhere to all applicable terms and conditions of this Agreement
regarding billing that will be processed by SWBT as well as SWBT's
right to audit billings submitted by a third Party to ensure that the
billings comply with the terms of this Agreement. Customer will also
ensure the Third Party agrees that SWBT or its authorized
representative(s) of SWBT shall have the right to review the third
Party's source documents, systems, records, and procedures in
performing such an audit. Such audit does not constitute a SWBT audit
or Examination of the Customer. At SWBT's request, Customer will
furnish documented evidence of Customer's compliance that such
applicable terms and conditions of this Agreement have been imposed
by Customer on the third party and that the third Party agrees SWBT or
SWBT's authorized
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<PAGE>
representative may review the third Party's source documents,
systems, records and procedures.
Should the Customer elect the volume discount pricing plan, the
Customer shall remain solely responsible for ensuring that each
sub-entity that they are forwarding billing on behalf of, complies
with the volume discount requirement of 85% of that sub-entity's
billings.
Customers that retain a third Party, other than SWBT, to provide
their End-User inquiry, authorize such third parties to represent
them and to act in their stead in the performance of inquiry and
collection activities associated with the Customer's billings.
XXV. Publicity
Neither Party shall publish or use advertising, sales promotions,
press releases, or matters wherein the other Party's name or marks
are mentioned or language from which association with the other
Party's name or mark therewith may be inferred or implied without the
other Party's prior written approval.
XXVI. Compliance with Law
Both Parties agree that they will comply with all applicable federal,
state and local laws, ordinances, regulations and codes with which
they are obligated to comply in the conduct of their business
including the procurement of required permits and certificates,
specifically, both parties will comply with the provisions of the
Fair Labor Standards Act of 1983, as amended. Parties further agree
not to discriminate against any employee or applicant for employment
because of race, color, religion, sex, national origin, age or
disability.
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<PAGE>
XXVII. Right to Withhold
Notwithstanding anything contained herein to the contrary, if the
financial condition of the Customer becomes impaired and/or the
Customer fails to pay its obligations to SWBT as they become due, the
Customer agrees SWBT shall entitled to withhold any funds, which
otherwise might be due, or become due to the Customer hereunder, to
satisfy any unpaid obligation of the Customer to SWBT, including, but
not limited to, any amounts due under this Agreement, any access
charges due SWBT, any amounts due to SWBT under applicable tariff, or
otherwise.
XXVIII. Independent Contractors
It is expressly understood and acknowledged that the Parties are
entering into this Agreement as independent contractors.
XXIX. Remedies Cumulative
All remedies are cumulative and are not exclusive of other remedies
to which the injured Party may be entitled at law or equity.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the
date first written above.
SOUTHWESTERN BELL AXCES, Inc.
TELEPHONE COMPANY ------------------------------
(Name of Customer)
By /s/ David D. Kerr By /s/ Michael Avignon
-------------------------------- ----------------------------
(Signature) (Signature)
Name David D. Kerr Name Michael Avignon
------------------------------ -------------------------
(Printed) (Printed)
Title General Manager-Access & Title Chairman, C.E.O.
--------------------------- ------------------------
Interconnection Marketing
Date 11/21/97 Date 11/11/97
----------------------------- --------------------------
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<PAGE>
RESALE AGREEMENT
THIS AGREEMENT is made and entered into this 18th day of March, 1993, by
and between Teleport Communications Group, Inc. a Delaware corporation with
its principal office located at One Teleport Drive, Suite 301, Staten Island,
New York 10311-1011, (hereinafter (TCG)", and ARC Networks, a division of
Avionics Research Corporation, a New York corporation, with its principal
office located at 425 Broad Hollow Road, Melville, New York 11747-4701
(hereinafter "Reseller)", for the purpose of establishing a sales
representation relationship between them.
WITNESSETH:
WHEREAS, TCG is in the business of providing telecommunications
services in certain geographic market areas; and
WHEREAS, Reseller has applied to TCG for the right to market, sell and
distribute TCG's services to the general public; and
WHEREAS, both TCG and Reseller recognize the compatible nature of their
individual goals in expanding competition in the services offered by TCG as
well as any services to be offered by Reseller and the benefits which will
accrue to the public through the Parties' cooperation; and
WHEREAS, TCG has agreed to engage Reseller pursuant to the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
warranties which appear below, and intending to be legally bound thereby, the
parties hereby agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, as hereinafter defined, the following
terms shall have the respective meanings given to them in this Article I,
unless the context requires otherwise. Said terms also shall have the said
meanings when used in any exhibit, schedule, attachment, or addendum hereto
or in any document made or otherwise delivered pursuant to this Agreement,
unless the context otherwise requires. Each said term defined in this
Article I shall be deemed to refer to the singular, plural, masculine,
feminine, or neuter as the context requires.
1.1. "AGREEMENT" means this Agreement, as originally executed and as
the same may be amended, modified and supplemented from time to time by
exhibits, schedules, attachments or addendum executed in accordance herewith.
1.2. "ASSIGNMENT" means a sale, exchange, transfer or other
disposition of all or any portion of a Party's rights hereunder.
<PAGE>
2
1.3. "AFFILIATE" means, when used with reference to a specific
Person, any Person that, directly or indirectly, through one or more
intermediaries, controls, is controlled by or is under common control with
such specific Person. This term shall also include any person who, directly
or indirectly, through one or more intermediaries, has the contractual right
or option to acquire or vote more than 10% of the voting interesting of a
specific Person.
1.4. "BUSINESS DAY" means day other than "Saturdays, Sundays, and
legal holidays.
1.5. "CONTROL" (or the verb from "Controlled"), a Person shall be
deemed to control another Person when such controlling Person has the power,
directly or indirectly, to cause the direction of the management or policies
of such other Person, whether through the ownership of voting securities, by
contract, agency or otherwise.
1.6. "CUSTOMER" means an end-user of TCG's Services.
1.7. "EFFECTIVE DATE" means the date of the last necessary signature
hereto.
1.8. "FCC" refers to the Federal Communications Commission.
1.9. "FINAL ORDER" means an action by any applicable federal or
state agency or court as to which: (i) no request for stay by the federal or
state agency or court of the action is pending, no such stay is in effect,
and, if any deadline for filing any such request is designated by statute or
regulation, it has passed; (ii) no petition for rehearing or reconsideration
of the action is pending and the time for filing any such petition has
passed; (iii) the federal or state agency or court does not have the action
under reconsideration on its own motion and the time for such reconsideration
has passed; and (iv) no appeal to a court, or request for stay by a court, of
the federal or state agency's or court's action is pending or in effect, and
if any deadline for filing such appeal or request is designated by statute or
rule, it has passed.
1.10 "MOU" means a minute of use of TCG's Services hereunder.
1.11 "PARTY" refers to one or both of the parties to this Agreement,
TCG or Reseller, as the context indicates.
1.12 "PERSON" means any general partnership, limited partnership,
corporation, joint venture, trust, business trust, governmental agency,
cooperative, association, individual or other entity, and the heirs,
executors, administrators, legal representatives, successors and assigns of
such person as the context may require.
1.13 "PROPRIETARY INFORMATION" means information relating to
<PAGE>
3
the business and operations of TCG or its subsidiaries, Affiliates, clients
and consultants including, but not limited to, all technical, marketing and
financial information relating thereto, any information relating to the
pricing, methods, processes, financial data, lists, apparatus, statistics,
programs, research, development or related information of TCG, its
subsidiaries or Affiliates, or TCG's or Reseller's clients, concerning past,
present or future business activities or operations of said entities or the
results of the provision of Services performed by Reseller under this
Agreement.
1.14 "SERVICES" OR "TCG'S SERVICES" refers to the point-to-point and
switched telecommunications services delineated in Schedules A & B hereto, to
be resold hereunder by Reseller to the general public in certain geographic
market areas.
ARTICLE II
UNDERTAKING OF THE PARTIES
2.1 "SCOPE" Reseller and TCG wish to set fourth a standard set of
general terms and conditions which will facilitate Reseller's ability to
market, sell and distribute the services in various metropolitan areas. The
Services will offered in each metropolitan area by an entity ("Authorized
Entity") which is either an affiliate or subsidiary of TCG and/or which TCG
manages or is otherwise contractually affiliated with. TCG will notify
Customer from time to time of the identity of each Authorized Entity for
which such terms and conditions are applicable.
2.2. "FORMATION" TCG hereby agrees to provide to Reseller, and
Reseller hereby agrees to accept use of certain TCG Services hereunder. The
Services are as set forth in Schedules A & B hereto and in any applicable
tariffs. These Schedules may be revised from time to time by TCG in
accordance with generally applicable changes in TCG's service offerings. TCG
will inform Reseller of any changes in its Services in a timely manner such
that Reseller may continue to correctly represent the services to the public.
2.2.1 Reseller will market the Services to its target accounts.
Reseller agrees that it shall enter into a Master Communications Services
Agreement and corresponding Service Supplements (hereinafter "Service
Supplements") with TCG for the provision of resale Services. Upon receipt of
an executed Service Supplement, TCG will install and then implement the
Service in its switching facility and network
<PAGE>
4
2.2.2 Reseller shall use TCG Services from among those listed in
Schedule A and Schedule B.
2.2.3 TCG reserves the right in its full discretion to decline to
accept a Customer contract solicited by Reseller pursuant to its generally
applicable business criteria.
2.3. CONNECTIONS TO IXCs: Reseller will specify to TCG its
automatic routing selections for all InterLATA and international traffic.
Reseller will negotiate directly with the IXC of its choice and be
responsible for all IXC charges.
2.4. AUTHORITY OF RESELLER TCG and Reseller hereby agree that
Reseller is a reseller of TCG's Services and solicits offers for such
Services. Reseller shall enter into contracts with Customers for the
Services. Reseller shall have not right, however, to enter into a contract
on TCG's account or to bind TCG in any manner.
2.5. RESELLER'S AUTHORIZATIONS Reseller shall secure and maintain,
at its sole expense, all licenses and permits required by federal, state or
municipal law or regulation for it and its employees, agents or other
representatives, to ensure Reseller's lawful performance of this Agreement.
ARTICLE III
PAYMENT AND COLLECTION TERMS
3.1. RATES FOR SERVICES Subject to the following Sections of this
Article III, Reseller will be charged pursuant to Schedule C hereto for
switched Services and pursuant to Schedule D hereto for dedicated Services.
Schedules C & D may be changed from time to time by TCG in accordance with
changes in TCG's tariffs or generally applicable schedule of rates.
3.1.1. In the event that the underlying local exchange carrier
increases its rates for services used by TCG in providing Service hereunder,
TCG shall have the option to increase its rates to Reseller accordingly.
3.2. MINIMUM COMMITMENT PERIODS Reseller understands and agrees that
the rates for Service to Representative are based upon an expected usage
level and that, absent the minimum usage for both switched and point to point
Service set forth herein, TCG would be unable to offer the Service at the
rates given to Reseller. In view thereof, Reseller shall have Minimum
Commitment Levels for Service hereunder. The first Minimum Commitment Level
shall be for a Minimum Commitment Period that shall commence after the
Effective Date hereof, and continue for a period of six (6) months. By the
sixth (6th) month of this period, Reseller must have in service an aggregate
from all of Reseller's accounts of two-hundred fifty thousand (250,000) MOUs
per month. A second Minimum Commitment
<PAGE>
5
Period shall begin at the end of the first such period. It will continue
until the twelfth (12th) month after the commencement of the first such
Period. By the twelfth (12th) month, Reseller must have in service an
aggregate from all of Reseller's accounts of five-hundred thousand (500,000)
MOUs per month as well as ten (10) DS-1s, TeleXpress Services, or other
services generating equivalent revenue.
3.2.1 TCG shall review Reseller's usage at the end of each Minimum
Commitment Period. If, at the end of each such Period, Reseller has not met
the associated Minimum Commitment Level, then Reseller shall pay to TCG the
amount that would have been paid to TCG for Service if the Minimum Commitment
Level had been achieved for all months of the associated Minimum Commitment
Period.
3.2.2 TCG shall invoice Reseller for the amount due pursuant to the
provisions of subsection 3.2.1 hereof, which amount shall be due from
Reseller within thirty (30) days after TCG sends the invoice. After the end
of the second Minimum Commitment Period, Reseller shall billed and shall
pay to TCG for actual usage or at the second Minimum Commitment Level,
whichever is greater.
3.3. LATE PAYMENT; BILLING DISPUTES Payment and billing disputes
shall be tendered in accordance with the provisions of the Master
Communications Services Agreement to be entered into between TCG and Reseller.
3.4. CREDITWORTHINESS In addition to any other remedies available
to TCG, TCG may elect, in its sole discretion, to cause start of service for
Service applicable to a Customer to be withheld or decline to accept a
Customer if there is a material change in Reseller's creditworthiness (or TCG
may condition the provision of Service on assurance of payment by Reseller or
Customer which shall take the form of a deposit or similar assurance as
specified by TCG).
3.5. SALES FORECAST Reseller will forecast quarterly sales
objectives. These objectives will not be considered by TCG as Reseller's
contractual commitments.
ARTICLE IV
TERM OF AGREEMENT
4.1 EFFECTIVE DATE; RENEWAL This agreement shall become effective
upon the Effective Date, and shall remain in effect for a period of ten (10)
years unless otherwise terminated in accordance herewith. This Agreement
automatically shall be renewed thereafter for successive periods of one (1)
year or as otherwise agreed by the Parties. This Agreement thereupon shall be
<PAGE>
6
terminable by either Party at the end of the initial or then-current renewal
term upon written notice two hundred seventy (270) days prior to the end of
the then-current term.
4.2. INSOLVENCY Either Party may terminate this Agreement upon
ninety (90) days notice to the other Party in the event of an admission by
the other Party of an inability to pay its debts, the entering into by the
other Party of a composition or other arrangement with its creditors, the
appointment of a trustee or receiver, with or without consent, for the other
Party of all or any substantial portion of its property or the filing of a
petition for relieve by or against the other Party under the Bankruptcy Code
or any similar federal or state statute (including moratorium laws);
PROVIDED, HOWEVER, that in the case of an involuntary petition, there shall
be no right of cancellation hereunder unless such petition remains
undismissed sixty (60) days after the filing thereof.
4.3. LOSS OF OPERATING AUTHORITY This Agreement shall terminate
automatically and without liability or further obligation on the part of
either Party to the other if, by Final Order, TCG loses its authority to
provide the Services as contemplated hereunder, or if such authority is
suspended or not renewed.
4.3.1 If such authority is lost, suspended or not renewed with regard
to a portion of the Services or service areas, then this Agreement shall
terminate automatically and without liability or further obligation on the
part of either Party to the other with regard only to the Service or service
area concerned.
4.3.2 The provisions of this Section 4.3 shall not be construed to
affect any liabilities which arise prior to the automatic termination
hereunder, or which may later arise from the Parties' activities during the
term of this Agreement.
4.4. EVENTS OF DEFAULT Aside from any other events of default set
forth in this Agreement, the following shall constitute an event of default
hereunder: (i) the failure by Reseller to make any payments due to TCG
hereunder for a period of ten (10) days after the date such payment is due;
(ii) the violation by either Party hereto of any material term or provision
of this Agreement or the failure of either party hereto to perform any of its
material obligations hereunder for a period of thirty (30) days, the failure
of the defaulting Party to take such steps as are necessary to commence the
cure within thirty (30) days and thereafter to prosecute such steps to
completion; (iii) the misapplication by Reseller of TCG's services; (iv) a
consistently poor payment record or other evidence of lack of financial
ability to perform; (v) any act that violates applicable federal or state law
or regulation or other unlawful act; (vi) the failure of Reseller to abide by
the
<PAGE>
7
terms of Sections 3.2, 3.3, 5.3, 5.4, and 7.4 hereof; or (vii) the willful or
intentional violation by either Party hereto of any term or provision of this
Agreement.
4.4.1. Upon the occurrence of an event of default as defined herein,
the non-defaulting Party shall have the right to terminate this Agreement
upon thirty (30) days written notice.
4.4.2. If Reseller defaults in its performance hereunder, as defined
in this Section 4.4, then TCG may, at its option, and as consideration for
TCG's capital expenditures in providing Service to Reseller's Customers
hereunder, enter into direct contracts with Customers obtained hereunder and
bill such Customers directly, with no compensation being due to Reseller
therefor.
4.5. SPECIFIC PERFORMANCE TCG shall have the right to enforce the
provisions of this Article IV by obtaining an injunction or specific
performance from any court of competent jurisdiction. Additionally, if
Reseller willfully breaches any material term hereof, whether or not TCG
exercises its option to terminate this Agreement pursuant to the terms of
Section 4.4 hereof, TCG shall be entitled to recover reasonable attorney's
fees in redressing said breach. The provisions of this Section 4.5 shall
survive the termination of this Agreement.
4.6. ALTERNATIVE REMEDIES The remedies set forth herein are
cumulative and in addition to, and not in limitation of, other remedies
available at law or in equity. None of the remedies specified in this
Article IV for any default or breach of this Agreement shall be exclusive.
ARTICLE V
MARKETING STANDARDS
-------------------
5.1 SALES LITERATURE TCG shall provide Reseller, at Reseller's
sole expense, with display materials and with an ongoing supply of sales
literature, if available. The copies of such display materials and sales
literature will be the property of Reseller. However, the rights preserved
to TCG pursuant to the provisions of Section 5.3 hereof will remain with
TCG. TCG will provide Reseller with assistance in assembling relevant
documentation.
5.2. MANAGERIAL TRAINING TCG shall provide managerial training
regarding its services, sales techniques and marketing strategies. Such
managerial training will be provided by TCG at no cost to Reseller for five
(5) managerial employees of Reseller. Training for additional of Reseller's
managerial employees shall be at Reseller's cost. Such cost shall be mutually
agreed-upon by the Parties.
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8
5.2.1 Expenses for Resellers' managerial employees who obtain
training hereunder shall be paid by Reseller. Said expenses shall include,
but not be limited to: air fare (or other travel expense); lodging; meals;
local transportation to TCG's training site; and incidental expenses.
5.3. TRADE NAMES AND TRADEMARKS All trade names, trademarks and
service marks owned or employed by TCG or any subsidiary or Affiliate of TCG,
used or employed in TCG's business operation, shall remain the sole and
exclusive property of TCG, or such subsidiary or Affiliate, and such trade
names, trademarks and service marks shall not be used by Reseller without
the prior written consent of TCG or such subsidiary or Affiliate. Reseller
shall immediately discontinue any use of such marks and names upon
termination hereof.
5.4. ADVERTISING TCG shall establish standards for all advertising,
promotional, and customer training materials used or distributed by Reseller
which relate to TCG's services. Reseller may refer to itself as an
authorized Reseller of TCG Services whenever it refers to the services in
promotional, advertising, or other materials. In addition, Reseller shall
provide to TCG for its prior review and written approval, all promotional,
advertising or other materials or activity using or displaying TCG's name,
Services or referring to Reseller as an authorized distributor of TCG
Services. Such review and standards will be limited to factual matters
pertaining to services furnished by TCG and use of TCG's marks and name.
Reseller agrees to change or correct, at Reseller's expense, any such
material or activity which TCG, in its sole judgement, determines to be
inaccurate, misleading or otherwise objectionable.
ARTICLE VI
OPERATING DUTIES OF THE PARTIES
6.1. CUSTOMER SUBSCRIPTION AND SERVICES Reseller shall provide
Customers with applications for service using pre-printed forms provide or
approved by TCG. Such applications shall then be forward by Reseller to
TCG within no more than three (3) Business Days after execution. Reseller
agrees to comply with all of TCG's customer service procedures regarding
TCG's Services hereunder.
6.2. RESELLER'S REPRESENTATIONS; CONTRACTS Reseller shall make no
representations, warranties, promises, understandings, or agreements
concerning TCG or TCG's Services not approved in advance by TCG. Reseller
may represent itself as a reseller of TCG's Services.
<PAGE>
9
6.3. CONDUCT OF RESELLER In performing this Agreement, Reseller
shall:
(a) conduct itself in an honest, professional, and ethical
manner and comply with all applicable statutes, ordinances, and
regulations; and
(b) employ only personnel who Reseller determines are fully
qualified through education and experience to perform Reseller's duties;
and
(c) deal directly with, and only with designated TCG
personnel for all purposes and with regard to all matters that arise
hereunder. The subject personnel will be designated by TCG upon the
execution by Reseller of this Agreement.
6.4. COLLECTION OF CHARGES Upon agreement by Reseller to provide
Service to Customer hereunder, the Customer shall become a customer of
Reseller. Reseller shall provide said service to such Customer and shall be
responsible for billing and collection of any associated deposits and charges
for such Service.
6.5. RESELLER'S FURTHER RESPONSIBILITIES: Reseller shall be
responsible to do the following:
(a) Negotiate sales; take orders; analyze and design service
proposals;; and coordinate with TCG as appropriate and necessary.
(b) Provide current customer and other information as
required for TCG to conduct customer surveys to ascertain Customer
satisfaction with the Service.
(c) Make only such representations concerning the
functions, capabilities, characteristics, design, installation date or
availability of any TCG Service as have been agreed upon by Reseller and
TCG.
(d) Use commercially reasonable efforts at all times to give
prompt, courteous and efficient service to customers; act in accordance
with the highest standards of honesty, integrity and fair dealing in all
dealings with such customers. Reseller shall not do anything which
would tend to discredit, dishonor, reflect adversely upon or in any
manner injure the reputation on TCG.
(e) Explain the Services and advise customers on the use of
the Services and the compatibility of the Services with other products
and services offered for sale by TCG.
(f) Maintain documents and records ("Records") supporting
the sales of Services subject hereof.
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10
(g) Cooperate fully in the collection, compilation and
maintenance of data required to be reported by TCG pursuant to any
federal or state statute, regulation or order. TCG represents that, to
the best of its knowledge, as of the date hereof, there are no reporting
requirements imposed on TCG which require Reseller's cooperation other
than in completing standard sales documents.
(h) Immediately inform TCG in the event of major or minor
outage. In addition, Reseller agrees that it shall give TCG immediate
notice in the event that a customer reports an outage to Reseller.
6.6. TCG EMPLOYEES Reseller agrees that the purpose and effect of
this Agreement is to increase competition in the access market, and to
facilitate Reseller's entry thereto. To aid Reseller in such completion,
pursuant to Section 5.2 hereof, Reseller will obtain access to certain of
TCG's confidential information and trade secrets, including system,s
procedures, customer relations practices, buying patterns and other
information acquired or developed by TCG. Reseller also will obtain access
to TCG employees who have such information. Accordingly, a confidential
relationship will exist hereunder between TCG and Reseller. Reseller thus
agrees that to use its position of confidence with TCG to obtain TCG
employees would be unfair. In view thereof, Reseller agrees that, should
Reseller hire any TCG employees, it will reimburse TCG for the reasonable
cost of recruiting and training replacement employees, and will not
appropriate, either directly or through said employees, TCG's customer lists
or other confidential information not already known to Reseller.
6.6.1 Reseller agrees and stipulates that access to TCG's employees
enhances Reseller's ability to compete in the access market, that the
provisions of this Section 6.6 are not designed to exclude, and will not
exclude, competition from the access market, and that said provisions are
both reasonably necessary and the least restrictive means for TCG to protect
its legitimate interests in encouraging more competition at the retail level.
6.7 TCG RESPONSIBILITIES: TCG shall use reasonable efforts to do
the following:
(a) Process Reseller's service orders in a prompt and
efficient manner.
(b) In accordance with TCG's applicable tariffs and Service
Contracts, install, maintain and support the Service(s) sold by Reseller
pursuant to this Agreement, but TCG shall have no responsibility for or
liability in connection with any other services or products sold by
Reseller.
<PAGE>
11
(c) Provide reasonable technical support to Reseller's
personnel.
ARTICLE VII
LIABILITY AND INDEMNIFICATION
7.1 RESELLER AN INDEPENDENT CONTRACTOR This Agreement constitutes
Reseller as a non-exclusive independent contractor only and not as TCG's
general or special agent and does not create a joint venture or apply to
confer any status, power or authority upon Reseller other than as expressly
set forth herein. The scope of Reseller's authority is specifically limited
to the minimum authority necessary to perform the duties accepted pursuant to
this Agreement and Reseller shall, to the maximum extent not inconsistent
with the provision hereof, control the means, details, manner and method of
allotment associated therewith. Reseller shall make no representations as to
the policies and procedures of TCG other than as specifically authorized by
TCG and shall be liable for any misrepresentation make by Reseller with regard
to TCG's Services.
7.2 RESELLER'S EMPLOYEES All persons employed by Reseller to
perform Reseller's duties under this Agreement are, and will remain, the
employees and agents of Reseller and are not, and will not become, employees
or agents of TCG. Reseller shall be solely responsible for the acts and
omissions of its employees and agents and shall have sole responsibility for
their supervision, direction, and control. Reseller shall comply with all
applicable laws regarding withholding and payment of all income taxes, social
security taxes, unemployment insurance and workmen's compensation and
disability benefits as well as those regarding equal employment opportunities
and safety of the workplace insofar as such concerns the subject matter
thereof.
7.3 RIGHT TO CONDUCT OTHER BUSINESS Each party hereto understands
and acknowledges that this Agreement is non-exclusive and that the Parties
themselves, their Affiliates, their representatives, and other entities with
whom they may contract may compete with the other Party hereto in the
businesses subject hereto in TCG's geographic market areas. This Agreement
shall not in any way limit TCG's power and right to contract with other
Persons concerning the subject matter hereof on such terms as TCG sees fit
even though such Persons, as a result, compete with Reseller. This Agreement
also shall not in any way limit Reseller's power and right to contract with
other Persons concerning the subject matter hereof, either during the term
hereof or thereafter, on such terms as Reseller sees fit even though such
persons, as a result, compete with TCG.
<PAGE>
12
7.4 INSURANCE Reseller shall, at its sole expense, be insured at
all time during the term of this Agreement under a comprehensive liability
insurance policy against claims for bodily and personal injury, death, and
property damage caused by or occurring in conjunction with Reseller's
activities hereunder. Such insurance coverage shall be maintained under one
or more policies of insurance issued by insurance companies qualified to do
business in the states where Reseller performs its duties hereunder, and
shall be in amounts not less than One Million Dollars ($1,000,000) per
occurrence for bodily and personal injury and death, Five Hundred Thousand
Dollars ($500,000) per occurrence for property damage, and Five Hundred
Thousand Dollars ($500,000) per occurrence for general liability arising out
of Reseller's conduct hereunder. Reseller shall provide TCG with a copy of
said policy(ies) and shall provide for not less than thirty (30) days prior
written notice of any modification, cancellation, or non-renewal thereof.
Reseller's insurance coverage hereunder is only for the purpose of assuring
TCG that Customers being solicited for TCG's services shall receive good
service; it does not and shall not be construed to give TCG any control over
or interest in any enterprise of Reseller other than the solicitation of
Customers for TCG's services.
7.5 INDEMNIFICATION Notwithstanding any of the provisions of this
Agreement which may be construed to the contrary, Reseller will indemnify
TCG, its directors, officers, employees, agents and representatives
("Indemnified Parties"), and save them harmless from and against any and all
claims, actions, damages, consequential damages, liabilities and expenses
(collectively, "Losses") occasioned by any act or omission of Reseller, its
directors, officers, employees, agents or representatives, relating to the
performance of its obligations hereunder. If any Indemnified Party shall,
without fault on its part, be made a party to any litigation commenced by or
against such Indemnified Party or Reseller, then Reseller shall protect and
hold such Indemnified Party harmless, and shall pay all costs, expenses,
Losses and reasonable attorney's fees incurred or paid by such Indemnified
Party in connection with said litigation.
7.6 QUALITY OF SERVICE TCG will make every reasonable effort to
provide continuous and uninterrupted service hereunder in accordance with
generally applicable industry standards; however;
EXCEPT FOR ANY EXPRESS WARRANTIES STATED IN THIS
AGREEMENT, TCG DISCLAIMS ALL WARRANTIES INCLUDING,
WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS AND OF FITNESS FOR A
PARTICULAR PURPOSE, WHETHER SUCH WARRANTIES ARE
MADE BEFORE OR AFTER THE EXECUTION HEREOF. THE
STATED WARRANTIES ARE IN LIEU OF ALL OBLIGATIONS
0R LIABILITIES ON THE PART OF TCG FOR DAMAGES
INCLUDING, BUT NOT
<PAGE>
13
LIMITED TO, SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES
ARISING OUT OF OR IN CONNECTION WITH THE USE OR
PERFORMANCE OF TCG'S SERVICE. IT IS EXPRESSLY
UNDERSTOOD THAT THE SOLE REMEDY OF RESELLER FOR
BREACH OF THIS AGREEMENT BY TCG OR FOR ANY DAMAGE TO
RESELLER OR OTHER PERSON CLAIMED TO HAVE RESULTED
FROM RESELLER'S RESALE HEREUNDER OR FROM THE USE
OF TCG'S SERVICE IS CREDITS FOR NETWORK OUTAGES AS
SET FORTH IN THE ASSOCIATED MASTER COMMUNICATIONS
SERVICES AGREEMENT.
7.7 TAXES Reseller shall be solely responsible to pay all
applicable local, state and federal taxes, including sales and uses taxes,
excise, access, bypass or other local, state and federal taxes or charges
imposed on based upon the provision, sales or use of the Services provide
hereunder. Reseller also shall pay any applicable gross receipts taxes with
regard to said Services, including surcharges. Such taxes will be billed by
TCG to Reseller and will be separately stated on Resellers' invoice;
PROVIDED, HOWEVER, that TCG will not bill to Reseller such taxes as may be
exempted by a tax exemption or resale certificate for operations in any state
for which Reseller obtains such a certificate.
ARTICLE VIII
CONFIDENTIALITY
8.1 PROPRIETARY INFORMATION During the term of this Agreement and
for a period of five (5) years thereafter, Reseller shall retain in
confidence, and shall require its directors, officers, employees,
consultants, representatives and agents to retain confidence, any and all
Proprietary Information. The Parties agree that the Proprietary Information
constitutes trade secrets of TCG and that the disclosure thereof in
contravention of this Agreement would constitute an unfair trade practice.
8.1.1 Reseller shall take effective precautions, contractual and
otherwise, reasonably calculated to prevent unauthorized disclosure or misuse
of Proprietary Information by any of its employees or by any other person
having access to such information. All of Reseller's employees, agents,
representatives or consultants who are given access to Proprietary
Information shall first independently and individually execute a
confidentiality agreement with TCG.
8.1.2 Proprietary Information shall not be deemed to include
information which is:
(a) already known to recipient;
<PAGE>
14
(b) publicly known (or becomes publicly known) without the fault or
negligence of recipient;
(c) received from a third party without restriction and without breach
of this Agreement;
(d) independently developed by recipient;
(e) furnished to a third party by TCG without a similar restriction on
the third party's rights;
(f) approved for release by written authorization of TCG; or
(g) required to be disclosed by law; PROVIDED, HOWEVER, that in the
event of a proposed disclosure pursuant to this Section 9.1.2(g),
Reseller shall give TCG not less than then (10) days prior written
notice before such disclosure is made.
8.2. DELIVERY OF DOCUMENTS Subject to the provisions of Section 5.1
hereof, all documents, manuals and other written information which
constitutes Proprietary Information given to or purchased by Reseller during
the term of this Agreement shall remain the sole and exclusive property of
TCG. Within ten (10) business days after termination of this Agreement,
Reseller shall return to TCG (without retaining copies thereof) any and all
Proprietary Information obtained from TCG in connection with the transactions
contemplated by this Agreement.
8.3 DISCLOSURE OF TERMS OF AGREEMENT Neither Party hereto shall
disclose the terms and conditions of this Agreement to any person or entity
without the prior written consent of the other Party.
ARTICLE IX
MISCELLANEOUS
9.1 FORCE MAJEURE Neither Party shall be liable to the other for
any delay or failure to perform hereunder, which delay or failure is due to
causes beyond the control of said Party, including, but not limited to:
acts of God; acts of the public enemy; acts of the United States of America,
or any state, territory or political subdivision thereof or of the District
of Columbia; fires; floods; epidemics; quarantine restrictions; or strikes or
freight embargoes.
9.1.1 Notwithstanding the foregoing provisions, in every case the
delay or failure to perform must be beyond the control and without the fault
or negligence of the Party claiming excusable delay.
<PAGE>
15
9.1.2 Performance times under this Agreement shall be considered
extended for a period of time equivalent to the time lost because of any
delay or failure to perform which is excusable hereunder; PROVIDED, HOWEVER,
that if any such delay or failure shall, in the aggregate, last for a period
of more than thirty (30) days, the Party not relying on the excusable delay
or failure, at its option, may terminate this Agreement.
9.2. SUCCESSION This Agreement shall be binding upon inure to the
benefit of the Parties and their respective heirs, executors, administrators,
legal representatives, successors, and assigns; PROVIDED, HOWEVER, that
Reseller may not assign its rights, nor may it delegate its duties hereunder,
except with TCG's prior written consent.
9.2.1 The Parties hereby agree and stipulate that TCG may expend
significant capital expenses in providing service to customers obtained by
Reseller hereunder. Accordingly, the Parties agree that should: (i) an
insolvency occur pursuant to Section 4.2 hereof; (ii) should TCG discontinue
offering a resale program pursuant to the notice requirement provided in
Section 4.1; or (iii) should Reseller lose, by Final Order, any necessary
local, state or federal authority necessary to perform its duties hereunder,
TCG may, at its option, directly provide Service to Customers at the
applicable retail rate. In the event that TCG exercises its option pursuant
to this Section 9.2.1., said option shall be deemed to be in consideration
for the above-described capital expenditures, and no further compensation
related thereto will be owed by TCG to Reseller.
9.3. NOTICES All notices pursuant to this Agreement shall be in
writing and shall be sent by overnight mail.
If to TCG, to: Teleport Communications Group, Inc.
1 Teleport Drive, Suite 301
Staten Island, NY 10311-1011
Attn: General Counsel
If to Reseller, to: ARC Networks
425 Broad Hollow Road
Melville, New York 11747-4701
Attn: Joseph Sicinski, President
9.4 INTEGRATION This Agreement represents the entire agreement and
understanding between TCG and Reseller as to the subject matter hereof. No
waiver, alteration, or modification of any of the provisions of this
Agreement shall be binding unless in writing and signed by duly authorized
representative of the Party against which enforcement of such waiver,
alteration, or modification is sought.
9.5 SAVINGS CLAUSE If any term, covenant, or condition of
<PAGE>
16
circumstance shall to any extent be invalid or unenforceable, the remainder
of this Agreement, or the application of such term, covenant or condition to
person or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby and each term, covenant, or
condition of the Agreement shall be valid and be enforced to the fullest
extent permitted by law.
9.5.1 All obligations and duties which by their nature extend beyond
the expiration or termination of this Agreement shall survive and remain in
effect beyond any expiration or termination.
9.6. APPLICABLE LAW This Agreement shall be governed by the laws
of the State of New York.
9.7. REGULATORY APPROVAL This Agreement shall be subject to and
governed by any applicable state and federal regulatory agencies having
jurisdiction over the subject matter hereof. Should any approval or
authority be required for any acts, duties or obligations to be performed
hereunder, the Parties will cooperate in securing the same.
9.8. AUTHORITY TO CONTRACT Reseller warrants that it has full
authority to enter into this Agreement and that such action has been duly
authorized in accordance with Reseller's articles of incorporation, by-laws
or other applicable organizational documents and procedures.
9.8.1 The individuals executing this Agreement on behalf of Reseller
further warrant that they have the full power and authority to bind their
respective entities to the terms hereof and have been duly authorized to do
so in accordance with Reseller's corporate or other organizational documents
and procedures.
9.9. CAPTIONS; SECTIONS Captions contained herein are inserted only
as a matter of convenience and in no way define, limit, or extend the scope
or intent of any provision hereof. Use of the term "Section" shall include
the entire subject Section and all its subsections where the context
requires.
9.10 INDEPENDENT BUSINESS JUDGMENT The Parties hereby acknowledge
and agree that Reseller is an independent business sufficiently sophisticated
to exercise and exercising its own business judgement. The Parties hereby
further acknowledge and agree that TCG has made no recommendations or
representations regarding any aspect of Reseller's business including, but not
limited to, and representations with regard to Reseller's profits therefrom.
9.11 WAIVER Failure or delay on the part of either Party to
exercise any right, power or privilege hereunder shall not operate as a waiver
thereof. A waiver of one obligation hereunder shall
<PAGE>
17
not operate as a waiver of any other obligation. Waiver by TCG or Reseller of
a breach of any provision of this Agreement by the other Party shall not
operate or be construed as a waiver of any subsequent breach by the other
Party.
9.12 EXECUTION This Agreement may be executed in counterparts and
each of such counterparts shall, for all purposes, be deemed to be an
original but altogether only one (1) Agreement.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
TELEPORT COMMUNICATIONS GROUP, INC. ARC NETWORKS
By: /s/ [ILLEGIBLE] By: /s/ Joseph Sicinski
-------------------------------- ----------------------------
Title: V.P. [ILLEGIBLE] Title: President
----------------------------- -------------------------
Date: 3/18/93 Date: 18 March 1993
------------------------------ --------------------------
APPROVED AS TO FORM
LEGAL DEPARTMENT
Date 18 March 93 By M.G.
------------ -----
<PAGE>
[LOGO]
SWITCHLESS WHOLESALE SERVICE AGREEMENT
BETWEEN
FRONTIER COMMUNICATIONS OF THE WEST, INC.
AND
ARC NETWORKS, INC.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION
- -------
<S> <C>
1. Services; Purchaser Representations
2. Term Of The Agreement
3. Billing And Payment
4. Billing Disputes
5. Termination Rights
6. Limitation Of Action
7. Taxes And Assessments
8. Amendment
9. Warranties And Limitation Of Liability
10. Indemnification
11. Representation
12. Force Majeure
13. Waivers
14. Assignment
15. Confidentiality
16. Integration
17. Construction
18. Governing Law
19. Notices
20. Counterparts
21. Compliance With Laws
22. Third Parties
23. Survival Of Provisions
24. Unenforceable Provisions
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
Exhibit A General And Service Definitions
Exhibit B Ancillary Fee Schedule
Exhibit C Call Detail Records; Order Processing Procedures; Letter Of Agency
Requirements
Exhibit D National Origination Service (1+)
Exhibit E National Origination Service (800 Switched & Dedicated)
Exhibit F National Origination Service (Dedicated)
Exhibit G National Origination Service - (Switched International)
Exhibit G(a) National Origination Service - (Dedicated International)
Exhibit H 800 PIN
Exhibit I (a-d) Carrier Termination Service
</TABLE>
2
<PAGE>
WHOLESALE SERVICE AGREEMENT
(Switchless)
This Wholesale Service Agreement ("AGREEMENT") is entered into between the
provider of service, Frontier Communications of the West, Inc. f/k/a West
Coast Telecommunications, Inc. on behalf of itself and its affiliates
("FRONTIER"), a California corporation located at 135 East Ortega Street,
Santa Barbara, CA 93101 and ARC Networks, Inc. ("Purchaser"), a New York
corporation with its principal place of business located at 1300 Veterans
Memorial Highway Hauppauge, New York 11788-3025 (hereinafter, Frontier and
Purchaser may be referred to in the aggregate as "PARTIES", and each
singularly as a "PARTY".)
PURPOSE
The Parties are telecommunications carriers subject to the Communications Act
of 1934, as amended. Purchaser desires to purchase network transport and
other telecommunication services from Frontier for Purchaser's resale to
business and residential customers on a common carrier basis. The Parties
agree as follows:
1. SERVICES; PURCHASER REPRESENTATIONS:
(a) Frontier shall, in accordance with the rates, terms and
conditions set forth herein, provide services to Purchaser, as
those services are defined herein or identified on exhibits,
schedules or other attachments appended hereto and made a part
of this Agreement from time-to-time in accordance with the
terms hereof (collectively, "SERVICES"). The initial Services
to be provided have been selected by Purchaser on the attached
SCHEDULE OF INITIAL SERVICES SELECTED BY PURCHASER which is made
a part hereof.
(b) Purchaser agrees to provide Frontier with at least 30 days
prior written notice of Service requirements that may exceed
anticipated or normal course of Service requirements utilized
by Purchaser. Provision of Services is contingent on
availability of facilities and resources of Frontier.
(c) Purchaser shall provide Frontier with a forecast covering a
good faith estimate based on historical information (if
available) of the monthly traffic volume and geographic
distribution for the ordered Services. The estimate will be
for the 3 calendar month period following the desired
activation date. The forecast is to be in the format supplied
or approved by Frontier. Frontier reserves the right to
request updated forecasts. Forecasts do not constitute a
binding commitment on the part of Purchaser.
(d) Orders for Services will be transmitted and processed in
accordance with the procedures set out in Exhibit C attached
hereto and made a part hereof as the same may be modified from
time to time by Frontier.
(e) Any Carrier Identification Code ("CIC") arrangement between
the Parties will be set out in writing as an attachment to this
Agreement. Purchaser is responsible for obtaining its own CIC.
(f) Purchaser is solely responsible for all billing, collection
and customer service activities for End-Users, except as may
otherwise be provided herein. Purchaser acknowledges and
affirms that Purchaser's financial obligations to Frontier
regarding Services provided must be satisfied in full, as
hereinafter provided, whether or not Purchaser has billed or
collected from End-Users.
3
<PAGE>
(g) Purchaser represents and warrants that prior to obtaining the
Services in any jurisdiction it will be qualified to do
business in such jurisdiction and will maintain good standing
in such jurisdiction during the term of this Agreement.
Purchaser further represents and warrants that prior to
obtaining the Services in any jurisdiction it will be
certified by the proper regulatory agencies to provide the
Services purchased hereunder to End-Users in such jurisdiction.
2. TERM OF THE AGREEMENT:
(a) INITIAL TERM: This Agreement is effective and the Parties'
obligations commence upon the date of execution by Frontier
("EFFECTIVE DATE") and continues in effect for a period of
three (3) years ("INITIAL TERM") from either the day Service
is first utilized by Purchaser (as determined by Frontier's
records), or the 90th day after the Effective Date, whichever
date occurs first.
(b) AUTOMATIC RENEWAL: This Agreement renews automatically for a
one (1) year period at the expiration of the Initial Term,
unless canceled in accordance with the terms hereof
("SUBSEQUENT TERM"). Each Subsequent Term renews
automatically for a one (1) year period upon its expiration,
unless canceled in accordance with the terms hereof.
(c) CANCELLATION: If either Party desires to terminate this
Agreement upon expiration of any term, such Party shall give
the other Party written notice of its intent to cancel at
least ninety (90) days prior to expiration of the then
current term.
3. BILLING AND PAYMENT: Purchaser shall pay Frontier for the Services at
the rates and charges set out in the attached Services Schedules and
such other exhibits, schedules or attachments as may be attached hereto
and made a part hereof from time to time. If Purchaser is required to
pay an initial cash deposit or provide other assurance of payment, then
Frontier is not obligated to begin accepting orders or providing
Service until the deposit or other assurance of payment is received.
(a) The initial cash deposit shall be $ (n/a). With Frontier's
prior consent, Purchaser may provide security in the form of
(check one); (n/a) a lock box arrangement acceptable to
Frontier, or _X_ a letter of credit in the amount of $50,000
from a financial institution and in a format acceptable to
Frontier in lieu of an initial cash deposit. Purchaser's
Letter of Credit must always be equal to or greater than the
Minimum Charge Schedule as defined in Section 3 (h).
(b) Frontier invoices Purchaser via facsimile on or about the
fifth Business Day after the close of each Billing Cycle for
the Services and for any other sums due Frontier ("INVOICE").
Each Invoice details: (i) the amount due Frontier, or the
credit due Purchaser, after a reconciliation between the
actual charges for the Services for the prior Billing Cycle
and any required pre-payment for the prior Billing Cycle, and
(ii) any other sums due Frontier. Except if Frontier has
agreed to a lock-box arrangement, in addition to the amounts
under (i) and (ii) above, the Invoice will provide for a
pre-payment equal to 0% of the actual charges for the Services
for the prior Billing Cycle (exclusive of any non-recurring
charges). If Purchaser has submitted a letter of credit that
has an expiration date greater than 45 days after the Invoice
date, or a cash deposit, the pre-payment for a given month
will be reduced by the amount of such security (but to not
less than zero).
4
<PAGE>
(c) Each Invoice shall be paid by Purchaser via wire transfer of
immediately available U.S. funds to an account designated by
Frontier so that the payment is received by Frontier no later
than 30 calendar days from the date of the Invoice (the "DUE
DATE"). Frontier agrees that (i) the Invoice date will be the
same day the Invoice is faxed to Purchaser, and (ii) the
Invoice will be faxed on a Business Day. Any Invoice not
paid by the Due Date shall bear late payment fees at the rate
of 1-1/2% per month (or such lower amount as maybe required by
law) until paid.
(d) The Purchaser facsimile number and contact for purposes of
this Section 3. is 516-951-2536, Attention: Eugene Conlon.
Purchaser may change the facsimile number and contact upon
written notice to Frontier.
(e) If Purchaser is delinquent in payment of an Invoice or
Frontier does not have security from Purchaser equal to
Purchaser's prior month usage charges, Frontier may, in
addition to its other remedies herein, demand and receive
additional security of its choice from Purchaser.
(f) FRAUDULENT USAGE: Frontier is not responsible for, and
Purchaser shall defend and indemnify Frontier against, any
fraudulent use of Service. Any claims of fraud shall not
constitute valid justification for dispute of an Invoice.
Subject to the fraudulent usage provisions of the Frontier
Interlink Calling Card Schedule, if applicable, Purchaser is
solely responsible for all Services usage, allegedly
fraudulent or otherwise, and for all additional charges as
may be associated with such usage. Frontier will monitor
End-User call activity for fraudulent use using the same
procedures Frontier uses for its own customers, except
Frontier will contact Purchaser, but will not directly contact
an End-User, with respect to suspected fraudulent use.
(g) Purchasers agrees to pay to Frontier any and all local
exchange carrier-assessed and governmental imposed charges
levied upon Frontier as a result of Services provided to
Purchaser, including but not limited to:
(i) primary Interexchange carrier ("PIC") change charges.
Because of the cost to Frontier associated with
administering PIC retractions, Frontier may at any
time assess the administrative fee(s) set out in
Exhibit B for PIC change reversals;
(ii) assessments by the National Exchange Carrier's
Association, Inc. (NECA) including but not limited to,
the Universal Service Fund/Lifeline Assistance
(USF/LA), the Telecommunications Relay Service (TRS)
Fund, and other assessments as may be assessed by NECA
in the future relative to the Services;
(iii) assessments by regulatory agencies, including but not
limited to, the Federal Communications Commission
(FCC) and state Public Utility/Service Commissions;
(iv) National Administrative Services Center assessments
(including any monthly recurring charges) for
"800"/"888" service installation;
(v) applicable charges set out in the Schedule of
Ancillary Fees attached hereto as Exhibit B and made a
part hereof.
5
<PAGE>
(h) In addition to any monthly minimum charges for a particular
Service required under this Agreement, commencing with
Purchaser's Invoice following its third full Billing Cycle,
Purchaser is liable for an overall monthly minimum usage
charge for the Services in accordance with the schedule
listed below (the "MINIMUM CHARGE").
<TABLE>
<CAPTION>
Billing Cycle Minimum Charge Schedule
------------- -----------------------
<S> <C>
Month 1-3 $0
Month 4 $10K
Month 5 $16K
Month 6 $25K
Month 7 $40K
Month 8 $65K
Month 9 $104K
Month 10 $167K
Month 11 $268K
Month 12 $429K
Month 13 $500K for duration of Agreement
</TABLE>
If Purchaser's net charges (after any discounts or credits)
for the Services are less than the Minimum Charge in any
month, Purchaser shall pay the shortfall (the "MONTHLY
SURCHARGE"). If this Agreement is terminated prior to the
time the Minimum Charge becomes effective (other than
termination by Purchaser for an uncured breach by Frontier),
Purchaser shall pay an amount equal to the difference between:
(i) the actual charges to Purchaser for usage of the Services
for the period up to the date of termination, and (ii) the
amount of charges for such usage calculated at the applicable
Frontier rates in effect at the time the Services were
provided (the "DISCOUNT MAKE-UP CHARGE").
(i) Frontier may revise the rates and monthly recurring and other
charges in this Agreement (and any exhibit, attachment or
schedule) at any time with 90 days written notice to
Purchaser. If the effective rates for the Services are
increased pursuant to this paragraph, then Purchaser may upon
90 days written notice cancel the Service subject to the rate
increase (Purchaser understands that it may not be able to
separately cancel domestic and international Service if only
one is subject to a rate increase). In order to be
effective, Purchaser's notice of cancellation must be received
by Frontier within 30 days after Purchaser's receipt of
Frontier's notice of the rate increase. Cancellation of a
Service under this paragraph includes cancellation of any
monthly minimum usage charge associated with the canceled
Service that accrues after the date of cancellation as well as
a pro-rata reduction in the Minimum Charge to adjust for the
Service being canceled. If the cancellation notice is not
received by Frontier within the 30 day period, Purchaser will
have irrevocably waived its right to cancel the affected
Service for that particular rate increase. If Purchaser does
not timely provide notice of cancellation, or if any Purchaser
traffic for a canceled Service remains on Frontier's network
after the effective date of cancellation, Purchaser shall pay
the increased rates for the affected Service and such traffic.
(j) Purchaser agrees that any make up to minimum charges,
shortfall charges and surcharges for which it is liable under
this Agreement are based on agreed upon minimum commitments on
its part and corresponding rate concessions on Frontier's
part, and are not penalties or consequential or other damages
under Section 9.(d). Frontier may charge Purchaser, and
Purchaser agrees to pay, reasonable attorneys' fees and all
costs incurred by Frontier in the collection of any unpaid
amounts due from Purchaser, whether or not suit is instituted.
6
<PAGE>
4. BILLING DISPUTES: The Parties agree that time is of essence for
payment of all Invoices. Purchaser has the affirmative obligation of
providing written notice and supporting documentation for any
good-faith dispute with an Invoice ("DISPUTE") within 60 Business Days
after Purchaser's receipt. If Purchaser does not report a Dispute
within the 60 Business Day period, Purchaser shall have irrevocably
waived its dispute rights for that Invoice. Purchaser shall pay
disputed amounts, subject to resolution of the Dispute. Frontier will
use reasonable efforts to resolve timely Disputes within 30
Business Days after its receipt of the Dispute notice. If a Dispute
is not resolved within the 30 Business Day period or if Frontier's
resolution is not acceptable to Purchaser, then at Purchaser's request
the Dispute will be referred to an executive officer of Frontier. If
the Dispute is not resolved within 15 Business Days after the referral,
then either Party may commence an action in accordance with Section 18,
provided that the prevailing Party in such action shall be entitled to
payment of its reasonable attorney fees and costs by the other Party.
The Parties agree to exercise all reasonable efforts to resolve
Disputes within the time frames established herein.
5. TERMINATION RIGHTS:
(a) REGULATORY CHANGES: If the FCC, a state PUC or a court of
competent jurisdiction issues a rule, regulation, law or order
which has the effect of canceling, changing, or superseding
any material term or provision of this Agreement
(collectively, "REGULATORY REQUIREMENT"), then this Agreement
shall be deemed modified in such a way as the Parties mutually
agree is consistent with the form, intent and purpose of this
Agreement and is necessary to comply with such Regulatory
Requirement. Should the Parties not be able to agree on
modifications necessary to comply with a Regulatory
Requirement that materially affects the rights of either Party
within 30 days after the Regulatory Requirement is effective,
then upon written notice either Party may, to the extend
practicable, terminate that portion of this Agreement impacted
by the Regulatory Requirement.
(b) Without affecting any amounts due Frontier, either Party may
terminate this Agreement upon the other Party's insolvency,
dissolution or cessation of business operations. Without
affecting any amounts due it, Frontier may terminate this
Agreement for Purchaser's failure to pay any delinquent
Invoice, or to maintain any other assurance of payment that
may be required hereunder, within 2 Business Days following
Purchaser's receipt of written notice from Frontier.
(c) In the event of a breach of any material term or condition of
this Agreement by a Party (other than a failure to pay which is
covered under (b) above), the other Party may terminate this
Agreement upon 30 days written notice, unless the breaching
Party cures the breach during the 30 day period. A breach
that cannot be reasonably cured within a 30 day period may be
addressed by a written waiver of this section signed by the
Parties.
(d) Upon any breach by Purchaser not cured after expiration of all
applicable notice, grace and cure periods, Frontier may at its
sole option do any or all of the following:
(i) cease accepting or processing orders for Service and
suspend Service;
(ii) cease all electronically and manually generated
information and reports (including any CDR not paid
for by Purchaser);
(iii) draw on any letter of credit, security deposit or
other assurance of payment provided by Purchaser;
(iv) enforce any security interest granted by Purchaser to
Frontier hereunder;
(v) terminate this Agreement and Service without liability
to Frontier;
7
<PAGE>
(vi) contact the End-Users directly to inform them that
their telecommunications service will no longer be
provided through the Purchaser, but may be continued
through Frontier directly;
(vii) bill and collect from the End-Users directly (or
through its billing agents) for services;
(viii) treat the End-Users as Frontier customers for all
purposes;
(ix) collect from Purchaser for future Services that would
have been provided, but for Purchaser's breach,
including but not limited to monthly minimums; and
(x) pursue such other legal or equitable remedy or relief
as may be appropriate.
(e) Exercise by Frontier of its remedies under items (v) through
(viii) above is referred to as the "END-USER PURCHASE" and is
limited to Presubscribed End-Users. As consideration for the
End-User Purchase, Frontier agrees to pay Purchaser the amount
of the net charges (standard published charges, less
governmental assessments and discounts) billed by Frontier
directly to acquired End-Users for actual usage of Frontier
services in the first full billing cycle in which Frontier
invoices such End-Users (the "TRANSFER PRICE").
(f) The Transfer Price may be setoff by Frontier against any
outstanding amounts due Frontier from Purchaser. Frontier
shall pay any balance of the Transfer Price remaining after
setoff to Purchaser within 30 days after the close of the
aforesaid Frontier billing cycle. If the total of
outstanding amounts due Frontier exceeds the Transfer Price,
Purchaser continues to be liable to Frontier for the excess.
As a condition for Purchaser's receipt or credit of the Transfer
Price, Purchaser agrees to fully cooperate with Frontier in
implementation of the transfer of the End-Users to direct
Frontier customers. Such cooperation includes without
limitation:
(i) joint correspondence to the End-Users explaining the
mechanics and impact of the transfer;
(ii) Purchaser promptly providing Frontier with all
End-User information in its possession reasonably
required by Frontier to administer End-User accounts;
and
(iii) Purchaser promptly providing Frontier with all LOAs
for such End-Users and a written assignment of all
Purchaser's rights to such LOA's.
(g) Upon termination of this Agreement and in addition to its right
to convert End-Users to Frontier customers, Frontier may
continue providing services to Presubscribed End-Users in
accordance with the rates and terms Frontier and an End-User
may agree upon and to treat such continuing End-Users as
Frontier customers for all purposes.
6. LIMITATION OF ACTION:
Purchaser shall not seek legal or equitable remedies,
including without limitation, injunctive relief, that would
require Frontier to continue providing Service to Purchaser or
to End-Users through Purchaser while any delinquent amounts
due Frontier remain unpaid, unless Frontier is in breach of the
Agreement.
8
<PAGE>
7. TAXES AND ASSESSMENTS:
Purchaser is responsible for the collection and remittance of
all governmental assessments, surcharges and fees pertaining
to its resale of the Services (other than taxes on Frontier's
net income) (collectively, "TAXES"). Purchaser shall provide
Frontier with valid and properly executed certificate(s) of
exemption for the Taxes, as applicable.
8. AMENDMENT:
Except as may be otherwise provided herein, this Agreement may
not be amended or modified, in whole or in part, except by the
Parties in writing.
9. WARRANTIES AND LIMITATION OF LIABILITY:
(a) Service will be provided by Frontier in accordance with the
applicable technical standards established for call transport
by the telecommunications industry. Frontier shall provide
Service in a quality and diligent manner consistent with
service Frontier provides to its other customers via digital
fiber optic network with SS7 signaling (where available).
FRONTIER MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED, WITH
RESPECT TO TRANSMISSION, EQUIPMENT OR SERVICE PROVIDED
HEREUNDER, AND EXPRESSLY DISCLAIMS ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OR
FUNCTION.
(b) It is the express intent of the Parties that Purchaser be
solely responsible for all claims of End-Users relating to the
Services, including without limitation, any credits or
adjustments that may be issued or required to be issued to
End-Users.
(c) Purchaser's sole and exclusive remedy in the case of a breach
of the Agreement by Frontier shall be a refund of the purchase
price paid for those Services not provided in accordance with
the terms of this Agreement.
(d) In no event shall either Party be liable to the other Party
for incidental and consequential damages, loss of goodwill,
anticipated profit, or other claims for indirect damages in
any manner related to this Agreement or the Services.
10. INDEMNIFICATION:
Each Party shall defend and indemnify the other Parry and its
directors, officers, employees, representatives and agents from any and
claims, taxes, penalties, interest, expenses, damages, lawsuits or
other liabilities (including without limitation, reasonable attorney
fees and court costs) relating to or arising out of (i) acts or
omissions in the operation of it's business; and (ii) it's breach of
this Agreement; provided, however, Frontier shall not be obligated to
indemnify Purchaser, and Purchaser shall defend and indemnify Frontier
hereunder, for any claims by Purchaser's customersd with respect to
services provided by Purchaser which may incorporate Frontier's
services.
11. REPRESENTATION:
The Parties acknowledge and agree that the relationship between them is
solely that of independent contractors, and nothing in this Agreement
is to be construed to constitute the Parties as employer/employee,
partners, franchise/franchisee, or otherwise as participants in a
joint or common undertaking. Neither Party, nor their respective
employees, agents or representatives, has any right, power or authority
to act or create any obligation, express or implied, on behalf of the
other Party.
9
<PAGE>
12. FORCE MAJEURE:
Other than with respect to failure to make payments due hereunder,
neither Party shall be liable under this Agreement for delays,
failures to perform, damages, losses or destruction, or malfunction of
any equipment, or any consequence thereof, caused or occasioned by,
or due to fire, earthquake, flood, water, the elements, labor disputes
or shortages, utility curtailments, power failures, explosions, civil
disturbances, governmental actions, shortages of equipment or
supplies, unavailability of transportation, acts of omissions of third
parties, or any other cause beyond its reasonable control.
13. WAIVERS:
Failure of either Party to enforce or insist upon compliance with the
provisions of this Agreement, or waive compliance with any provisions
of this Agreement in any instance, shall not be construed as a general
waiver or relinquishment of any provision or right of this Agreement.
14. ASSIGNMENT:
(a) Neither Party may assign or transfer its rights or
obligations under this Agreement without the other Party's
written consent, which consent may not be unreasonably
withheld, except that Frontier may assign this Agreement to
its parent, successor in interest, or an affiliate or
subsidiary without Purchaser's consent. Any assignment or
transfer without the required consent is void.
(b) Purchaser may not assign, sell, convey or otherwise transfer
all or a portion of its Presubscribed End-User base
(collectively "TRANSFER") without the prior written consent of
Frontier, which consent Frontier may not unreasonably
withhold. Purchaser must provide Frontier with at least 60
days prior written notice of Purchaser's intent to initiate a
Transfer. Within 30 days from the date of receipt of Frontier
of Purchaser's notice of intent, Frontier will in writing
inform Purchaser of the conditions required by Frontier for
its consent to the Transfer, which conditions will at a minimum
include compensation to Frontier to cover charges for future
Services that would have been provided but for the Transfer,
including but not limited to, any minimum charges herein. If
Frontier fails to respond and provide the required conditions
within the 30 day period, Frontier is deemed to have consented
to the Transfer. Purchaser understands and agrees that:
(i) its breach of this Section 14(b) is an incurable
breach, unless Frontier elects in writing to allow
Purchaser to cure; and
(ii) upon the occurrence of such breach Frontier may
immediately proceed with its remedies under Section 5.
15. CONFIDENTIALITY:
(a) Each Party agrees that all information furnished to and
identified by the other Party as being confidential or
proprietary information or trade secrets (collectively
referred to as "PROPRIETARY INFORMATION"), is and
continuously remains, the sole and exclusive property of the
Party furnishing the same (the Party furnishing the
Proprietary Information hereinafter referred to as the
"DISCLOSING PARTY" and the other Party hereinafter referred to
as the "RECEIVING PARTY"). Each Party shall treat the
Proprietary Information and the contents of this Agreement in
a confidential manner and, except to the extent necessary in
connection with the performance of its obligations under this
Agreement, neither Party may directly or indirectly disclose
the same to any third party without the written consent of the
Disclosing Party.
10
<PAGE>
(i) The Proprietary Information is to be used by the
Receiving Party only for the purposes contemplated in
this Agreement and the Receiving Party may not disclose
the same to anyone other than its employees on a need
to know basis and who agree to be bound by the terms of
this Section. The Proprietary Information may not be
retained by the Receiving Party and all originals and
any copies or summaries shall be returned to the
Disclosing Party upon request.
(b) The confidentiality of obligations of this Section do not apply
to any portion of the Proprietary Information which:
(i) is or becomes public knowledge through no fault of the
Receiving Party;
(ii) is in the lawful possession of Receiving Party prior to
disclosure to it by the Disclosing Party (as confirmed
by the Receiving Party's records);
(iii) is disclosed to the Receiving Party without
restriction on disclosure by a person who has the
lawful right to disclose the information; or
(iv) is disclosed pursuant to the lawful requirements or
formal request of a governmental agency. If the
Receiving Party is requested or legally compelled by a
governmental agency to disclose any of the Proprietary
Information of the Disclosing Party, the Receiving
Party agrees on behalf of itself and its representatives
that it will provide the Disclosing Party with prompt
written notice of such requests that the Disclosing
Party has the opportunity to pursue its legal and
equitable remedies regarding potential disclosure.
(c) Each Party acknowledges that its breach or threatened breach of
this Section may cause the Disclosing Party irreparable harm
which would not be adequately compensated by monetary damages.
Accordingly, in the event of any such breach or threatened
breach, the Receiving Party agrees that equitable relief,
including temporary restraining orders or preliminary or
permanent injunctions, is an available remedy in addition to
any legal remedies to which the Disclosing Party may be
entitled.
(d) Neither Party may use the name, logo, trade name, service
marks, trade marks, or printed materials of the other Party,
in any promotional or advertising material, statement,
document, press release or broadcast without the prior written
consent of the other Party, which consent may be granted or
withheld at the other Party's sole discretion.
(e) The Parties acknowledge the existence of a highly competitive
telecommunications marketplace and understand and agree that
either Party may offer to provide services to customers of the
other Party (including End-Users) in accordance with such
rates and terms as a Party and a customer may agree upon,
provided however, a Party may not use Proprietary Information
of the other Party in soliciting customers for services.
Provided further, neither Party may, in any marketing
activities to existing customers of the other Party, use the
fact that Frontier is the Purchaser's underlying carrier as an
inducement for such customers to switch their services.
(f) Notwithstanding the restrictions set forth in this Section,
Frontier may use End-User Information in furtherance of its
rights under Section 5.
11
<PAGE>
16. INTEGRATION:
This Agreement and all Exhibits, Schedules and other attachments
hereto, represent the entire agreement between the Parties with respect
to the subject matter hereof and supersede and merge all prior
agreements, promises, understandings, statements, representations,
warranties, indemnities and inducements to the making of this
Agreement relied upon by either Party, whether written or oral.
17. CONSTRUCTION:
The language used in this Agreement is deemed the language chosen by
the Parties to express their mutual intent. No rule of strict
construction shall be applied against either Party.
18. GOVERNING LAW:
This Agreement shall, in all respects, be governed by and enforced
in accordance with the laws of the State of New York, excluding its
choice of law provisions. For valuable consideration, both Parties
acknowledge and agree that any action to enforce or interpret the
terms of this Agreement shall be instituted and maintained only in the
Federal Court for the Western District of New York, or if jurisdiction
is not available in the Federal Court, then a state court located in
Rochester, New York. Purchaser hereby consents to the jurisdiction and
venue of such courts and waives any right to object to such
jurisdiction and venue.
19. NOTICES:
All notices, including but not limited to, demands, requests and other
communications required or permitted hereunder (not including
Invoices) shall be in writing and shall be deemed to be delivered when
actually received, whether upon personal delivery or if sent by common
carrier. All notices given by mail or other means of delivery shall be
sent by first class mail, duly addressed and with proper postage, to
the following address, or such other address as each of the Parties
hereto may notify the other:
Frontier Communications of the ARC Networks, Inc.
West, Inc. Attn: Peter Parrinello,
ATTN: Peggy L. Palak, Contract Services President
Brian V. Fitzpatrick, VP Carrier 160 Broadway, Suite 908
Services New York, NY 11788-3025
135 E. Ortega Street Facsimile # 212-566-2136
Santa Barbara, CA 93101
Facsimile # 800-689-2395
20. COUNTERPARTS:
This Agreement may be executed in several counterparts, each of which
shall constitute an original, but all of which shall constitute one
and the same instrument.
21. COMPLIANCE WITH LAWS:
During the term of this Agreement, the Parties shall comply with all
local, state and federal laws and regulations applicable to this
Agreement and to their respective businesses. Further, both Parties
shall obtain, file and maintain any tariffs, permits, certifications,
authorizations, licenses or similar documentation as may be required
by the FCC, a state Public Utility or Service Commission, or any other
governmental body or agency having jurisdiction over its business.
Upon request, either Parties will provide the other with copies of
such required tariffs, permits, certifications, authorizations,
licenses and similar documentation.
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<PAGE>
22. THIRD PARTIES:
The provisions of this Agreement and the rights and obligations
created hereunder are intended for the sole benefit of Frontier and
Purchaser, and do not create any right, claim or benefit on the part
of any person not a Party to this Agreement, including End-Users.
23. SURVIVAL OF PROVISIONS:
Any obligations of the Parties relating to monies owed, as well as
those provisions relating to confidentiality, assurances of payment,
limitations on liability and actions and indemnification, survive
termination of this Agreement.
24. UNENFORCEABILITY OF PROVISIONS:
The illegality or unenforceability of any provision of this Agreement
does not affect the legality or enforceability of any other provision
or portion. If any provision or portion of this Agreement is deemed
illegal or unenforceable for any reason, there shall be deemed to be
made such minimum change in such provision or portion as is necessary to
make it valid and enforceable as so modified. This Agreement is
voidable by Frontier if modified by Purchaser without Frontier's
written or initialed consent.
By its signature below, each Party acknowledges and agrees that sufficient
allowance has been made for review of this Agreement by respective counsel and
that each Party has been advised as to its legal rights, duties and
obligations under this Agreement.
FRONTIER COMMUNICATIONS OF THE WEST, INC. ARC NETWORK, INC.
By: /s/ Brian Fitzpatrick By: /s/ Peter Parrinello
---------------------- ---------------------
Brian Fitzpatrick, Vice President Peter Parrinello, President
Frontier Carrier Services
Date: 1/22/97 Date: 1/21/97
-------------------- ------------------
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<PAGE>
[LOGO]
AMENDMENT #1 TO WHOLESALE SERVICE AGREEMENT
ARC Networks, Inc.
August 14, 1997
This is Amendment #1 to the above referenced Agreement between Frontier
Communications of the West, Inc. ("Frontier") and ARC Networks, Inc.
("Purchaser"), dated January 22, 1997, as amended (the "Agreement").
1. Except as otherwise stated, capitalized terms used herein have the same
meaning as set forth in the Agreement.
2. Purchaser's National Origination Service (NOS) Switched Outbound and
Inbound, INTRASTATE and INTRALATA, rates will be modified to reflect
new rates for the following states:
<TABLE>
<CAPTION>
STATE RPM STATE RPM
-----------------------------------------------------------------------
<S> <C> <C> <C>
Florida $0.1180 New York $0.1050
-----------------------------------------------------------------------
Illinois $0.0710 New York (Intralata 132) $0.0890
-----------------------------------------------------------------------
Illinois (Intralata 358) $0.0475 Ohio $0.0860
-----------------------------------------------------------------------
Maryland $0.0850 Pennsylvania $0.0960
-----------------------------------------------------------------------
</TABLE>
3. Purchaser's NOS Dedicated Outbound and Inbound, INTRASTATE, rates will
be modified to reflect new rates for the following states:
<TABLE>
<CAPTION>
STATE RPM STATE RPM
-----------------------------------------------------------------------
<S> <C> <C> <C>
Florida $0.0685 New York $0.0550
-----------------------------------------------------------------------
Illinois $0.0400 Ohio $0.0520
-----------------------------------------------------------------------
Maryland $0.0550 Pennsylvania $0.0550
-----------------------------------------------------------------------
</TABLE>
4. Purchaser's Carrier Domestic Termination rate structure, identified
in the Agreement as Exhibit 1(a), will be modified to reflect new
rates as presented in the following amended Exhibit 1(a), attached
hereto and made a part hereof. Purchaser's Carrier Domestic Discount,
as identified in Exhibit 1(d) of the Agreement, shall no longer be
applicable and shall be deleted from the Agreement in it's entirety.
Purchaser's Carrier International Discount, identified in Exhibit 1(d)
of the Agreement, shall remain intact.
5. All of the above rates will be effective as of August 7, 1997.
6. Purchaser hereby requests subscription to Frontier's 800 Carrier
Transport Service identified as Exhibit J, attached hereto and made a
part hereof.
7. Item #3(i) of the Agreement shall be modified to read as follows:
Frontier may revise the rates and monthly recurring and other charges
in this Amendment and/or Agreement (and any exhibit, attachment, or
schedule) at any time upon written notice to Customer. Unless
otherwise stated in the notice, domestic rates are effective within
thirty days and international/offshore rates are effective within
seven days of the date of Frontier's written notice. If the effective
rate for a Service is increased pursuant to this paragraph, then
Purchaser may cancel the Service subject to the rate increase upon
written notice to Frontier given within 30 days after Customer's
receipt of the rate increase notice. Cancellation of a Service under
this paragraph includes a pro-rata reduction in the Minimum Charge to
adjust for the Service being canceled. If a rate increase affects a
portion of a Service that is not severable from the entire
Service Purchaser shall not be able to cancel the affected portion,
e.g. domestic outbound switched service is not cancelable as a result
of a rate increase in directory assistance calls (DA cannot be
separately blocked); further, if the rate increase affects traffic to
a particular LATA or country, Purchaser may only cancel Service to the
particular LATA/country to the extent severable by Frontier.
<PAGE>
8. The balance of the Agreement and any amendments or addenda thereto not
modified by this Amendment shall remain in full force and effect.
9. This Amendment is effective as of the date signed by Frontier below.
FRONTIER COMMUNICATIONS OF THE WEST, INC. ARC NETWORKS, INC.
By: /s/ Brian V. Fitzpatrick By:/s/ Peter Parrinello
---------------------- ---------------------
Brian V. Fitzpatrick, Vice President Peter Parrinello, President
Frontier Carrier Services
Dated: 8/29/97 Dated:
-------------------- ------------------
<PAGE>
[LOGO]
AMENDMENT #2 TO WHOLESALE SERVICE AGREEMENT
ARC Networks, Inc.
October 21, 1997
This is Amendment #2 to the above referenced Agreement between Frontier
Communications of the West, Inc. ("Frontier") and ARC Networks, Inc.
("Purchaser"), dated January 22, 1997, as amended (the "Agreement").
1. Except as otherwise stated, capitalized terms used herein have the
same meaning as set forth in the Agreement.
2. Purchaser requests subscription to Frontier's Interlink Calling Card
Service, attached hereto and made a part hereof, and identified as
Exhibits K, K(c), K(b), and K(c).
3. The balance of the Agreement and any executed Amendment's or addenda
thereto not modified by this Amendment #2 shall remain in full force
and effect.
4. This Amendment #2 is effective as of the date signed by Frontier below.
FRONTIER COMMUNICATIONS OF THE WEST, INC. ARC NETWORKS, INC.
By: By:/s/ Peter Parrinello
---------------------- ---------------------
Brian V. Fitzpatrick, Vice President Peter Parrinello, President
Frontier Carrier Services
Dated: Dated: 10/27/97
-------------------- ------------------
<PAGE>
[LOGO]
AMENDMENT #3 TO WHOLESALE SERVICE AGREEMENT
ARC Networks, Inc.
November 25, 1997
This is Amendment #3 to the above referenced Agreement between Frontier
Communications of the West, Inc. ("Frontier") and ARC Networks, Inc.
("Purchaser"), dated January 22, 1997, as amended (the "Agreement").
1. Except as otherwise stated, capitalized terms used herein have the
same meaning as set forth in the Agreement.
2. Purchaser's Carrier Termination International Service rate structure,
identified in the Agreement as Exhibit 1(c), will be modified to
reflect new rates as presented in the following Amended Exhibit 1(c),
attached hereto and made a part hereof. These rates will be effective
with Purchaser's November 28, 1997-December 27, 1997 Billing Cycle.
3. The balance of the Agreement and any executed Amendment's or addenda
thereto not modified by this Amendment #3 shall remain in full force
and effect.
FRONTIER COMMUNICATIONS OF THE WEST, INC. ARC NETWORKS, INC.
By: /s/ Brian Fitzpatrick By:/s/ Peter Parrinello
---------------------- ---------------------
Brian Fitzpatrick, Vice President Peter Parrinello, President
Frontier Carrier Services
Dated: 12/12/97 Dated: 12/3/97
-------------------- ------------------
<PAGE>
[LOGO]
AMENDMENT #4 TO WHOLESALE SERVICE AGREEMENT
ARC Networks, Inc.
February 26, 1998
This is Amendment #4 to the above referenced Agreement between Frontier
Communications of the West, Inc. ("Frontier") and ARC Networks, Inc.
("Purchaser"), dated January 22, 1997, as amended (the "Agreement").
1. Except as otherwise stated, capitalized terms used herein have the
same meaning as set forth in the Agreement.
2. Purchaser's Initial Term, as identified in the Agreement, shall be
extended by six months (through Purchaser's July 28, 2000-August 27,
2000 Billing Cycle).
3. Purchaser's Minimum Charge, as identified in the Agreement, shall be
modified as follows:
"In addition to any monthly minimum charges for a particular
Service required under this Agreement, commencing with
Purchaser's appropriate Billing Cycle, Purchaser is liable for
an overall monthly minimum usage charge for all Services (the
"Minimum Charge") in accordance with the schedule listed below:
<TABLE>
<CAPTION>
Billing Cycle Minimum Charge Schedule
------------- -----------------------
<S> <C>
January 28, 1998-February 27, 1998 $150,000
February 28, 1998-March 27, 1998 $150,000
March 28, 1998-April 27, 1998 $150,000
April 28, 1998-May 27, 1998 $268,000
May 28, 1998-June 27, 1998 $429,000
June 28, 1998-July 27, 1998 $500,000
</TABLE>
If Purchaser's net charges (after any discounts or credits)
for the Services are less than the Minimum Charge in any month,
Purchaser shall pay the shortfall (the "Monthly Surcharge")."
The remainder of the paragraph remains unchanged.
4. Purchaser's Carrier Domestic Termination rates, as identified in
Amended Exhibit 1(a) of Amendment #1, shall be modified to reflect
new rates. These rates are attached hereto and made a part hereof and
are identified as Amended Exhibit 1(a).
5. Purchaser's Carrier 800 Transport rates, as identified in Exhibit J of
Amendment #1, shall be modified to reflect new rates. These rates
are attached hereto and made a part hereof and are identified as
Amended Exhibit J.
6. All of the above rates will be effective within thirty days from the
date of signature of this Amendment #4 by Frontier.
7. Purchaser has elected to assume responsibility for the reporting and
payment of "per call payphone dial-around compensation" charges with
respect to its customers' completed calls that originate from
payphones and are terminated by Frontier to Purchaser's switch or
other facilities under the Agreement (the "Purchaser Calls").
Purchaser and Frontier agree as follows.
<PAGE>
A. Pursuant to Section 276 of the Telecommunications Act of 1996
(the "Act"), the Federal Communications Commission ("FCC") has
prescribed regulations that establish a compensation plan to
ensure that all payphone service providers are compensated for
completed calls made from their payphones ("Payphone
Compensation"). The Parties agree that with respect to the
Purchaser Calls, Purchaser shall be deemed the service provider
and the party responsible for reporting and paying the FCC
mandated Payphone Compensation charges for the Purchaser Calls.
Purchaser agrees to comply with all laws, rules and regulations
promulgated by the FCC or its designees with respect to Payphone
Compensation for the Purchaser Calls. Further, Purchaser agrees
to indemnify Frontier in accordance with Purchaser's
indemnification obligations under the Agreement, and otherwise
comply with the terms of the Agreement, with respect to third
party and regulatory claims against Frontier related to
Purchaser's acts or omissions regarding the Purchaser Calls and
the Payphone Compensation reporting and payment obligations
assumed by Purchaser hereunder. This provision shall survive
termination or expiration of the Agreement.
B. While the Agreement is in effect, Purchaser agrees to contract
with the National Payphone Clearing House or a similar
organization that has the qualifications and systems necessary to
collect and validate information necessary to determine each
payphone owners' eligibility for payment of Payphone Compensation
(the "Agency") for the Purchaser Calls, for the purpose of
reporting and paying Payphone Compensation in compliance with the
Act. Upon request, Purchaser shall provide Frontier with a copy
of Purchaser's contract with the Agency.
C. On a quarterly basis, Purchaser shall provide Frontier with a copy
of the Payphone Compensation reports it provides to the Agency
with respect to the Purchaser Calls, plus supporting documentation,
which reports shall be certified by an officer of purchaser as
being accurate and in compliance with the Act. Upon request,
Purchaser agrees to continue providing copies of such reports
after termination or expiration of the Agreement as long as
Purchaser's above indemnification obligations remain in effect.
D. Frontier may upon reasonable advance notice, and at its expense,
conduct an audit of Purchaser's books and records pertinent to the
calculation, reporting and payment of Payphone Compensation for
the Purchaser Calls. Frontier may perform the initial audit at the
end of the third full month following the effective date of this
Amendment.
E. Purchaser agrees that it shall be charged and shall pay Frontier's
then current Payphone Compensation surcharge for any completed
payphone calls that both originate and terminate on Frontier's
network under the Agreement, such as completed calling card calls
or completed 1 + calls (the "Frontier Calls"). Frontier shall be
responsible for reporting and paying the Payphone Compensation
charges for the Frontier Calls.
8. The balance of the Agreement and any executed Amendment's or addenda
thereto not modified by this Amendment #4 shall remain in full force
and effect.
9. This Amendment #4 is effective as of the date signed by Frontier below.
FRONTIER COMMUNICATIONS OF THE WEST, INC. ARC NETWORKS, INC.
By: By: /s/ Peter Parrinello
------------------------------------ ----------------------------
Brian V. Fitzpatrick, Vice President Peter Parrinello, President
Frontier Carrier Services
Dated: Dated: 2/27/98
-------------------- ------------------
2/26/98 2
<PAGE>
[LOGO]
AMENDMENT #5 TO WHOLESALE SERVICE AGREEMENT
ARC NETWORKS, INC.
April 8, 1998
This is Amendment #5 to the above referenced Agreement between Frontier
Communications of the West, Inc. ("Frontier") and ARC Networks, Inc.
("Purchaser"), dated January 22, 1997, as amended (the "Agreement").
1. Except as otherwise stated, capitalized terms used herein have the
same meaning as set forth in the Agreement.
2. Purchaser's Carrier Termination International Service rates, as
identified in Amended Exhibit 1(c) of Amendment #3, shall be modified
to reflect the rates set out in the new Amended Exhibit 1(c), which
is attached hereto and made a part hereof. These rates are effective
within thirty (30) days following the execution date of this
Amendment #5 by Frontier.
3. The balance of the Agreement and any executed amendments or addenda
thereto not modified by this Amendment #5 shall remain in full force
and effect.
4. Excluding any rate changes, this Amendment #5 is effective as of the
date signed by Frontier below.
FRONTIER COMMUNICATIONS OF THE WEST, INC. ARC NETWORKS, INC.
By: /s/ Brian V. Fitzpatrick By: /s/ Peter Parrinello
----------------------------------- ----------------------------
Brian V. Fitzpatrick, Vice President Peter Parrinello, President
Frontier Carrier Services Group
Date: Date: 4/15/98
--------------------------------- --------------------------
<PAGE>
[LOGO] ORIGINAL
AMENDMENT #6 TO WHOLESALE SERVICE AGREEMENT
ARC NETWORKS, INC.
June 8, 1998
This is Amendment #6 to the above referenced Agreement between Frontier
Communications of the West, Inc. ("Frontier") and ARC Networks, Inc.
("Purchaser"), dated January 22, 1997, as amended (the "Agreement").
1. Except as otherwise stated, capitalized terms used herein have the
same meaning as set forth in the Agreement.
2. In addition to Purchaser's Carrier Domestic Termination and Carrier
800 Transport rates FOB NY, as identified in Amendment #4, Purchaser
shall receive Carrier Domestic Termination and Carrier Toll Free
Transport rates FOB LA, attached hereto and made a part hereof, and
identified as Exhibits I(d) and J(a).
3. The balance of the Agreement and any executed amendments or addenda
thereto not modified by this Amendment #6 shall remain in full force
and effect.
4. This Amendment #6 is effective as of the date signed by Frontier below.
FRONTIER COMMUNICATIONS OF THE WEST, INC. ARC NETWORK, INC.
By: /s/ Brian V. Fitzpatrick 6/17 By: /s/ Michael P. Sable
----------------------------------- ----------------------------
Brian V. Fitzpatrick, Vice President Michael P. Sable, SVP. CFO
Frontier Carrier Services
Date: 6/17/98 Date: 6/12/98
--------------------------------- --------------------------
VOID
AS PER
CARRIE V.
8-26-98
SEE CONTRACT
DATED 6-19
<PAGE>
[LOGO] ORIGINAL
AMENDMENT #7 TO WHOLESALE SERVICE AGREEMENT
ARC NETWORKS, INC.
June 18, 1998
This is Amendment #7 to the above referenced Agreement between Frontier
Communications of the West, Inc. ("Frontier") and ARC Networks, Inc.
("Purchaser"), dated January 22, 1997, as amended (the "Agreement").
1. Except as otherwise stated, capitalized terms used herein have the
same meaning as set forth in the Agreement.
2. Purchaser's Initial Term, as identified in Item #2 of Amendment #4,
shall be extended one year (through Purchaser's July 28, 2001-August
27, 2001 Billing Cycle).
3. Purchaser's Minimum Charge, as identified in Item #3 of Amendment #4,
shall be modified as follows:
"In addition to any monthly minimum charges for a particular
Service required under this Agreement, commencing with
Purchaser's appropriate Billing Cycle, Purchaser is liable for
an overall monthly minimum usage charge for all Services (the
"Minimum Charge") in accordance with the schedule listed below:
<TABLE>
<CAPTION>
Billing Cycle Minimum Charge
------------- --------------
<S> <C>
May 28, 1998-June 27, 1998 $125,000
June 28, 1998-July 27, 1998 $125,000
July 28, 1998-August 27, 1998 $150,000
August 28, 1998-September 27, 1998 $200,000
September 28, 1998-October 27, 1998 $225,000
October 28, 1998-November 27, 1998 $250,000
November 28, 1998-December 27, 1998 $275,000
December 28, 1998-January 27, 1999 $300,000
January 28, 1999-February 27, 1999 $325,000
February 28, 1999-March 27, 1999 $350,000
March 28, 1999-April 27, 1999 $375,000
April 28, 1999-May 27, 1999 $400,000
May 28, 1999-June 27, 1999 $425,000
June 28, 1999-July 27, 1999 $450,000
July 28, 1999-August 27, 1999 $475,000
August 28, 1999-September 27, 1999
-each month thereafter $500,000
</TABLE>
If Purchaser's net charges (after any discounts or credits)
for the Services are less than the Minimum Charge in any month,
Purchaser shall pay the shortfall (the "Monthly Surcharge")."
The remainder of the paragraph remains unchanged.
4. Purchaser's National Origination Service (NOS) Switched and Dedicated,
Outbound, Inbound, and International rates, as identified in any
Amendment/Addendum prior to this Amendment #7, shall be modified to
reflect new Frontier Access Direct rates as provided in Amended
Exhibits D, E, F, G, and G(a).
6/19/98
<PAGE>
5. Purchaser's Carrier Domestic Termination, Carrier International
Termination, and Carrier 800 Transport Service's rates, as identified
in any Amendment/Addendum prior to this Amendment #7, shall be
modified to reflect new Frontier Access Direct rates as provided
Amended Exhibits I, I(a), I(c), and J.
6. All of the above revised rates are attached hereto and made a
part hereof, and will be effective on a go forward basis with
Purchaser's first full Billing Cycle following the execution of this
Amendment #7 by Frontier.
7. Purchaser requests subscription to Frontier's Unbundled Sub-CIC
Service and Private Line Service, both of which are attached hereto
and made a part hereof and identified as Exhibits K and L.
8. Provided Purchaser is not currently in default under the Agreement,
Frontier shall credit Purchaser's account for all shortfall charges
accrued prior to the effective date of this Amendment #7.
9. The balance of the Agreement and any executed amendments or addenda
thereto not modified by this Amendment #7 shall remain in full force
and effect.
10. Excluding any rate changes, this Amendment #7 is effective as of the
date signed by Frontier below.
FRONTIER COMMUNICATIONS OF THE WEST, INC. ARC NETWORKS, INC.
By: /s/ Brian V. Fitzpatrick 6/26/98 By: /s/ Peter Parrinello
--------------------------------- ---------------------------
Brian V. Fitzpatrick, Vice President Peter Parrinello, President
Frontier Carrier Services
Date: 6/26/98 Date: 6/22/98
-------------------- -------------------
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
Optionee: __________________
1. GRANT OF STOCK OPTION. As of the GRANT DATE (identified in SECTION 19
below), Omnilynx Communications Corporation, a Delaware corporation (the
"COMPANY"), hereby grants an Incentive Stock Option (the "OPTION") to the
OPTIONEE (identified above), an employee of the Company, to purchase the number
of shares of the Company's common stock, $.0001 par value per share (the
"COMMON STOCK"), identified in SECTION 19 below (the "SHARES"), subject to the
terms and conditions of this agreement (the "AGREEMENT") and the Omnilynx
Communications Corporation 1999 Stock Incentive Plan (the "PLAN") which is
hereby incorporated herein in its entirety by reference. The Shares, when
issued to Optionee upon the exercise of the Option, shall be fully paid and
nonassessable. The Option is an "incentive stock option" as defined in Section
422 of the Internal Revenue Code.
2. DEFINITIONS. All capitalized terms used herein shall have the
meanings set forth in the Plan unless otherwise provided herein. SECTION 19
below sets forth meanings for various capitalized terms used in this Agreement.
3. OPTION TERM. The Option shall commence on the Grant Date (identified
in SECTION 19 below) and terminate on the date immediately prior to the _____
(__) anniversary of the Grant Date. The period during which the Option is in
effect and may be exercised is referred to herein as the "OPTION PERIOD".
4. OPTION PRICE. The Option Price per Share is identified in SECTION 19
below.
5. VESTING. The total number of Shares subject to this Option shall vest
in accordance with the VESTING SCHEDULE (identified in SECTION 19 below). The
Shares may be purchased at any time after they become vested, in whole or in
part, during the Option Period; provided, however, the Option may only be
exercisable to acquire whole Shares. The right of exercise provided herein
shall be cumulative so that if the Option is not exercised to the maximum extent
permissible after vesting, the vested portion of the Option shall be
exercisable, in whole or in part, at any time during the Option Period.
6. METHOD OF EXERCISE. The Option is exercisable by delivery of a
written notice to the attention of the Secretary of the Company, signed by the
Optionee, specifying the number of Shares to be acquired on, and the effective
date of, such exercise. The Optionee may withdraw notice of exercise of this
Option, in writing, at any time prior to the close of business on the business
day preceding the proposed exercise date.
<PAGE>
7. METHOD OF PAYMENT. The Option Price upon exercise of the Option shall
be payable to the Company in full either: (i) in cash or its equivalent, or (ii)
subject to prior approval by the Committee in its discretion, by tendering
previously acquired Shares having an aggregate Fair Market Value (as defined in
the Plan) at the time of exercise equal to the total Option Price (provided that
the Shares must have been held by the Optionee for at least six (6) months prior
to their tender to satisfy the Option Price), or (iii) subject to prior approval
by the Committee in its discretion, by withholding Shares which otherwise would
be acquired on exercise having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price, or (iv) subject to prior approval by
the Committee in its discretion, by a combination of (i), (ii), and (iii) above.
Any payment in shares of Common Stock shall be effected by the delivery of such
shares to the Secretary of the Company, duly endorsed in blank or accompanied
by stock powers duly executed in blank, together with any other documents as the
Secretary may require. If the payment of the Option Price is remitted partly in
Shares, the balance of the payment of the Option Price shall be paid in either
cash, certified check, bank cashiers' check, or by wire transfer.
The Committee, in its discretion, may allow (i) a "cashless exercise" as
permitted under Federal Reserve Board's Regulation T, 12 CFR Part 220 (or its
successor), and subject to applicable securities law restrictions and tax
withholdings, or (ii) any other means of exercise which the Committee, in its
discretion, determines to be consistent with the Plan's purpose and applicable
law.
As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to or on behalf of the Optionee, in
the name of the Optionee or other appropriate recipient, Share certificates for
the number of Shares purchased under the Option. Such delivery shall be
effected for all purposes when a stock transfer agent of the Company shall have
deposited such certificates in the United States mail, addressed to Optionee or
other appropriate recipient.
8. RESTRICTIONS ON EXERCISE. The Option may not be exercised if the
issuance of such Shares or the method of payment of the consideration for such
Shares would constitute a violation of any applicable federal or state
securities or other laws or regulations, or any rules or regulations of any
stock exchange on which the Common Stock may be listed.
9. TERMINATION OF EMPLOYMENT. Voluntary or involuntary termination of
Employment shall affect Optionee's rights under the Option as follows:
(a) TERMINATION FOR CAUSE. The vested and non-vested portions of the
Option shall expire on 12:01 a.m. (CST) on the date of termination of
Employment and shall not be exercisable to any extent if Optionee's
Employment with the Company is terminated for Cause (as defined in the Plan
at the time of such termination of Employment).
(b) DEATH OR DISABILITY. If Optionee's Employment with the Company
is terminated by death or Disability (as defined in the Plan at the time of
such termination of Employment), then (i) the non-vested portion of the
Option shall immediately expire on the date of termination of Employment
and (ii) the vested portion of the Option shall
2
<PAGE>
expire 365 calendar days after the date of such termination of Employment
to the extent not exercised by Optionee or, in the case of death, by the
person or persons to whom Optionee's rights under the Option have passed by
will or by the laws of descent and distribution or, in the case of
Disability, by Optionee or Optionee's legal representative. In no event
may the Option be exercised by anyone after the earlier of (i) the
expiration of the Option Period or (ii) 365 days after Optionee's death or
termination of Employment due to Disability.
(c) OTHER INVOLUNTARY TERMINATION OR VOLUNTARY TERMINATION. If
Optionee's Employment with the Company is terminated for any reason other
than for Cause, death or Disability, then (i) the non-vested portion of the
Option shall immediately expire on the termination date and (ii) the vested
portion of the Option shall expire to the extent not exercised within three
(3) months after the date of such termination of Employment. In no event
may the Option be exercised by anyone after the earlier of (i) the
expiration of the Option Period or (ii) three months after termination of
Employment.
10. QUALIFICATION AS AN INCENTIVE STOCK OPTION. The Optionee understands
that the Option is intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Code. The Optionee must meet certain holding
periods under Section 422(a) of the Code to obtain the federal income tax
treatment applicable to the exercise of incentive stock options and the
disposition of shares acquired thereby. The Optionee further understands that
the exercise price of Shares subject to this Option has been set by the
Committee at a price that the Committee determined to be not less than 100% (or,
if the Optionee, at the Grant Date, owned more than 10% of the total combined
voting power of the Company's outstanding voting securities, 110%) of the Fair
Market Value, as determined in accordance with the Plan, of a share of Common
Stock on the Grant Date. The Optionee further understands and agrees, however,
that the Company shall not be liable or responsible for any additional tax
liability incurred by the Optionee in the event that the Internal Revenue
Service for any reason determines that this Option does not qualify as an
"incentive stock option" within the meaning of the Code.
11. INDEPENDENT LEGAL AND TAX ADVICE. Optionee acknowledges that the
Company has advised Optionee to obtain independent legal and tax advice
regarding the grant and exercise of the Option and the disposition of any Shares
acquired thereby.
12. REORGANIZATION OF COMPANY. The existence of the Option shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize any or all adjustments, recapitalizations, reorganizations or other
changes in Company's capital structure or its business, or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Shares or the rights thereof,
or the dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
Notwithstanding the vesting provisions in SECTION 19 hereof, in the
event of a "Change in Control" of the Company (as defined in the Plan at the
time of such event), vesting of the entire
3
<PAGE>
Option shall be accelerated and the Option shall automatically become 100%
vested as of the day immediately preceding the Change in Control date.
13. ADJUSTMENT OF SHARES. In the event of stock dividends, spin-offs of
assets or other extraordinary dividends, stock splits, combinations of shares,
recapitalizations, mergers, consolidations, reorganizations, liquidations,
issuances of rights or warrants and similar transactions or events involving
Company, appropriate adjustments shall be made to the terms and provisions of
this Option as provided in the Plan.
14. NO RIGHTS IN SHARES. Optionee shall have no rights as a stockholder
in respect of the Shares until the Optionee becomes the record holder of such
Shares.
15. INVESTMENT REPRESENTATION. Optionee will enter into such written
representations, warranties and agreements as Company may reasonably request in
order to comply with any federal or state securities law. Moreover, any stock
certificate for any Shares issued to Optionee hereunder may contain a legend
restricting their transferability as determined by the Company in its
discretion. Optionee agrees that Company shall not be obligated to take any
affirmative action in order to cause the issuance or transfer of Shares
hereunder to comply with any law, rule or regulation that applies to the Shares
subject to the Option.
16. NO GUARANTEE OF EMPLOYMENT. The Option shall not confer upon Optionee
any right to continued employment with the Company or any subsidiary thereof.
17. WITHHOLDING OF TAXES. The Company shall have the right to (a) make
deductions from the number of Shares otherwise deliverable upon exercise of the
Option in an amount sufficient to satisfy withholding of any federal, state or
local taxes required by law, or (b) take such other action as may be necessary
or appropriate to satisfy any such tax withholding obligations.
18. GENERAL.
(a) NOTICES. All notices under this Agreement shall be mailed or
delivered by hand to the parties at their respective addresses set forth
beneath their signatures below or at such other address as may be
designated in writing by either of the parties to one another. Notices
shall be effective upon receipt.
(b) SHARES RESERVED. Company shall at all times during the Option
Period reserve and keep available under the Plan such number of Shares as
shall be sufficient to satisfy the requirements of this Option.
(c) NONTRANSFERABILITY OF OPTION. The Option granted pursuant to
this Agreement is not transferable other than by will, the laws of descent
and distribution or by a qualified domestic relations order (as defined in
Section 414(p) of the Internal Revenue Code). The Option will be
exercisable during Optionee's lifetime only by Optionee or by Optionee's
legal representative in the event of Optionee's Disability. No right or
benefit hereunder shall in any
4
<PAGE>
manner be liable for or subject to any debts, contracts, liabilities,
obligations or torts of Optionee.
(d) AMENDMENT AND TERMINATION. No amendment, modification or
termination of the Option or this Agreement shall be made at any time
without the written consent of Optionee and Company.
(e) NO GUARANTEE OF TAX CONSEQUENCES. The Company and the Committee
make no commitment or guarantee that any federal or state tax treatment
will apply or be available to any person eligible for benefits under the
Option. The Optionee has been advised and been provided the opportunity to
obtain independent legal and tax advice regarding the grant and exercise of
the Option and the disposition of any Shares acquired thereby.
(f) SEVERABILITY. In the event that any provision of this Agreement
shall be held illegal, invalid, or unenforceable for any reason, such
provision shall be fully severable, but shall not affect the remaining
provisions of the Agreement, and the Agreement shall be construed and
enforced as if the illegal, invalid, or unenforceable provision had not
been included herein.
(g) SUPERSEDES PRIOR AGREEMENTS. This Agreement shall supersede and
replace all prior agreements and understandings, oral or written, between
the Company and the Optionee regarding the grant of the Options covered
hereby.
(h) GOVERNING LAW. The Option shall be construed in accordance with
the laws of the State of Texas without regard to its conflict of law
provisions, to the extent federal law does not supersede and preempt Texas
law.
19. DEFINITIONS AND OTHER TERMS. The following capitalized terms shall
have those meanings set forth opposite them:
(a) OPTIONEE: __________
(b) GRANT DATE: __________
(c) SHARES: __________ (____) of the Company's Common Stock.
(d) OPTION PRICE: __________ Dollars ($_____) per Share.
(e) OPTION PERIOD: __________ 199__ through _____________ 200_ (until
5:00 p.m. CST).
5
<PAGE>
(f) VESTING SCHEDULE: Options for ________ of the Shares shall vest
on the first anniversary of the Grant Date, and Options for an
additional _________ of the Shares shall vest on each subsequent
anniversary of the Grant Date until fully vested, as follows:
<TABLE>
<CAPTION>
Date Options Vesting
---- ---------------
<S> <C>
-------- --------
-------- --------
-------- --------
Total
--------
--------
</TABLE>
[SIGNATURE PAGE FOLLOWS.]
6
<PAGE>
IN WITNESS WHEREOF, the Company, as of _____________, 1999, has caused this
Agreement to be executed on its behalf by its duly authorized officer and
Optionee has hereunto executed this Agreement as of the same date.
OMNILYNX COMMUNICATIONS CORPORATION
By:
---------------------------------------------------
Name:
--------------------------------------------------
Title:
-------------------------------------------------
Address for Notices:
Omnilynx Communications Corporation
1770 Motor Parkway, Suite 300
Hauppauge, New York 11788
OPTIONEE
-------------------------------------------------------
Address for Notices:
------------------------------
------------------------------
------------------------------
7
<PAGE>
OMNILYNX COMMUNICIATIONS CORPORATION
NONSTATUTORY STOCK OPTION
Optionee: _____________
1. GRANT OF STOCK OPTION. As of the GRANT DATE (identified in SECTION 18
below), Omnilynx Communications Corporation, a Delaware corporation (the
"COMPANY"), hereby grants a Nonstatutory Stock Option (the "OPTION") to the
OPTIONEE (identified above), an employee of the Company, to purchase the number
of shares of the Company's common stock, $.0001 par value per share (the "COMMON
STOCK") identified in SECTION 18 below (the "SHARES"), subject to the terms and
conditions of this agreement (the "AGREEMENT") and the Omnilynx Communications
Corporation 1999 Stock Incentive Plan (the "PLAN") which is hereby incorporated
herein in its entirety by reference. The Shares, when issued to Optionee upon
the exercise of the Option, shall be fully paid and nonassessable. The Option
is not an "incentive stock option" as defined in Section 422 of the Internal
Revenue Code.
2. DEFINITIONS. All capitalized terms used herein shall have the
meanings set forth in the Plan unless otherwise provided herein. SECTION 18
below sets forth meanings for various capitalized terms used in this Agreement.
3. OPTION TERM. The Option shall commence on the Grant Date (identified
in SECTION 18 below) and terminate on the date immediately prior to the _____
(___) anniversary of the Grant Date. The period during which the Option is in
effect and may be exercised is referred to herein as the "OPTION PERIOD".
4. OPTION PRICE. The Option Price per Share is identified in SECTION 18
below.
5. VESTING. The total number of Shares subject to this Option shall vest
in accordance with the VESTING SCHEDULE (identified in SECTION 18 below). The
Shares may be purchased at any time after they become vested, in whole or in
part, during the Option Period; provided, however, the Option may only be
exercisable to acquire whole Shares. The right of exercise provided herein
shall be cumulative so that if the Option is not exercised to the maximum extent
permissible after vesting, the vested portion of the Option shall be
exercisable, in whole or in part, at any time during the Option Period.
6. METHOD OF EXERCISE. The Option is exercisable by delivery of a
written notice to the Secretary of the Company, signed by the Optionee,
specifying the number of Shares to be acquired on, and the effective date of,
such exercise. The Optionee may withdraw notice of exercise of this
<PAGE>
Option, in writing, at any time prior to the close of business on the business
day preceding the proposed exercise date.
7. METHOD OF PAYMENT. The Option Price upon exercise of the Option shall
be payable to the Company in full either: (i) in cash or its equivalent, or (ii)
subject to prior approval by the Committee in its discretion, by tendering
previously acquired Shares having an aggregate Fair Market Value (as defined in
the Plan) at the time of exercise equal to the total Option Price (provided that
the Shares must have been held by the Optionee for at least six (6) months prior
to their tender to satisfy the Option Price), or (iii) subject to prior approval
by the Committee in its discretion, by withholding Shares which otherwise would
be acquired on exercise having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price, or (iv) subject to prior approval by
the Committee in its discretion, by a combination of (i), (ii), and (iii) above.
Any payment in shares of Common Stock shall be effected by the delivery of such
shares to the Secretary of the Company, duly endorsed in blank or accompanied by
stock powers duly executed in blank, together with any other documents as the
Secretary may require. If the payment of the Option Price is remitted partly in
Shares, the balance of the payment of the Option Price shall be paid in either
cash, certified check, bank cashiers' check, or by wire transfer.
The Committee, in its discretion, may allow (i) a "cashless exercise" as
permitted under Federal Reserve Board's Regulation T, 12 CFR Part 220 (or its
successor), and subject to applicable securities law restrictions and tax
withholdings, or (ii) any other means of exercise which the Committee, in its
discretion, determines to be consistent with the Plan's purpose and applicable
law.
As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to or on behalf of the Optionee, in
the name of the Optionee or other appropriate recipient, Share certificates for
the number of Shares purchased under the Option. Such delivery shall be
effected for all purposes when a stock transfer agent of the Company shall have
deposited such certificates in the United States mail, addressed to Optionee or
other appropriate recipient.
8. RESTRICTIONS ON EXERCISE. The Option may not be exercised if the
issuance of such Shares or the method of payment of the consideration for such
Shares would constitute a violation of any applicable federal or state
securities or other laws or regulations, or any rules or regulations of any
stock exchange on which the Common Stock may be listed.
9. TERMINATION OF EMPLOYMENT. Voluntary or involuntary termination of
Employment shall affect Optionee's rights under the Option as follows:
(a) TERMINATION FOR CAUSE. The vested and non-vested portions of the
Option shall expire on 12:01 a.m. (CST) on the date of termination of
Employment and shall not be exercisable to any extent if Optionee's
Employment is terminated for Cause (as defined in the Plan at the time of
such termination of Employment).
2
<PAGE>
(b) RETIREMENT. If Optionee's Employment is terminated for
Retirement on or after Optionee attains the age of 65, then (i) the
non-vested portion of the Option shall immediately expire on the
termination date and (ii) the vested portion of the Option shall expire to
the extent not exercised within 183 calendar days after the date of such
termination of Employment. In no event may the Option be exercised by
anyone after the earlier of (i) the expiration of the Option Period or (ii)
183 calendar days after the date of termination of Employment due to
Retirement.
(c) DEATH OR DISABILITY. If Optionee's Employment is terminated by
death or Disability (as defined in the Plan at the time of such termination
of Employment), then (i) the non-vested portion of the Option shall
immediately expire on the date of termination of Employment and (ii) the
vested portion of the Option shall expire 365 calendar days after the date
of such termination of Employment to the extent not exercised by Optionee
or, in the case of death, by the person or persons to whom Optionee's
rights under the Option have passed by will or by the laws of descent and
distribution or, in the case of Disability, by Optionee or Optionee's legal
representative. In no event may the Option be exercised by anyone after
the earlier of (i) the expiration of the Option Period or (ii) 365 days
after the date of Optionee's death or termination of Employment due to
Disability.
(d) OTHER INVOLUNTARY TERMINATION OR VOLUNTARY TERMINATION. If
Optionee's Employment is terminated for any reason other than for Cause,
Retirement, death or Disability, then (i) the non-vested portion of the
Option shall immediately expire on the termination date and (ii) the vested
portion of the Option shall expire to the extent not exercised within 90
calendar days after the date of such termination of Employment. In no
event may the Option be exercised by anyone after the earlier of (i) the
expiration of the Option Period or (ii) 90 calendar days after the date of
termination of Employment.
10. INDEPENDENT LEGAL AND TAX ADVICE. Optionee acknowledges that the
Company has advised Optionee to obtain independent legal and tax advice
regarding the grant and exercise of the Option and the disposition of any Shares
acquired thereby.
11. REORGANIZATION OF COMPANY. The existence of the Option shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize any or all adjustments, recapitalizations, reorganizations or other
changes in Company's capital structure or its business, or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Shares or the rights thereof,
or the dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
Notwithstanding the vesting provisions in SECTION 18 hereof, in the event
of a "Change in Control" of the Company (as defined in the Plan at the time of
such event), vesting of the entire Option shall be accelerated and the Option
shall automatically become 100% vested as of the day immediately preceding the
Change in Control date.
3
<PAGE>
12. ADJUSTMENT OF SHARES. In the event of stock dividends, spin-offs of
assets or other extraordinary dividends, stock splits, combinations of shares,
recapitalizations, mergers, consolidations, reorganizations, liquidations,
issuances of rights or warrants and similar transactions or events involving
Company, appropriate adjustments shall be made to the terms and provisions of
the Option as provided in the Plan.
13. NO RIGHTS IN SHARES. Optionee shall have no rights as a stockholder
in respect of the Shares until the Optionee becomes the record holder of such
Shares.
14. INVESTMENT REPRESENTATION. Optionee will enter into such written
representations, warranties and agreements as Company may reasonably request in
order to comply with any federal or state securities law. Moreover, any stock
certificate for any Shares issued to Optionee hereunder may contain a legend
restricting their transferability as determined by the Company in its
discretion. Optionee agrees that Company shall not be obligated to take any
affirmative action in order to cause the issuance or transfer of Shares
hereunder to comply with any law, rule or regulation that applies to the Shares
subject to the Option.
15. NO GUARANTEE OF EMPLOYMENT. The Option shall not confer upon Optionee
any right to continued employment with the Company or any subsidiary thereof.
16. WITHHOLDING OF TAXES. The Company shall have the right to (a) make
deductions from the number of Shares otherwise deliverable upon exercise of the
Option in an amount sufficient to satisfy withholding of any federal, state or
local taxes required by law, or (b) take such other action as may be necessary
or appropriate to satisfy any such tax withholding obligations.
17. GENERAL.
(a) NOTICES. All notices under this Agreement shall be mailed or
delivered by hand to the parties at their respective addresses set forth
beneath their signatures below or at such other address as may be
designated in writing by either of the parties to one another, or to their
permitted transferees if applicable. Notices shall be effective upon
receipt.
(b) SHARES RESERVED. The Company shall at all times during the
Option Period reserve and keep available under the Plan such number of
Shares as shall be sufficient to satisfy the requirements of this Option.
(c) TRANSFERABILITY OF OPTION. The Option granted pursuant to this
Agreement is not transferable other than by will or by the laws of descent
and distribution or by a qualified domestic relations order (as defined in
Section 414(p) of the Internal Revenue Code). The Option will be
exercisable during Optionee's lifetime only by Optionee or by Optionee's
legal representative in the event of Optionee's Disability. No right or
benefit hereunder shall in any manner be liable for or subject to any
debts, contracts, liabilities, obligations or torts of Optionee or any
permitted transferee thereof.
4
<PAGE>
(d) AMENDMENT AND TERMINATION. No amendment, modification or
termination of the Option or this Agreement shall be made at any time
without the written consent of Optionee and Company.
(e) NO GUARANTEE OF TAX CONSEQUENCES. The Company and the Committee
make no commitment or guarantee that any federal or state tax treatment
will apply or be available to any person eligible for benefits under the
Option. The Optionee has been advised and been provided the opportunity to
obtain independent legal and tax advice regarding the grant and exercise of
the Option and the disposition of any Shares acquired thereby.
(f) SEVERABILITY. In the event that any provision of this Agreement
shall be held illegal, invalid, or unenforceable for any reason, such
provision shall be fully severable, but shall not affect the remaining
provisions of the Agreement, and the Agreement shall be construed and
enforced as if the illegal, invalid, or unenforceable provision had not
been included herein.
(g) SUPERSEDES PRIOR AGREEMENTS. This Agreement shall supersede and
replace all prior agreements and understandings, oral or written, between
the Company and the Optionee regarding the grant of the Options covered
hereby.
(h) GOVERNING LAW. The Option shall be construed in accordance with
the laws of the State of Texas without regard to its conflict of law
provisions, to the extent federal law does not supersede and preempt Texas
law.
18. DEFINITIONS AND OTHER TERMS. The following capitalized terms shall
have those meanings set forth opposite them:
(a) OPTIONEE __________________
(b) GRANT DATE: __________ , 199__
(c) SHARES: __________________ (_____) Shares of the Company's
Common Stock.
(d) OPTION PRICE: __________________ Dollars ($_______) per Share.
(e) OPTION PERIOD: __________________, 199__ through _________, 200__
(until 5:00 p.m. CST).
(f) [VESTING SCHEDULE: Options for __________ of the Shares shall
vest on the first anniversary of the Grant Date, and Options for
an additional ______ of the
5
<PAGE>
Shares shall vest on each subsequent anniversary of the Grant
Date until fully vested, as follows:]
<TABLE>
<CAPTION>
Date Options Vesting
---- ---------------
<S> <C>
-------- --------
-------- --------
-------- --------
Total
--------
--------
</TABLE>
[SIGNATURE PAGE FOLLOWS.]
6
<PAGE>
IN WITNESS WHEREOF, the Company, as of _____________, 1999, has caused this
Agreement to be executed on its behalf by its duly authorized officer and
Optionee has hereunto executed this Agreement as of the same date.
OMNILYNX COMMUNICATIONS CORPORATION
By:
---------------------------------------------------
Name:
--------------------------------------------------
Title:
-------------------------------------------------
Address for Notices:
Omnilynx Communications Corporation
1770 Motor Parkway, Suite 300
Hauppauge, New York 11788
OPTIONEE
-------------------------------------------------------
Address for Notices:
------------------------------
------------------------------
------------------------------
7
<PAGE>
OMNILYNX COMMUNICATIONS CORPORATION
NONSTATUTORY STOCK OPTION
Optionee: _____________
1. GRANT OF STOCK OPTION. As of the GRANT DATE (identified in SECTION 18
below), Omnilynx Communications Corporation, a Delaware corporation (the
"COMPANY"), hereby grants a Nonstatutory Stock Option (the "OPTION") to the
OPTIONEE (identified above), a non-employee director of the Company, to purchase
the number of shares of the Company's common stock, $.0001 par value per share
(the "COMMON STOCK") identified in SECTION 18 below (the "SHARES"), subject to
the terms and conditions of this agreement (the "AGREEMENT") and the Omnilynx
Communications Corporation 1999 Stock Incentive Plan (the "PLAN") which is
hereby incorporated herein in its entirety by reference. The Shares, when
issued to Optionee upon the exercise of the Option, shall be fully paid and
nonassessable. The Option is not an "incentive stock option" as defined in
Section 422 of the Internal Revenue Code.
2. DEFINITIONS. All capitalized terms used herein shall have the
meanings set forth in the Plan unless otherwise provided herein. SECTION 18
below sets forth meanings for various capitalized terms used in this Agreement.
3. OPTION TERM. The Option shall commence on the Grant Date (identified
in SECTION 18 below) and terminate on the date immediately prior to the _____
(___) anniversary of the Grant Date. The period during which the Option is in
effect and may be exercised is referred to herein as the "OPTION PERIOD".
4. OPTION PRICE. The Option Price per Share is identified in SECTION 18
below.
5. VESTING. The total number of Shares subject to this Option shall vest
in accordance with the VESTING SCHEDULE (identified in SECTION 18 below). The
Shares may be purchased at any time after they become vested, in whole or in
part, during the Option Period; provided, however, the Option may only be
exercisable to acquire whole Shares. The right of exercise provided herein
shall be cumulative so that if the Option is not exercised to the maximum extent
permissible after vesting, the vested portion of the Option shall be
exercisable, in whole or in part, at any time during the Option Period.
6. METHOD OF EXERCISE. The Option is exercisable by delivery of a
written notice to the Secretary of the Company, signed by the Optionee,
specifying the number of Shares to be acquired on, and the effective date of,
such exercise. The Optionee may withdraw notice of exercise of this
<PAGE>
Option, in writing, at any time prior to the close of business on the business
day preceding the proposed exercise date.
7. METHOD OF PAYMENT. The Option Price upon exercise of the Option shall
be payable to the Company in full either: (i) in cash or its equivalent, or (ii)
subject to prior approval by the Committee in its discretion, by tendering
previously acquired Shares having an aggregate Fair Market Value (as defined in
the Plan) at the time of exercise equal to the total Option Price (provided that
the Shares must have been held by the Optionee for at least six (6) months prior
to their tender to satisfy the Option Price), or (iii) subject to prior approval
by the Committee in its discretion, by withholding Shares which otherwise would
be acquired on exercise having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price, or (iv) subject to prior approval by
the Committee in its discretion, by a combination of (i), (ii), and (iii) above.
Any payment in shares of Common Stock shall be effected by the delivery of such
shares to the Secretary of the Company, duly endorsed in blank or accompanied by
stock powers duly executed in blank, together with any other documents as the
Secretary may require. If the payment of the Option Price is remitted partly in
Shares, the balance of the payment of the Option Price shall be paid in either
cash, certified check, bank cashiers' check, or by wire transfer.
The Committee, in its discretion, may allow (i) a "cashless exercise" as
permitted under Federal Reserve Board's Regulation T, 12 CFR Part 220 (or its
successor), and subject to applicable securities law restrictions and tax
withholdings, or (ii) any other means of exercise which the Committee, in its
discretion, determines to be consistent with the Plan's purpose and applicable
law.
As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to or on behalf of the Optionee, in
the name of the Optionee or other appropriate recipient, Share certificates for
the number of Shares purchased under the Option. Such delivery shall be
effected for all purposes when a stock transfer agent of the Company shall have
deposited such certificates in the United States mail, addressed to Optionee or
other appropriate recipient.
8. RESTRICTIONS ON EXERCISE. The Option may not be exercised if the
issuance of such Shares or the method of payment of the consideration for such
Shares would constitute a violation of any applicable federal or state
securities or other laws or regulations, or any rules or regulations of any
stock exchange on which the Common Stock may be listed.
9. TERMINATION OF DIRECTORSHIP SERVICE. Voluntary or involuntary
termination of the Optionee as a member of the Company's Board of Directors
shall affect Optionee's rights under the Option as follows:
(a) TERMINATION FOR CAUSE. The vested and non-vested portions of the
Option shall expire on 12:01 a.m. (CST) on the date of termination of
directorship service and shall not be exercisable to any extent if
Optionee's directorship service is terminated for Cause (as
2
<PAGE>
defined in the Plan at the time of such termination as a member of the
Company's Board of Directors).
(b) DEATH OR DISABILITY. If Optionee's membership on the Company's
Board of Directors is terminated by death or Disability (as defined in the
Plan at the time of such termination of Employment), then (i) the
non-vested portion of the Option shall immediately expire on the date of
termination of directorship service and (ii) the vested portion of the
Option shall expire 365 calendar days after the date of such termination of
directorship service to the extent not exercised by Optionee or, in the
case of death, by the person or persons to whom Optionee's rights under the
Option have passed by will or by the laws of descent and distribution or,
in the case of Disability, by Optionee or Optionee's legal representative.
In no event may the Option be exercised by anyone after the earlier of (i)
the expiration of the Option Period or (ii) 365 days after the date of
Optionee's death or termination of directorship service due to Disability.
(c) OTHER INVOLUNTARY TERMINATION OR VOLUNTARY TERMINATION. If
Optionee's membership on the Company's Board of Directors is terminated for
any reason other than for Cause, death or Disability, then (i) the
non-vested portion of the Option shall immediately expire on the date of
termination of directorship service and (ii) the vested portion of the
Option shall expire to the extent not exercised within 90 calendar days
after the date of such termination of directorship service. In no event
may the Option be exercised by anyone after the earlier of (i) the
expiration of the Option Period or (ii) 90 calendar days after the date of
termination of directorship service.
10. INDEPENDENT LEGAL AND TAX ADVICE. Optionee acknowledges that the
Company has advised Optionee to obtain independent legal and tax advice
regarding the grant and exercise of the Option and the disposition of any Shares
acquired thereby.
11. REORGANIZATION OF COMPANY. The existence of the Option shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize any or all adjustments, recapitalizations, reorganizations or other
changes in Company's capital structure or its business, or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Shares or the rights thereof,
or the dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
Notwithstanding the vesting provisions in SECTION 18 hereof, in the event
of a "Change in Control" of the Company (as defined in the Plan at the time of
such event), vesting of the Option shall be accelerated and the entire Option
shall automatically become 100% vested as of the day immediately preceding the
Change in Control date.
12. ADJUSTMENT OF SHARES. In the event of stock dividends, spin-offs of
assets or other extraordinary dividends, stock splits, combinations of shares,
recapitalizations, mergers,
3
<PAGE>
consolidations, reorganizations, liquidations, issuances of rights or warrants
and similar transactions or events involving Company, appropriate adjustments
shall be made to the terms and provisions of the Option as provided in the Plan.
13. NO RIGHTS IN SHARES. Optionee shall have no rights as a stockholder
in respect of the Shares until the Optionee becomes the record holder of such
Shares.
14. INVESTMENT REPRESENTATION. Optionee will enter into such written
representations, warranties and agreements as Company may reasonably request in
order to comply with any federal or state securities law. Moreover, any stock
certificate for any Shares issued to Optionee hereunder may contain a legend
restricting their transferability as determined by the Company in its
discretion. Optionee agrees that Company shall not be obligated to take any
affirmative action in order to cause the issuance or transfer of Shares
hereunder to comply with any law, rule or regulation that applies to the Shares
subject to the Option.
15. NO GUARANTEE OF DIRECTORSHIP. The Option shall not confer upon
Optionee any right to continued membership on the Company's Board of Directors.
16. WITHHOLDING OF TAXES. The Company shall have the right to (a) make
deductions from the number of Shares otherwise deliverable upon exercise of the
Option in an amount sufficient to satisfy withholding of any federal, state or
local taxes required by law, or (b) take such other action as may be necessary
or appropriate to satisfy any such tax withholding obligations.
17. GENERAL.
(a) NOTICES. All notices under this Agreement shall be mailed or
delivered by hand to the parties at their respective addresses set forth
beneath their signatures below or at such other address as may be
designated in writing by either of the parties to one another. Notices
shall be effective upon receipt.
(b) SHARES RESERVED. The Company shall at all times during the
Option Period reserve and keep available under the Plan such number of
Shares as shall be sufficient to satisfy the requirements of this Option.
(c) NONTRANSFERABILITY OF OPTION. The Option granted pursuant to
this Agreement is not transferable other than by will or by the laws of
descent and distribution or by a qualified domestic relations order (as
defined in Section 414(p) of the Internal Revenue Code). The Option will
be exercisable during Optionee's lifetime only by Optionee or by Optionee's
legal representative in the event of Optionee's Disability. No right or
benefit hereunder shall in any manner be liable for or subject to any
debts, contracts, liabilities, obligations or torts of Optionee.
4
<PAGE>
(d) AMENDMENT AND TERMINATION. No amendment, modification or
termination of the Option or this Agreement shall be made at any time
without the written consent of Optionee and Company.
(e) NO GUARANTEE OF TAX CONSEQUENCES. The Company and the Committee
make no commitment or guarantee that any federal or state tax treatment
will apply or be available to any person eligible for benefits under the
Option. The Optionee has been advised and been provided the opportunity to
obtain independent legal and tax advice regarding the grant and exercise of
the Option and the disposition of any Shares acquired thereby.
(f) SEVERABILITY. In the event that any provision of this Agreement
shall be held illegal, invalid, or unenforceable for any reason, such
provision shall be fully severable, but shall not affect the remaining
provisions of the Agreement, and the Agreement shall be construed and
enforced as if the illegal, invalid, or unenforceable provision had not
been included herein.
(g) SUPERSEDES PRIOR AGREEMENTS. This Agreement shall supersede and
replace all prior agreements and understandings, oral or written, between
the Company and the Optionee regarding the grant of the Options covered
hereby.
(h) GOVERNING LAW. The Option shall be construed in accordance with
the laws of the State of Texas without regard to its conflict of law
provisions, to the extent federal law does not supersede and preempt Texas
law.
18. DEFINITIONS AND OTHER TERMS. The following capitalized terms shall
have those meanings set forth opposite them:
(a) OPTIONEE: _______________
(b) GRANT DATE: _______________, 199__
(c) SHARES: _______________ (_____) Shares of the Company's
Common Stock.
(d) OPTION PRICE _______________ Dollars ($_______) per Share.
(e) OPTION PERIOD: _______________, 199__ through ___________, 200__
(until 5:00 p.m. CST).
5
<PAGE>
(f) VESTING SCHEDULE: Options for __________ of the Shares shall
vest on the first anniversary of the Grant Date, and Options for
an additional ______ of the Shares shall vest on each subsequent
anniversary of the Grant Date until fully vested, as follows:
<TABLE>
<CAPTION>
Date Options Vesting
---- ---------------
<S> <C>
-------- --------
-------- --------
-------- --------
Total
--------
--------
</TABLE>
[SIGNATURE PAGE FOLLOWS.]
6
<PAGE>
IN WITNESS WHEREOF, the Company, as of _____________, 1999, has caused this
Agreement to be executed on its behalf by its duly authorized officer and
Optionee has hereunto executed this Agreement as of the same date.
OMNILYNX COMMUNICATIONS CORPORATION
By:
---------------------------------------------------
Name:
--------------------------------------------------
Title:
-------------------------------------------------
Address for Notices:
Omnilynx Communications Corporation
1770 Motor Parkway, Suite 300
Hauppauge, New York 11788
OPTIONEE
-------------------------------------------------------
Address for Notices:
------------------------------
------------------------------
------------------------------
7
<PAGE>
AMENDMENT NO. 3
This Amendment No. 3 to the Loan Agreement dated September 18, 1998, as
amended, by and among CONSOLIDATED TECHNOLOGY GROUP LTD., a New York
corporation (hereinafter, "LENDER"), and ARC NETWORKS, INC., a Delaware
corporation (hereinafter "ARC DELAWARE") and A.R.C. NETWORKS, INC., a New
York corporation (hereinafter "ARC N.Y.") is made as of the 19th day of May,
1999 by and among Lender, ARC Delaware, and ARC N.Y.
WHEREAS, Lender established a credit facility in favor of ARC Delaware
and ARC N.Y. pursuant to the Loan Agreement dated September 18, 1998, as
amended as of January 25, 1999 and March 18, 1999, between Lender, ARC
Delaware and ARC N.Y. (THE "LOAN AGREEMENT"); and
WHEREAS, ARC Delaware has requested a modification in the repayment
provisions of the aforementioned credit facility; and
WHEREAS, Lender, SIS Capital Corp., Lender's wholly owned subsidiary
("SISC"), ARC Delaware, and Technology Acquisitions, Ltd. ("TAL") have
entered into a Stock Purchase Agreement (THE "PURCHASE AGREEMENT)"), pursuant
to which SISC has agreed to sell all of the shares and capital stock of ARC
Delaware owned by it to TAL; and
WHEREAS, Lender has agreed to aRC Delaware's request to modify the
repayment provisions of the credit facility, all of the foregoing on and
subject to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants herein and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the undersigned do hereby agree as follows:
1. INCORPORATION BY REFERENCE:
1.1 All capitalized terms which are used but not defined in
this Amendment shall have the meanings ascribed to them in the Loan
Agreement and the Purchase Agreement, the terms of which are incorporated
herein by reference thereto.
1.2 The following terms shall have the meanings set forth
below:
(a) "AMENDMENT" shall mean this Amendment between
Lender and Borrowers.
<PAGE>
(b) "AMENDED LOAN AGREEMENT" shall mean the Loan
Agreement, as further amended by this Amendment.
(c) CONVERTIBLE ACCOUNT" shall mean the First
Convertible Amount and/or the Second Convertible Amount, as each are defined
in clause (d) below.
(d) "MATURITY DATE" shall mean:
(i) with respect to $750,000 of the Principal
amount of the Loan, the earlier of (A) October 19, 1999, or (B) the receipt by
Gemini II, Inc. or its successors ("GEMINI") of at least $10,000,000 in gross
proceeds from an initial public offering of debt or equity securities, or (C)
any earlier date on which Borrowers repay to Lender the then outstanding
aggregate amount of the Obligations; and
(ii) with respect to $450,000 of the
Principal amount of the Loan (the "FIRST CONVERTIBLE AMOUNT"), the earlier of
(D) January 31, 2000, (E) the date, if any, on which Lender either delivers
the Note to ARC Delaware for conversion in accordance with Section 2.5 hereof
or gives notice to ARC Delaware that it has delivered the Note to Gemini
for conversion in accordance with Section 2.5 hereof or (F) the event set
forth in clause (i)(C) above; and
(iii) with respect to $1,2000,000 of the
Principal amount of the Loan (the "SECOND CONVERTIBLE AMOUNT"), the earlier
of (G) June 19,2000, (H) the event set forth in clause (ii)(E) above or (I)
the event set forth in clause (i)(C) above.
2. THE LOAN
2.1 Simultaneously with the execution of this Amendment,
Borrowers will execute the Note in the form annexed hereto as Exhibit A,
which Note will replace and supersede the Secured Promissory Note of
Borrowers to Lender dated as of March 18, 1999.
2.2 The first sentence of Section 2.4 of the Loan Agreement
shall be amended to read as follows:
"All Advances shall bear interest on the unpaid principal amount
thereof from the date made until paid in full (a) until June 17,
1999 at the Prime Rate plus two percent (2%) and (b) from and
after June 17, 1999 at the rate of 14% per annum."
2.3 Simultaneously with the execution of this Amendment,
Gemini will execute the Guarantee in the form annexed hereto as Exhibit B.
2.4 Simultaneously with the execution of this Amendment,
Gemini and Lender shall execute the Warrant Agreement in the form annexed
hereto as Exhibit C, under
-2-
<PAGE>
which Lender will receive a warrant to purchase 90,000 shares of Common Stock
at an exercise of $8.00 per share, subject to adjustment as provided in the
Warrant Agreement.
2.5 The Lender will have the right, at any time and from time
to time, (x) prior to January 31, 2000, to convert all or any portion of the
First Convertible Amount into shares of Common Stock of ARC Delaware or of
Gemini (the "COMMON STOCK") at the Conversion Rate, as hereinafter defined in
accordance with the provisions of this Section 2.5 and (y) prior to June 19,
2000, to convert all or any portion of the Second Convertible Amount into
shares of Common Stock at the Conversion Rate in accordance with the
provisions of this Section 2.5.
(a) In the event that the Borrowers prepay any
portion of the Convertible Amount, the right of the Lender to convert such
portion of the Convertible Amount into Common Stock shall terminate at 5:30
P.M. New York time on the day before the date of prepayment. Each Borrower
agrees to give the Lender notice of its intention to prepay any portion of
the First or Second Convertible Amount in accordance with the terms of the
Note.
(b) (i) The "CONVERSION RATE" shall mean $8.00,
subject to adjustment as provided in Section 2.5(e) of this Amendment.
(c) Conversion of the Convertible Amount shall be
effected by surrender of the Note to ARC Delaware or Gemini, depending on
whose Common Stock the Lender desires to receive (the "ISSUER").
(d) The Convertible Amount shall be deemed to have
been converted immediately prior to the close of business on the day of the
surrender for conversion of the Note to the Issuer, and the person or persons
entitled to receive shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder of such shares of
Common Stock as of such time. As promptly as practicable on or after the
conversion date, the Issuer or its transfer agent shall issue and shall
deliver a certificate or certificates for the number of shares of Common
Stock issuable upon such conversion to the person or persons entitled to
receive the same.
(e) The Conversion Rate shall be subject to
adjustment as follows:
(i) In case either ARC Delaware or Gemini
shall (A) pay a dividend or make a distribution on its shares of Common Stock
in shares of Common Stock, (B) subdivide, split or reclassify its outstanding
Common Stock into a greater number of shares, (C) effect a reverse split or
otherwise combine or reclassify its outstanding Common Stock into a smaller
number of shares, or (D) issue any shares by reclassification of its shares
of Common Stock, the Conversion Rate in respect of such Issuer in effect at
the time of the record date for such dividend or distribution or of the
effective date of such subdivision, combination or reclassification shall be
proportionately increased or decreased, as the case may be, to reflect such
dividend, subdivision, combination or reclassification. Such adjustment
shall be made successively whenever any event listed in this Section
2.5(d)(i) shall occur.
-3-
<PAGE>
(ii) In case either ARC Delaware or Gemini
shall issue rights or warrants to all holders of its Common Stock entitling
them to subscribe for or purchase shares of Common Stock (or securities
convertible into Common Stock) at a price (or having a conversion price per
share) less than the current market price of its Common Stock (determined in
accordance with Section 2.5(e)(v) of this Amendment) on the record date
mentioned below, the Conversion Rate in respect of such Issuer shall be
adjusted so that the same shall equal the price determined by multiplying the
Conversion Rate in respect of such Issuer in effect immediately prior to the
date of such issuance by a fraction, of which the numerator shall be the
number of shares of its Common Stock outstanding on the record date mentioned
below plus the number of shares determined by multiplying the price or the
conversion price at which additional shares of its Common Stock are offered
by the number of shares of its Common Stock being offered by the number of
shares being issued, including shares being issued upon conversion of any
convertible securities, and dividing the result so obtained by the current
market price of its Common Stock (determined in accordance with Section
2.5(e)(v) of this Amendment), and of which the denominator shall be the
number of shares of its Common Stock outstanding on such record date plus the
number of additional shares of its Common Stock offered for subscription or
purchased (or into which the convertible securities so offered are
convertible). Such adjustment shall be made successively whenever such
rights or warrants are issued and shall become effective immediately after
the record date for the determination of stockholders entitled to receive
such rights or warrants; and to the extent that shares of Common Stock or
securities convertible into Common Stock are not delivered after the
expiration of such rights or warrants, the Conversion Rate in respect of the
applicable Issuer shall be readjusted to the Conversion Rate which would then
be in effect had the adjustments made upon the issuance of such rights or
warrants been made upon the basis of delivery of only the number of shares of
Common Stock (or securities convertible into Common Stock) actually delivered.
(iii) in case either ARC Delaware or Gemini
shall issue shares of its Common Stock or rights or warrants entitling the
recipient to subscribe for or purchase shares of Common Stock (or securities
convertible into Common Stock) at a price (or having a conversion price per
share) [said price hereafter being referred to as the "New Issue Price"] less
than both the then current market price of its Common Stock (determined in
accordance with Section 2.5(e)(v) of this Amendment) on the effective date
mentioned below and the then current Conversion Rate, the Conversion Rate in
respect of such Issuer shall be adjusted so that the same shall equal the New
Issue Price. Such adjustment shall be made successively whenever such shares
of Common Stock, rights or warrants are issued and shall become effective
immediately after the effective date for the issuance of such shares of
Common Stock, rights or warrants; and to the extent that shares of Common
Stock or securities convertible into Common Stock are not delivered after the
expiration of such rights or warrants, the Conversion Rate in respect of the
applicable Issuer shall be readjusted to the Conversion Rate which would then
be in effect had the adjustments made upon the issuance of such rights or
warrants been made upon the basis of delivery of only the number of shares of
Common stock (or securities convertible into Common Stock) actually
delivered. Notwithstanding anything to the contrary in this Section
2.5(e)(iii), no adjustment in the Conversion Rate shall be made hereunder
upon the issuance of shares of Common Stock upon exercise of currently
existing stock options or warrants issued by ARC Delaware or upon the
issuance of stock options, warrants or other rights issued or to be issued by
Gemini or the issuance of Common Stock of Gemini or securities convertible
into Common Stock of Gemini upon the exercise or conversion of such options,
warrants or other rights or otherwise which
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<PAGE>
options, warrants, rights or shares of Common Stock are outstanding at the
closing of the initial public offering of Gemini.
(iv) In case either ARC Delaware or Gemini shall
distribute to all holders of its Common Stock evidences of its indebtedness
or assets (excluding cash dividends or distributions paid out of current
earnings and dividends or distributions referred to in Section 2.5(e)(i) of
this Amendment) or subscription rights or warrants (excluding those referred
to in Section 2.5(e)(ii) of this Amendment), then in each such case the
Conversion Rate in respect of such Issuer in effect thereafter shall be
determined by multiplying the Conversion Rate in respect of such Issuer in
effect immediately prior thereto by a fraction, of which the numerator shall
be the total number of shares of Common Stock of such Issuer outstanding
multiplied by the current market price per share of its Common Stock
(determined in accordance with Section 2.5(e)(v) of this Amendment), less the
fair market value (as determined in good faith by its Board of Directors) of
said assets or evidences of indebtedness so distributed or of such rights or
warrants, and of which the denominator shall be the total number of shares of
Common Stock of such Issuer outstanding multiplied by such current market
price per share of its Common Stock. Such adjustment shall be made
successively whenever such a record date is fixed. Such adjustment shall be
made whenever any such distribution is made and shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such distribution.
(v) For the purpose of any computation under Sections
2.5(e)(ii), (iii) and (iv) of this Amendment, the current market price per
share of Common Stock at any date shall be deemed to be the average of the
daily closing prices for five (5) consecutive trading days commencing twenty
(20) trading days before such date, as reported by the principal stock
exchange or market on which the Common Stock is listed; provided, however,
that if, on any of such days there are no reported sales of the Common Stock,
the closing low bid price shall be used for such day. If the Common Stock is
not listed or admitted to listed on any stock exchange or market, the closing
low bid prices as reported by the National Quotation Bureau, Inc. or other
similar organization if Nasdaq is no longer reporting such information, or if
not so available, the fair market price as reasonably determined by the Board
of Directors of the Issuer.
(vi) No increase or decrease in the Conversion Rate
shall be required unless such adjustment would require an increase or decrease
of at least one percent (1%); provided, however, that any adjustments which,
by reason of this Section 2.5(e)(vi), are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 2.5(e) shall be made to the nearest one-tenth
(1/10) of a cent.
(vii) The Issuer may retain a firm of independent
public accountants of recognized standing selected by its Board of Directors
(who may be the regular accountants employed by it) to make any computation
required by this Section 2.5(e), and a certificate signed by such firm shall
be conclusive evidence of the correctness of such adjustment.
(viii) In the event that at any time, as a result of an
adjustment made pursuant this Section 2.5(e), the Lender thereafter shall
become entitled to receive any shares of an
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<PAGE>
Issuer, other than Common Stock, thereafter the number of such shares so
receivable upon conversion of the Convertible Amount shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
this Section 2.5.
(ix) In addition to the adjustments provided for in
this Section 2.5(e), an Issuer may modify the Conversion Rate applicable to
it in a manner which will increase the number of shares of its Common Stock
issuable upon conversion of the Convertible Amount if such Issuer believes
that such adjustment is necessary or desirable in order to avoid adverse
Federal income tax consequences to the Lender.
(f) Whenever any adjustment is required by the provisions of
Section 2.5(e) of this Amendment, ARC Delaware or Gemini, as the case may be,
shall forthwith file in the custody of its Secretary or an Assistant
Secretary at its principal office and with its stock transfer agent, if any,
an officer's certificate showing the adjustment, setting forth in reasonable
detail the facts requiring such adjustment. Each such officer's certificate
shall be made available at all reasonable times for inspection by the Lender,
and ARC Delaware or Gemini shall, forthwith after each such adjustment, mail
a copy of such certificate by first class mail to the Lender at the Lender's
address set forth in the books and records of such Issuer.
(g) In case:
(i) ARC Delaware or Gemini shall pay any dividend or
make any distribution upon its Common Stock (other than a regular cash
dividend payable out of retained earnings or cash surplus); or
(ii) ARC Delaware or Gemini shall offer to the holders
of its Common Stock for subscription or purchase by them any shares of any
class or any other rights; or
(iii) of any issuance of shares of Common Stock or
rights or warrants by ARC Delaware or Gemini at a price (or having a
conversion price per share) less than both the then current market price of
its Common Stock and the then current Conversion Rate; or
(iv) of any reclassification of the capital stock of
ARC Delaware or Gemini, the consolidation or merger of ARC Delaware or Gemini
with or into another corporation, the sale, lease or transfer of all or
substantially all of the property and assets of ARC Delaware or Gemini to
another corporation, or the voluntary or involuntary dissolution, liquidation
or winding up of ARC Delaware or Gemini shall be effected;
then in any such case, ARC Delaware or Gemini, as the case may be, shall
cause to be mailed by first class mail to the Lender at least ten (10) days
prior to the date specified in (A), (B) or (C) below, as the case may be, a
notice containing a brief description of the proposed action and stating the
date on which (A) a record is to be taken for the purpose of such dividend,
distribution or rights, or (B) such issuance of Common Stock, rights or
warrants is to take place or (C) such reclassification,
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<PAGE>
consolidation, merger, conveyance, lease, dissolution, liquidation or winding
up is to take place and the date, if any is to be fixed, as of which the
holders of its Common Stock or other securities shall receive cash or other
property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
(h) In case of any reclassification, capital
reorganization or other change of outstanding shares of Common Stock of ARC
Delaware or Gemini, or in case of any consolidation or merger of ARC Delaware
or Gemini into another corporation (other than a merger with a subsidiary in
which merger ARC Delaware or Gemini is the continuing corporation and which
does not result in any reclassification, capital reorganization or other
change of outstanding shares of Common Stock or the class issuable upon
conversion of the Convertible Amount) or in case of any sale, lease or
conveyance to another corporation of the property of ARC Delaware or Gemini
as an entirety, ARC Delaware or Gemini, as the case may be, shall, as a
condition precedent to such transaction, cause effective provisions to be
made so that the Lender shall have the right thereafter by converting the
Convertible Amount, to receive the kind and amount of shares of stock and
other securities and property receivable upon such reclassification, capital
reorganization and other change, consolidation, merger, sale or conveyance by
a holder of the number of shares of such Issuer's Common Stock which might
have been received upon conversion of the Convertible Amount immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance. Any such provision shall include provision for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Amendment. The foregoing provisions of this Section
2.5(h) shall similarly apply to successive reclassifications, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. The provisions of this
Section 2.5(h) shall not apply with respect to any merger, consolidation,
sale, conveyance or other transaction if such transaction would be deemed a
liquidation of ARC Delaware or Gemini.
(i) No fractional shares or scrip representing
fractional shares shall be issued upon the conversion of the Convertible
Amount. If, upon conversion of any portion of the Convertible Amount, the
Lender would, except for the provisions of this Section 2.5(i), be entitled
to receive a fractional share of Common Stock, then the number of shares of
Common Stock issuable upon such conversion shall be rounded up to the next
higher whole number of shares.
(j) ARC Delaware or Gemini shall each at all times
reserve and keep available, free from preemptive rights, out of its
authorized but unissued Common Stock the full number of shares of Common
Stock then issuable upon the conversion of the entire Convertible Amount
outstanding.
(k) The Common Stock issuable upon conversion of the
Convertible Amount shall, when so issued, be duly and validly authorized and
issued, fully paid and non-assessable.
2.6 Simultaneously with the execution of this Amendment,
Section 2.11 of the Loan Agreement shall be deleted.
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2.7 Notwithstanding anything to the contrary contained in the
Loan Agreement, this Amendment or the Note, Borrowers' obligation to pay
accrued but unpaid interest shall be as follows: Borrowers shall pay $50,000
of accrued but unpaid interest on or before June 30, 1999 and shall pay the
balance of all accrued and unpaid interest through July 31, 1999 on or before
August 5, 1999.
2.8 Simultaneously with the execution of this Amendment,
Gemini and Lender shall execute the Registration Rights Agreement in the form
annexed hereto as Exhibit D.
2.9 Borrowers will, on the date hereof, deliver to Lender
certified copies of corporate resolutions of their respective Boards of
Directors authorizing the execution and delivery of this Amendment, in form
and substance reasonably satisfactory to Lender's counsel.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWERS.
3.1 Borrowers will, at all times until the Obligations are
fully paid, provide all documentation, information and financial reports and
summaries concerning Borrowers' operations and financial condition as and
when requested by Lender's Chief Financial Officer.
3.2 Borrowers have been represented by counsel in connection
with the execution and delivery of this Amendment.
4. NO WAIVER: INCONSISTENCIES.
4.1. Nothing contained in this Amendment shall constitute a
waiver of, or otherwise be with prejudice to, all rights and remedies of
Lender under the Loan Agreement, notwithstanding any term, provision,
representation or warranty of Lender of Borrowers in this Amendment on in the
Purchase Agreement.
4.2 Except as expressly provided for in this Amendment, none
of the other terms, conditions, representations or warranties contained in
the Amended Loan Agreement shall be amended or modified, and the Loan
Agreement, as amended hereby, shall remain in full force and effect in
accordance with its terms. To the extent that there is any inconsistency
between the terms of this Amendment and the terms of the Loan Agreement, the
terms of this Amendment shall govern and be controlling.
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<PAGE>
IN WITNESS WHEREOF, Borrowers and Lender have executed this
Amendment by their duly authorized officers as of the date first above
written.
CONSOLIDATED TECHNOLOGY GROUP LTD.
By: /s/ Richard Young
--------------------------------
Richard Young, President
-----------------------------------
Print Name and Title
ARC NETWORKS, INC.
By: /s/ Peter Parrinello
--------------------------------
Peter Parrinello
President
A.R.C. NETWORKS, INC.
By: /s/ Peter Parrinello
--------------------------------
Peter Parrinello
President
The undersigned agrees to be bound by the provisions of Section
2.5 above.
GEMINI II, INC.
By: /s/ Christopher Efird
--------------------------------
Christopher Efird, President
-----------------------------------
Print Name and Title
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
OmniLynx Communications Corporation
Houston, Texas
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Amendment No. 1 to Form S-1 No. 333-82151 of our
report dated May 3, 1999, relating to the financial statements of OmniLynx
Communications Corporation which is contained in the Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Houston, Texas
August 20, 1999
<PAGE>
Exhibit 23.2
[LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in the registration statement of Omnilynx
Communications Corporation, Amendment No. 1 to Form S-1, of our report dated
April 13, 1999, on our examination of the December 31, 1998 financial
statements of AXCES, Inc. We also consent to the reference to our firm under
the caption "Experts".
/s/ Pannell Kerr Forster of Texas, P.C.
PANNELL KERR FORSTER OF TEXAS, P.C.
Houston, Texas
August 19, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
InfoHighway International, Inc.
We consent to the use of our report dated April 9, 1999, related to the
financial statements of InfoHighway International, Inc. as of December 31,
1997 and 1998, and for each of the years in the three year period ended
December 31, 1998, included herein and the reference to our firm under the
heading "Experts" in the Prospectus.
/s/ KPMG LLP
Houston, Texas
August 18, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form S-1 of our
report dated February 16, 1999, accompanying the financial statements of ARC
Networks, Inc., which report includes an explanatory paragraph relating to
the ability of ARC Networks, Inc. to continue as a going concern, and to the
use of our name, and the statements with respect to us as appearing under the
heading "Experts" in the Prospectus.
/s/ Moore Stephens, P.C.
----------------------------
MOORE STEPHENS, P.C.
Certified Public Accountants
Cranford, New Jersey
August 20, 1999
