<PAGE>
As filed with the Securities and Exchange Commission on November 24, 1999
Registration No. 333-88799
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
Infonet Services Corporation
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7374 95-4148675
(State or Other Jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
Incorporation or
Organization) Classification Code Number) Identification Number)
</TABLE>
2160 East Grand Avenue
El Segundo, California 90245-1022
(310) 335-2600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Ernest U. Gambaro, Esq.
Senior Vice President, General Counsel and Secretary
Infonet Services Corporation
2160 East Grand Avenue
El Segundo, California 90245-1022
(310) 335-2600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
William J. Cernius, Esq. Rise B. Norman, Esq.
Paul A. Galleberg, Esq. Simpson Thacher & Bartlett
Latham & Watkins 425 Lexington Avenue
650 Town Center Drive, 20th Floor New York, New York 10017-3954
Costa Mesa, California 92626-1925 (212) 455-2000
(714) 540-1235
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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. [_]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Title of Each Class of Maximum Aggregate Amount of
Securities to be Registered Offering Price(1)(2) Registration Fee (2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Class B Common Stock, par value $0.01
per share............................. $150,000,000 $41,700
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes shares that the Underwriters have the option to purchase solely to
cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as
amended, solely for the purpose of computing the amount of the registration
fee. The amount of the registration fee does not include $278,000
previously paid on the registration of an aggregate of $1,000,000,000 in
securities.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated November 24, 1999
PROSPECTUS
51,282,300 Shares
[LOGO OF INFONET APPEARS HERE]
Class B Common Stock
-----------
This is Infonet Services Corporation's initial public offering of Class B
common stock. We are offering 38,461,600 shares and the selling stockholders
identified on page 64 of this prospectus are offering 12,820,700 shares. The
estimated initial public offering price is between $18.00 and $21.00 per share.
Prior to the offering, there has been no public market for our Class B
common stock. We have been approved to list our Class B common stock on the New
York Stock Exchange under the symbol "IN," and we have applied for listing on
the Frankfurt Stock Exchange.
Investing in our Class B common stock involves risks which are described in
the "Risk Factors" section beginning on page 6 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price............................... $ $
Underwriting discount............................... $ $
Proceeds, before expenses, to Infonet Services
Corporation........................................ $ $
Proceeds, before expenses, to the selling
stockholders....................................... $ $
</TABLE>
The underwriters may also purchase up to an additional 7,692,342 shares
from the selling stockholders at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. See "Underwriting."
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.
The shares of Class B common stock will be ready for delivery on or about
, 1999.
-----------
Joint Global Coordinators
Merrill Lynch & Co. Warburg Dillon Read LLC
Merrill Lynch & Co. is the sole bookrunner for the offering.
-----------
Merrill Lynch & Co Warburg.Dillon Read LLC
ABN AMRO Rothschild
a division of ABN AMRO Incorporated
Goldman, Sachs & Co.
Lehman Brothers
Salomon Smith Barney
-----------
Deutsche Bank acted as advisor to the selling stockholders.
The date of this prospectus is , 1999.
<PAGE>
EDGAR APPENDIX
The outside front and back covers of the Preliminary Prospectus, the inside
front cover and one gatefold page have a beige world map design over which the
black text of such pages is printed. The table of Infonet's global
communications solutions is printed on a plain white page.
Inside front cover text:
"Infonet's mission is simple... We make global communications for
multinationals a global reality. In a time of dramatic change, we represent
continuity, stability and innovation. We deliver performance, network power and
support to multinationals."
Inside front cover gatefold text:
"Infonet has the products, services, network and quality of performance to make
communications a global reality for discriminating companies worldwide. Our
"one size doesn't fit all" approach to custom solutions makes us unique."
[next page of gatefold]
The Infonet logo is above a table of Infonet's global communications
solutions.
The table of global communications solutions sets forth Infonet's various
service offerings in broad terms, such as "Applications Services" and
"MultiMedia Services", all supported by "The World Network."
Inside back cover text:
"Our success has--and always will be--measured by the success of each of our
multinational clients. Anticipating their global communications needs remains
the inspiration, source and global reality of our competitive advantage."
Illustration on page 48:
This illustration shows the hierarchical structure of The World Network, showing
global switching nodes at the top, flowing to global interregional traffic, to
regional switching/access nodes, flowing to intraregional traffic, to local
access nodes, flowing to local traffic at the bottom. Also shown on the diagram
are the speeds for each level and the points of typical customer and high-volume
customer access.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Industry................................................................. 38
Business................................................................. 41
Management............................................................... 57
Related Party Transactions............................................... 63
Principal and Selling Stockholders....................................... 64
Description of Capital Stock............................................. 66
Description of Credit Facility........................................... 69
Shares Eligible for Future Sale.......................................... 71
Material United States Income Tax Consequences for Non-U.S. Holders...... 73
Underwriting............................................................. 76
Legal Matters............................................................ 79
Experts.................................................................. 79
Where You Can Find Additional Information................................ 79
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
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 an 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 prospects may have changed since that date.
In this prospectus, we rely on and refer to information regarding our
industry and its segments and competitors from market research reports and
other publicly available information. Although we believe this information is
reliable, we cannot guarantee the accuracy and completeness of the information
and have not independently verified it.
References in this prospectus to "Infonet," "we," "our" and "us" are to
Infonet Services Corporation, a Delaware corporation, and its consolidated
subsidiaries. "Infonet" is a trademark of Infonet Services Corporation. Each
trademark, trade name or service mark of any other company appearing in this
prospectus belongs to its holder.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights some of the information contained elsewhere in
this prospectus. This summary is not complete and does not contain all of the
information that you should consider before investing in our Class B common
stock. You should read the entire prospectus carefully, especially the risks of
investing in our Class B common stock discussed under "Risk Factors." Some
technical terms used in this prospectus are more fully explained in the
sections entitled "Industry" and "Business."
Infonet
Overview
We are a leading provider of cross-border managed data communications
services to more than 1,150 corporations worldwide, including 29% of the top
500 corporations in Business Week's 1998 Global 1000. We own and operate The
World Network, an extensive and versatile data communications network that can
be accessed from over 180 countries, making it one of the world's largest data
communications networks in terms of geographic coverage. Through The World
Network, we provide managed data services to our clients on a global basis, an
advantage over service providers that do not own an extensive global network.
We sell our services directly through our country representatives and
indirectly through major international telecommunications carriers. Our diverse
client base is comprised of multinational corporations that require cross-
border data communications services such as Allergan, Baan, Microsoft, Nestle,
Nokia, Pharmacia/Upjohn and Volkswagen. For the year ended March 31, 1999, we
had revenues of $303.0 million and EBITDA of $20.6 million.
Our broad range of integrated service solutions includes Frame Relay,
remote access, intranet, multimedia and Internet services; consulting, design,
and implementation; sale and installation of customer premise equipment; e-
mail, messaging, collaboration, Web hosting and other value-added services. Our
services employ a range of data transmission protocols available in the
industry, such as Asynchronous Transfer Mode, or ATM, Internet Protocol, or IP,
and Frame Relay.
Our country representatives give us a significant local presence in more
than 60 countries and strong working relationships with leading local
telecommunications providers in those countries. We believe this structure also
provides us with a competitive advantage over other data service providers who
do not have comparable levels of expertise on local operating, regulatory and
market conditions. Our country representative structure emerged from our
historical relationships with major telecommunications companies, such as
Deutsche Telecom, France Telecom, Korea Telecom, Singapore Telecom and Telekom
Malaysia.
We began operations in 1969 as a part of Computer Sciences Corporation,
or CSC. Today, our stockholders include six of the world's largest
telecommunications companies:
.KDD--KDD Corporation (Japan);
.KPN--KPN Telecom B.V. (The Netherlands);
.Swisscom--Swisscom AG (Switzerland);
.Telefonica --Telefonica International Holding B.V. (Spain);
.Telia--Telia AB (Sweden); and
.Telstra--Telstra Corporation Limited (Australia).
1
<PAGE>
Business Strategy
Our goal is to be the leading provider of global data communications
services to multinational corporations. To accomplish this objective, we will
continue to:
. Focus on multinational clients that require data communications
solutions;
. Upgrade and expand our global network;
. Develop innovative, value-added solutions;
. Strengthen our sales and customer support structure; and
. Provide the highest level of quality, security and reliability for our
services.
Recent Developments
Access to AUCS Clients
AT&T-Unisource Communications Services N.V., which we refer to as AUCS,
was a joint venture between AT&T Corp. and Unisource N.V. providing
international voice, data, Internet and messaging services to a broad array of
multinational corporations located primarily in Europe and the United States.
Unisource is owned by three of our stockholders, KPN, Swisscom and Telia. See
"Principal and Selling Stockholders." In early 1999, AT&T elected to exit the
AUCS joint venture. As a result, AUCS sought a new partner through which it
could outsource its services beyond the European region and could provide
international networking services previously provided by AT&T. We have agreed
to provide these services.
In our ongoing efforts to sell our services to multinational
corporations, on September 30, 1999, we entered into agreements with AUCS,
Unisource, and KPN, Swisscom and Telia. Our agreements with KPN, Swisscom and
Telia will give us access to their approximately 1,300 multinational corporate
clients currently being served by AUCS as well as additional multinational
clients to which KPN, Swisscom and Telia may provide services in the future. We
believe these agreements will increase the number of multinational corporate
clients to which we may offer our services. In exchange for the right to market
our services to their clients and $40.0 million in cash, we have issued an
aggregate of 47.84 million shares of our Class B common stock to KPN, Swisscom
and Telia under stock purchase agreements. Based on publicly available
information, AUCS total consolidated revenues for the 1998 calendar year were
875 million guilders, or approximately $441 million. The multinational clients
to which we will have access represented approximately 50% of AUCS revenues
over the past two years.
Senior Secured Credit Facility
In August 1999, we entered into a credit agreement with Merrill Lynch &
Co., as lead arranger and syndication agent, the Bank of Nova Scotia, as
administrative agent, Societe Generale, as documentation agent, and Merrill
Lynch Capital Corporation, UBS A.G., Stamford Branch, an affiliate of Warburg
Dillon Read LLC, and various other banks as lenders. This agreement provides
for a $250.0 million senior secured credit facility comprised of two term loan
facilities in an aggregate principal amount of $150.0 million which mature in
June 2006 and a revolving credit facility in an aggregate principal amount of
$100.0 million that matures in August 2005. Our ability to borrow under the
facilities is subject to various conditions. See "Description of Credit
Facility."
----------------
We were incorporated under the laws of the State of Delaware in March
1988 and our executive offices are located at 2160 East Grand Avenue, El
Segundo, California 90245-1022. Our telephone number is (310) 335-2600.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Class B common stock offered by us......... 38,461,600 shares
Class B common stock offered by the selling
stockholders.............................. 12,820,700 shares
Total...................................... 51,282,300 shares
Common stock to be outstanding after the
offering.................................. Approximately 168.69 million
shares of Class A common stock
and approximately 300.81 million
shares of Class B common stock.
The number of shares of our Class
B common stock to be outstanding
immediately after the offering is
based on the number of shares
outstanding on November 1, 1999.
This number does not take into
account approximately 14.32
million shares of our Class B
common stock which may be issued
upon exercise of options
outstanding under our stock
option plans.
Selling stockholders....................... The stockholders selling shares
in this offering are KDD, KPN,
Swisscom, Telefonica, Telia and
Telstra. Immediately prior to
this offering, selling
stockholders owned 100% of our
Class A common stock and
approximately 96% of our Class B
common stock.
After the completion of this
offering, selling stockholders
will own 100% of our Class A
common stock and approximately
80% of our Class B common stock.
For more information on the
selling stockholders, please read
the section entitled "Principal
and Selling Stockholders."
Over-allotment option...................... The selling stockholders have
granted the underwriters the
right to purchase up to
approximately 7.69 million
additional shares to cover over-
allotments.
Voting rights:
Class A common stock................. Ten votes per share,
representing, in the aggregate,
approximately 85% of the total
voting power upon the close of
this offering.
Class B common stock................. One vote per share, representing,
in the aggregate, approximately
15% of the total voting power
upon the close of this offering.
Other rights............................... Each class of common stock has
the same dividend and liquidation
rights. The Class A common stock
is convertible into Class B
common stock on a one-for-one
basis. However, the Class A
common stock cannot be sold or
transferred except after approval
by not less than two-thirds of
the outstanding Class A common
stock. Any proposed transfer of
the Class A common stock is also
subject to a right of first
refusal by the Class A
stockholders.
</TABLE>
3
<PAGE>
<TABLE>
<C> <S>
The Class A common stock
automatically converts into Class
B common stock upon the
occurrence of specified events.
See "Description of Capital
Stock."
Use of proceeds............................ We intend to use the net proceeds
of the offering to develop and
expand our network infrastructure
and for working capital and other
general corporate purposes. We
will not receive any proceeds
from the sale of Class B common
stock by the selling
stockholders. See "Use of
Proceeds."
New York Stock Exchange symbol............. "IN"
Frankfurt Stock Exchange Listing........... In connection with this offering,
we concurrently have applied for
the admission of the entirety of
our issued Class B common stock
to the Official Quotation
(Amtlicher Handel) of the
Frankfurt Stock Exchange.
Frankfurt Stock Exchange trading symbol.... "IN" The Frankfurt Stock Exchange
issues a trading symbol when a
corporation has been approved for
listing. The trading symbol is
expected to be "IN."
</TABLE>
----------------
Unless we indicate otherwise, all information in this prospectus
reflects:
. the conversion of all outstanding Class C common stock to Class B
common stock to be effected automatically upon the closing of this
offering;
. a 29,900-for-1 stock split of our common stock to be effected prior to
the closing of this offering; and
. no exercise by the underwriters of their over-allotment option to
purchase up to additional shares of Class B common stock from
the selling stockholders.
4
<PAGE>
Summary Consolidated Financial Data
The following table sets forth our summary consolidated financial data.
You should read this information together with our consolidated financial
statements and the related notes to those statements appearing elsewhere in
this prospectus, the information under "Selected Consolidated Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." In the opinion of management, the unaudited consolidated financial
statements have been prepared on a basis consistent with our audited
consolidated financial statements and include all adjustments, which are only
normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for the unaudited periods. The
historical results are not necessarily indicative of the operating results to
be expected in the future. The consolidated balance sheet data presented on a
pro forma as adjusted basis reflects: (1) the sale of approximately 38.46
million shares of our Class B common stock in this offering at an assumed
public offering price of $19.50 per share; (2) the termination of the
repurchase right on our Class C common stock and its conversion into our Class
B common stock upon the completion of this offering; and (3) the conversion of
our book value stock option plan to a market value stock option plan. We
restated our consolidated financial statements for 1998 and 1999. See Note 16
of "Notes to Consolidated Financial Statements."
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
---------------------------- ----------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated statement of
operations data:
Revenues................. $264,684 $294,244 $302,997 $140,571 $ 173,219
Expenses................. 275,071 297,001 301,170 146,617 182,858
Operating income (loss).. (10,387) (2,757) 1,827 (6,046) (9,639)
Net income (loss)(1)..... (7,481) (3,444) 3,449 (4,993) (9,774)
Basic and diluted
earnings (loss) per
common share(1)......... (0.02) (0.01) 0.01 (0.01) (0.03)
Basic and diluted
weighted average number
of common shares
outstanding............. 373,750 373,750 373,750 373,750 382,004
Other consolidated
financial data:
Net cash flows provided
by (used in):
Operating activities... $ 1,383 $ 13,032 $ 11,911 $ 1,311 $ 2,263
Investing activities... (4,704) (5,511) (20,679) (4,393) (42,690)
Financing activities... 13,048 (14,390) 5,828 5,253 71,186
EBITDA................... 9,631 18,075 20,612 2,158 4,133
<CAPTION>
As of September 30,
1999
----------------------
Pro forma as
Actual adjusted
-------- ------------
<S> <C> <C> <C> <C> <C>
Consolidated balance
sheet data:
Cash and cash equivalents........................... $ 39,202 $ 750,001
Total current assets................................ 117,010 827,809
Total assets........................................ 292,077 1,002,876
Total current liabilities........................... 81,203 81,203
Total debt.......................................... 96,259 96,259
Total stockholders' equity.......................... 93,119 789,453
</TABLE>
- --------
(1) In our three month period ending December 31, 1999, we will record a non-
cash, pre-tax compensation charge of approximately $13.8 million, resulting
from the conversion of our book value stock options to market value options
as a result of the offering and a pre-tax charge of approximately $9.4
million, resulting from our stock appreciation rights, each of which is
based upon the midpoint of the anticipated price range of this offering.
Had the offering been completed during our six month period ended September
30, 1999, our net loss would have been approximately $24.2 million and our
basic and diluted earnings (loss) per common share would have been
approximately $(0.06).
5
<PAGE>
RISK FACTORS
An investment in our Class B common stock involves risks. You should
consider carefully the following information about these risks, together with
the other information contained in this prospectus, before you decide to buy
our Class B common stock. If any of the following risks actually occur, our
business, results of operations or financial condition would likely suffer. In
that case, the market price of our Class B common stock could decline, and you
might lose all or part of the money you paid to buy our Class B common stock.
We may not be able to achieve our strategic objectives unless we successfully,
timely and cost-effectively expand our network and manage our growth.
We must continue to develop and expand our network infrastructure as the
number of clients and the amount of information they wish to transport as well
as the number of services we offer increases. The expansion and development of
our network infrastructure will require substantial financial, operational and
management resources. We may not be able to expand our network adequately to
meet the demand for increased usage. If we do not expand our network rapidly
enough, additional stress may be placed on our network hardware, traffic
management and other systems and operating facilities. Our network may be
unable to service a substantial number of additional clients while maintaining
high performance and competitive data transmission speeds.
A variety of factors, uncertainties and contingencies that are beyond our
control such as the availability of transmission capacity, price of
transmission capacity, continued deployment of our ATM-enabled network, local
regulations and availability of country representatives or other third-party
sales and support channels will affect the continued expansion of our network.
Currently, there is substantial volatility in the market price for transmission
capacity. We are investing significant capital in acquiring transmission
capacity at current fixed prices. These prices are anticipated to decline in
the future. We cannot assure you that actual expansion costs or the time
required to complete our network will not substantially exceed current
estimates. A failure to continue to expand our network may have a material
adverse effect on our ability to service our clients and to grow our business.
Our growth has placed, and our anticipated future growth in our
operations will continue to place, a significant strain on our management,
financial controls, operating and accounting systems, personnel and other
resources. We currently rely on a relatively small core management team. As we
grow, we must not only manage demands on this team but also increase its
management resources, among other things, to continue to expand, train and
manage our employee base and maintain close coordination among our technical,
accounting, finance, marketing and sales staff. In addition, our network
infrastructure, technical support and other resources may not be sufficient to
facilitate our growth. If we do not successfully manage our growth, we may be
unable to adequately support our clients' communications needs in the future.
If we are unable to maintain our country representative and third-party sales
channel relationships, then our ability to sell and support our services may be
negatively impacted.
We are and will continue to be significantly dependent on a number of
third-party relationships, including our non-consolidated country
representatives, to market and support our services. Many of our arrangements
with third-party providers are not exclusive and may be terminated at the
convenience of either party. We cannot assure you that these third parties
regard our relationship with them as important to their own respective
businesses and operations, that they will not reassess their commitment to us
at any time in the future or that they will not develop their own competitive
services.
We may not be able to maintain or form new relationships with third
parties that supply us with clients, software or related products that are
important to our success. Accordingly, we cannot assure you that our existing
or prospective relationships will result in sustained business partnerships,
successful service offerings or the generation of significant revenues.
6
<PAGE>
We rely on our country representatives for some of the support and local
implementation necessary to deliver our services on a global basis. We also
rely on these country representatives for insights into local operating and
market conditions. The failure of these country representatives to perform
their tasks or operate their business effectively could, in turn, adversely
affect our business. In addition, we sometimes provide our country
representatives with equipment and installation services to facilitate our
market participation. We may have limited recourse, or potentially no recourse,
if they do not perform the services that we expect them to perform, and we may
not be able to recover our equipment. Our recourse may be limited because the
local laws and judicial system may not be effective in enforcing our rights.
Also, our country representatives are parties to the legal contracts with
clients. If these agreements are terminated, the clients have no obligation to
purchase our services.
In addition, we frequently depend on our country representatives to
obtain the regulatory approvals and licenses that we need to offer our
communications services in other countries. In some cases, we cannot determine
whether they are complying with local regulatory laws or taking the steps
necessary to maintain proper licenses and permits. If any of our country
representatives lose their telecommunications licenses, whether by violating
local laws or otherwise, our business could suffer.
We may expend extensive managerial and operational resources to transition the
multinational clients of KPN, Swisscom and Telia without receiving a
corresponding increase in revenues.
The multinational corporate clients of KPN, Swisscom and Telia, currently
using AUCS services, have no obligation to use our services. As a result, we
cannot assure you that any significant number of these clients will continue to
use the AUCS services we will provide or transition to The World Network during
the next 12 to 18 months or at all. We cannot assure you that the clients which
do transition to our network will continue to purchase our services or, if they
continue to use our services after the transition, that they will purchase as
many or more services from us than they did from AUCS. Thus, our access to this
additional client base may not yield substantial additional revenue.
We may not be able to reduce AUCS losses and therefore may not receive
management fees.
AUCS has a history of operating losses. If we are unable to reduce the
losses of AUCS, we may not earn the incentive payments provided for in the
management agreement and may be required to rebate our entire management fee.
If this occurs, we will have expended significant amounts of management time
and operational capacity which could have been more profitably spent on other
matters.
In addition, either party may terminate the management agreement upon 180
days' written notice, or upon 30 days' notice if agreed-upon funding
requirements of Unisource are exceeded. For additional information, please read
the section entitled "Business--AUCS Management Agreement."
Delays in receiving transmission capacity or delays in equipment delivery or
loss of our equipment suppliers could impair the quality of our service and our
growth.
We acquire, by lease or by purchase, transmission capacity from a wide
range of suppliers, both to connect client premises to our network and for
other network connections. We have from time to time experienced short-term
delays in receiving the requisite transmission capacity from suppliers. We
cannot assure you that we will be able to obtain these services in the future
within the time frames required by us and at a reasonable cost. Any failure to
obtain transmission capacity on a timely basis and at a reasonable cost in a
particular jurisdiction, or any interruption of local access services, could
have an adverse effect on our service levels and our growth.
The switches and routers used in our network are provided primarily by
Nortel Networks Corp. and Cisco Systems Inc. These suppliers also sell products
to our competitors and may become competitors themselves. We may experience
delays in receiving components from our suppliers or difficulties in obtaining
7
<PAGE>
their products at commercially reasonable terms. If we are required to seek
alternate sources of switches and routers, we are likely to experience delays
in obtaining the requisite equipment we need and may be required to pay higher
prices for that equipment, increasing the cost of expanding and maintaining our
network.
If our network infrastructure is disrupted or security breaches occur, we may
lose clients or incur additional liabilities.
We and other network services providers may in the future experience
interruptions in service as a result of fire, natural disasters, power loss, or
the accidental or intentional actions of service users, current and former
employees and others. Although we continue to implement industry-standard
disaster recovery, security and service continuity protection measures,
including the physical protection of our plant and equipment, similar measures
taken by us or by others have been insufficient or circumvented in the past. We
cannot assure you that these measures will be sufficient or that they will not
be circumvented in the future. Unauthorized use of our network could
potentially jeopardize the security of confidential information stored in the
computer systems of or transmitted by our clients. Furthermore, addressing
security problems may result in interruptions, delays or cessation of services
to our clients. These factors may result in liability to us or our clients.
The markets we serve are highly competitive and our competitors may have much
greater resources to commit to growth, new technology or marketing.
Our current and potential competitors include other companies that
provide data communications services to multinational businesses, systems
integrators, national and regional Internet Service Providers, or ISPs,
wireless, cable television and satellite communications companies, software and
hardware vendors, and global, regional and local telecommunications companies.
In addition, we expect that the predicted growth of the data communications
market will attract other established companies and multinational alliances.
Further, there are established and start-up companies building global networks
and beginning to offer data communications as part of a comprehensive
communications services portfolio. Our competitors, which may operate in one or
more of these areas, include companies such as AT&T, British Telecommunications
PLC, or BT, Equant N.V., Global One, Inc. and MCI WorldCom, Inc. and new
entrants such as Qwest Communications International Inc. and Global Crossing
Ltd. Our country representatives and suppliers could also become competitors
either directly or through strategic relationships with our competitors. We
have in the past and expect in the future to encounter competition as a result
of the formation of global alliances among large telecommunications providers,
such as the newly formed joint venture between AT&T and BT.
Several of our competitors have substantially greater financial,
technical and marketing resources, larger customer bases, greater name
recognition and more established relationships in the telecommunications
industry than we do. We cannot be sure that we will have the resources or
expertise to compete successfully in the future. Our competitors may be able
to:
. develop and expand their network infrastructures and service
offerings more quickly;
. adapt better to new or emerging technologies and changing client
needs;
. take advantage of acquisitions and other opportunities more readily;
. devote greater resources to the marketing and sale of their products;
and
. adopt more aggressive pricing policies.
Some of our competitors may also be able to provide clients with
additional benefits at lower overall costs. We cannot be sure that we will be
able to match cost reductions of our competitors. In addition, we believe it is
likely that there will be consolidation in our market, which could increase
competition in ways that may adversely affect our business, results of
operations and financial condition.
8
<PAGE>
Because we have international operations, we face additional risks related to
global political and economic conditions.
We operate in and intend to expand further into international markets. We
cannot be sure that we will be able to obtain or build the necessary global
communications infrastructure in a cost-effective manner or compete effectively
in international markets. There are risks inherent in conducting business
internationally. These include:
. unexpected changes in regulatory requirements;
. export restrictions;
. tariffs and other trade barriers;
. challenges in staffing and managing foreign operations;
. differing technology standards;
. employment laws and practices in foreign countries;
. weaker intellectual property protections;
. political, social and economic instability;
. costs of services tailored to specified markets;
. imposition of currency exchange controls; and
. potentially adverse tax consequences.
Any of these factors could adversely affect our operations. In addition,
if we are able to transition a substantial number of the AUCS multinational
clients to our system, or if we derive significant revenues from the delivery
of AUCS services, then a substantial portion of our revenues will be derived
from European clients. Therefore, a future slowdown or recession in the
European economy in particular could have a material adverse effect on our
revenues and profitability.
Adverse currency fluctuations and foreign exchange controls could decrease
revenues we receive from our international operations.
We invoice all sales of services to our country representatives and sales
channel partners in U.S. dollars. However, many of our country representatives
and sales channel partners derive their revenues and incur maintenance and
other costs in currencies other than U.S. dollars. The obligations of these
country representatives and sales channel partners whose revenues are largely
in foreign currencies will be subject to unpredictable and indeterminate
fluctuations if those currencies change relative to U.S. dollars. Furthermore,
these country representatives and sales channel partners may be or may become
subject to exchange control regulations which might restrict or prohibit the
conversion of their revenue currencies into U.S. dollars. The occurrence of any
of these factors could have a material adverse effect on our current or future
international operations.
Our exposure to exchange rate fluctuations may increase while we
transition multinational clients of KPN, Swisscom and Telia to The World
Network because our receivables from these clients and our payables to AUCS
under the services agreement for services provided to those clients will be
denominated in different foreign currencies.
Our ability to retain our clients and provide them with new and innovative
service offerings may suffer if we are not able to keep up with the rapid
technological developments in our industry.
The global communications industry is subject to rapid and significant
technological changes, such as continuing developments of alternative
technologies for providing high-speed data communications. We cannot predict
the effect of technological changes on our business. We may rely in part on
third parties, including
9
<PAGE>
some of our competitors and potential competitors, for the development of and
access to communications and networking technologies. We expect that new
services and technologies applicable to our market will emerge. New products
and technologies may be superior and/or render obsolete the products and
technologies that we currently use to deliver our services. Our future success
will depend, in part, on our ability to anticipate and adapt to technological
changes and evolving industry standards. We may be unable to obtain access to
new technologies on acceptable terms or at all, and we may be unable to obtain
access to new technologies and offer services in a competitive manner. Any new
products and technologies may not be compatible with our technologies and
business plan. We believe that the global communications industry should set
standards to allow for the compatibility of various products and technologies.
The industry, however, may not set standards on a timely basis or at all.
If members of our senior management team leave Infonet, then our ability to
operate our business may be negatively affected.
Our future success depends to a significant extent on the continued
services of our senior management, particularly Jose A. Collazo, President and
Chairman of the Board of Directors, Akbar H. Firdosy, our Chief Financial
Officer, and other members of our executive management team. The loss of the
services of either of Mr. Collazo or Mr. Firdosy, or any other present or
future key employee, could have a material adverse effect on the management of
our business. We have employment agreements with Mr. Collazo and Mr. Firdosy.
We do not maintain "key person" life insurance for any of our personnel.
Competition for highly-skilled personnel is intense and the success of our
business depends on our ability to attract, retain and manage key personnel.
Our future success depends on our continuing ability to attract, retain
and motivate highly-skilled employees. As we continue to grow, we will need to
hire additional personnel in all areas. Competition for personnel throughout
the data and voice communications industries is intense. We may be unable to
attract or retain key employees or other highly qualified employees in the
future. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining
highly-skilled employees with appropriate qualifications. If we do not succeed
in attracting sufficient new personnel or retaining and motivating our current
personnel, our ability to provide our services could diminish.
Your share ownership may grant you limited voting power because our existing
stockholders will control the outcome of stockholder votes.
Following the offering, our existing stockholders will, in the aggregate,
beneficially own all of our Class A common stock and approximately 80% of our
Class B common stock, or more than 95% of our voting power. These stockholders
will be able to exercise control over all matters requiring approval by our
stockholders, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also have the
effect of delaying or preventing a change in control of our company, which
could have a material adverse effect on our stock price.
Immediately prior to the consummation of this offering, we expect to
enter into a stockholders agreement with all of our Class A stockholders. This
stockholders agreement will provide that each Class A stockholder holding at
least 14.95 million shares of our Class A common stock will have the right to
designate one of our directors, and each Class A stockholder will agree to vote
all of its shares in favor of the directors designated by the other Class A
stockholders and for our president as a director. Accordingly, seven of the
nine directors on our board will be appointed by our Class A stockholders.
In addition, our revised certificate of incorporation contains provisions
that require the approval of both 95% of the voting power of the Class A
stockholders and two-thirds of the voting power of the Class A and Class B
common stock voting together to take significant corporate actions such as
changes to our share capital, or a merger, consolidation or liquidation. Based
on the current ownership of our Class A common stock, we will not be able to
undertake these actions without the approval of each of our Class A
stockholders.
10
<PAGE>
If we sustain continued operating losses, then your share value may be
negatively impacted.
We incurred operating losses of approximately $10.4 million and $2.8
million for the years ended March 31, 1997 and 1998 and operating losses of
approximately $6.0 million and $9.6 million for the six months ended September
30, 1998 and 1999. We cannot assure you that we will be able to achieve or
sustain profitability from operations in the future.
The Year 2000 problem could significantly disrupt our operations, causing a
decline in cash flow and revenue and other difficulties.
Many currently installed computer systems and software products are
unable to distinguish between twentieth century dates and twenty-first century
dates. As a result, many companies' software and computer systems may need to
be upgraded or replaced to comply with these Year 2000 requirements. Our
business is dependent on the operations of numerous systems that could
potentially be impacted by Year 2000-related problems. As a result, we may
experience serious, unanticipated negative consequences, including material
costs caused by undetected errors in the technology used in our internal
systems.
We believe that the greatest risk of disruption in our business exists in
less developed countries. The possible consequences of us or our key business
partners not being fully Year 2000 compliant include, among other things,
temporary network closings, delays in the delivery of services, delays in the
receipt of supplies or invoice and collection errors. Based on our assessment
of these risks and after discussions with third parties, including key vendors,
service providers, country representatives and alternate sales channel
partners, we have made an evaluation of our state of readiness, potential risks
and costs, and are preparing a contingency plan. Please read the section in
this prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of the Year 2000."
We rely on several telecommunications providers to provide us with
transmission capacity. The Year 2000 compliance of telecommunications carriers
worldwide is beyond our control. There may be no possible alternate
telecommunications company available to us if a major carrier in a large
country breaks down due to Year 2000 problems. Any breakdown could prevent us
from delivering our services in that country, and possibly in other countries
where our service can be routed only through the problem country. Our inability
to deliver a significant portion of our services to our clients would have a
material adverse effect on our business, results of operations and financial
condition.
In addition, we cannot assure you that governmental agencies, utility
companies, ISPs, third-party service providers and others outside our control
will be Year 2000 compliant. Our worst case scenario is a prolonged failure of
these or other entities as a result of the Year 2000 problem, resulting in a
systemic failure beyond our control, such as a prolonged Internet,
telecommunications or electrical failure, which would prevent us from
delivering many of our services.
Our quarterly operating results may vary which may cause volatility or a
decline in the price of our Class B common stock.
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. These
factors include:
. the size and timing of significant equipment and transmission
capacity purchases;
. the timing of new service offerings;
. changes in our pricing policies or those of our competitors;
. the timing and completion of our network expansion;
. market acceptance of data communications generally and of new and
enhanced versions of our services in particular;
. the length of our contract cycles; and
. our success in expanding our sales force and expanding our
distribution channels.
11
<PAGE>
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to global communications capacity,
depreciation, real estate and interest expenses and personnel, and therefore
our results of operations are particularly sensitive to fluctuations in
revenues. Due to the factors noted above and the other risks discussed in this
section, you should not rely on period-to-period comparisons of our results of
operations. Quarterly results are not necessarily meaningful and you should not
rely on them as an indication of future performance. It is possible that in
some future periods our operating results may be below the expectations of
public market analysts and investors. In this event, the price of our Class B
common stock may fall. Please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We face uncertain and changing regulatory restrictions which could limit our
operating flexibility and increase our costs.
The Federal Communications Commission, or the FCC, currently does not
regulate the data communications systems we operate in the United States
because our special services features enhance the basic data transmission
facilities offered to clients by connecting them to data switches or
processors. These networks generally are referred to as value-added networks
and are targeted to the data transfer requirements of the specific client. The
FCC also does not regulate value-added services such as voicemail, facsimile,
database access, storage and retrieval services, store-and-forward messaging
services, network management services, and Internet access, which are not
encompassed in the FCC's definition of "basic telecommunications services" and
which we refer to as enhanced services. Collectively, these services are
classified for regulatory purposes as "information services" and are currently
exempt from the common carrier regulations that apply to entities providing
"telecommunications services." As a result, most of the services we provide are
not currently subject to direct regulation by the FCC or the states. Future
changes in legislation or regulation, however, could result in some aspects of
our current operations becoming subject to regulation by the FCC or a state of
the United States. If the FCC or a state seeks to regulate some segments of our
activities as "telecommunications services," we cannot predict the impact, if
any, that future regulation or regulatory changes may have on our operations.
We currently hold common carrier authorizations to provide international
telecommunications services between the United States and other countries. We
apply for authorization as a common carrier in jurisdictions where we believe
this authorization will decrease our costs. We also hold an international
facilities license in the United Kingdom. Our licenses subject us to the
jurisdiction of the relevant regulatory body which, in turn, may require that
we make specified regulatory filings and pay attendant fees. Future regulatory,
judicial and legislative changes in countries in which we operate may impose
additional costs on us or restrict our activities. In addition, regulators or
third parties may raise material issues with regard to our compliance with
applicable regulations. Failure to comply with applicable laws or regulations
in the United States, or other countries in which we operate, could prevent us
from carrying on our operations cost effectively.
The law relating to the liability of online services companies and Internet
access providers for data and content carried on or disseminated through their
networks is currently unsettled and could expose us to unforseen liabilities.
It is possible that claims could be made against online services
companies and Internet access providers under United States and/or foreign law
for defamation, negligence, copyright or trademark infringement, or other
theories based on data or content disseminated through their networks, even if
a user independently originated this data or content. Several private lawsuits
seeking to impose liability upon online services companies and Internet access
providers have been filed in U.S. and foreign courts. While the United States
has passed laws protecting Internet access providers from liability for actions
by independent users in limited circumstances, this protection may not apply in
any particular case at issue. In addition, some countries, such as China,
regulate or restrict the transport of voice and data traffic in their
jurisdiction. The risk to us, as an Internet access provider, of potential
liability for data and content carried on or disseminated through our
12
<PAGE>
system could require us to implement measures to reduce our exposure to this
liability. This may require us to expend substantial resources or to
discontinue some of our services. Our ability to monitor, censor or otherwise
restrict the types of data or content distributed through our network is
limited. Failure to comply with any applicable laws or regulations in
particular jurisdictions could result in fines, penalties or the suspension or
termination of our services in these jurisdictions. The negative attention
focused upon liability issues as a result of these lawsuits and legislative
proposals could adversely impact the growth of public Internet use. Our
professional liability insurance may not be adequate to compensate or may not
cover us at all in the event we incur liability for damages due to data and
content carried on or disseminated through our network. Any costs not covered
by insurance that are incurred as a result of this liability or alleged
liability, including any damages awarded and costs of litigation, could harm
our business and prospects.
If we or our existing stockholders sell additional shares of our Class B common
stock after the offering, it could cause the market price of our Class B common
stock to decline.
The market price of our Class B common stock could decline as a result of
sales of a large number of shares of Class B common stock in the market after
the offering, the perception that such sales could occur or sales by us, our
management or our stockholders. These sales, or the possibility that these
sales may occur, also might make it more difficult for us to sell equity
securities in the future at a time and at a price that we deem appropriate.
Sales of our common stock are restricted by lock-up agreements that we,
our directors, officers and certain existing stockholders have entered into
with the underwriters. The lock-up agreements restrict us, our directors and
officers and certain existing stockholders, subject to certain exceptions, from
selling or otherwise disposing of any shares for a period of 180 days after the
date of this prospectus without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated. Merrill Lynch, Pierce, Fenner & Smith
Incorporated may, however, in its sole discretion and without notice, release
all or any portion of the shares from the restrictions in the lock-up
agreements.
After the offering, we will have approximately 300.81 million shares of
Class B common stock outstanding and approximately 168.69 million shares of
Class A common stock, which, subject to limitations, are convertible to Class B
common stock. Of these shares, the approximately 51.28 million shares we and
the selling stockholders are offering will be freely tradable. This leaves
approximately 418.21 million shares eligible for sale in the public market as
follows:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----
<C> <S>
14,322,100 Upon the filing of a registration statement to register for
resale shares of Class B common stock issuable upon the
exercise of options granted under our stock option plans
356,051,713 After 180 days from the date of this prospectus (subject, in
some cases, to volume limitations under Rule 144)
47,840,000 At various times after 180 days from the date of this
prospectus (Rule 144)
</TABLE>
We intend to file one or more registration statements to register shares
of Class B common stock subject to outstanding stock options and Class B common
stock reserved for issuance under our stock option plan after the expiration of
the 180-day lockup. We expect the additional registration statements to become
effective immediately upon filing.
Volatility of our stock price may expose us to securities litigation.
The stock market has experienced significant price and volume
fluctuations, and the market prices of global communications companies have
been extremely volatile. The market price of our Class B common stock could be
affected by:
. quarterly variations in our operating results;
13
<PAGE>
. technological innovations of ours or of our competitors;
. changes in government regulations;
. conditions in the international data communications and
telecommunications industries;
. increased price competition;
. changes in earnings estimates by analysts; and
. changes in general economic conditions and volatility in the
financial markets.
In the past, following periods of volatility in the market price of a
public company's securities, securities class action litigation has often been
instituted against that company. This litigation could result in substantial
costs and a diversion of management's attention and resources.
There is no existing market for our Class B common stock, and we do not know if
one will develop to provide you with adequate liquidity.
There has not been a public market for our Class B common stock. We
cannot predict the extent to which investor interest in our company will lead
to the development of a trading market or how liquid that market might become.
The initial public offering price for the shares will be determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the open market.
The book value of shares of Class B common stock purchased in the offering will
be immediately diluted.
Investors who purchase Class B common stock in the offering will suffer
immediate and significant dilution in the net tangible book value per share. We
also have a large number of outstanding stock options to purchase Class B
common stock with exercise prices significantly below the estimated initial
public offering price of the Class B common stock. To the extent that these
options are exercised, there will be further dilution.
Our certificate of incorporation and bylaws include provisions that may
discourage a takeover attempt.
Provisions contained in our revised certificate of incorporation, our
revised bylaws, Delaware law and our stockholders agreement could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders. Provisions of our bylaws and certificate of incorporation
impose various procedural and other requirements which could make it more
difficult for stockholders to effect certain corporate actions. Our certificate
of incorporation requires the approval of both 95% of the voting power of the
Class A common stock and two-thirds of the voting power of the Class A and
Class B common stock voting together to take significant corporate actions such
as changes to our share capital, or a merger, consolidation or liquidation.
These provisions could limit the price that certain investors might be willing
to pay in the future for shares of our Class B common stock and may have the
effect of delaying or preventing a change in control.
This prospectus contains forward-looking statements that may not be accurate
indicators of our future performance.
Some of the statements contained in this prospectus contain forward-
looking information. These statements are found in the sections entitled
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Industry" and "Business." They include statements concerning:
. our business;
. our strategy;
14
<PAGE>
. liquidity and capital expenditures;
. use of proceeds of the offering;
. future sources of revenues;
. trends in the international data network services and global
communications industries;
. expansion of international network operations; and
. trends in government and international regulations.
You can identify these statements by forward-looking words such as
"expect," "anticipate," "believe," "goal," "plan," "intend," "estimate," "may"
and "will" or similar words. You should be aware that these statements are
subject to known and unknown risks, uncertainties and other factors, including
those discussed in this section, that could cause actual results to differ
materially from those suggested by the forward-looking statements.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares we are offering, after
deducting underwriting discounts and estimated offering expenses, are estimated
to be approximately $710.8 million, assuming an initial public offering price
of $19.50 per share. We will not receive any of the proceeds from the sale of
shares by the selling stockholders in the offering.
We intend to use the net proceeds of the offering primarily to develop
and expand our network infrastructure, and we intend to use any remaining net
proceeds for working capital and other general corporate purposes. Expansion of
our network infrastructure includes significant acquisitions of transmission
capacity and continued deployment of the ATM-enabled backbone.
Our management, subject to supervision by our board of directors, will
have significant flexibility in applying the net proceeds of the offering.
Pending any use as described above, we intend to invest the net proceeds in
interest-bearing investment grade instruments.
DIVIDEND POLICY
Since 1996, we have paid cash dividends of $500,000 per year on our
capital stock. However, we do not expect to pay any dividends for the
foreseeable future. We currently intend to retain future earnings, if any, to
finance the expansion of our business. Any determination to pay cash dividends
in the future will be at the discretion of our board of directors and will
depend upon our results of operations, financial condition, contractual
restrictions and other factors deemed relevant at that time by our board of
directors.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1999 our
capitalization on an actual basis and on a pro forma as adjusted basis. You
should read this information in conjunction with "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
related notes to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999 (1)
---------------------------------
Pro forma as
Actual adjusted (2)
-------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents..................... $ 39,202 $ 750,001
============== ==============
Short-term debt (including current portion of
long-term debt).............................. 2,793 2,793
Long-term debt (excluding current portion).... 93,466 93,466
-------------- --------------
Total debt................................ 96,259 96,259
-------------- --------------
Common stock subject to repurchase rights,
net:
Class C common stock, $0.01 par value per
share: 299,000,000 shares authorized,
9,444,513 shares issued and outstanding,
actual; 30,000,000 shares authorized, no
shares issued and outstanding, as
adjusted................................... 7,897 --
Less notes receivable from issuance of
common stock (3)(4)........................ (7,910) --
-------------- --------------
Total common stock subject to repurchase
rights, net.............................. (13) --
-------------- --------------
Stockholders' equity:
Class A common stock, $0.01 par value per
share: 373,750,000 shares authorized,
373,750,000 shares issued and 170,993,017
shares outstanding, actual; 400,000,000
shares authorized, 371,442,300 shares
issued and 168,685,317 shares outstanding,
as adjusted................................ 67,819 67,400
Class B common stock, $0.01 par value per
share: 373,750,000 shares authorized,
250,596,983 shares issued and outstanding,
actual; 600,000,000 shares authorized,
300,810,796 issued and outstanding, as
adjusted................................... 163,575 882,690
Less notes receivable from issuance of
common stock (3)(4)........................ -- (7,910)
Stock subscription receivable............... (13,333) (13,333)
Treasury stock, at cost, 202,756,983 shares
of Class A common stock.................... (121,184) (121,184)
Accumulated deficit......................... (2,810) (17,262)
Accumulated other comprehensive loss........ (948) (948)
-------------- --------------
Total stockholders' equity................ 93,119 789,453
-------------- --------------
Total capitalization.................... $ 189,365 $ 885,712
============== ==============
</TABLE>
- --------
(1) For consistency of presentation, we have described October 1, 1999 as
September 30, 1999.
(2) The consolidated balance sheet data presented on a pro forma as adjusted
basis reflects: (1) the sale of 38.46 million shares of our Class B common
stock in this offering at an assumed public offering price of $19.50 per
share; (2) the conversion of approximately 2.31 million shares of our
Class A common stock into our Class B common stock upon completion of this
offering; (3) the termination of the repurchase right on our Class C
common stock and its conversion into our Class B common stock upon the
completion of this offering; and (4) the conversion of our book value
stock option plan to a market value stock option plan.
(3) Represents recourse notes issued by employees to us upon exercise of stock
purchase rights under our 1998 Stock Purchase Plan.
(4) Excludes approximately 3.71 million shares of our Class B common stock
that are reserved for issuance pursuant to outstanding options and
approximately 10.61 million shares of our Class B common stock that are
reserved for issuance upon exercise of options that may be issued in the
future under our stock option plan.
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was $21.6
million, or $0.05 per share of outstanding common stock. Pro forma net tangible
book value per share is equal to the amount of our total tangible assets (total
assets less intangible assets) less total liabilities, divided by the number of
shares of our common stock outstanding as of September 30, 1999 and assumes the
termination of the repurchase right on our Class C common stock. Assuming the
sale of the shares we are offering by this prospectus at an assumed initial
public offering price of $19.50 per share and after deducting underwriting
discounts and the estimated offering expenses payable, our pro forma net
tangible book value as of September 30, 1999 would have been $732.4 million, or
$1.56 per share of common stock. This represents an immediate increase in
pro forma net tangible book value of $1.51 per share to existing stockholders
and an immediate dilution in pro forma net tangible book value of $17.94 per
share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share...................... $19.50
------
Pro forma net tangible book value per share before this offering... 0.05
Increase per share attributable to this offering................... 1.51
------
Adjusted pro forma net tangible book value per share after the
offering............................................................ 1.56
------
Dilution per share to new investors.................................. $17.94
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by new investors
purchasing shares in the offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------- -------------------- Price Per
Number Percent Amount Percent Share
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).... 431,034,513 92% $118,107,000 14% $ 0.27
New investors............... 38,461,600 8 750,001,200 86 19.50
----------- --- ------------ --- ------
Total....................... 469,496,113 100% $868,108,200 100% $ 1.85
=========== === ============ === ======
</TABLE>
- --------
(1) Net of 202,756,983 shares of Class A common stock we hold in treasury. We
paid $121.2 million to acquire these shares.
The tables and calculations above assume no exercise of outstanding
options. As of September 30, 1999, there were approximately 3.71 million shares
of our Class B common stock reserved for issuance upon exercise of outstanding
options at a weighted average exercise price of $0.84 per share. To the extent
that these options are exercised, there will be further dilution to new
investors. See "Management--Employee Benefit Plans--1998 Stock Option Plan" and
"Description of Capital Stock."
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data.
You should read this information together with our consolidated financial
statements and the related notes to those statements appearing elsewhere in
this prospectus and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected consolidated financial data
as of March 31, 1995, 1996 and 1997 and for each of the years in the two year
period ended March 31, 1996 have been derived from our audited consolidated
financial statements which are not included in this prospectus. The selected
consolidated financial data as of March 31, 1998 and 1999, and for each of the
years in the three year period ended March 31, 1999 have been derived from our
audited consolidated financial statements which appear elsewhere in this
prospectus. The selected consolidated financial data as of September 30, 1999,
and for the six months ended September 30, 1998 and 1999 are derived from our
unaudited consolidated financial statements which appear elsewhere in this
prospectus. In the opinion of management, the unaudited consolidated financial
statements have been prepared on a basis consistent with our audited
consolidated financial statements and include all adjustments, which are only
normal recurring adjustments, necessary for a fair presentation of the
financial position and the results of operations for the unaudited periods. The
historical results are not necessarily indicative of the operating results to
be expected in the future.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31,(1) September 30,(1)
------------------------------------------------ ------------------
1995 1996 1997 1998(2) 1999(2) 1998 1999
-------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated statement of operations
data:
Revenues............................... $213,292 $240,776 $264,684 $294,244 $302,997 $140,571 $173,219
Expenses:
Country representative compensation.. 36,918 43,232 35,090 41,136 53,766 24,929 31,035
Bandwidth and related costs.......... 33,936 37,407 43,134 48,089 52,700 26,336 35,443
Network operations................... 68,075 75,386 81,106 77,489 55,041 26,852 32,899
Selling, general and administrative.. 78,290 84,948 115,741 130,287 139,663 68,500 83,481
-------- -------- -------- -------- -------- -------- --------
Total expenses....................... 217,219 240,973 275,071 297,001 301,170 146,617 182,858
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)................ (3,927) (197) (10,387) (2,757) 1,827 (6,046) (9,639)
-------- -------- -------- -------- -------- -------- --------
Other income (expense):
Interest income...................... 1,751 1,847 1,014 1,515 1,881 1,501 1,073
Interest expense..................... (627) (477) (874) (868) (689) (454) (2,883)
Other, net........................... 3,664 (227) 2,591 2,969 382 (233) (111)
-------- -------- -------- -------- -------- -------- --------
Total other income (expense)......... 4,788 1,143 2,731 3,616 1,574 814 (1,921)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before provision (credit)
for income taxes and minority
interest.............................. 861 946 (7,656) 859 3,401 (5,232) (11,560)
Provision (credit) for income taxes.... 426 887 (175) 4,446 (180) (255) (1,748)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before minority
interest.............................. 435 59 (7,481) (3,587) 3,581 (4,977) (9,812)
Minority interest(3)................... -- -- -- (143) 132 16 (38)
-------- -------- -------- -------- -------- -------- --------
Net income (loss)(4)................... $ 435 $ 59 $ (7,481) $ (3,444) $ 3,449 $ (4,993) $ (9,774)
======== ======== ======== ======== ======== ======== ========
Basic and diluted earnings (loss) per
common share(4)(5).................... $ 0.00 $ 0.00 $ (0.02) $ (0.01) $ 0.01 $ (0.01) $ (0.03)
Basic and diluted weighted average
number of common shares outstanding... 355,063 373,750 373,750 373,750 373,750 373,750 382,004
Other consolidated financial data:
Net cash flows provided by (used in):
Operating activities................. $ 11,146 $ (1,641) $ 1,383 $ 13,032 $ 11,911 $ 1,311 $ 2,263
Investing activities................. (36,777) (7,364) (4,704) (5,511) (20,679) (4,393) (42,690)
Financing activities................. 36,505 (3,577) 13,048 (14,390) 5,828 5,253 71,186
EBITDA(6).............................. 8,724 15,201 9,631 18,075 20,612 2,158 4,133
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
As of September 30,
As of March 31,(1) 1999(1)
-------------------------------------------- -----------------------
Pro forma
1995 1996 1997 1998(2) 1999(2) Actual as adjusted(7)
-------- -------- -------- -------- -------- -------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated balance
sheet data:
Cash and cash
equivalents............ $ 22,030 $ 9,448 $ 18,906 $ 11,449 $ 8,681 $ 39,202 $ 750,001
Total current assets.... 86,273 75,709 92,296 90,757 90,277 117,010 827,809
Total assets............ 146,985 143,868 159,439 153,799 182,263 292,077 1,002,876
Current liabilities..... 41,706 42,744 60,286 62,814 73,271 81,203 81,203
Total debt.............. 8,003 5,112 15,372 2,066 15,837 96,259 96,259
Total stockholders'
equity................. 83,869 83,347 78,711 74,131 76,717 93,119 789,453
Other operating data:
Number of ports......... 5,143 5,814 7,914 9,205 10,590 11,977 11,977
Number of country
representatives........ 48 49 51 52 56 56 56
Number of dedicated
personnel:
U.S................... 660 728 764 580 592 630 630
Non-U.S.(8)........... 570 535 556 585 659 683 683
</TABLE>
- --------
(1) Our fiscal year is the 52- or 53-week period ending on the Friday nearest
to March 31. For simplicity of presentation, we have described the 52-week
periods ended April 1, 1995, March 29, 1996, and March 28, 1997, the 53-
week period ended April 3, 1998 and the 52-week period ended April 2, 1999
as the years ended March 31, 1995, 1996, 1997, 1998 and 1999, and we have
described the 26-week periods ended October 2, 1998 and October 1, 1999 as
the six months ended September 30, 1998 and 1999.
(2) As restated, see Note 16 of "Notes to Consolidated Financial Statements."
(3) Reflects the acquisition of a 51% interest in Infonet Luxembourg in the
year ended March 31, 1998.
(4) In our three month period ending December 31, 1999, we will record a non-
cash, pre-tax compensation charge of approximately $13.8 million, resulting
from the conversion of our book value stock options to market value options
as a result of the offering and a pre-tax charge of approximately $9.4
million, resulting from our stock appreciation rights, each of which is
based upon the midpoint of the anticipated price range of this offering.
Had the offering been completed during our six month period ended September
30, 1999, our net loss would have been approximately $24.2 million and our
basic and diluted earnings (loss) per common share would have been
approximately $(0.06).
(5) As of March 31, 1995, 1996, 1997 and 1998 and September 30, 1998, there
were no options, warrants or other forms of potential common stock issued
by us. Our outstanding common stock purchase rights represent the only form
of potential common stock as of March 31, 1999. All of these rights were
excluded from the computation of diluted earnings per share because their
inclusion would have had an antidilutive effect on earnings per share. Our
outstanding common stock options represent the only form of potential
common stock as of September 30, 1999. All of these options were excluded
from the computation of diluted earnings per share because their inclusion
would have been antidilutive.
(6) EBITDA, which we calculate as income from operations before interest, other
income (expense), provision for income taxes, depreciation, amortization
and compensation charge for stock option plans, is a supplemental financial
measure we use in the evaluation of our business and is used by many
analysts in our industry. However, you should read EBITDA only in
conjunction with our consolidated financial data summarized above and our
consolidated financial statements and the related notes to those financial
statements prepared in accordance with generally accepted accounting
principles, which appear elsewhere in this prospectus. You should not
construe EBITDA as an alternative to income from operations, as determined
in accordance with generally accepted accounting principles, as an
indicator of our operating performance or as an alternative to cash flows
from operating activities, as determined in accordance with generally
accepted accounting principles, as a measure of our liquidity. Our
definition of EBITDA may not be comparable to similarly titled measures of
other companies.
20
<PAGE>
(7) The consolidated balance sheet data presented on a pro forma as adjusted
basis reflects: (1) the sale of approximately 38.46 million shares of our
Class B common stock in this offering at an assumed public offering price
of $19.50 per share; (2) the termination of the repurchase right on our
Class C common stock and its conversion into our Class B common stock upon
the completion of this offering; and (3) the conversion of our book value
stock option plan to a market value stock option plan.
(8) Includes employees of non-consolidated country representatives.
Quarterly Operating Performance
The following table sets forth quarterly operating data for the year
ended March 31, 1999 and for the quarters ended June 30 and September 30, 1999.
The information is derived from our unaudited consolidated financial
statements, prepared on a basis consistent with our audited consolidated
financial statements which appear elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended,
----------------------------------------------------------------------
June 30, September 30, December 31, March 31, June 30, September 30,
1998 1998 1998 1999 1999 1999
-------- ------------- ------------ --------- -------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $69,004 $71,567 $77,108 $85,318 $85,706 $87,513
Operating income
(loss)................. (3,213) (2,833) 1,522 6,351 (543) (9,096)
</TABLE>
Our revenues and operating income vary from quarter to quarter due to a
number of factors including the timing of new client contracts, new service
offerings, changes in our pricing policies or those of our competitors and the
timing and completion of our network expansion. Our operating income (loss)
also varies from quarter to quarter due to timing of expenses related to
provisioning of our services. Quarterly results are not necessarily meaningful
and you should not rely on them as an indication of our future performance.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with the financial
statements and the related notes to those statements appearing elsewhere in
this prospectus. This discussion contains forward-looking statements that
involve risks and uncertainties. Please see "Risk Factors--This prospectus
contains forward-looking statements that may not be accurate indicators of our
future performance."
Overview
We are a leading provider of cross-border managed data communications
services to more than 1,150 multinational corporations worldwide. We offer our
services to our clients directly through country representatives and indirectly
through alternate sales channels consisting of major international
telecommunications carriers and value-added resellers. We deploy a broad array
of fully managed data communications services over our reliable, secure, and
high quality global network, which we refer to as The World Network. The World
Network is an extensive and versatile ATM-enabled network that can be accessed
by our clients from over 180 countries.
We began operations in 1969 as a part of Computer Sciences Corporation,
or CSC. In a series of transactions from 1988 to 1992, CSC sold its ownership
in Infonet to a group of telecommunications companies. From 1988 through March
31, 1999, we funded the majority of our operations, capital expenditures and
other cash requirements from internally generated funds and from two separate
stock issuances of $40.0 million each to our stockholders, one in 1995 and one
in 1999.
Prior to October 1997, our results included the operations of Government
Systems, Inc., or GSI, a wholly owned subsidiary, and our government accounts
business, which we refer to together as Government Services. In October 1997,
we sold the assets of GSI to a third party for $21.0 million in cash and a
$5.5 million reduction in debt. For the year ended March 31, 1998, results of
operations from GSI included $32.5 million in revenues and $4.0 million in
income before taxes. In addition, we sold our government accounts to the same
third party and entered into an agreement allowing the third party to operate
as a country representative for a total of $7.0 million in cash. These
government accounts contributed $4.3 million in revenues in the year ended
March 31, 1998.
Subsequent to the issuance of our 1999 financial statements, we
determined that a charge of $3.3 million related to certain network equipment
taken in 1998 was in error. The effects of the restatement are presented in
Note 16 of "Notes to Consolidated Financial Statements" and are reflected in
our financial statements.
Revenues by Region and by Country
We provide our services throughout the world, with revenues billed and
costs incurred in more than 60 countries. The following tables set forth our
revenues by region and by country based upon the ten largest countries in terms
of revenues for the six months ended September 30, 1999. Due to the
multinational nature of our client base, the table does not reflect the country
in which services are provided, but rather is based on the jurisdiction in
which we invoice for our services.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
---------------------------------------- --------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
Region (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Americas................ $104,888 48% $109,049 43% $115,937 38% $ 53,518 38% $ 62,127 36%
Europe, Middle East and
Africa (EMEA).......... 90,710 41 116,123 46 158,234 52 73,148 52 93,082 54
Asia Pacific............ 23,320 11 29,004 11 28,826 10 13,905 10 18,010 10
-------- --- -------- --- -------- --- -------- --- -------- ---
Subtotal................ 218,918 100% 254,176 100% 302,997 100% 140,571 100% 173,219 100%
Government Services..... 45,766 40,068 -- -- --
-------- -------- -------- -------- --------
Total revenues.......... $264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Six Months
Year Ended March 31, Ended September 30,
---------------------------------------- --------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Country
Australia............... $ 8,375 4% $ 9,206 4% $ 11,781 4% $ 5,313 4% $ 6,726 4%
Belgium................. 10,509 5 7,499 3 8,536 3 3,864 3 4,820 3
France.................. 12,804 6 12,671 5 13,183 4 6,679 5 6,906 4
Germany................. 14,735 7 17,742 7 23,438 8 10,493 7 13,783 8
Japan................... 4,661 2 6,315 2 7,813 3 3,730 3 4,323 2
Netherlands............. 8,449 4 20,091 8 34,944 12 15,492 11 21,044 12
Sweden.................. 7,659 3 10,923 4 13,859 4 6,466 4 8,623 5
Switzerland............. 8,116 4 9,931 4 12,071 4 5,633 4 7,191 4
United Kingdom.......... 11,488 5 12,604 5 19,682 6 9,310 7 13,033 8
United States........... 89,694 41 89,754 35 103,190 34 48,276 34 56,448 33
Other countries......... 42,428 19 57,440 23 54,500 18 25,315 18 30,322 17
-------- --- -------- --- -------- --- -------- --- -------- ---
Subtotal............... 218,918 100% 254,176 100% 302,997 100% 140,571 100% 173,219 100%
Government Services..... 45,766 40,068 -- -- --
-------- -------- -------- -------- --------
Total revenues.......... $264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
</TABLE>
Distribution Channels
We offer our services through country representatives and through
alternate sales channels such as major telecommunication service providers and
value-added resellers. In the year ended March 31, 1999, country
representatives contributed 90% of our total revenues, while alternate sales
channels contributed 10% of our total revenues. The table below shows the
relative contribution to revenues from country representatives, excluding
Government Services, and alternate sales channels.
<TABLE>
<CAPTION>
Six Months
Ended September
Year Ended March 31, 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Country representatives:
Number of representatives... 51 52 56 55 56
Number of clients........... 1,152 1,101 1,129 1,123 1,189
Country representatives'
revenues................... $212,421 $239,776 $273,150 $128,209 $153,081
Percent of total revenues... 97% 94% 90% 91% 88%
Alternate sales channels:
Number of sales channel
partners................... 6 12 17 13 18
Number of sales channel
partners' clients.......... 63 117 184 157 195
Alternate sales channel
revenues................... $ 6,497 $ 14,400 $ 29,847 $ 12,362 $ 20,138
Percent of total revenues... 3% 6% 10% 9% 12%
</TABLE>
Country Representatives
We currently have 56 country representatives, nine consolidated and 47
non-consolidated, which together provide services in more than 60 countries.
Our consolidated country representatives are those in which we own, directly or
indirectly, greater than a 50% equity interest. Our consolidated country
representatives provide services in 14 countries and accounted for
approximately $152.4 million, or approximately 50% of our total revenues, in
the year ended March 31, 1999. Consolidated country representatives accounted
for approximately $86.8 million, or approximately 50% of our total revenues,
for the six months ended September 30, 1999.
23
<PAGE>
Our service agreements with our country representatives give us the right
to recommend prices for services, set revenue targets jointly, determine
staffing jointly, appoint one of the three members of the advisory review
board, and terminate the agreement if the country representative fails to meet
the revenue targets or if we cannot agree on revenue targets for two
consecutive years. In addition, each agreement outlines the compensation and
pricing arrangements with the country representatives. Established rates and
support charges are generally the same for all country representatives
throughout the world.
Our country representatives determine the prices they charge clients, in
accordance with our recommended prices and standard discounts, and enter into
contracts with clients to provide services using The World Network. We bill our
country representatives and recognize the full amount of revenues for all of
our services delivered to the clients. The country representatives bill us for
the sales and support services they provide, which we account for as country
representative compensation. The country representative bears the risk of
collection from the client as well as the exchange rate risk.
Alternate Sales Channels
Our alternate sales channel partners sell all or a portion of our suite of
services in their territories to clients that require one or more of our global
communications services that the sales channel partners cannot supply
independently. These sales channel partners include, among others, AT&T and MCI
WorldCom. Our relationships are governed by multi-year contracts, under which
we provide services to our sales channel partners who then resell our services
to clients on terms our sales channel partners determine.
Components of Revenues
Our revenues are derived from providing the following global data
communications services to our multinational clients worldwide:
. Network Services--includes Frame Relay, remote access, intranet,
multimedia, Internet and IP services;
. Consulting, Integration and Provisioning Services--includes consulting,
design, and implementation; installation of leased lines and customer
premise equipment associated with the client's access to
The World Network and use of our Network Services;
. Applications Services--includes e-mail, messaging, collaboration, Web
hosting and other value-added services; and
. Other Communications Services--includes X.25 transport services,
service access fees and other communications services.
Revenues by Services
We currently derive a majority of our revenues from the sale of Network
Services, specifically Frame Relay, remote access and IP services, as shown
below. We expect that Network Services will continue to constitute the largest
component of our revenue base going forward. We also anticipate that a
significant portion of our future revenue growth will continue to come from
Network Services and Consulting, Integration and Provisioning Services.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
---------------------------------------- --------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Network Services........ $ 66,153 30% $100,337 39% $144,642 48% $ 66,927 48% $ 95,891 55%
Consulting, Integration
and Provisioning
Services............... 48,264 22 58,637 23 78,777 26 37,090 26 45,729 27
Applications Services... 16,604 8 22,433 9 20,068 6 9,000 6 7,673 4
Other Communications
Services............... 87,897 40 72,769 29 59,510 20 27,554 20 23,926 14
-------- --- -------- --- -------- --- -------- --- -------- ---
Subtotal................ 218,918 100% 254,176 100% 302,997 100% 140,571 100% 173,219 100%
Government Services..... 45,766 40,068 -- -- --
-------- -------- -------- -------- --------
Total revenues.......... $264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
</TABLE>
24
<PAGE>
Pricing Policies
The pricing for our services differs depending on the services provided,
the speed of service, geographic location and capacity utilization. In the case
of services permitting dedicated client access to the network by leased
circuit, pricing is generally dependent more on the nature and capacity of the
service provided than on actual usage. For example, the pricing for a
connection to be used for Frame Relay services generally consists of a monthly
charge for the connection and the bandwidth access provided through the
connection. Pricing for dedicated access services is therefore largely based on
access equipment and bandwidth. In the case of remote access services, actual
usage and geographic location are more relevant to the pricing determination,
as the client is generally charged based on the duration of each connected
session. Once a base service is set, additional factors are taken into account
such as charges for additional network services, breadth of the service, and
discounts for larger volume clients that are prepared to guarantee specific
revenue levels.
Client Contracts
The client contracts generally include an agreed-upon price schedule that
details both fixed and variable prices for contracted services. The client
contracts generally have a term of one to three years, however, when clients
implement a number of our services, they may choose to extend the contracts for
a longer period of time. Our country representatives can easily add additional
services to existing contracts, enabling clients to increase the number of
locations through which they access our network, increase the speed of that
access, increase the sophistication of the services they use, or extend the
term for existing services.
Components of Costs and Expenses
Country Representative Compensation
Country representative compensation reflects the amounts paid to the
country representatives for the sales and support services our country
representatives provide to clients. These expenses are variable and increase as
the revenues from country representatives increase.
Bandwidth and Related Costs
Our bandwidth and related costs are primarily comprised of leasing and
amortization expenses associated with the leasing or purchasing of network
circuits. Currently, the majority of our network backbone infrastructure is
obtained from various providers from whom we lease bandwidth primarily under
short-term cancellable agreements. We bear these leasing expenses regardless of
whether we lease directly or indirectly through another entity that may lease
communications lines locally on our behalf. In the future, as we move towards
establishing a facilities-based network, we intend to migrate from leasing
bandwidth to purchasing bandwidth. Management believes that these purchases
will ultimately result in a lower unit cost for network infrastructure.
Bandwidth and related costs also include related equipment, maintenance and
personnel costs.
Network Operations
Our network operations expenses include costs associated with our network
management, operations and support activities. These costs include personnel,
occupancy, maintenance, equipment depreciation, outsourcing costs and other
network related costs.
Selling, General and Administrative
Selling expenses consist primarily of personnel costs and incentive
compensation related to our consolidated country representative sales force, as
well as costs related to providing centralized sales and marketing support for
our non-consolidated country representatives. Our selling expenses also include
promotion, advertising, travel and entertainment. In 1998, we began a global
advertising campaign to increase awareness of the Infonet brand name and our
service offerings. This campaign includes substantial increased
25
<PAGE>
spending on advertising. General and administrative expenses consist primarily
of salaries and other compensation, and occupancy costs for executive,
financial and accounting, human resources, legal and other administrative
personnel, as well as company-wide management incentive related costs.
Disposition of ESG Communications Inc.
In September 1999, we committed to a plan to dispose of our subsidiary,
ESG Communications Inc. ESG was formed as a wholly owned subsidiary in March
1998 to sell telecommunications services over international bypass routes.
Since formation, ESG established seven routes. Increasing competition,
decreasing prices and lower than anticipated volumes have resulted in current
and forecasted negative cash flows from the operation of each of ESG's routes.
Our plans to dispose of ESG call for the sale or abandonment of those routes.
Two of ESG's routes were shut down and abandoned prior to September 30, 1999
and one was shut down and abandoned in October 1999. We anticipate that the
remaining routes, if not sold, will be shut down and abandoned by December 31,
1999.
In connection with our decision to dispose of ESG, we recorded a total
charge of $4.0 million. This charge was comprised of $3.6 million related to
the impairment of communication equipment, of which approximately $1.2 million
related to routes abandoned before September 30, 1999, and $400,000 related to
remaining payments under communication line leases which have no alternative
use to us after operations cease. All lease payments will be made in cash
within the next twelve months. The $3.6 million impairment charge and the
$400,000 charge for lease payments are included in network operations, and
bandwidth and related costs in our statement of operations for the six months
ended September 30, 1999. See Note 17 of Notes to Consolidated Financial
Statements. The impairment charge was determined to be equal to the carrying
value of the equipment as the discounted estimated future cash flows from each
of the routes were negative. Our efforts to date to sell the equipment have
been unsuccessful. We estimate that the proceeds from the sale of equipment or
routes, if we are successful in selling any, will not be material. Revenues and
losses from operations of ESG were $270,000 and $1.4 million, for the fiscal
year ended March 31, 1999, and $1.7 million and $2.0 million for the six months
ended September 30, 1999. As a result of our decision, future operating results
over the course of the next twelve months will not reflect charges for the
$400,000 of lease payments and for the next four years our operating results
will not contain depreciation charges of approximately $900,000 per year as
these amounts are included in the charges discussed above. We expect no other
material cost savings as a result of our decision to dispose of ESG.
Future Compensation Charges Related to Stock Option and Stock Appreciation
Rights Grants
In April 1999, we granted options to employees for the purchase of
approximately 3.71 million shares of our Class B common stock at an exercise
price of $0.84 per share pursuant to our 1998 Stock Option Plan. The 1998 Stock
Option Plan is a book value plan which will convert to a market value plan upon
the close of this offering, creating a new measurement date for the stock
options. Since the exercise price of these options is substantially below the
anticipated price to the public in the offering, we will record a non-cash
compensation charge over the five year vesting period of the options. The
amount of this charge is a function of the public offering price. Based upon
the midpoint of the anticipated price range in the offering, this charge would
total approximately $69.2 million of which approximately $13.8 million would be
recognized in our three months ending December 31, 1999. The remaining charge
would be amortized to expense at a rate of approximately $3.5 million per
quarter through December 31, 2003.
During December 1998, we issued approximately 1.21 million stock
appreciation rights, or SARs, and during April 1999 we issued 365,079 SARs to
employees pursuant to our SARs Plan. The SARs vest 25% per year, commencing in
January, 2001, and are indexed to our Class B common stock at a base price of
$0.84 per share. We will record a compensation charge in each quarter of the
vesting period based upon the difference between the exercise price and market
value of our Class B common stock during the vesting period. The total amount
of this charge is a function of the price of our Class B common stock during
the vesting period. Based
26
<PAGE>
upon the midpoint of the anticipated price range in the offering, these charges
would total approximately $29.3 million over the next five years, of which
approximately $9.4 million would be recognized in our three months ending
December 31, 1999. However, the aggregate amount of these charges will differ
due to fluctuations in our stock price during the vesting period and those
differences could be material.
Results of Operations
The following table sets forth certain financial data from our
consolidated statements of operations for the years ended March 31, 1997, 1998
and 1999 and for the six months ended September 30, 1998 and 1999 expressed in
each case as a percentage of revenues.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
March 31, September 30,
------------------ ----------------
1997 1998 1999 1998 1999
---- ---- ---- ------ ------
(As a percentage of
revenues)
<S> <C> <C> <C> <C> <C>
Revenues................................ 100% 100% 100% 100% 100%
Expenses:
Country representative compensation... 13 14 18 17 18
Bandwidth and related costs........... 16 17 17 19 21
Network operations.................... 31 26 18 19 19
Selling, general and administrative... 44 44 46 49 48
--- --- --- ------ ------
Total expenses........................ 104 101 99 104 106
--- --- --- ------ ------
Operating income (loss)................. (4) (1) 1 (4) (6)
Other income (expense)
Interest income....................... 0 1 0 1 1
Interest expense...................... 0 0 0 (1) (2)
Other, net............................ 1 1 0 0 0
Provision for income taxes.............. 0 (2) 0 0 1
Minority interest....................... 0 0 0 0 0
--- --- --- ------ ------
Net income (loss)....................... (3)% (1)% 1% (4)% (6)%
=== === === ====== ======
</TABLE>
Six Months Ended September 30, 1999 Compared to Six Months Ended September 30,
1998
Revenues increased $32.6 million, or 23%, from $140.6 million for the six
months ended September 30, 1998 to $173.2 million for the six months ended
September 30, 1999. This increase was primarily due to a $29.0 million
increase, or 43%, growth in sales of Network Services over the period, from
$66.9 million to $95.9 million. The majority of the Network Services growth
came from increased sales of Frame Relay and remote access services. Frame
Relay sales increased $22.7 million, or 66%, from $34.6 million to
$57.3 million and remote access sales increased $9.2 million, or 86%, from
$10.7 million to $19.9 million, over the period. In addition, Consulting,
Integration and Provisioning Services, comprised primarily of our Global
Connect services increased $8.6 million, or 23%, from $37.1 million to $45.7
million. Our Applications Services declined over the period by $1.3 million, or
15%, from $9.0 million to $7.7 million, largely due to an expected decline in
our mature messaging product line as our clients migrate to more advanced
messaging applications and non-X.25 based transport services. Other
communications services including our X.25 transport services decreased $3.6
million, or 13%, from $27.6 million to $23.9 million.
Revenues from our country representatives increased $24.9 million, or
19%, from $128.2 million for the six months ended September 30, 1998 to $153.1
million for the six months ended September 30, 1999. While we increased the
number of our country representatives from 55 to 56 over the period, the
majority of our revenue growth was derived from existing country
representatives. While the number of our clients increased only 6% from 1,123
clients as of September 30, 1998 to 1,189 as of September 30, 1999, revenues
27
<PAGE>
increased as clients that used mostly lower revenue generating messaging and
X.25 based transport services were replaced by clients that purchased higher
revenue yielding Network Services. Revenues from our alternate sales channels
also grew $7.8 million, or 63%, from $12.4 million to $20.1 million. Our
alternate sales channel partners resold our suite of services to a net
additional 38 clients, or 24% more clients during the period, from 157 clients
as of September 30, 1998 to 195 clients as of September 30, 1999.
In terms of revenues billed on a regional basis, the largest portion of
our growth, in percentage terms, was in the Asia Pacific region, which grew
$4.1 million, or 30%, from $13.9 million for the six months ended September 30,
1998 to $18.0 million for the six months ended September 30, 1999. The majority
of this revenue growth was derived from strong alternate sales channel revenue
growth in Australia and strong country representative activities in Japan and
Singapore. Revenues billed in the Americas increased $8.6 million, or 16%, from
$53.5 million to $62.1 million over the period. EMEA revenues also increased
$19.9 million, or 27%, from $73.1 million to $93.1 million.
Country Representative Compensation increased $6.1 million, or 24%, from
$24.9 million for the six months ended September 30, 1998 to $31.0 million for
the six months ended September 30, 1999. This increase was due primarily to the
increase in the services provided by our non-consolidated country
representatives during the period. While we added one new country
representative, nearly all of the growth in these expenses came from increased
payments for services provided by our existing country representatives. These
payments are variable expenses, based on the amount and nature of services
provided by our country representatives. As such, we expect these expenses to
increase in the future as revenues generated by our country representatives
increase.
Bandwidth and Related Costs increased $9.1 million, or 35%, from $26.3
million for the six months ended September 30, 1998 to $35.4 million for the
six months ended September 30, 1999. This increase was directly related to
higher network leasing expenses associated with increasing the capacity of our
network. The usage growth reflects additional client port growth and increased
capacity per port. While bandwidth costs have been declining over time, clients
are demanding greater bandwidth capacity at the same price. Lease expense, the
largest component of Bandwidth and Related Costs, increased $8.1 million, or
31%, from $26.3 million to $34.4 million over the period. Bandwidth and related
costs for the six months ended September 30, 1999 also reflect a charge of
$400,000 for lease payments, which will be made subsequent to the anticipated
disposition of ESG. Amortization of purchased capacity of $1.0 million was
included in the six months ended September 30, 1999, reflecting purchases of
communications line capacity that commenced in November 1998 and will be
amortized over 10 years.
Network Operations increased $6.0 million, or 23%, from $26.9 million for
the six months ended September 30, 1998 to $32.9 million for the six months
ended September 30, 1999. The largest component of this increase was the $3.6
million impairment charge resulting from our September 1999 decision to dispose
of ESG. To a lesser extent this increase was related to the increased costs
associated with our network management, operations and support activities,
personnel costs, depreciation and other network operations expenses.
Depreciation expense related to network equipment increased $3.8 million, or
82%, from $4.7 million to $8.5 million over the period.
Selling, General and Administrative increased $15.0 million, or 22%, from
$68.5 million for the six months ended September 30, 1998 to $83.5 million for
the six months ended September 30, 1999. The increase was due, in part, to
sales support expenses for multinational support activities which increased
$6.9 million from $28.0 million for the six months ended September 30, 1998 to
$34.9 million for the six months ended September 30, 1999. This increase was
directly related to revenue growth. In addition, personnel-related expenses
increased by $1.2 million from $19.2 million for the six months ended September
30, 1998 to $20.5 million for the six months ended September 30, 1999, due to
sales and marketing efforts to grow our business. Administrative expenses
increased by $4.1 million from $6.5 million for the six months ended September
30, 1998 to $10.6 million for the six months ended September 30, 1999,
primarily due to legal and accounting fees incidental to the AUCS transactions
of $1.6 million and retirement settlement expense of
28
<PAGE>
$1.7 million. Depreciation expenses increased by $913,000 from $2.8 million for
the six months ended September 30, 1998 to $3.7 million for the six months
ended September 30, 1999, due to the placement of additional equipment at
client premises.
Operating Income (Loss) grew by $(3.6) million, or 59%, from $(6.0)
million to $(9.6) million. This increase in the loss was primarily due to costs
associated with the disposition of ESG partially offset by a slower growth in
expenses as described above.
Other Income (Expense) decreased from income of $814,000 for the six
months ended September 30, 1998 to expense of $1.9 million for the six months
ended September 30, 1999. This decrease was due to an increase in interest
expense over the period of $2.4 million, or 535%, from $454,000 to
$2.9 million. The increased interest expense resulted from borrowings under the
credit facility commencing in May 1999. The decrease in Other Income (Expense)
was also impacted by a decline in interest income of $428,000, or 29%, from
$1.5 million to $1.1 million over the period.
Provision (Credit) for Income Taxes increased $(1.5) million, or 585%,
from a credit of $(255,000) for the six months ended September 30, 1998 to a
credit of $(1.7) million for the six months ended September 30, 1999. This
increase in income tax credits was due primarily to an increase in losses
during the period.
Net Income (Loss) grew by $(4.8) million, or 96%, from $(5.0) million for
the six months ended September 30, 1998 to $(9.8) million for the six months
ended September 30, 1999, as a result of the factors described above.
Year Ended March 31, 1999 Compared to Year Ended March 31, 1998
Revenues increased $8.8 million, or 3%, from $294.2 million in the year
ended March 31, 1998 to $303.0 million in the year ended March 31, 1999.
Revenues in the year ended March 31, 1998 included $40.1 million related to
Government Services, which were sold in the year ended March 31, 1998 and thus
did not contribute to our revenues in the year ended March 31, 1999. Excluding
the contribution in 1998 from this business, our revenues would have grown
$48.8 million, or 19%, over the period from $254.2 million to $303.0 million.
This increase was primarily due to a $44.3 million increase, or 44%, in sales
of Network Services over the period, from $100.3 million to $144.6 million. The
majority of the Network Services growth came from increased sales of Frame
Relay and remote access services. Frame Relay sales increased $37.2 million, or
85%, from $43.7 million to $80.9 million and remote access sales increased
$9.8 million, or 76%, from $12.9 million to $22.7 million, over the period. In
addition, Consulting, Integration and Provisioning Services, comprised
primarily of our Global Connect services, increased $20.1 million, or 34%, from
$58.6 million to $78.8 million over the period. Our Applications Services
declined $2.4 million, or 11%, from $22.4 million to $20.1 million, and our
Other Communications Services declined $13.3 million, or 18%, from $72.8
million to $59.5 million. Our Other Communications Services decreased over the
period largely due to an expected decline in our mature messaging product line
and our X.25 transport services, as our clients are migrating to more advanced
messaging applications and non-X.25 based transport services.
Revenues from our country representatives excluding amounts generated by
Government Services increased $33.4 million, or 14%, from $239.8 million in the
year ended March 31, 1998 to $273.2 million in the year ended March 31, 1999.
While we increased the number of our country representatives from 52 to 56 over
the period, the largest portion of our revenue growth was derived through
existing country representatives. While the number of our clients increased
only 3%, from 1,101 clients as of March 31, 1998 to 1,129 clients as of March
31, 1999, revenues increased as clients that used mostly lower revenue
generating messaging and X.25 based transport services were replaced by clients
that purchased higher revenue yielding Network Services. Revenues from our
alternate sales channels grew $15.4 million, or 107%, from $14.4 million to
$29.8 million over the period primarily due to increased revenues from
Unisource Business Network, an alternate sales channel partner operating in The
Netherlands. In total, our alternate sales channel partners resold our suite of
services to a net additional 67 clients, or 57% more clients, during the
period, from 117 clients at the year ended March 31, 1998 to 184 clients at the
year ended March 31, 1999.
29
<PAGE>
In terms of revenues billed on a regional basis, the majority of our
growth was in the EMEA region, which increased $42.1 million, or 36%, from
$116.1 million in the year ended March 31, 1998 to $158.2 million in the year
ended March 31, 1999. More than half of the growth in the EMEA region came from
strong alternate sales channel revenue growth in The Netherlands and strong
country representative activities in the United Kingdom and Germany. Revenues
billed in the Americas grew $6.9 million, or 6%, from $109.0 million to $115.9
million over the period. Revenues billed in Asia Pacific decreased by $178,000
from $29.0 million in the year ended March 31, 1998 to $28.8 million in the
year ended March 31, 1999, reflecting a slowdown in the Asian economy.
Country Representative Compensation increased $12.6 million, or 31%, from
$41.1 million in the year ended March 31, 1998 to $53.8 million in the year
ended March 31, 1999. This increase was due primarily to the increase in the
services provided by our non-consolidated country representatives during the
period. While we added four new country representatives, nearly all of the
growth in these expenses came from increased payments for services provided by
our existing country representatives.
Bandwidth and Related Costs increased $4.6 million, or 10%, from $48.1
million in the year ended March 31, 1998 to $52.7 million in the year ended
March 31, 1999. This increase was directly related to the increased traffic on
our network associated with higher usage of our services by our clients. The
usage growth reflects 15% client port growth and increased capacity per port.
This increase was directly related to higher network leasing costs associated
with the increased traffic on our network.
Network Operations decreased $22.4 million or 29%, from $77.5 million in
the year ended March 31, 1998 to $55.0 million in the year ended March 31,
1999. The majority of this decrease was due to the inclusion of $24.0 million
of network operations expense related to Government Services in the year ended
March 31, 1998 and the absence of those costs in the year ended March 31, 1999
because we sold those businesses in the year ended March 31, 1998. Excluding
this factor, network operations would have increased $1.6 million or, 3%, from
$53.5 million to $55.0 million over the period.
Selling, General and Administrative increased $9.4 million, or 7%, from
$130.3 million in the year ended March 31, 1998 to $139.7 million in the year
ended March 31, 1999. The year ended March 31, 1998 expenses included $4.6
million in selling and administrative costs associated with GSI. Excluding this
factor, Selling, General and Administrative would have increased $14.0 million,
or 11%, from $125.7 million to $139.7 million over the period. Our sales
support expenses for multinational activities increased $7.0 million from $50.4
million in the year ended March 31, 1998 to $57.4 million in the year ended
March 31, 1999 which was directly related to revenue growth. In addition, sales
and marketing personnel related expenses increased $5.7 million for our
business while the GSI related expenses decreased $4.4 million resulting in a
net increase in these expenses of $1.3 million from $54.3 million in the year
ended March 31, 1998 to $55.6 million in the year ended March 31, 1999. The
decrease in GSI expense was due to the sale of that business and the increase
in our other business expenses was related to increased sales and marketing
efforts. Administrative expenses decreased by $2.4 million from $14.8 million
in the year ended March 31, 1998 to $12.4 million in the year ended March 31,
1999, primarily due to changes in our management incentive program, which was
replaced by a stock incentive program to better retain key personnel.
Depreciation expenses increased by $2.3 million from $4.4 million in the year
ended March 31, 1998 to $6.7 million in the year ended March 31, 1999. This was
due primarily to increased client premise equipment associated with our
network.
Operating Income (Loss) increased by $4.6 million, from a loss of $(2.8)
million in the year ended March 31, 1998 to income of $1.8 million in the year
ended March 31, 1999 due to the factors described above. The year ended March
31, 1998 included $10.9 million in operating income related to Government
Services.
Other Income (Expense) decreased from $3.6 million in the year ended
March 31, 1998 to $1.6 million in the year ended March 31, 1999. This decrease
was due to a one-time pretax gain of $3.7 million on the sale of GSI's assets
in the year ended March 31, 1998. Excluding this one-time gain, Other Income
(Expense) would have increased from $(100,000) in the year ended March 31, 1998
to $1.6 million in the year ended
30
<PAGE>
March 31, 1999. This increase reflects growth in interest income of $366,000,
or 24%, from $1.5 million to $1.9 million due to higher cash balances provided
by the investment of the proceeds from the sale of Government Services. In
addition, the increase reflects a slight decrease in interest expense of
$179,000, or 21%, from $868,000 to $689,000 over the period.
Provision (Credit) for Income Taxes decreased from $4.4 million in the
year ended March 31, 1998 to $(180,000) in the year ended March 31, 1999. The
unusually high tax provision in the year ended March 31, 1998, was primarily
due to our inability to realize tax benefits related to certain U.S. and
foreign subsidiary losses. In the year ended March 31, 1999, changes in
circumstances allowed the U.S. tax losses from the year ended March 31, 1998 to
be carried forward and included in our tax returns, resulting in a lower than
normal tax provision in the year ended March 31, 1999.
Net Income (Loss) increased from $(3.4) million in the year ended March
31, 1998 to $3.4 million in the year ended March 31, 1999 due to the factors
described above.
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
Revenues increased $29.6 million, or 11%, from $264.7 million in the year
ended March 31, 1997 to $294.2 million in the year ended March 31, 1998.
Revenues in the year ended March 31, 1998 included $40.1 million related to
Government Services, which were sold in the year ended March 31, 1998.
Similarly, revenues in the year ended March 31, 1997 included $45.8 million
related to Government Services. Excluding the contribution from these
businesses, our revenues would have grown $35.3 million, or 16%, over the
period from $218.9 million to $254.2 million. This increase was primarily due
to a $34.2 million increase, or 52%, growth in sales of Network Services over
the period, from $66.2 million in the year ended March 31, 1997 to $100.3
million in the year ended March 31, 1998. The majority of Network Services
growth came from increased sales of Frame Relay and remote access services.
Frame Relay sales increased $24.1 million, or 123%, from $19.6 million to $43.7
million and remote access sales increased $8.1 million, or 169% from
$4.8 million to $12.9 million, over the period. In addition, Consulting,
Integration and Provision Services, comprised primarily of our Global Connect
services increased $10.4 million, or 21%, from $48.3 million to $58.6 million
over the period. Our Applications Services revenues increased $5.8 million, or
35%, from $16.6 million to $22.4 million, and our Other Communications Services
declined $15.1 million, or 17%, from $87.9 million to $72.8 million. Our
Applications Services and Other Communications Services decreased over the
period largely due to an expected decline in our mature messaging product line
and our X.25 transport services, as our clients are migrating to more advanced
messaging applications and non-X.25 based transport services.
Revenues from our country representatives increased $27.4 million, or
13%, from $212.4 million in the year ended March 31, 1997 to $239.8 million in
the year ended March 31, 1998. While we increased the number of our country
representatives from 51 to 52 over the period, the largest portion of our
revenue growth was derived through existing country representatives. While the
number of our clients decreased by 4% from 1,152 clients as of March 31, 1997
to 1,101 clients as of March 31, 1998, revenue increased as clients that used
mostly lower revenue generating messaging and X.25 based transport services
were replaced by clients that purchased higher revenue yielding Network
Services. Revenues from our alternate sales channels grew $7.9 million, or
122%, from $6.5 million to $14.4 million over the period primarily due to
increased revenues from Unisource Business Network, an alternate sales channel
partner operating in The Netherlands. In total, our alternate sales channel
partners resold our suite of services to a net additional 54 customers, or 86%
more customers during the period, from 63 customers at the year ended March 31,
1997 to 117 customers at the year ended March 31, 1998.
In terms of revenues billed on a regional basis, the majority of our
growth was in the EMEA region, which increased $25.4 million, or 28%, from
$90.7 million in the year ended March 31, 1997 to $116.1 million in the year
ended March 31, 1998 primarily due to strong alternate sales channel revenue
growth in The Netherlands, and strong country representative activities in
Germany and Sweden, partially offset by a decline in revenues in Belgium.
Revenues billed in the Americas, grew $4.2 million, or 4%, from
31
<PAGE>
$104.9 million to $109.0 million over the period. Revenues billed from Asia
Pacific increased $5.7 million, or 24%, from $23.3 million in the year ended
March 31, 1997 to $29.0 million in the year ended March 31, 1998, reflecting a
strong Asian economy during the year ended March 31, 1998.
Country Representative Compensation increased $6.0 million, or 17%, from
$35.1 million in the year ended March 31, 1997 to $41.1 million in the year
ended March 31, 1998. This increase was due primarily to the increase in the
services provided by our non-consolidated country representatives during the
period. As we added only one new country representative over the period,
effectively all of the growth in these expenses came from the growth in
payments for services provided by our existing country representatives.
Bandwidth and Related Costs increased $5.0 million, or 11%, from $43.1
million in the year ended March 31, 1997 to $48.1 million in the year ended
March 31, 1998. This network leasing cost increase was directly related to the
increased traffic on our network associated with higher usage of our services
by our clients. The usage growth reflects 16% client port growth and increased
capacity per port.
Network Operations decreased $3.6 million, or 4%, from $81.1 million, in
the year ended March 31, 1997 to $77.5 million in the year ended March 31,
1998. These expenses included network operations expense related to Government
Services of $24.0 million in the year ended March 31, 1998 and $30.7 million in
the year ended March 31, 1997. Excluding this factor, network operations would
have increased $3.1 million, or 6%, from $50.4 million in the year ended March
31, 1997 to $53.5 million in the year ended March 31, 1998. This increase was
related to the increased costs associated with our network management,
operations and support activities, including depreciation and personnel costs.
Selling, General and Administrative increased $14.5 million, or 13%, from
$115.7 million in the year ended March 31, 1997 to $130.3 million in the year
ended March 31, 1998. These expenses included selling and administrative costs
associated with GSI of $6.8 million in the year ended March 31, 1997 and $4.6
million in the year ended March 31, 1998. Excluding GSI, these expenses would
have increased $16.8 million, or 15%, from $108.9 million to $125.7 million
over the period. Our sales support expenses for multinational support
activities increased $8.3 million from $42.1 million in the year ended March
31, 1997 to $50.4 million in the year ended March 31, 1998. The increases were
directly related to revenue growth. Sales and marketing personnel and related
expenses increased $2.1 million for our business while expenses related to GSI
decreased $2.2 million, resulting in a net decrease of these expenses of
$100,000 from $54.4 million in the year ended March 31, 1997 to $54.3 million
in the year ended March 31, 1998. The decrease in GSI expense was due to a
change in business strategy and the increase in our other business expenses was
related to increased sales and marketing efforts to grow the business.
Administrative expenses increased $3.4 million from $11.4 million in the year
ended March 31, 1997 to $14.8 million in the year ended March 31, 1998, due to
changes in our management incentive program. Depreciation expenses decreased by
$400,000 from $4.8 million in the year ended March 31, 1997 to $4.4 million in
the year ended March 31, 1998. This was due primarily to increased customer
premise equipment, offset by a one time adjustment in the year ended March 31,
1997.
Operating Income (Loss) improved by $7.6 million, or 73%, from a loss of
$(10.4) million in the year ended March 31, 1997 to a loss of $(2.8) million in
the year ended March 31, 1998 due to the factors described above.
Other Income (Expense) increased from $2.7 million in the year ended
March 31, 1997 to $3.6 million in the year ended March 31, 1998. This reflects
growth in interest income of $501,000, or 49%, from $1.0 million to $1.5
million due to higher cash balances provided by the investment of the proceeds
from the sale of Government Services. In addition, Other, net increased by
$378,000 for the year ended March 31, 1998 primarily related to lower foreign
exchange losses during the period. The year ended March 31, 1998 included a
one-time pretax gain of $3.7 million related to the sale of GSI's assets.
Similarly, the year ended March 31, 1997 included a one-time pretax gain of
$3.7 million related to the sale of an Internet business in Belgium.
32
<PAGE>
Provision (Credit) for Income Taxes increased $4.6 million, from
$(175,000) in the year ended March 31, 1997 to $4.4 million in the year ended
March 31, 1998. The unusually high tax provision in the year ended March 31,
1998, was primarily due to our inability to realize tax benefits related to net
operating losses of U.S. and foreign subsidiaries.
Net Income (Loss) narrowed from $(7.5) million in the year ended March
31, 1997 to $(3.4) million in the year ended March 31, 1998 due to the factors
described above.
Liquidity and Capital Resources
Net cash provided by operating activities during the six months ended
September 30, 1999 was $2.3 million compared to $1.3 million during the six
months ended September 30, 1998. The increase in net cash provided by operating
activities was primarily the result of increased depreciation and amortization
of $5.6 million, increases of $7.9 million in accounts payable, $5.3 million in
other accrued expenses and $5.6 million in deferred income and compensation
partially offset by a $4.8 million increase in net loss for the period,
decreased income taxes payable of $6.4 million and net purchases of trading
securities of $7.9 million. Net cash used in investing activities for the six
months ended September 30, 1999 was $42.7 million compared to $4.4 million for
the six months ended September 30, 1998. The increased cash used in investing
activities in this period primarily resulted from increased spending of $37.3
million for property, equipment and communications lines and $2.0 million for
other investing activities, decreased net proceeds from short-term investments
of $6.5 million and increased net proceeds from held-to-maturity securities of
$7.6 million. Net cash provided by financing activities for the six months
ended September 30, 1999 was $71.2 million compared to $5.3 million for the
six months ended September 30, 1998. This increased cash provided by financing
activities primarily resulted from net borrowings under our long-term credit
facilities in the amount of $51.0 million and $26.7 million of cash proceeds
from the issuance of our common stock partially offset by $4.9 million of debt
issuance cost.
Net cash provided by operating activities during the year ended March 31,
1999 was $11.9 million compared to $13.0 million during the year ended March
31, 1998. The decrease in net cash provided by operating activities in 1999
resulted primarily from a $2.0 million decrease in depreciation and
amortization expense, a $7.5 million increase in deferred income tax assets and
an $11.0 million increase in accounts receivable which were substantially
offset by an increase in net income of $6.9 million, an increase of
$5.7 million in accounts payable and the absence of the $10.7 million gain from
the sale of Government Services in 1999. We expect depreciation and
amortization expense to increase in the future. Net cash used in investing
activities for 1999 was $20.7 million compared to $5.5 million for 1998. The
increase in cash used in investing activities in 1999 primarily reflects the
sale in 1998 of GSI for net proceeds of $22.0 million. Net cash provided by
financing activities for 1999 was $5.8 million compared to net cash used in
financing activities in 1998 of $14.4 million, resulting primarily from the
issuance of $16.0 million of long-term obligations in 1999.
Net cash provided by operating activities during the year ended March 31,
1998 was $13.0 million compared to $1.4 million in the year ended March 31,
1997. The increase in net cash provided by operating activities in 1998 was
primarily attributable to a decrease in net loss of $4.0 million and increases
in most operating liabilities, partially offset by the gain of $10.7 million
from the sale of Government Services in 1998. Net cash used in investing
activities for 1998 was $5.5 million compared to $4.7 million for 1997. The
increase in cash used for investing activities during this period primarily
resulted from net increased purchases of short-term investments and other
securities of $27.6 million and increased purchases of property, equipment and
communication lines of $6.4 million, partially offset by net proceeds of $22.0
million from the sale of Government Services and proceeds of $12.5 million from
sale of property, equipment and communications lines in 1998. Net cash used in
financing activities for 1998 was $14.4 million compared to net cash provided
by financing activities of approximately $13.0 million for the year ended
March 31, 1997. The increase in net cash used in financing activities in the
year ended March 31, 1998 primarily reflects the repayment of $12.0 million of
net long-term obligations issued in 1997 and the absence of $3.3 million of net
cash provided by the sale and repurchase of common stock in 1997.
33
<PAGE>
As of September 30, 1999, we had $39.2 million of cash and cash
equivalents and working capital of $35.8 million.
In May 1999, we entered into a $50.0 million bridge loan facility with
Merrill Lynch Capital Corporation. This facility provided for an interest rate
of LIBOR plus 2.5%. In August 1999, we entered into a senior secured credit
facility with a group of lenders. This $250.0 million senior secured credit
facility consists of a seven year $100.0 million Delayed Draw Term Loan, a
seven year $50.0 million Tranche B Term Loan, and a six year $100.0 million
Revolving Credit Facility. The Tranche B Term Loan was fully funded at closing
and was used to pay down in full all amounts outstanding on August 20, 1999
under the bridge loan and a $9.5 million note payable. The Delayed Draw Term
Loan was partially funded in the amount of $10.0 million at closing.
Availability under the senior secured credit facility is determined by a
number of factors including financial covenants, financial ratios and other
conditions. The term loan facilities mature in June 2006 and the revolving
credit facility matures in August 2005. Amortization and reduced availability
began September 30, 1999 pursuant to a schedule. Interest on the loans is
payable, at a variable rate based on, at our option, either the base rate or
the eurodollar rate, in each case, plus a margin. The margin for term loans
(and, prior to February 20, 2000, for revolving credit loans) is fixed by
facility and by type of loan at the rates specified in the credit agreement and
ranges from 1.50% to 2.75%. From and after February 20, 2000, the margin for
revolving credit loans varies depending on the ratio of our total indebtedness
to consolidated EBITDA and ranges from 0.50% to 2.50%. Furthermore, we are
required by February 2000 to enter into hedge agreements that fix the interest
rate on at least 50% of the outstanding term loans for a period satisfactory to
our lenders. The senior secured credit facility is secured by substantially all
of our assets and a pledge of the stock of our direct and indirect
subsidiaries, requires us to maintain certain financial covenants and places
restrictions on, among other things, the payment of dividends, the incurrence
of debt and liens, the disposition of assets, transactions with affiliates and
certain investments. Deferred financing fees related to obtaining this senior
secured credit facility and the bridge loan were approximately $4.9 million.
In June 1999, we authorized, and have subsequently issued, 47.84 million
shares of our Class B common stock to KPN, Swisscom and Telia in exchange for
access to their multinational clients and $40.0 million in cash. See
"Business--Access to Multinational Corporate Clients of KPN, Swisscom and
Telia." We expect to use the funds from this issuance for continued upgrade and
expansion of our network and for general corporate purposes.
Our principal capital expenditure requirements involve the upgrade and
expansion of The World Network through the purchase or lease of transmission
capacity and the purchase of network related equipment as well as computer
equipment, furniture and fixtures. We have funded these expenditures to date
primarily through cash from operations, borrowings under our bridge loan
facility and operating and capitalized leases. Our capital expenditures for the
year ended March 31, 1999 were approximately $11.7 million for network related
equipment, approximately $9.8 million for the purchase of transmission capacity
and approximately $5.5 million for other capital expenditures. As of March 31,
1999, we had capital lease commitments totaling approximately $8.1 million
payable in various years through 2004.
In connection with the deployment of our ATM-enabled backbone, we
estimate that we will make at least $100.0 million of capital expenditures
during the year ending March 31, 2000. We expect our capital expenditures for
the year ending March 31, 2000 to include $18.0 million for the purchase of an
indefeasible right of use of capacity in a fiberoptic submarine cable system.
In addition, we will have the option for 90 days from the date of occupancy to
purchase our new headquarters facility for approximately $33.0 million. If we
exercise this option, we may finance this purchase with proceeds of the
offering, cash from operations or a mortgage loan from a commercial lender. We
expect that our capital expenditures will be the same or higher in the year
ending March 31, 2001. These expenditures will include payments of
approximately $27.0 million for the purchase of additional submarine cable
capacity. We expect to use cash from operations together with the proceeds of
the offering and availability under the senior secured credit facility to fund
these capital
34
<PAGE>
expenditures. The exact amount of future capital expenditures will depend on a
number of factors, including availability under our senior secured credit
facility, our ability to negotiate contracts to purchase transmission capacity
at favorable prices and the demands of our multinational clients. If we have
exhausted the net proceeds of this offering and borrowings under the senior
secured credit facility are not available, we may be required to seek
additional debt or equity financing. We cannot assure you that any financing
will be available on commercially reasonable terms or at all, or that any
additional debt financing would be permitted by the terms of our existing
indebtedness.
Our ability to make scheduled payments of principal of, or to pay
interest on, our debt obligations, and our ability to refinance any debt
obligations, or to fund planned capital expenditures, will depend on our future
performance, which, to a certain extent, is subject to general economic,
financial, competitive, regulatory and other factors that are beyond our
control. Our business strategy contemplates substantial capital expenditures in
connection with the upgrade and expansion of The World Network. We believe that
cash flow from operations and the proceeds of the offering and available
borrowings under our senior secured credit facility will be sufficient to fund
our anticipated capital expenditures through the year ending March 31, 2002.
Inflation
The impact of inflation on our operations has not been significant to
date. Over the past two years, rising prices for some of our supplies have been
offset by decreasing prices for other services. In particular, our per unit
costs for leased lines and circuits has generally decreased over this period.
However, we cannot assure you that per unit costs for leased lines and circuits
will continue to decline or that a high rate of inflation in the future will
not adversely affect our operating results.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks, which arise during the normal course of
business from changes in foreign exchange rates and interest rates. A
discussion of our primary market risks associated with our foreign currency
transactions, short-term investments, and long-term debt exposure is presented
below.
Foreign Exchange Risk
We conduct our operations in more than 60 countries around the world in a
number of different currencies. There is exposure to future earnings when
foreign exchange rates change and certain receivables, payables and
intercompany transactions are denominated in foreign currencies. We monitor our
exposure to foreign currencies through our regular operating activities and
have not historically used derivatives to hedge foreign exchange risk.
We bill our country representatives in U.S. dollars and our prices are in
U.S. dollars. However, many of our country representatives derive their
revenues and incur costs in currencies other than U.S. dollars. To the extent
that the local currency used by the country representative fluctuates against
the U.S. dollar, the obligations of the country representative may increase or
decrease significantly and lead to foreign exchange losses or gains. We assume
the exchange rate risk for our consolidated country representatives, although
our non-consolidated country representatives assume the exchange rate risk
under our country representative structure. Our exposure to exchange rate
fluctuations may increase while we transition multinational clients of KPN,
Swisscom and Telia to The World Network because our receivables from these
clients and our payables to AUCS under the services agreement for services
provided to those clients will be denominated in different foreign currencies.
As of March 31, 1999 we were primarily exposed to the following
currencies: the Canadian dollar, the British pound, the Belgian franc, the
French franc, and the Spanish peseta. Based upon a hypothetical ten-percent
strengthening of the U.S. dollar across all currencies, the potential losses in
future earnings due to foreign currency exposures would have been approximately
$513,000 as of that date.
35
<PAGE>
Interest Rate Risk
We currently maintain an investment portfolio of high quality marketable
securities. According to our investment policy, we may invest in taxable
instruments including U.S. Treasury bills, obligations issued by government
agencies, certificates of deposit, commercial paper, master notes, corporate
notes and asset-backed securities. In addition, the policy establishes limits
on credit quality, maturity, issuer and type of instrument. All securities are
classified as available for sale, and recorded in the balance sheet at fair
value. Fluctuations in fair value attributable to changes in interest rates are
reported as a separate component of stockholders' equity. We do not use
derivative instruments to hedge our investment portfolio.
All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents. The remaining
short-term investments have maturities that range between three and 12 months.
The carrying amount, principal maturity and estimated fair value of our
investment portfolio and long-term debt exposure are as follows:
<TABLE>
<CAPTION>
Carrying
Amount Maturity
-------- -------------------------------------- Fair
1999 2000 2001 2002 2003 2004 Value
-------- ------ ------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Investments
Cash equivalents........ $6,354 $ -- $ -- $ -- $ -- $ -- $6,354
Weighted average
interest rate.......... 5.61% -- -- -- -- --
Short term investments.. $8,196 $ -- $ -- $ -- $ -- $ -- $8,196
Weighted average
interest rate.......... 6.40% -- -- -- -- --
Long-Term Debt
Secured bank notes...... $8,915 $1,662 $1,789 $1,925 $2,071 $1,468 $8,878
Average interest rate... 7.36% 7.36% 7.36% 7.36% 7.36% 7.36% --
</TABLE>
We have not historically used derivatives to hedge our interest rate
risk. However, under the terms of our senior secured credit facility entered
into on August 17, 1999, we will be required to enter into hedge agreements to
provide that at least 50% of the outstanding term loans are subject to fixed
interest rates.
Impact of the Year 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may recognize a date using "00" as the year 1900 rather than the year
2000. As a result, computer systems and/or software that many companies and
governmental agencies use may need to be upgraded to comply with Year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
In August 1996, we began working on our Year 2000 readiness project. As
part of the Year 2000 project, we have reviewed the Year 2000 readiness of all
of our systems, software and equipment, including our messaging systems,
billing systems and network services. Following our review, we conducted
simulation and integration tests of our systems. This testing was for the most
part completed by December 1998.
In our review and testing process we identified several critical and non-
critical systems with Year 2000 problems. To date, these systems have been
removed, replaced by compliant systems or transferred to Year 2000 compliant
environments.
We have requested that all of our key vendors, service providers and
sales channels provide us with statements of their Year 2000 readiness.
Wherever possible, our final determination as to whether these entities are
Year 2000 compliant has been based on our testing process, rather than their
responses to our requests. We
36
<PAGE>
have received responses from over two-thirds of our key vendors, service
providers and sales channels indicating that they are compliant and are
following up with those who have not yet responded.
In order to minimize the risk of operational problems due to the Year
2000 date change, we will avoid making changes to our network, services,
products and processes from the period October 1, 1999 to March 31, 2000. We
will, however, continue to support existing and new clients and make client
modifications, although we will not make structural changes such as node
migrations or formatting network modifications during this period.
To date, almost all of the work associated with our Year 2000 project has
been completed. As of September 30, 1999, we had spent approximately $1.0
million on our Year 2000 project and do not expect to incur significant
additional costs. Additionally, we have incurred capital expenditures of
approximately $2.2 million in upgrading our network to satisfy Year 2000
requirements.
We believe that the greatest risk of disruption in our businesses exists
in less developed countries. The possible consequences of us or our key
business partners not being fully Year 2000 compliant include, among other
things, temporary network closings, delays in the delivery of services, delays
in the receipt of supplies or invoices and collection errors. Based on our
assessment of these risks and after discussions with third parties, including
key vendors, service providers, country representatives and alternate sales
channel partners, we have made an evaluation of our state of readiness,
potential risks and costs, and are preparing a contingency plan. This
contingency plan is intended to prepare us for failures by these parties and
other business partners.
Our business and results of operations could be materially adversely
affected by a temporary inability to conduct our business in the ordinary
course for a period of time after January 1, 2000. Our worst case scenario is a
prolonged failure of one or more third-party entities as a result of the Year
2000 problem, resulting in a systemic failure beyond our control, such as a
prolonged Internet, telecommunications or electrical failure, which would
prevent us from delivering many of our services. We believe, however, that our
Year 2000 readiness program, including the contingency planning discussed
above, should significantly reduce the extent of any disruption. See "Risk
Factors--The Year 2000 problem could significantly disrupt our operations,
causing a decline in cash flow and revenue and other difficulties."
Recently Adopted Accounting Standards
During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended, which establishes new
standards for reporting derivative and hedging information. The standard is
effective for periods beginning after June 15, 2000 and will be adopted by us
by April 1, 2001. We have not assessed the impact that the adoption of this
standard will have on our consolidated financial position or results of
operations.
37
<PAGE>
INDUSTRY
The information provided in "Industry" regarding growth in the
communications market was obtained from Data Communications magazine. Although
we believe that this source is reliable, we cannot assure you that these
projections will prove to be correct. See "Risk Factors."
Market Opportunity
With developments in network technology, advances in communications
service offerings and the globalization of business, multinational corporations
are increasingly demanding integrated solutions for their mission-critical
global communications needs. In addition, the rapid expansion and adoption of
the public Internet is creating additional opportunities for corporations to
interact with a large number of geographically distributed offices, employees,
customers, suppliers and partners. However, the public Internet was not
designed with the reliability, consistency, response time and security required
for mission-critical applications. As a result, multinational corporations rely
on service providers to enhance the quality, reliability and security of their
data communications and to provide global access equivalent to the public
Internet. These corporations require integrated solutions that span multiple
countries, have guaranteed network availability, can deliver continuous
increases in speed and capacity and provide local service and support. The
demand for these managed data services has dramatically increased the size and
growth rate of the communications marketplace.
The size of the global communications market reached approximately $800
billion in 1998, according to the International Telecommunications Union. The
market for data communications is one of the fastest growing segments of this
market. According to Data Communications, a leading magazine covering
enterprise networking, the global data communications services market, which
includes Frame Relay, ATM, intranet services, commercial Internet services and
Web hosting, was approximately $22 billion in 1998, or 2.8% of the global
communications market and had a compound annual growth rate of 55% from 1996 to
1998. Within this market, we focus on cross-border managed data communications
services for multinational corporations.
Industry Drivers
We believe that there is an attractive opportunity for marketing managed
data communications services to multinational corporations which results from
the following factors:
. globalization of business and increased need for connecting
international locations;
. rapid expansion of Internet-based applications;
. rising importance of data communications as a service critical to a
corporation's success; and
. increased outsourcing of corporate data communications.
Globalization of business and increased need for connecting international
locations. Over the past several decades, corporations have significantly
increased the international scope of their businesses. These corporations have
opened and made direct investments in branch offices, factories, and other
local representative facilities around the globe. It is critical for these
corporations to share information accurately and expediently between their
geographically dispersed locations, as well as with travelling and
telecommuting employees. New technologies and advanced remote access
alternatives are enabling these geographically dispersed employees to connect
to corporate and public networks at greater speeds, as well as from more varied
locations.
Rapid expansion of Internet-based applications. Internet-based
applications are rapidly expanding as an important medium for global
communications and e-commerce with the potential to connect a large number of
geographically dispersed offices, employees, customers, suppliers and partners.
Internet-based applications
38
<PAGE>
have emerged as a strategic component of business, and investment in Internet
services has increased dramatically. The public Internet's lack of reliability
and security for mission-critical data communications, however, has forced many
corporations to seek assistance from service providers and data network
companies to enhance the quality of their Internet communications or to design
and implement high performance private networks.
Rising importance of data communications as a service critical to a
corporation's success. An increasing number of businesses are investing in data
networks to achieve higher levels of productivity and lower operating expenses.
Increasingly, corporate intranets, public Internet Web sites, extranets and
other managed data networks are creating competitive advantages for companies
that use them to foster internal communications, e-commerce, source supplies,
recruit new employees, communicate with customers, penetrate new market
segments and collect market information. Corporations are demanding that their
networks deliver data quickly, consistently and globally and that these
networks can be upgraded as the complexity of the applications grows and
technologies change. Corporations also require networks that operate 24-hours a
day, seven days a week, and offer application support and a broad range of
functions, such as security, remote access and reliability.
Increased outsourcing of corporate data communications. Corporations are
focusing their resources on their core competencies. Investing in resources and
personnel required to maintain in-house private corporate networks is costly
and difficult, especially given the shortage of technical talent and risk of
technological change. The ongoing expansion of multinational businesses and
developments in technology, have made it difficult for in-house solutions to
keep pace with corporate needs. Therefore, corporations have sought third
parties to provide managed data communications services. Given the costs and
difficulties involved in implementing international network solutions, we
believe that multinational corporations are even more likely to outsource their
cross-border data communications needs.
Technology Overview
The evolution of computing and data network services has had a major
impact on the ways companies function. Most multinational corporations now
depend upon the efficient transmission of information through effective
communications networks. At particular sites, organizations employ localized
data networks known as local area networks, or LANs, to connect personal
computers. These LANs can be used to promote collaborative work practices
through data and directory sharing, facilitate communications through e-mail
and voice messaging, and simplify administrative procedures through services
such as direct facsimile transmission from a desktop computer. When LANs are
connected through a larger network, commonly referred to as a wide area
network, or WAN, an organization is able to replicate the services that can be
provided by a LAN seamlessly throughout the organization's various sites,
enabling personnel in diverse locations to share information.
A WAN which is designed to connect to and provide information from
diverse locations within a corporate organization is often referred to as an
intranet. An intranet operates like the public Internet but with more
consistent performance and better security. Intranets can also be used to
transmit information to and receive information from outside an organization,
enabling a company to engage in e-commerce. When a WAN or intranet is able to
transmit and receive information from outside an organization via the public
Internet, it is often referred to as an extranet.
Data protocols enable computers to exchange information by using a
commonly understood language and set of rules. Protocols are critical in data
communications because they dictate the speed and flexibility with which data
can be exchanged between computers. The following are the most commonly used
protocols:
. X.25 is a protocol that allows dial-up or permanent access to a
network from the user's premises at low to medium speeds from 9.6 to
64 kilobits per second, or Kbps. X.25 is suitable for most lower
performance applications and for users in developing countries that
lack the communications infrastructure to deliver high speed
services;
39
<PAGE>
. Frame Relay is a wide area protocol designed for transporting data at
higher speeds of up to 2 megabits per second, or Mbps. Frame Relay is
particularly suited for users who transmit high volumes of data. As
such, Frame Relay is a cost-effective means of connecting
geographically dispersed LANs;
. ATM is a high speed protocol that is capable of very high
transmission rates, primarily 45 Mbps or greater. ATM can be deployed
both as a protocol to transport data within core networks and as a
technology that enables high volume users to access a network. Both
LANs and WANs can use ATM to support broadband services such as
voice, video and data services; and
. Internet Protocol, or IP, is the protocol used for the Internet and
on many LANs and WANs that enables efficient communications across
data networks regardless of the hardware, software and protocols
used. IP permits WANs and LANs to operate seamlessly with one another
and permits varied networking and computer platforms to exchange
information. IP standards can be used to create intranets that link
IP-based corporate networks and to create extranets to connect
corporate networks to the public Internet.
40
<PAGE>
BUSINESS
Overview
We are a leading provider of cross-border managed data communications
services to more than 1,150 corporations worldwide, including 29% of the top
500 corporations in Business Week's 1998 Global 1000. Our network, which we
refer to as The World Network, can be accessed from over 180 countries, making
it one of the world's largest data communications networks in terms of
geographic coverage. We own and operate our network, which allows us to provide
managed data services to our clients on a global basis, an advantage over
service providers that do not own an extensive global network. We sell our
services directly through our country representatives and indirectly through
major international telecommunications carriers, such as AT&T and MCI WorldCom,
and value-added resellers. Our country representatives give us a significant
local presence in more than 60 countries and strong working relationships with
leading local telecommunications providers in these countries. Our diverse
client base is comprised of multinational corporations that require cross-
border data communications services such as Allergan, Baan, Microsoft, Nestle,
Nokia, Pharmacia/Upjohn and Volkswagen.
We offer a broad range of integrated service solutions to our clients,
such as:
. Network Services--includes Frame Relay, remote access, intranet,
multimedia, Internet and IP services;
. Consulting, Integration and Provisioning Services--includes
consulting, design, and implementation; installation of leased lines
and customer premise equipment associated with the client's access to
The World Network and use of our Network Services;
. Applications Services--includes e-mail, messaging, collaboration, Web
hosting and other value-added services; and
. Other Communications Services--includes X.25 transport services,
service access fees and other communications services.
We take a consultative, applications-oriented approach to identifying
client needs and developing customized solutions. In addition, we offer a
consolidated billing, management and support system which provides a complete
solution for all the external and internal data communications services our
multinational clients require. Our approach is to integrate our full range of
services with the data communications and network operations of our clients. We
believe our ability to provide a comprehensive solution to our clients gives us
a key competitive advantage because our solutions are costly to develop and
difficult to replicate.
We own and operate The World Network, an extensive and versatile ATM-
enabled network that provides the delivery platform for our integrated,
enterprise-wide communications solutions. The World Network has approximately
11,142 ports comprised of over 6,000 IP, Frame Relay and X.25 access and
customer premise devices which are connected by over 950,000 route-kilometers
of data transmission circuits, most of which are over fiberoptic routes. This
global private network enables our clients to deploy and manage applications
effectively by combining reliability, security, high performance and a broad
range of functions using a variety of network protocols.
Our global sales and support structure, which in some countries is based
on partnerships with local telecommunications and other service providers,
gives us a strong presence in each of our markets. We believe this structure
also provides us with a competitive advantage over other data service providers
who do not have comparable levels of expertise as to local operating,
regulatory and market conditions. Our country representative structure emerged
from our historical relationships with major telecommunications companies, such
as Deutsche Telekom, France Telecom, Korea Telecom, Singapore Telecom and
Telekom Malaysia.
41
<PAGE>
We began operations in 1969 as a part of Computer Sciences Corporation,
or CSC. In a series of transactions from 1988 to 1992, CSC sold its ownership
in Infonet to a group of telecommunications companies. Our current stockholders
include six of the world's largest telecommunications companies:
. KDD--KDD Corporation (Japan);
. KPN--KPN Telecom B.V. (The Netherlands);
. Swisscom--Swisscom AG (Switzerland);
. Telefonica--Telefonica International Holding B.V. (Spain);
. Telia--Telia AB (Sweden); and
. Telstra--Telstra Corporation Limited (Australia).
Business Strategy
Our goal is to be the leading provider of global data communications
services to multinational corporations. We will continue to:
Focus on multinational clients that require data communications solutions
We will continue to focus on multinational corporations with cross-border
managed data communications needs. We believe that the rapid pace of
technological change, and the resultant complexity and cost of network
communications services, are causing large multinational corporations to
outsource their data communications services to focus on their core
competencies. Our flexible network architecture, local presence in more than 60
countries and consultative sales approach allow us to tailor our data
communications solutions to meet our clients' needs. Given the global reach of
our network, our local support services and our reputation for reliable and
innovative services, we believe we can further penetrate the market for global
data services. Between 1996 and 1998, we increased our penetration of the top
500 corporations in Business Week's Global 1000 from 21% to 29%. As part of
this strategy, we have launched a global branding program to increase awareness
of our services and the Infonet brand.
Upgrade and expand our global network
We intend to invest significant capital resources to upgrade and expand
further The World Network to maintain our competitive advantage. Currently, the
majority of our backbone is comprised of circuits leased on a short-term basis.
We are in the process of making significant purchases of transmission capacity
on major terrestrial and undersea routes. We believe that these investments
will enable us to exploit economies of scale associated with high volume
transmission capacity and better meet our clients' requirements for higher
speed connections. Also, as part of this strategy, we are currently expanding
the deployment of ATM backbone switches that will connect our core network
nodes around the world. We believe this ATM-enabled network will provide
greater capacity and improved functionality. We expect to use our ATM-enabled
network as a platform to offer a broader range of value-added services that
combine voice, video and data.
Develop innovative, value-added solutions
We are continually developing new solutions to meet our clients' rapidly
changing needs due to technological advances and the globalization of their
businesses. For example, we were the first to offer multiple levels of Frame
Relay service to our clients, providing them the flexibility to manage
standard, as well as mission-critical operations effectively through one
service. In 1998, we were awarded the Data Communications magazine "Hot Product
of the Year" award for our Frame Relay service, marking the sixth time in seven
years we have won this award for innovative services. With the expansion of our
ATM backbone we will begin to offer to our clients a broader range of
innovative, value-added services, including voice, video and data. We intend to
continue developing these services to allow us to derive additional revenue
from our existing client base and to attract new clients.
42
<PAGE>
Strengthen our sales and customer support structure
Our country representatives play a major role in the sales and marketing,
local client support and implementation of our services on a global basis. Our
country representative strategy has allowed us to expand geographically without
the related financial and managerial costs associated with building large
numbers of wholly-owned multinational sales and support operations. We are
constantly evaluating new opportunities to expand our sales channels through
the addition of new country representatives and alternate sales channel
partners. In the last three years, we have expanded into seven new countries
and have added 11 new alternate sales channel partners. Our strategy is to
capitalize on the strength of our country representatives and alternate sales
channel partners to build market share among multinational corporations.
Provide the highest level of quality, security and reliability for our
services
We are committed to maintaining the highest level of quality, security
and reliability in delivering data communications services over our network.
Using our network management tools and systems, we are able to proactively
monitor our global network operations and respond quickly to client problems,
24-hours a day, seven days a week. We consistently meet or exceed our 99.7%
quality standard, reflecting our guarantee of network availability. In
addition, we support our clients through our extensive local operations. To
ensure this quality, we continue to make investments in client service and
support, and continually evaluate our performance in order to retain our valued
clients. We also continually hire and train experienced and technically
sophisticated network support and services personnel. We are committed to
adhering to these quality standards, in part by maintaining our ISO 9001
certification.
Our Service Solutions
We provide services to meet clients' global data communications needs. We
offer clients either individual services that they can use as part of their own
networks or more integrated solutions that combine several of our services.
Examples of how our services and solutions meet our clients' needs include:
. For one of the world's oldest and largest luxury hotel companies, we
connect the reservation systems of 300 hotels in 66 countries;
. For a global health care company, we manage data communications
between 40 offices, 4,500 desktop computers and 6,000 employees
around the world;
. For a major European commercial bank, we provide managed data
communications services to branch offices in 66 cities located in
Europe and Asia; and
. For a German freight services company, we connect offices in 40
countries and integrate their different e-mail and messaging systems.
Our services are organized into four categories: Network Services;
Consulting Integration and Provisioning Services; Application Services; and
Other Communications Services.
Network Services
We offer multinational corporations and our sales channel partners
private managed data services. Our clients use these services to manage
information among their worldwide locations. For example, manufacturing
companies use our services to integrate production and inventory schedules,
technology companies use our services to transmit design files and financial
institutions use our services to connect their trading desks. Typically,
clients employ these services to transmit information that is critical to their
daily operations. Within Network Services, we offer Frame Relay, ATM, Private
Internet, Global Internet, MultiMedia and Remote Access.
Frame Relay Services. Our Global Frame Relay service is the largest
component of our Network Services. We offer three levels of Frame Relay service
to meet the specific performance characteristics of our
43
<PAGE>
clients' applications. A premium level Frame Relay service is available for our
clients' mission-critical, interactive applications requiring the highest level
of performance and network availability. For example, clients use this service
to enhance the performance of and maximize their investment in enterprise
resource planning software. Clients use our second level Frame Relay service
for multi-protocol applications with less stringent response time requirements
such as remote printing, intranet browsing, collaborative software and large
file transfers. Our third level Frame Relay service is most suitable for
clients using applications with lower performance requirements which are less
sensitive to longer response times such as Internet browsing, e-mail and small
file transfers.
ATM Services. We are in the process of commercializing our ATM service.
More advanced than Frame Relay and X.25 technology, ATM enables us to address
the rapidly emerging requirements for high speed integrated voice, video and
data services, as well as the delivery of bandwidth-intensive applications,
such as video conferencing and advanced voice, video and data services.
Private Internet Services. As part of our Network Services, we offer our
clients a private Internet solution. Our Private Internet Services use IP to
provide corporate networks functionality similar to the public Internet but
with the performance characteristics of The World Network. This means that
clients can effectively run mission-critical applications using cost effective
Internet development tools on our high performance private network. Our Private
Internet Services are ideal for corporations seeking to establish extranets or
to engage in e-commerce.
Global Internet Services. Global Internet Services provide dedicated and
dial-up connectivity to the public Internet. We offer our multinational clients
dedicated and dial-up public Internet access from our locations through a
series of peering agreements and transit relationships with other global ISPs.
This service is attractive because clients can deal with a single provider
instead of a different ISP in each country. We provide a completely managed
service with local support, network management and 24-hour operations. We also
produce one consolidated invoice for all services.
MultiMedia Services. We provide high quality voice services, referred to
as our MultiMedia Services, which can be used independently or in combination
with our managed data services. We deliver high quality, cost-effective voice
services by using a technology that we developed with Nortel. We can easily add
office-to-office voice communications for clients that are using our managed
data services by connecting their voice telecommunications systems to The World
Network. We can also offer single-site companies such as shippers,
importers/exporters and telemarketers connections to the local public
telecommunications network. We can offer all of these voice services on a
single global invoice with location and call detail as well as customized dial-
plan capability. We expect to expand our MultiMedia Services to include video
services in the future.
Remote Access Services. We offer our clients a variety of remote access
services on a wireline and wireless basis. Our remote access services provide
our clients' employees, who are travelling or who are located remotely, with
access to the same network applications that would be available if they were at
their primary office. Using our services, applications such as enterprise
resource planning, file sharing, Internet access and e-mail are accessible with
higher levels of security and performance than would normally be provided by
accessing these networks via the public Internet. We contract with one of the
industry's leading suppliers of enhanced security products to offer these
security products to provide greater security than traditional password
systems. As a result, our remote access service provides connectivity for
"virtual offices" anywhere in the world, quickly, securely and cost
effectively. We provide dial-up connectivity through The World Network to
insure secure access for our clients' employees, business partners and
customers. We also provide worldwide virtual private network connectivity for
remote offices and LANs that support small office/home office, business
partner/client support networks and basic Internet access requirements. We can
offer this service through telecommuters' home computers, through toll free
dial-up service or via mobile phones connecting to our network via the local
public telecommunications network or via access methods appropriate to wireless
data telephony.
44
<PAGE>
Consulting, Integration and Provisioning
We offer integration, provisioning and implementation services to our
clients to implement the "last-mile" part of the solution. Our country
representatives provide the on-the-ground support and local implementation
necessary to deliver these services on a global basis. As part of the
integrated solution, the country representatives provision leased lines to
connect our clients' sites to The World Network. In addition, they procure,
install and maintain the appropriate customer premises equipment. We believe
few other global data communications service providers can provide these
localized services on a global scale and our local presence is a significant
competitive advantage. As part of the comprehensive solutions we offer, we also
provide consulting services to assist our clients in integrating our data
communications services into their operations.
Application Services
Our Application Services include messaging and collaboration services
that provide an attractive alternative for businesses that prefer to outsource
all of their "non-core" business messaging activities. We provide three types
of messaging and collaboration services. First, we host e-mail services for our
clients using Microsoft Exchange and Lotus Notes software. Our e-mail hosting
activities include management of the client servers, software support and
service, and e-mail translations to telex and fax. Second, we have developed a
proprietary global unified messaging and collaboration service and software
solution called MailMail. MailMail enables voicemail, fax, telex, paging and e-
mail messages to be aggregated and forwarded to a single e-mail location,
accessible via the public Internet. We offer MailMail as an alternate
enterprise wide e-mail service to our multinational clients, and we license it
to other ISPs. Third, our X.400 service enables our clients to exchange
information between different e-mail systems in a seamless and secure manner.
We offer hosting of Web sites, referred to as Web hosting services, to
clients who wish to outsource their Web sites and other Internet applications.
We run clients' servers for them at an operations center with high bandwidth
Internet connectivity, redundant power and disaster recovery provisioning. We
can connect hosting centers to the clients' private network, and we also offer
firewall and security services.
Other Communications Services
Our highly reliable, widely available and cost-efficient X.25 service is
typically used for lower performance applications requiring secure
connectivity. X.25 is a widely deployed and proven technology frequently used
in developing countries where high speed transmission capacity is not
available.
Global Network Management/Local Support
The World Network is the physical platform across which we deliver all of
our services. Our Global Network Management/Local Support infrastructure is the
combination of support, billing, management and personnel, which allows us to
offer our solutions seamlessly throughout the world.
We deliver our services through an infrastructure comprised of
technology, connectivity, tools, processes and personnel. We provide seamless
global performance through our network of nodes, switches, circuits and
terminating devices, combined with the management systems and processes for
change, configuration, security, billing and accounting. Changes, upgrades and
enhancements to our network are possible given our common information,
management and tracking infrastructure.
We develop client solutions through a collaborative effort among the
country representatives responsible for serving each client location. To ensure
the quality of the solution provided, an experienced global project management
team overseas the deployment of the client solution, using a highly-developed
set of systems, processes and infrastructure, which have been developed, tested
and improved over the last 30 years. After installation, our integrated global
billing system allows clients to receive a single invoice for all services.
45
<PAGE>
We believe the time and capital required to duplicate our global capabilities
provides us with a significant competitive advantage.
Development of Innovative Services
We are recognized in the industry as an innovative developer of products
and services. For example, Data Communications, a leading magazine covering
enterprise networking, has repeatedly recognized our achievements. In January
1998, it awarded us a "Hot Product of the Year" award for our innovative Frame
Relay technology. This marked the sixth time in seven years that an Infonet
service earned this distinguished award. In addition, we released multiple
levels of Frame Relay service in 1998 and IP service in 1991, in each case,
more than one year before our competitors. Designing solutions for our clients
keeps us closely involved with new market requirements, the most promising of
which are added to our ongoing service development programs.
Client Base
We have more than 1,150 multinational clients which typically have
between 15 and 25 locations and are diversified across both industry groups and
geographic regions. We provide our services to many of the world's largest
multinationals including Allergan, Baan, Microsoft, Nestle, Nokia,
Pharmacia/Upjohn and Volkswagen. Our 29% share of the top 500 corporations in
Business Week's 1998 Global 1000, an annual list of the world's largest
corporations, is evidence of the central role that we play in the global data
communications industry. No single client comprised more than 2% of our
revenues in fiscal year 1999.
A substantial portion of our revenues are under contract for one to three
years. The act of switching service providers not only has the potential to
compromise the security and performance of the client's network, but also
presents a significant inconvenience, particularly to larger clients using a
number of our services. Therefore, we believe that our larger clients typically
are reluctant to terminate their contracts with us.
Country Representatives
Our country representative structure gives us global reach and strong
local presence in the countries in which we operate. The country representative
structure emerged from our historical relationship with major
telecommunications companies, such as Deutsche Telekom, Embratel (Brazil),
France Telecom, Korea Telecom, Singapore Telecom and Telekom Malaysia. We have
enjoyed strong relationships with our 56 country representatives. A total of 14
country representatives have been with us for more than ten years and 29 have
been with us for more than five years.
Our consolidated country representatives consist of nine separate country
representatives that provide service in 14 countries. Our consolidated country
representatives accounted for approximately $152.4 million of our revenues in
fiscal year 1999, representing about 50% of total revenues. In addition to our
consolidated country representatives, we have 47 non-consolidated country
representatives which, together with our consolidated country representatives,
provide service in more than 60 countries. In the aggregate, our country
representatives accounted for approximately 90% of our revenues in fiscal year
1999.
We are the principal service provider to our clients and control the
delivery of all services to them on an end-to-end basis. We centrally control
and configure our network and rely on our country representatives to deliver
our services and maintain The World Network locally. We rely on our country
representatives for insights into local operating, regulatory and market
conditions. They are involved in sales and marketing, operations, network
management and client support. Depending on the geographic location and needs
of a client, country representatives from different countries will collaborate
with each other when making sales presentations. Country representatives manage
accounts on a daily basis and are the first point of contact for clients,
generally providing service in the local language. To minimize our regulatory
hurdles, each country representative is a party to a legal contract with the
client. Once a new client has signed a contract, we
46
<PAGE>
configure the network for the service and coordinate with other country
representatives to implement the solution for the client. Our country
representatives take a lead role in implementing the last-mile part of the
solution by provisioning leased lines and installing equipment at the client
site. In addition, the country representatives provide local support for our
services, operating our local network nodes and, in some cases, housing and
operating components of the infrastructure for specific services on our behalf.
Governance and Controls
We have service agreements with all of our country representatives that
govern our relationships. The agreements are generally non-exclusive and are
essentially the same for all country representatives and generally have five
year terms. These agreements provide the country representatives with:
. the right to market and sell our services;
. the right to use our trademarks and service marks;
. access to operational and marketing documentation; and
. training materials and sessions.
The agreements give us:
. the right to recommend prices;
. the right to jointly set revenue targets with the country
representatives;
. the ability to terminate the agreement if the country representative
fails to meet the revenue targets or if targets cannot be agreed upon
for two consecutive years;
. the ability to determine staffing of the local office jointly with
the country representatives; and
. in many cases, the right to appoint one of the three members of the
Advisory Review Board, which governs the relationship between us and
the country representative.
The agreements outline the fees that the country representatives are
required to pay us for access to our network. In addition, the agreements
outline our compensation and pricing arrangements with the country
representatives.
The World Network
Overview
We own and operate The World Network, one of the world's largest
commercial global data networks in terms of geographic coverage accessible from
over 180 countries. Our network supports several major protocols that allow us
to offer a broad range of services. Our network structure allows us to respond
quickly to our clients' changing needs for increased bandwidth, reliability and
security while enabling us to manage data traffic patterns efficiently. Because
we manage our network on an end-to-end basis, we are better able to control and
customize the services delivered to our clients. The World Network has 11,977
ports comprised of over 6,000 IP, Frame Relay and X.25 access and customer
premise devices which are connected by over 950,000 route-kilometers of data
transmission circuits, most of which are over fiberoptic routes.
47
<PAGE>
The World Network is based upon a three-tier hierarchical structure which
we believe provides a competitive advantage because it allows for efficient
traffic management, higher performance and reduced cost. This three-tiered
hierarchical structure is comprised of Global Switching Nodes, Regional
Switching/Access Nodes and Local Access Nodes as diagrammed below:
[Diagram of Tiered Node Structure Appears Here]
Global Switching Nodes: We use our Global Switching Nodes cost
effectively to aggregate and distribute interregional network traffic flows.
Equipped with FORE Systems' high capacity ATM switches, these Global Switching
Nodes are capable of accepting multiple channel inputs of data in excess of 45
Mbps. Our Global Switching Nodes are connected by fiberoptic transmission
capacity and are currently located in the following ten locations: Amsterdam,
Dallas, Kuala Lumpur, London, London-Docklands, Los Angeles, New Jersey, New
York, Stockholm and Tokyo. We plan to add more additional Global Switching
Nodes to further expand and enhance our ATM-enabled network around the world
and to increase our transmission capacity to as high as 2.5 gigabits per
second, or Gbps.
Regional Switching/Access Nodes: We use our Regional Switching/Access
Nodes to aggregate regional traffic and provide access to The World Network for
clients with bandwidth-intensive applications. These nodes are equipped with
Nortel Passport switches and Cisco hub and access routers. The Nortel Passport
switches provide Frame Relay capability as well as high capacity access (at
speeds of 2 Mbps to 45 Mbps) to the Global Switching Nodes through our
backbone. The Cisco hub and access routers provide high capacity
48
<PAGE>
local access for our clients and aggregation services for regional IP traffic.
The Cisco hub routers can also use the Nortel Passport switches for connection
to the Global Switching Nodes to exchange data interregionally. Our 114
Regional Switching/Access Nodes are located in 48 countries around the world.
Local Access Nodes: Our Local Access Nodes connect clients to The World
Network at speeds generally less than 2 Mbps. These nodes enable our clients to
connect to and use IP, X.25 and Frame Relay applications through dedicated and
dial-up access. The Local Access Nodes are equipped with Cisco access routers,
Nortel and Siemens X.25 devices and Ascend Dial Access devices. The Cisco
routers provide dedicated IP access, the Nortel and Siemens devices provide
dedicated access using X.25 and the Ascend devices provide dial-up access.
Local access is available in 125 locations in over 60 countries. We are also
able to extend our network reach to countries where the communications
infrastructure is not available by using satellite services, which are
integrated as part of The World Network.
Local Access
Clients can access The World Network either directly using a dedicated
line or through dial-up services by connecting through Local Access Nodes,
Regional Switching/Access Nodes, or via our interconnection with the national
data network of our local telecommunications partners. A country representative
arranges dedicated access through a leased line or via the national data
network of the local telecommunications partner. Dial-up services offer local
and remote access to The World Network through the local public
telecommunications network. We plan to offer additional access methods and
adapt them to our backbone for increased efficiency. Among those services
planned or under review for clients that require higher speed access are ATM,
digital subscriber line or DSL, and broadband wireless remote access. In remote
locations clients can access The World Network via satellite services. Clients
can choose to have us manage their entire provisioning and support at and
between each client location.
Backbone Capacity
Our backbone connects all nodes on The World Network. Traditionally, we
have obtained backbone capacity from major telecommunications carriers through
short-term leases. We have begun, and expect to continue, to purchase capacity
on major international and regional routes where it is economical to do so and
where capacity is available for purchase or long-term lease. We intend to
invest significant capital resources to expand and upgrade our network in order
to maintain our competitive advantage. We are currently in discussions with
several suppliers of terrestrial and intercontinental undersea cable. In
collaboration with Hughes Electronics, we are also using satellite technology
as a fill-in strategy to provide satellite links to The World Network where
terrestrial connections or alternative paths for specific high availability
applications may not be available. We increased our network capacity by more
than 500% in 1999, and we expect to continue to expand capacity as our clients
require.
Network Protocols
Our network strategy is to support a wide range of managed data
communications services over a common infrastructure. As such, our global
network infrastructure supports a variety of protocols including X.25, Frame
Relay, IP and ATM. Our existing Frame Relay network is the basis for our
delivery of seamless managed data communications services on a worldwide basis.
Moreover, by using Frame Relay technology we are able to capitalize efficiently
on The World Network's bandwidth to transport a variety of data traffic. We are
implementing the new industry-standard IP versions and extensions to
differentiate our network from other competitive networks. We intend to
introduce IP Version 6 into the network as it becomes commercially available
and is accepted.
Our ATM-enabled network is able to support broadband services that
require asynchronous networking capabilities (for example, video services), as
well as provide transport for aggregated data between our Regional
Switching/Access Nodes and our Global Switching Nodes. We believe our ATM-
enabled network will be the transport platform for our managed data
communications services in the future. We expect our ATM-enabled network will
allow for the efficient and high-speed transport of voice, video and data
traffic over
49
<PAGE>
a single network. This capability will not only enable us to further leverage
our network assets, but also allow us to capitalize on the demand for
anticipated new service offerings that combine voice, video and data.
Furthermore, as client demand for additional bandwidth, faster transmission
speeds and enhanced service quality increases for applications such as desktop
videoconferencing, we believe our investment in ATM technology will position us
as a leading provider of these services.
Network Management
We manage our network and monitor its operation 24-hours a day, seven
days a week through two network control centers located in Los Angeles and
Brussels and three global customer assistance centers in Los Angeles, London
and Tokyo. The customer support operations consist of multilingual,
technologically experienced staff in over 60 countries.
Our network management infrastructure is an integral component of the
seamless delivery and management of our suite of services. We proactively
monitor the "real-time" status of over 10,000 network components that provide
performance feedback on a daily basis. Consistent information is available to
all global support entities using trouble tracking services, network alerts and
alarms, change configuration and security management processes. We continue to
enhance these capabilities by adding automation tools and providing on-going
training.
Network Security
We have built and maintain an advanced security and control structure.
Because we manage our global network from end-to-end, we maintain central
control of network access, operations and maintenance. We protect our network
through various means including firewalls, intrusion detection platforms,
network address translation, filtering, and network architecture structures, as
well as various dedicated network and remote access authentication processes.
Backup Network Control Centers and Nodes
We also have backup network control centers in Sacramento, California and
Chantilly, Virginia, which we created to assume network control center
operations in the event of a disaster or similar emergency. In addition, in
order to lower the potential exposure from major failures or disasters
affecting a node, we have implemented second nodes capable of assuming the
traffic of our primary nodes. The fiber connections in the area and, where
feasible, client access lines are split between the two nodes. Thus, transit
traffic through a city can continue to flow in the event of a major failure or
disaster affecting one of the nodes. We have implemented second nodes in the
London-Docklands, Los Angeles, New York, New Jersey, San Francisco and
Sacramento metropolitan areas.
Circuit Diversity
Nodes are connected with other nodes with at least two redundant
connections, so that no single connection failure will result in the isolation
of the node. The failure of a connection results in the automatic rerouting of
traffic to one or more alternate network paths. In the event of a node outage,
transit traffic is automatically rerouted to paths around the failed node. In
addition, we have, over our operating history, sought to ensure that our
circuits are, as much as possible, diversely routed so that a major failure by
a carrier in a given route does not result in a total network outage to our
clients.
Disaster Recovery
Under our Disaster Recovery Plan, we distribute our critical operations
over two to three global regions which constantly share information with one
another. These network control centers and customer
50
<PAGE>
assistance centers are essentially self-contained units located in diverse
geographic regions, and thus provide natural disaster backup for each other as
described below:
. Network Control Centers in Los Angeles and Brussels;
. Global Customer Assistance Centers in Los Angeles, London and Tokyo;
. Second Level Customer Assistance in Los Angeles, Brussels and Tokyo;
and
. Third Level Customer Assistance in Los Angeles and Brussels.
Within the backbone, we have attempted to minimize the risk of node
outages by placing our nodes in highly secure facilities, and by requiring dual
cable entrances, diversely routed circuits and uninterruptable power supplies.
However, clients who need quick recovery from disasters or failures affecting a
node can supplement their service with our Failure Recovery Service option,
which provides access to an alternate Infonet node via a leased line, dial-up
access backup or satellite services. We provide this service on an automatic or
manual backup basis.
Quality Standards
We perform ongoing quality system audits and conduct client satisfaction
surveys. As a result, we receive constant performance feedback to ensure that
our quality systems meet client needs and our guarantee of 99.7% network
availability. We have been awarded ISO 9001 certification for several of our
services.
Sales and Marketing
Direct Sales Channels
Our country representatives are responsible for all of our sales
activities in their respective territories. Each country representative
maintains a sales force which directly calls on clients, coordinates the
contract signing process and manages accounts on a daily basis. We begin our
sales process by working with the client to gain an understanding of its
business needs so we can tailor a solution to meet its specific requirements.
The sales force for each country representative applies its knowledge of the
local operating, regulatory and market conditions to market our service
offerings effectively to best meet the needs of the local client base. In
addition, we provide centralized sales and marketing support for our country
representatives. We conduct sales training centrally and within each sales
region and use computerized training to reinforce classroom training. Direct
sales channels accounted for approximately 90% of our revenues in the year
ended March 31, 1999.
Alternate Sales Channels
Our global alternate sales structure is typically comprised of major
telecommunications companies and other value-added resellers. These sales
channel partners sell all or a portion of our suite of services in their
territories to clients that require one or more of our global network
communications services that the sales channel partners cannot supply
independently. Our sales channel partners often market these services under
their own brand names. We act as the "carrier's carrier" and/or as the product
development resource, providing global services to meet the sales channel
partners' specific needs. Multi-year contracts govern these relationships.
Alternate sales channels accounted for approximately 10% of our revenues in the
year ended March 31, 1999. The following are examples of our alternate sales
channel relationships:
. AT&T offers our services outside the U.S. to its U.S.-based clients.
AT&T also offers global access to the AT&T InterSpan Frame Relay
service using our Frame Relay dial-up and dedicated connectivity;
. MCI WorldCom has an agreement that allows it to offer global services
to its U.S. customers in those countries where MCI WorldCom has no
coverage; and
. Telstra, one of our stockholders and a leading telecommunications
provider, has entered into an agreement with us which allows it to
extend its global reach beyond Australia through The World Network.
51
<PAGE>
Promotion and Advertising
We recognize that strong brand development and awareness is crucial in
obtaining and maintaining market share. Our promotional and advertising
programs include participation in business seminars and information technology
information/training sessions as well as advertising in selected network
computer publications.
In 1999, we began a new global campaign to increase awareness of the
Infonet brand name and our service offerings. This campaign includes increased
spending on direct advertising, advertising in airports, major U.S. and
European newspapers, business magazines, trade magazines and inflight
magazines, as well as participation in trade shows and Internet marketing
campaigns.
Access to Multinational Corporate Clients of KPN, Swisscom and Telia
In our ongoing efforts to sell our services to multinational
corporations, on September 30, 1999, we entered into agreements with AUCS
Communications Services N.V., Unisource, the owner of AUCS, and the three
companies that own Unisource, KPN, Swisscom and Telia. KPN, Swisscom and Telia
are also our stockholders. See "Principal and Selling Stockholders."
Our agreements with KPN, Swisscom and Telia will give us access to their
approximately 1,300 multinational corporate clients currently being served by
AUCS as well as additional multinational clients to which KPN, Swisscom and
Telia may provide services in the future. We believe these agreements will
increase the number of multinational corporate clients to which we may offer
our services. In exchange for the right to market our services to their clients
and $40.0 million in cash, we have issued an aggregate of 47.84 million shares
of our Class B common stock to KPN, Swisscom and Telia under stock purchase
agreements.
These multinational clients represented approximately 50% of AUCS
revenues over the past two years. We understand that no single multinational
client accounted for more than approximately 3% of AUCS revenues in 1998 and
that the top ten multinational clients accounted for approximately 15% of AUCS
revenues in 1998. Based on publicly available information, AUCS total
consolidated revenues for the 1998 calendar year were 875 million guilders, or
approximately $441 million according to the exchange rate on October 1, 1999.
AUCS total revenues include amounts derived from AT&T customers serviced by
AUCS, but we will not obtain access to these clients. In addition, AUCS
revenues include voice and other services that we provide on a limited basis or
not at all. Because it is not possible to predict the multinational clients'
future needs, the multinational clients' contribution to AUCS total revenue is
not indicative of any contribution they may make to our revenues.
We have assumed the obligation to provide the multinational clients with
the services currently provided to them by AUCS under the terms of an agreement
that assigns existing distribution agreements to us. We also intend to sell
these multinational clients our services as a supplement or replacement for
services previously provided by AUCS and, over time, we expect to transition
the multinational clients onto The World Network. During the transition period,
we will continue to use the AUCS platform to deliver all or some of the
services provided to the multinational clients, which for convenience we refer
to as the AUCS services.
We will obtain the AUCS services to be provided to the multinational
clients under the terms of a services agreement with AUCS, which is based on
our standard services agreement. The pricing of the AUCS services provides us
with an agreed-upon approximately 20% gross margin on the provision of these
services. The services agreement is terminable upon 180 days' notice by any
party.
We also entered into a call option for the underlying tangible assets of
AUCS. Until September 2002, the option allows us to purchase any and all of the
AUCS tangible assets at fair market value not to exceed $130 million. The call
right allows us to purchase the assets of AUCS so that we can continue to offer
the AUCS services to our clients if the services agreement is terminated. The
call option may be subject to regulatory approval and is conditioned upon AUCS
ability to continue to fulfill its contractual obligations to third parties.
52
<PAGE>
While we will attempt to transition the multinational clients to The
World Network as soon as possible, we expect the transition will be implemented
over a period of 12 to 18 months. Since we already have The World Network, an
existing sales and marketing force and other elements necessary to service
these multinational clients, we believe our infrastructure will be sufficient
to transition these clients. We have not purchased any assets from AUCS, and we
will not obtain the right to use the AUCS sales force or employees.
The percentage of total revenues from the multinational clients
attributable to AUCS services and to our services is expected to vary depending
on the degree of the transition's success and the time necessary to transition
the multinational clients to The World Network. If the transition is not
effected quickly, the revenues attributable to AUCS services will remain a
larger percentage of our total revenues from the multinational clients than
that attributable to our services. As the transition is completed, and assuming
that the multinational clients continue as our clients after the transition,
the percentage of our total revenues attributable to our services, as compared
to that attributable to AUCS services, will correspondingly increase. Since the
multinational clients have no obligation to use our services, we cannot assure
you that all of the multinational clients will transition to our network, that
the multinational clients which do transition to our network will continue to
purchase our services or, if they continue to use our services after the
transition, that the multinational clients will purchase as many or more
services from us than they did from AUCS.
AUCS Management Agreement
We also entered into a three-year management agreement with AUCS on
September 30, 1999. For our management services, we will receive a quarterly
management fee equal to 1.5% of the total consolidated revenues of AUCS, up to
an aggregate maximum of (Euro)17.1 million, or $18.3 million as of October 7,
1999, over the term of the agreement. In addition, we will receive an incentive
payment equal to 100% of the amount by which the cumulative sum of AUCS EBITDA
losses during the initial three-year term is less than approximately
(Euro)295.3 million, or $316.9 million, or we must rebate to AUCS 25% of the
aggregate amount by which the cumulative sum of AUCS EBITDA losses during the
initial three-year term exceeds (Euro)295.3 million, or $316.9 million, subject
to a cap equal to the aggregate management fee. AUCS owner, Unisource, has the
right to terminate the agreement on 180 days' notice generally and 30 days'
notice if the cumulative EBITDA losses of AUCS exceed approximately
(Euro)368.3 million or $395.2 million during the three-year term of the
management agreement. From its formation in 1996 to December 31, 1998, AUCS
cumulative EBITDA losses were approximately $409 million. While we expect that
our management will improve the performance of AUCS during the three-year term
of the management agreement, we cannot assure you that AUCS losses
will decrease, that we will receive any incentive fee or that we will not have
to rebate all or part of our management fee.
Industry Participants and Competition
The growth and potential size of the data communications industry has
attracted many new entrants as well as existing businesses from several
industries. Current and prospective industry participants include multinational
alliances, long distance and local telecommunications providers, systems
integrators, cable television and satellite communications companies, software
and hardware vendors, wireless telecommunications providers and national, local
and regional ISPs. In addition, we expect that the predicted growth of the data
communications market will attract other established companies and
multinational alliances. Further, there are established and start-up companies
building global networks and beginning to offer data communications as part of
a comprehensive communications services portfolio. Our competitors include
AT&T, BT, Equant, GlobalOne and MCI WorldCom and new entrants such as Global
Crossing and Qwest. We compete in highly fragmented markets. Most participants
specialize in specific segments of the market, such as access and/or backbone
provision, managed access, such as intranets and extranets, application
services such as Web hosting; security services, and communication services,
such as IP-based voice, fax and video services and commercial e-mail. Many of
these existing and potential competitors have greater financial resources than
we do.
53
<PAGE>
We believe that competition in the data communication market is mainly a
function of the ability to offer a broad variety of innovative services
available on a reliable network supported by an effective service organization.
We believe that the key factors to our competitive position in this market are:
. our global reach;
. our full range of value-added services;
. the reliability of our extensive global network; and
. our extensive country representative structure and the support it
provides to our clients.
Employees
As of September 30, 1999, including our consolidated country
representatives, we had a total of approximately 857 employees, 227 of which
are located internationally. There are approximately 456 additional dedicated
Infonet personnel who are employed by our non-consolidated country
representatives, all of whom are based internationally. We have not experienced
any work stoppages and consider our relations with employees to be good. None
of our employees is represented by a labor union.
Facilities
Our principal offices currently occupy over 107,000 square feet in El
Segundo, California pursuant to a long term lease which expires in November
1999 and then continues on a month-to-month basis at our option. We have
entered into a lease for approximately 150,000 square feet of new office space
in an adjacent building currently under construction. This new building is
being constructed to our specifications and is expected to be completed in
December 1999. We have a 90-day option beginning on November 19, 1999 to
purchase the building for approximately $33.0 million. Any purchase would be
funded from general corporate funds and may be augmented by a mortgage. Once
complete, this new building will also house our Los Angeles Network Control
Center.
In addition, we lease sales offices domestically and internationally in a
variety of locations. These leases generally have terms of three to five years.
None of these offices is critical to our success, and we believe that suitable
additional or alternative space is available on commercially reasonable terms
as needed.
We also lease facilities for our network control centers, global customer
assistance centers and engineering offices around the world. We lease these
facilities at commercial rates under standard commercial leases. We believe
that suitable space for these operations is generally available on commercially
reasonable terms as needed.
Legal Proceedings
From time to time, we may be involved in litigation that arises in the
normal course of our business operations. As of the date of this prospectus, we
are not a party to any litigation that we believe could reasonably be expected
to have a material adverse effect on our business, financial condition or
results of operations and we have not been involved in any litigation of that
kind in the past three years.
Regulation in the United States
Overview
We operate as an unregulated provider of information services, as that
term is defined in the Communications Act of 1934, as amended, and as an
enhanced service provider, as that term is defined in the Federal
Communications Commission ("FCC") rules. The FCC currently does not regulate
the data communications systems we operate in the United States because our
special services features enhance the basic data transmission facilities
offered to clients by connecting them to data switches or processors. These
networks generally are referred to as value-added networks and are targeted to
the data transfer requirements of
54
<PAGE>
the specific clients. The FCC also does not regulate value-added services such
as voicemail, facsimile, database access, storage and retrieval services,
store-and-forward messaging services, network management services, and Internet
access, which are not encompassed in the FCC's definition of "basic
telecommunications services" and which we refer to as enhanced services.
Collectively, these services are classified for regulatory purposes as
"information services." In most foreign jurisdictions we operate as a value-
added network provider. Our operations currently are not regulated by the FCC,
the states or the governments in the other countries where we operate. Although
we do not operate as a common carrier, we hold authorizations to provide
international services in some countries on a common carrier basis. We have
obtained common carrier authorizations only in those countries in which such
authorizations are useful in securing more favorable terms in our capacity or
facilities leases or interconnection arrangements. These authorizations require
us to comply with specified regulatory filing and reporting requirements. To
the extent that we begin to offer regulated telecommunications services as a
common carrier, we will become subject to additional rules and policies.
Various existing U.S. federal and state regulations are currently the
subject of judicial proceedings, legislative hearings and administrative
proposals which could change, in varying degrees, the manner in which the
telecommunications industry operates. In addition, some foreign governments are
actively considering regulation of some of the services we offer. We cannot
predict the outcome of these proceedings, or the impact they may have on the
telecommunications or information services industries generally, or on us
particularly. In addition, we cannot assure you that future legislative,
regulatory or judicial changes in the United States or in other countries in
which we operate will not have a material adverse impact on our business.
FCC Policy on Enhanced Services
In 1980, the FCC created a distinction between "basic" services, which it
regulates as common carrier services, and enhanced services, which remain
unregulated. The FCC exempted enhanced service providers from federal
regulations governing common carriers, including the obligation to pay access
charges and contribute to universal service. The Telecommunications Act of 1996
established a similar distinction between "telecommunications services" and
"information services." Changing technology and changing market conditions,
however, have made it increasingly difficult to discern the boundary between
unregulated and regulated services.
In general, information services are value-added services that provide
access to regulated transmission facilities only as part of a services package
which also uses network or computer software to change or enhance the
information transmitted. We believe the services we provide come within this
definition. Because the regulatory boundaries in this area are unclear and
subject to dispute, however, the FCC could seek to characterize some or all of
our services as "telecommunications services." If that happens, our services
would become subject to FCC regulation, although the impact of that
reclassification is difficult to predict. In general, the FCC does not regulate
the rates, services, and market entry and exit of non-dominant carriers, but
does require them to contribute to universal service and comply with other
regulatory requirements.
U.S. Licenses
Although we do not currently provide regulated telecommunications
services, we are authorized under Section 214 of the Communications Act of
1934, as amended, to provide global switched, data, voice, value-added and
private line services on a common carrier basis. We received authorization to
provide these services as a facilities-based common carrier in January 1999 and
to provide these services as a reseller in July 1999. We obtained these
licenses because we believe they allow us to procure the facilities and
capacity we need between the U.S. and foreign points under more favorable terms
and at lower cost than we could otherwise obtain. Although we do not currently
provide regulated telecommunications services, our FCC licenses subject us to
certain reporting and filing requirements.
FCC Regulatory Requirements
As noted above, our operation of networks does not currently subject us
to regulation in the U.S. either at the federal or state level. As an
authorized international common carrier, however, we are regulated by the FCC.
In
55
<PAGE>
the United States, authorized international carriers are subject to various
annual reporting requirements as a condition of their licenses. Each year, we
must submit data to the FCC concerning our international traffic as well as the
status of our international circuits. We must also file an annual employment
report to comply with the Commission's Equal Employment Opportunity policies.
International common carriers are also required to file a tariff containing the
rates, terms and conditions applicable to their services before initiating
international telecommunications services. If we fail to maintain proper
federal tariffs or certifications, or if there is any finding by the FCC that
we are not operating under permissible terms and conditions, this may result in
an enforcement action against us or an investigation, either of which could
impose upon us substantial penalties, including the loss of our licenses to
provide telecommunications services.
If we begin providing interstate, international telecommunications
services on a common carrier basis, we will be required to file additional
reports concerning our interstate and international traffic revenues. We also
may be required to contribute a percentage of these revenues to governmental
funds including Universal Service, Telecommunications Relay Service, Number
Portability, and the administration of the North American Numbering Plan. We
will also be subject to annual regulatory fees assessed by the FCC.
FCC Policies Applicable to Regulated International Traffic
If we begin to operate as a common carrier, we will be required to comply
with additional FCC policies governing international common carriers. For
example, the FCC requires carriers such as us to report "significant
affiliations," as defined by the FCC, with global carriers that have market
power in the countries in which we operate. In addition, the FCC administers a
variety of international service regulations, including the international
settlements policy. The international settlements policy governs the
settlements between U.S. carriers and their foreign correspondents of the cost
of terminating traffic over each other's networks, as well as the accounting
rates for settlement. The FCC has considerably relaxed this policy in its
implementation of the 1997 World Trade Organization Agreement on Basic
Telecommunications ("WTO Agreement"), which went into effect in January 1998.
Representing 90% of worldwide telecommunications traffic, the 72 signatory
countries to the WTO Agreement agreed to open their telecommunications markets
to competition and foreign ownership. We believe that this agreement, and its
implementation by the signatory countries, will provide us with significant
opportunities to compete in markets in which we did not previously have access,
and to provide end-to-end facilities-based services to and from these
countries.
The regulatory requirements that may affect our operations continue to
evolve as a result of the WTO Agreement, federal legislation, court decisions
and new and revised policies of the FCC. In particular, the FCC continues to
refine its international service regulations in order to promote competition,
to reflect and encourage deregulation in foreign countries and to reduce
international accounting rates toward cost. Among other things, these changes
may increase competition and alter our ability to compete with other similar
service providers or to introduce new services. Any change in applicable
regulatory requirements may have an impact on our operations in a way that we
cannot predict.
Regulation in Non-U.S. Markets
Although most countries impose little or no regulation on our network
operations, the laws and regulations governing our services are under review in
many countries outside the U.S. and are subject to change. Consistent with our
strategy of obtaining licenses or authorizations to provide regulated services
when we are able to obtain more favorable facilities or capacity lease terms or
interconnection arrangements, we have obtained facilities-based authorization
to provide telecommunications services in the United Kingdom. We anticipate
filing requests for authorization in several other countries as well. In some
countries we are able to obtain the more favorable arrangements we seek simply
by notifying the relevant government authority that we intend to operate on a
common carrier basis. In other countries, we are engaging in discussions with
foreign regulators to determine whether we must apply for authorization in
order to acquire or lease facilities or interconnect with other carriers.
56
<PAGE>
MANAGEMENT
Executive Officers, Directors and Key Employees
The following table sets forth, as of December 1, 1999, the name, age and
position of our directors, executive officers and other key employees.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Jose A. Collazo 55 President, Chairman of the Board of
Directors
Ernest U. Gambaro 61 Senior Vice President and Secretary,
General Counsel
Akbar H. Firdosy 53 Vice President and Chief Financial
Officer
John C. Hoffman 53 Executive Vice President of
Communications Sales & Service
Michael J. Timmins 47 Executive Vice President of Global
Business Development
Thomas E. Whidden 53 Vice President of Marketing
John M. Williams 52 Vice President of Network Services
Douglas Campbell(3) 60 Director
Eric M. de Jong(2) 51 Director
Morgan Ekberg(1) 54 Director
Masao Kojima(2) 51 Director
Joseph Nancoz(1) 51 Director
Rafael Sagrario(3) 55 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit and Finance Committee.
(3) Member of the Quality Assurance Committee.
Jose A. Collazo has served as our President and Chairman of the Board of
Directors since our founding in 1988. From 1967 to 1988, Mr. Collazo held
several management positions at Computer Sciences Corporation, or CSC,
including President of the International Division and head of global network
services. Mr. Collazo is on the Pepperdine University Board of Regents.
Dr. Ernest U. Gambaro is a Senior Vice President and has served as our
General Counsel and Secretary since our founding in 1988. From 1980 to 1988,
Dr. Gambaro was Assistant General Counsel of CSC. Dr. Gambaro also is a
director of STM Wireless, Inc., a satellite networking equipment and services
company.
Akbar H. Firdosy has served as our Vice President and Chief Financial
Officer since 1995. During 1994 and 1995, Mr. Firdosy served as our Controller.
Mr. Firdosy has been with us since our founding in 1988.
John C. Hoffman has served as our Executive Vice President Communications
Sales & Service since 1991. Mr. Hoffman also serves as president of our wholly
owned subsidiary, ESG Communications Inc. Mr. Hoffman has been with us since
our founding in 1988 and from 1983 to 1988 held several positions at CSC.
Michael J. Timmins has served as our Executive Vice President of Global
Business Development since 1995. From 1993 to 1995, he served as our Vice
President of Global Business Development. Mr. Timmins has been with us since
our founding in 1988.
57
<PAGE>
Thomas E. Whidden has served as our Vice President of Marketing since
December 1997. From July 1994 to December 1997 he served as our President of
International Sales. Prior to that time, he held various positions in our
European operations and Network Services.
John M. Williams has served as our Vice President of Network Services
since 1999. From 1992 to 1998, Mr. Williams was our Director of Network
Operations, the Vice President of Services Integration and Management for our
subsidiary, Government Systems, Inc., and from 1998 to 1999 was Senior Vice
President of the Communication Systems Division of our country representative,
CACI, Inc.
Douglas Campbell has been a member of our board of directors since 1999.
He is currently the Group Managing Director--Wholesale & International of
Telstra Corporation, a position he has held since 1998. From 1993 to 1998, he
served as Group Managing Director--Network & Technology of Telstra.
Eric M. de Jong has been a member of our board of directors since 1999.
Since 1996, he has served as the Director--Partnership Management of KPN
International. Prior to this time, he was Director of Strategy and a Project
Director of KPN in charge of the telecommunications development of the
Amsterdam airport area.
Morgan Ekberg has been a member of our board of directors since 1997. He
is currently a senior executive with Telia.
Masao Kojima has been a member of our board of directors since 1998. He
is currently a Senior Deputy Director, Network Business Department, of KDD, a
position he has held since 1999. From 1997 to 1999, Mr. Kojima served as Deputy
Director, Telecommunications Business Department, of KDD. From 1996 to 1997,
Mr. Kojima served as General Manager, Network Division of KDD. From 1995 to
1996, Mr. Kojima served as Deputy Director, Network System Development
Department of KDD. From 1993 to 1995, Mr. Kojima served as Manager, Network
Quality, Network Operations & Administration Department, of KDD.
Joseph Nancoz has been a member of our board of directors since 1989.
Since 1994, he has been the Chairman of the Board of Directors of Infonet
Switzerland, our country representative for Switzerland and a subsidiary of
Swisscom. Since 1998 he has held various positions in Swisscom's Products and
Services division. He was director of Swisscom's Key Accounts and Multinational
Corporations division from 1993 to 1998.
Rafael Sagrario has been a member of our board of directors since January
1999. He is currently the President of Telefonica International Holding B.V.
From 1995 to 1997, he served as the President of Telefonica Transmision de
Datos. From 1998 to February 1999, he served as Sole Administrator of
Telefonica Transmision de Datos. From March 1999 to the present, he has served
as Operations General Manager of Telefonica Data.
Directors' Terms
Members of our board of directors currently hold office and serve until
our next annual meeting of stockholders, or until their respective successors
have been elected. Our board of directors is currently comprised of seven
directors and we expect to add one additional independent member to our board
of directors within 90 days and a second independent member to our board of
directors within one year after the consummation of this offering. At each
annual meeting of stockholders, the successors to directors whose term will
then expire will be elected to serve until the next annual meeting of
stockholders. In addition, our restated certificate of incorporation provides
that the authorized number of directors will be between seven and twelve, with
the exact number to be determined by a majority of our board of directors. Our
directors may be removed, with or without cause, by the affirmative vote of the
holders of two-thirds of the shares entitled to vote at an election of
directors. There are no family relationships among any of our directors and
executive officers.
58
<PAGE>
Committees of the Board of Directors
The Audit and Finance Committee of our board of directors was established
in 1988 and reviews, acts on and reports to our board of directors with respect
to various auditing and accounting matters, including the recommendation of our
independent auditors, the scope of the annual audits, fees to be paid to the
independent auditors, the performance of our independent auditors and our
accounting practices. The members of the Audit and Finance Committee are
Messrs. de Jong and Kojima and we intend to add one of the two additional
independent members to this committee within 90 days after the consummation of
this offering.
The Compensation Committee of our board of directors was established in
1988 and determines the salaries, benefits and stock option grants for our
employees, consultants and directors. The members of the Compensation Committee
are Messrs. Ekberg and Nancoz. The members of the Compensation Committee also
serve as our Stock Plans Committee. The Stock Plans Committee oversees the
administration of our employee stock option plans.
The Quality Assurance Committee of our board of directors was established
in 1994 and reviews, acts on and reports to our board of directors with respect
to the operation of our systems and the provision of services to our clients.
The members of the Quality Assurance Committee are Messrs. Campbell and
Sagrario.
Director Compensation
Directors receive approximately $1,130 per board of directors meeting and
approximately $565 per meeting of committees of the board of directors. All
directors are reimbursed for their out-of-pocket expenses in serving on the
board of directors or any committee thereof. In addition, we plan to provide
our non-employee directors with stock options under our 1999 Stock Option Plan.
Each non-employee director will receive options upon the date of his election
to the board of directors with additional options upon the date of each annual
meeting of stockholders as long as the director has served for at least six
months and continues to serve on our board of directors. Each option grant
vests equally over a five year period.
Compensation Committee Interlocks and Insider Participation
No member of the compensation committee serves as a member of the board
of directors or the compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee. See "Related Party Transactions" for a description of
transactions between Infonet and entities affiliated with members of the
compensation committee.
Employment and Other Agreements
We have entered into employment agreements with Mr. Collazo, Mr. Firdosy
and Dr. Gambaro. These agreements become effective as of January 1, 2000 and
have three year terms which automatically renew in two year increments unless
notice is given not later than 24 months prior to the expiration date of each
term. The salary to be received by each of Messrs. Collazo and Firdosy and Dr.
Gambaro is his base salary in effect as of January 1, 2000 and will be reviewed
annually in accord with our salary review policies. Each will be eligible to
participate in all benefit programs we offer.
Each of the employment agreements may be terminated by us or the
respective executive without further obligation on the part of either party if
we terminate the executive for cause or if the executive resigns for other than
good reason, as those terms are defined in the agreements.
59
<PAGE>
If any of Messrs. Collazo or Firdosy or Dr. Gambaro is terminated without
cause or resigns for good reason, then he would:
. be entitled to receive, for a period of two years or until the
expiration of his term of employment, whichever is longer, separation
payments equal to his average total cash compensation received during
the 12 month period immediately preceding the termination or
resignation date and his benefits,
. be entitled to accrue benefits during the severance period; and
. be subject to a limited non-compete clause for the term of the
severance period.
In the event of a change of control, Messrs. Collazo and Firdosy and Dr.
Gambaro would have identical rights to the ones described in the first two
bullet points above.
All of our other executive officers are appointed annually and serve at
the discretion of the board of directors.
Executive Compensation
The following table sets forth all compensation awarded to, earned by or
paid to our chief executive officer and our four other most highly compensated
executive officers whose annual salary and bonus exceeded $100,000 in 1999 (the
"Named Executive Officers") for services rendered in all capacities to us
during our 1999 fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Annual Compensation Securities
Name and Principal Fiscal ------------------- Underlying All Other
Position Year Salary Bonus Options Compensation (1)
- ------------------ ------ ------------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Jose A. Collazo,
President
and Chairman of the
Board................. 1999 $ 353,998 $ 297,358 -- $378,710
Ernest U. Gambaro,
Senior Vice
President, Secretary
and
General Counsel....... 1999 199,222 167,346 -- 188,813
Akbar H. Firdosy, Vice
President and
Chief Financial
Officer............... 1999 162,048 136,120 269,100 3,531
John C. Hoffman,
Executive Vice
President of
Communications Sales &
Service............... 1999 194,365 147,450 -- 75,486
Michael J. Timmins,
Executive Vice
President of Global
Business Development.. 1999 127,957 252,878 -- 58,831
</TABLE>
- --------
(1) All other compensation includes imputed income in connection with payments
under auto allowances, financial planning services, club expenses, life
insurance and executive retirement plan values for the named executive
officers.
60
<PAGE>
Option/SAR Grants In Last Year
We granted the following stock options to Mr. Firdosy in the year ended
March 31, 1999. We did not grant any stock appreciation rights to the Named
Executive Officers in the year ended March 31, 1999.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
% of Total Stock Option Appreciation
Number of Shares Options Granted for Option Term
Underlying Options to Employees Exercise Expiration --------------------------
Name Granted in Fiscal Year Price ($/share) Date 5% 10%
- ---- ------------------ --------------- --------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Jose A. Collazo......... -- -- --
Ernest U. Gambaro....... -- -- --
Akbar H. Firdosy........ 269,100 7.26% $0.84 10/20/04 $ 6,667,514 $ 8,738,454
John C. Hoffman......... -- -- --
Michael J. Timmins...... -- -- --
</TABLE>
There was no public trading market for our Class B common stock as of
March 31, 1999. Accordingly, these values have been calculated on the basis of
the assumed initial public offering price of $19.50 per share, less the
applicable exercise price per share, multiplied by the number of shares
underlying these options.
Employee Benefit Plans
1998 Stock Purchase Plan
Our board of directors adopted a stock purchase plan, effective as of
October 20, 1998. The plan provides all employees designated by our board of
directors the ability to purchase shares of our Class B common stock. The plan
is administered by the compensation committee of our board of directors. No
shares of stock purchased under the plan are transferable until we have
effected an initial public offering.
In April 1999, we sold approximately 9.44 million shares of our Class B
common stock to our key employees pursuant to our 1998 Stock Purchase Plan. In
accordance with the provisions of the Stock Purchase Plan, some employees
purchased their shares for cash and other employees received their shares in
exchange for a secured, recourse promissory note held by us. Each share was
sold for $0.84, which price was set by the pricing formula at the time of the
sales. We do not intend to offer any more shares for purchase under this plan.
1998 Stock Option Plan
In October 1998, we adopted our 1998 Stock Option Plan. The specific
terms of the options issued is to be determined at the time of issuance by the
compensation committee of our board of directors. The exercise price for shares
issued under the plan may be no less than the value of the shares determined by
a pricing formula based on a multiple of our consolidated historic revenues.
Shares of stock purchased under the plan may not be traded or exchanged prior
to our initial public offering. The plan terminates on October 20, 2008, unless
terminated earlier pursuant to its terms.
In April 1999, we issued options to purchase approximately 3.71 million
shares of our Class B common stock to 29 employees under our 1998 Stock Option
Plan. Each option was evidenced by an option agreement. The exercise price for
each option is $0.84 per share. Each option award vests in 20% portions on
December 31 of each year from 1999 to 2004. All shares of our Class C common
stock will convert automatically into Class B common stock upon the
consummation of this offering.
1999 Stock Option Plan
In November 1999, we adopted our 1999 Stock Option Plan. The plan
provides for the issuance of options, restricted stock, common stock and stock
appreciation rights and other awards related to our Class B common stock to our
directors, employees and consultants. We may not issue more than 10.61 million
shares of our Class B common stock under the plan.
61
<PAGE>
The specific terms of any options, stock appreciation rights or stock
awards issued under the plan will be determined at the time of issuance by a
committee appointed by our board of directors administering the plan. The
exercise price for options issued under the plan will generally be based on the
trading price of the Class B common stock at the time the options are issued.
No awards have been issued under the plan.
The plan calls for the issuance of options to each of our non-employee
directors on the date of each of their election to the board of directors
following the offering. In addition, the plan calls for the issuance of
additional options to each individual serving on our board of directors on the
date of each annual meeting of our stockholders for each individual who has
served as one of our directors for at least six months and continues to serve
as one of our directors. The specific number of options that will be granted to
each director will be determined at a later date.
Pension Plan
Our pension plan is a contributory defined pension plan in which
substantially all of our domestic employees are eligible to participate. The
pension benefits received by a retiring employee are calculated by multiplying
the employee's total eligible compensation by 2.25%. Eligible compensation
consists of base compensation plus nondiscretionary bonuses and commissions.
Compensation deferred under the Infonet Deferred Income Plan, income related to
the 1998 Stock Option Plan, reimbursements, fringe benefits or other forms of
special pay are not eligible compensation.
As of March 31, 1999, Jose A. Collazo, Ernest U. Gambaro, Akbar H.
Firdosy, John C. Hoffman and Michael J. Timmins, upon retirement at age 65,
would be entitled to annual retirement benefits of $46,621, $46,384, $15,547,
$18,762, and $20,924.
Supplemental Executive Retirement Plan
We also have a Supplemental Executive Retirement Plan, or SERP, which is
a non-qualified, non-contributory pension plan. Our SERP is a defined benefit
retirement plan for specified key officers and executives and provides for
benefits based on years of service, the age of the participant, and the
participant's average compensation during his or her final period of employment
under the SERP.
Stock Appreciation Rights Plan
The stock referred to in the SARs Plan is our Class B common stock. The
SARs vest at 25% per year over four years with the first quartile vesting on
January 1, 2001. The SARs Plan terminates on October 20, 2004 or earlier if
specified conditions of the SARs Plan have been fully met.
Deferred Income Plan
The Infonet Deferred Income Plan, or IDIP, is a nonqualified deferred
income plan for employees earning over a prescribed amount. Participants may
defer receipt of compensation, which is held by us in trust and is invested in
accordance with the participants' directions.
62
<PAGE>
RELATED PARTY TRANSACTIONS
Stockholders Agreement
Immediately prior to the consummation of this offering, we expect to
enter into a stockholders agreement with all of our Class A stockholders. This
stockholders agreement provides that each Class A stockholder holding at least
14.95 million shares of our Class A common stock will have the right to
designate one of our directors, and each Class A stockholder will agree to vote
all of its shares of common stock in favor of the directors designated by the
other Class A stockholders and for our president as a director. Accordingly,
seven of the nine directors on our board will be appointed by our Class A
stockholders. Each Class A stockholder will have a right of first refusal to
acquire any Class A common stock proposed to be sold or otherwise transferred
by another Class A stockholder. We will agree in the stockholders agreement to
include, at the request of any Class A stockholder, shares of that Class A
stockholder in a registered offering of stock by us or another Class A common
stockholder through provisions commonly referred to as piggyback registration
and, subject to limitations, to undertake up to two registered offerings of
Class B common stock upon demand by each Class A stockholder up to a maximum of
two per year but only one in the first year following this offering. Each Class
A stockholder will agree to maintain a country representative to support our
marketing efforts and our clients in that stockholder's home country.
Commercial Contracts with Related Parties
Some of our country representatives are related parties where either
(1) we hold more than twenty but less than fifty percent ownership interest or
(2) a country representative is owned, directly or indirectly, by one of our
stockholders. In each such case, our agreement with the related party acting as
our country representative is our standard service agreement. Each service
agreement has a term of four or five years, and gives the country
representative the right to sell our services and use our trademarks, marketing
and operating documentation and our training materials and services. In the
agreements, we receive the right to set revenue targets, terminate the
agreement if the revenue targets are not met, jointly determine staffing of the
country office with the country representative and appoint members of the
country representative's advisory review board. The agreements outline monthly
fees the country representatives pay us for access to our network and the fees
we pay the country representatives for the service and customer support.
Additionally, we have alternate sales channel agreements with some of our
stockholders that allow these stockholders to resell our services under their
brand names or to package them with other services they provide to their
customers. These alternate sales channel agreements are generally under the
same terms as alternate sales channel agreements we enter into with other
communications providers. For the year ended March 31, 1999, $88.3 million of
total revenues were generated by all of these related parties and $40.0 million
of total country representative compensation resulted from a related party
acting as our country representative.
From time to time we lease transmission capacity from our stockholders
where they are existing local carriers. These leases are short term and at
tariff rates in regulated markets and at standard market rates in unregulated
markets.
Recent Contracts with our Stockholders
We recently entered into a number of agreements with our stockholders,
KPN, Swisscom and Telia, as well as a number of their affiliates. As part of
the agreements, our stockholders have agreed to indemnify us and we have agreed
to indemnify them for certain breaches of representations and warranties. For
additional information, please read the sections entitled "Business--Access to
Multinational Corporate Clients of KPN, Swisscom and Telia" and "Business--AUCS
Management Agreement," as well as the applicable risks disclosed in our "Risk
Factors."
Loans to our Senior Management
In connection with our 1998 Stock Purchase Plan, several members of our
management team borrowed the purchase price for their stock pursuant to terms
of the plan. Persons borrowing from us entered into loan, pledge and security
agreements. In addition, the loan is full recourse to the borrower. Each loan
is at an annual interest rate of five percent. The amounts loaned to each
officer were: Jose A. Collazo, $3,325,000; Ernest U. Gambaro, $1,400,000; Akbar
H. Firdosy, $450,000; John C. Hoffman, $750,000; Michael J. Timmins, $750,000;
Thomas E. Whidden, $475,000; and John M. Williams, $75,000.
We have loaned $100,000 to John C. Hoffman in connection with Mr.
Hoffman's purchase of a club membership which he uses for business-related
facilities and entertainment. Mr. Hoffman has executed a promissory note for
the full amount of the loan. The note is payable on demand and is secured by
some of Mr. Hoffman's assets.
63
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information as of November 1, 1999 with
respect to the beneficial ownership of our common stock, and as adjusted to
reflect the sale of the shares of Class B common stock in the offering, by (1)
each person (or group of affiliated persons) known by us to beneficially own 5%
or more of our common stock, (2) each of our directors and Named Executive
Officers and (3) all of our directors and executive officers as a group. Unless
otherwise set forth herein, the street address of the named beneficial owner is
2160 East Grand Avenue, El Segundo, California 90245-1022.
<TABLE>
<CAPTION>
Prior to this Offering (1) This Offering After this Offering
----------------------------------------------------------------------------- -------------------------
Shares of Class B
common stock
Shares of Class A Shares of Class B Shares of Class A and being sold in Shares of Class A and
Common Stock Common Stock Class B Common Stock this offering(2) Class B Common Stock
----------------- ----------------- ----------------------------------------- -------------------------
Percent Percent
of Total of Total
Voting Voting
Beneficial Owner Number Number Number Power Number Number Power
---------------- ----------------- ----------------- ------------- --------------------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
KDD
Corporation(3)(4)..... 26,877,588 38,229,542 65,107,130 15.7 4,871,800 60,235,330 15.2
KDD Bldg. P.O. No. 1
3-2, Nishishinjuku 2
Chome
Shinjuku-Ku, Tokyo 163
Japan
KPN Telecom B.V.(4).... 28,918,263 57,078,502 85,996,765 16.9 1,410,300 84,586,465 17.3
Telecomplein 5
2516 CK The Hague
The Netherlands
Swisscom AG (4)........ 28,918,263 57,078,502 85,996,765 16.9 1,410,300 84,586,465 17.3
Alte Tiefenaustrasse 6
CH-3048 Worblaufen
Switzerland
Telefonica
International Holding
B.V.(4)............... 28,918,263 41,131,935 70,050,198 16.9 1,410,300 68,639,898 16.5
Beatriz de Bobadilla,
18
28040 Madrid, Spain
Telia AB(3)(4)......... 28,918,263 57,078,502 85,996,765 16.9 1,410,300 84,586,465 17.3
Vitsandsgatan 9, House
D
S-123 86 Farsta, Sweden
Telstra Corporation
Limited............... 28,442,375 -- 28,442,375 16.6 2,307,700 26,134,675 13.1
Level 14
231 Elizabeth Street
Sydney NSW 2000
Australia
Jose A. Collazo........ -- 3,976,700 3,976,700 * -- 3,976,700 *
Ernest U. Gambaro...... -- 1,674,400 1,674,400 * -- 1,674,400 *
Akbar H. Firdosy....... -- 538,200 538,200 * -- 538,200 *
John C. Hoffman........ -- 897,000 897,000 * -- 897,000 *
Michael J. Timmins..... -- 897,000 897,000 * -- 897,000 *
Thomas G. Whidden...... -- 568,100 568,100 * -- 568,100 *
John M. Williams....... -- 89,700 89,700 * -- 89,700 *
Douglas Campbell....... -- -- -- -- -- -- --
Eric M. de Jong........ -- -- -- -- -- -- --
Morgan Ekberg.......... -- -- -- -- -- -- --
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Prior to this Offering (1) This Offering After this Offering
------------------------------------------------------------ ------------------ -------------------------
Shares of Class B
common stock
Shares of Class A Shares of Class B Shares of Class A and being sold in Shares of Class A and
Common Stock Common Stock Class B Common Stock this offering(2) Class B Common Stock
----------------- ----------------- ------------------------ ------------------ -------------------------
Percent of Percent
Total of Total
Voting Voting
Beneficial Owner Number Number Number Power Number Number Power
---------------- ----------------- ----------------- ------------- ----------------------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Masao Kojima......... -- -- -- -- -- -- --
Joseph Nancoz........ -- -- -- -- -- -- --
Rafael Sagrario...... -- -- -- -- -- -- --
All directors and
executive officers
as a group (13
persons)............ -- 8,641,100 8,641,100 * -- 8,641,100 *
</TABLE>
- --------
* Less than 1% of total.
(1) Gives effect to the shares of Class B common stock issuable within 60 days
of the closing of this offering upon the exercise of all options and other
rights beneficially owned by the indicated stockholders on that date.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, or SEC, and includes voting and
investment power with respect to shares. Unless otherwise indicated, the
persons named in the table have sole voting and sole investment control
with respect to all shares beneficially owned.
(2) Does not reflect any exercise of the underwriters' over-allotment option.
If that option is exercised in full, each selling stockholder would sell
approximately 1.28 million more shares of Class B common stock.
(3) Under an agreement between Telia and KDD entered into in November 1999,
Telia has agreed to buy 5,531,500 shares of our Class A common stock and
5,531,500 shares of our Class B common stock from KDD. This transaction is
subject to the other Class A stockholders' right of first refusal, approval
by each of KDD's and Telia's board of directors and approval under the
Hart-Scott-Rodino Act. If consummated, this offering will reduce the number
of shares held by KDD prior to this offering to 21,346,088 shares of Class
A common stock and 32,698,042 shares of Class B common stock. Similarly,
the number of shares held by Telia prior to this offering will increase to
34,449,763 shares of Class A common stock and 62,610,002 shares of Class B
common stock. This sale is expected to close shortly after this offering.
(4) Shares of Class A common stock do not reflect fractional shares of 0.4,
which are not included for ease of presentation.
65
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and provisions of our
certificate of incorporation and our bylaws are summaries and are qualified by
reference to the provisions of our certificate and our bylaws. Copies of these
documents have been or will be filed with the SEC as exhibits to our
registration statement, of which this prospectus forms a part. The description
of our capital stock reflects changes to our capital structure that will occur
upon the closing of this offering in accordance with the terms of our
certificate of incorporation.
Our authorized capital stock consists of 400 million shares of Class A
common stock, par value $0.01 per share, 600 million shares of Class B common
stock, par value $0.01 per share, and 30 million shares of Class C common
stock, par value $0.01 per share. As of November 1, 1999, there were
170,993,017 shares of Class A common stock, 250,596,983 shares of Class B
common stock, and 9,444,513 shares of Class C common stock outstanding and held
of record by an aggregate of 36 stockholders. Our board of directors has the
power to issue the authorized but unissued shares of our Class B and Class C
common stock, which authority is of unlimited duration. Upon the closing of
this offering, the Class C common stock will automatically convert to Class B
common stock; however, Class C common stock will remain authorized under our
certificate of incorporation. The Class C common stock has no voting rights and
we have no plans to issue any of the authorized Class C common stock in the
future.
Common Stock
Holders of Class B common stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders and they do not have
cumulative voting rights. Holders of Class A common stock are entitled to ten
votes for each share on all matters submitted to a vote of stockholders and
they do not have cumulative voting rights. Accordingly, holders of a majority
of the shares of Class A common stock entitled to vote in any election of
directors may elect all of the directors standing for election. However, the
holders of the Class B common stock have the exclusive right to elect two
independent directors. Holders of Class A and Class B common stock are entitled
to receive ratably those dividends, if any, as may be declared by our board of
directors out of funds legally available for that purpose. Upon any
liquidation, dissolution or winding up, the holders of Class A and Class B
common stock are entitled to receive ratably our net assets available after the
payment of all debts and other liabilities. Holders of our Class A common stock
have pre-emptive rights to acquire additional shares of Class A common stock
that may be issued, as well as a right of first refusal upon proposed transfers
from other Class A stockholders, but they have no redemption or conversion
rights other than from Class A to Class B common stock on a one-for-one basis.
Holders of our Class B common stock have no preemptive, subscription,
redemption or conversion rights. The Class A common stock cannot be sold or
transferred except after approval by not less than two-thirds of the
outstanding Class A common stock. Any proposed transfer of the Class A common
stock, including any proposed conversion of the Class A common stock into Class
B common stock, is also subject to a right of first refusal by the selling
stockholders. Following the consummation of this offering, all of our issued
common stock will be fully paid and non-assessable.
Registration Rights
Under the terms of the stockholders agreement, after the closing of this
offering the holders of Class A common stock will be entitled to require us to
register, under the Securities Act of 1933 (the "Act"), some or all of the
Class B shares they currently hold, or those shares they will hold after
conversion of their Class A common stock. We will agree to include, at the
request of any Class A stockholder, shares of that Class A stockholder in a
registered offering by us or another Class A common stockholder through
provisions commonly referred to as piggyback registration and, subject to
limitations, to undertake up to two registered offerings of Class B common
stock upon demand by each Class A stockholder up to a maximum of two
registrations per year but only one in the first year following this offering.
We will bear the costs and expenses attributable to the registration.
66
<PAGE>
Anti-Takeover Effects of Provisions of Delaware Law and Our Certificate of
Incorporation and Bylaws
Subject to exceptions, Section 203 of the Delaware General Corporation
Law prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained that status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes, among other
things, a merger or consolidation involving us and an interested stockholder
and the sale of more than 10% of our assets. Although there are limited
exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% of our
voting stock. This statute could prohibit or delay the accomplishment of
mergers or other takeover or change in control attempts with respect to us and,
accordingly, may discourage attempts to acquire us. A Delaware corporation may
opt out of the anti-takeover law with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from amendments approved by the holders of at
least a majority of the corporation's outstanding voting shares. Under the
terms of our certificate of incorporation, we have opted out of this provision
of the anti-takeover law.
In addition, provisions of our certificate and bylaws that will be in
effect upon the closing of this offering and are summarized in the following
paragraphs, may be deemed to have anti-takeover effects and may delay, defer or
prevent a tender offer or takeover attempt that a stockholder might consider in
its best interest, including those attempts that might result in a premium over
the market price for the shares held by stockholders. These provisions may also
have the effect of preventing changes in our management.
Our certificate authorizes our board of directors to fill vacant
directorships. This may deter a stockholder from removing incumbent directors
and simultaneously gaining control of our board of directors by filling the
vacancies created by that removal with its own nominees. Our certificate and
bylaws contain other provisions that may be deemed to have anti-takeover
effects, such as the ability of a majority of our Class A stockholders to call
special meetings and a limit on the maximum number of directors. These
provisions could delay, defer or prevent a tender offer or takeover attempt. In
addition, based on the current ownership of our Class A common stock and the
voting rights that attach to them, the Class A stockholders will be able to
exercise control over all matters requiring approval by our stockholders,
including the approval of significant corporate transactions.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws,
unless a corporation's certificate of incorporation or bylaws, as the case may
be, requires a greater percentage. Our certificate of incorporation and bylaws
provide that the affirmative vote of at least two-thirds of the Class A and
Class B common stock voting as a single class is required to amend our
certificate of incorporation and bylaws and both 95% of the Class A and two-
thirds of the Class A common stock and Class B common stock voting as a single
class is required to approve a change in our capital structure or significant
corporate actions.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that, except to the extent
prohibited by the Delaware General Corporation Law, our directors are not
personally liable to us or our stockholders for monetary damages for any breach
of fiduciary duty as our directors. Under the Delaware General Corporation Law,
our directors have a fiduciary duty to us that is not eliminated by this
provision of our certificate of incorporation and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under the Delaware General Corporation Law
for breach of the director's duty of loyalty to us or our stockholders, for
acts or omissions
67
<PAGE>
which are found by a court of competent jurisdiction to be not in good faith or
that involve intentional misconduct, or knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited
by the Delaware General Corporation Law. This provision also does not affect
the directors' responsibilities under any other laws, such as the Federal
securities laws or state or Federal environmental laws.
Our certificate of incorporation provides that we will indemnify our
directors, officers, employees and agents to the fullest extent provided in our
bylaws or in any contract or agreement with any of those directors, officers,
employees or agents. Our bylaws provide that we will, to the greatest extent
permitted by the Delaware General Corporation Law, indemnify and advance the
expenses of 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 such person is or was a director, officer, employee or agent of ours
or is or was serving at our request as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with the action, suit or proceeding.
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. We
believe that these provisions and agreements are necessary to attract and
retain qualified directors and executive officers. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions, regardless of whether the
Delaware General Corporation Law would permit indemnification. We have
liability insurance for our officers and directors.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under our certificate of incorporation. We are not aware
of any threatened litigation or proceeding that may result in a claim for
indemnification.
Transfer Agent and Registrar
Upon the closing of this offering, the transfer agent and registrar for
the Class B common stock will be Firstar Corporation.
68
<PAGE>
DESCRIPTION OF CREDIT FACILITY
The Senior Secured Credit Agreement
We entered into a senior secured credit agreement with a syndicate of
lenders arranged by Merrill Lynch & Co., which included The Bank of Nova
Scotia, as administrative agent, Societe Generale, as documentation agent and a
number of financial institutions and other entities as lenders. The credit
agreement provides for the following facilities:
. Delayed Draw Term Loan Facility. This is a seven-year delayed-draw term
loan facility in an aggregate principal amount equal to $100.0 million
available to be drawn until August 20, 2000. The initial draw under the
facility was used to repay existing indebtedness and fees and expenses
in connection with the bridge loan facility. The proceeds of future
draws can be used for our general working capital needs as well as
those of our subsidiaries, including for capital expenditures. The
delayed draw term loans are required to be repaid in 20 consecutive
quarterly installments, commencing on September 30, 2001. Amounts
borrowed and repaid under this facility cannot be reborrowed.
. Tranche B Term Loan Facility. This is a seven-year term loan facility
in an aggregate principal amount equal to $50.0 million. The tranche B
term loan was drawn in full on August 20, 1999, the closing date of the
credit agreement, and was used to repay our existing indebtedness under
the bridge loan facility. The tranche B term loan is required to be
repaid in 28 consecutive quarterly installments, which commenced on
September 30, 1999. Amounts borrowed and repaid under this facility
cannot be reborrowed.
. Revolving Credit Facility. This is a six-year revolving credit facility
in an aggregate principal amount equal to $100.0 million. Loans made
under this facility are to be used for our general working capital
needs as well as those of our subsidiaries, including capital
expenditures. Amounts borrowed and repaid under this facility can be
reborrowed during the six-year availability period. This facility
contains a $10.0 million sub-limit for letters of credit.
Optional and Mandatory Prepayment
The loans under each facility may be prepaid without premium or penalty
at our option. The term loans are also subject to mandatory prepayment with:
. 100% of the net proceeds of specified indebtedness (excluding the
first $100.0 million of senior subordinated indebtedness);
. 50% (reduced to 25% upon satisfaction of a leverage ratio) of the net
proceeds of any equity issuance (excluding the first $750.0 million
realized from an initial public offering by us);
. 100% of the net proceeds of specified asset sales or dispositions (or
payments received in respect of property or casualty insurance
claims); and
. beginning in our 2002 fiscal year, 50% (reduced to 25% upon
satisfaction of a leverage ratio) of excess cash flow.
The revolving credit loans are subject to mandatory prepayment (with an
accompanying permanent reduction of the commitments under the revolving credit
facility) with:
. 100% of the net proceeds of specified indebtedness (excluding the
first $100.0 million of senior subordinated indebtedness); and
. 100% of the net proceeds of specified asset sales or dispositions (or
payments received in respect of property or casualty insurance
claims).
69
<PAGE>
Mandatory prepayments are applied first to pay down the term loans and
second to pay down the revolving credit loans. As long as any delayed draw term
loans are outstanding, each tranche B term loan lender has the right to refuse
all or any part of any optional or mandatory prepayment that would otherwise be
allocated to its tranche B term loans. Any tranche B prepayment amount refused
will instead be applied to prepay the delayed draw term loans.
Interest Rates and Fees
Interest on the loans is payable, at a variable rate based on, at our
option, either the base rate or the eurodollar rate, in each case, plus a
margin. The margin for term loans (and, prior to February 20, 2000, for
revolving credit loans) is fixed by facility and by type of loan at the rates
specified in the credit agreement and ranges from 1.50% to 2.75%. From and
after February 17, 2000, the margin for revolving credit loans varies depending
on the ratio of our total indebtedness to consolidated EBITDA and ranges from
0.50% to 2.50%. Eurodollar loans are available, at our option, with an interest
period of one, two, three or six months and, if available to all relevant
lenders, twelve months.
Under our credit agreement, we are required, by February 17, 2000, to
enter into hedge agreements to provide that at least 50% of the outstanding
term loans are subject to either a fixed interest rate or interest rate
protection for a period acceptable to the administrative agent.
We are required to pay the lenders under the delayed draw term loan
facility and the revolving credit facility commitment fees, at a variable rate
depending on our level of borrowing under each facility, on the available
undrawn amount under each facility. The commitment fee rate varies from 0.50%
to 1.00%. Commitment fees are payable quarterly in arrears. We are also
required to pay an annual administration fee to the administrative agent and
certain other fees pursuant to a fee letter with Merrill Lynch & Co. and one of
its affiliates.
Collateral
Our obligations under the credit agreement and the other loan documents
are secured by liens granted by us and our domestic subsidiaries on
substantially all of our tangible assets located in the United States and on
all of our intangible assets. The collateral includes intellectual property and
all of the capital stock of each of our direct and indirect domestic
subsidiaries and 65% of the capital stock of any foreign subsidiaries owned
directly by us or any of our domestic subsidiaries, now owned or hereafter
acquired. Various assets and properties, including our new corporate
headquarters and our Maryland data center facility, are expressly excluded from
the collateral.
In addition, the payment and performance of our obligations under the
credit agreement and the other loan documents are guaranteed by our domestic
subsidiaries and a Belgian subsidiary.
Restrictions
The credit agreement contains representations, warranties, covenants
(including affirmative, negative and financial covenants) and events of
default, including nonpayment of principal and interest, violations of
covenants and the incurrence of material judgments, each of which are customary
for transactions of this type.
The financial covenants require compliance with a minimum consolidated
fixed charge coverage ratio, a maximum consolidated leverage ratio and a
minimum consolidated interest coverage ratio. The credit agreement also
contains limitations on permitted capital expenditures.
Certain other negative covenants restrict our ability and our
subsidiaries' ability to, among other things, incur debt, make investments or
acquisitions, grant liens, dispose of property, pay dividends or make other
restricted payments.
For purposes of the loan documents, Networks Telephony Corporation and
Osiware International, S.A. are deemed not to be our subsidiaries.
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our
Class B common stock, and no prediction can be made as to the effect, if any,
that market sales of shares of Class B common stock or the availability of
shares of Class B common stock for sale will have on the market price of our
Class B common stock. Nevertheless, sales of substantial amounts of Class B
common stock in the public market, or the perception that such sales could
occur, could materially and adversely affect the market price of our Class B
common stock and could impair our future ability to raise capital through the
sale of our equity securities. See "Risk Factors--If we or our existing
stockholders sell additional shares of our Class B common stock after the
offering, it could cause the market price of our Class B common stock to
decline."
Upon the closing of this offering, we will have an aggregate of
approximately 300.81 million shares of Class B common stock and approximately
168.69 million shares of Class A common stock outstanding, assuming no exercise
of outstanding options. Of the outstanding shares, the shares sold in this
offering will be freely tradable, except that any shares held by our
"affiliates," as that term is defined under Rule 144 of the Securities Act of
1933, as amended, or the Act, may be sold only in compliance with the
limitations described below. The remaining shares of Class A common stock and
Class B common stock will be deemed "restricted securities" as defined under
Rule 144. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 of the Act, which rules are summarized below.
Subject to the lock-up agreements described below and the provisions of
Rules 144, 144(k) and 701, additional shares of our Class B common stock will
be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<C> <S>
14,322,100 Upon the filing of a registration statement to register for resale
shares of Class B common stock issuable upon the exercise of
options granted under our stock option plans
356,051,713 After 180 days from the date of this prospectus (subject, in some
cases, to volume limitations under Rule 144)
47,840,000 At various times after 180 days from the date of this prospectus
(Rule 144)
</TABLE>
Rule 144
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares of our Class B common stock for at least one year is
entitled to sell, 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
. 1% of the then outstanding shares of Class B common stock (including
any Class A common stock converted into Class B common stock) or
approximately 4.70 million shares
. the average weekly trading volume in the Class B common stock on the
New York Stock Exchange during the four calendar weeks preceding the
date on which notice of such sale is filed, subject to restrictions.
Such sales under Rule 144 are also subject to manner of sale provisions
and notice requirements and to the availability of current public information
about us.
In addition, a person who is not deemed to have been an affiliate of ours
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 would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate of ours, such
person's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
71
<PAGE>
Rule 701
Our employees, directors, officers or consultants who purchase our shares
in connection with a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 permits non-affiliates to
sell their Rule 701 shares without having to comply with the public
information, holding period, volume limitation or notice provisions of Rule
144. Affiliates may sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions. In each of these cases, Rule 701 allows
the stockholders to sell 90 days after the date of the prospectus.
Lock-Up Agreements
Our directors, officers and certain existing stockholders have agreed
that they will not sell, directly or indirectly, subject to certain exceptions,
any shares of our common stock without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated for a period of 180 days from the
date of this prospectus. See "Underwriting."
We have agreed not to sell or otherwise dispose of any shares of our
common stock during the 180-day period following the date of this prospectus,
except we may issue, and grant options to purchase, shares of Class B common
stock under our existing employee benefit plans referred to in this prospectus.
In addition, we may issue shares of Class B common stock in connection with any
acquisition of another company if the terms of the issuance provide that the
Class B common stock may not be resold prior to the expiration of the 180-day
period described above.
Registration Rights
Following this offering, under conditions and limitations described in
the stockholders agreement, holders of our outstanding Class A common stock
will have registration rights with respect to their shares of Class B common
stock (subject to the 180-day lock-up arrangement described above) to require
us to register their shares of Class B common stock under the Securities Act,
and to participate in any future registration of securities by us. These
holders are subject to lock-up periods of not more than 180 days following the
date of this prospectus or any subsequent prospectus. See "Description of
Capital Stock--Registration Rights."
Stock Options and Warrants
Options to purchase an aggregate of approximately 14.32 million shares of
our Class B common stock will be outstanding as of the closing of this
offering, but vest over a five year period. None of the shares issuable
pursuant to these vested options is subject to the 180-day lock-up agreements
described above.
Following this offering, we intend to file one or more registration
statements on Form S-8 under the Securities Act to register all shares of
common stock subject to outstanding stock options and options issuable pursuant
to our stock option plan. Subject to the lock-up agreements, shares covered by
these registration statements will be eligible for sale in the public markets,
other than shares owned by our affiliates, which may be sold in the public
market if they qualify for an exemption from registration under Rule 144 or
701.
72
<PAGE>
MATERIAL UNITED STATES INCOME TAX CONSEQUENCES
FOR NON-U.S. HOLDERS
Overview
The following general discussion summarizes certain of the material U.S.
federal income and estate tax aspects of the ownership and disposition of Class
B common stock applicable to non-U.S. holders of Class B common stock. In
general, a "non-U.S. holder" is a person other than:
. a citizen or resident of the United States,
. a corporation or other entity taxable as a corporation created or
organized under the laws of the United States or any of its political
subdivisions,
. an estate the income of which is subject to U.S. federal income
taxation regardless of its sources,
. a trust if a U.S. court is able to exercise primary supervision over
administration of the trust and one or more U.S. persons have
authority to control all substantial decisions of the trust; or
. a trust that has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a United States person.
The discussion is based upon the Internal Revenue Code of 1986, as
amended, regulations of the Treasury Department, Internal Revenue Service
rulings and pronouncements and judicial decisions now in effect, all of which
are subject to change (possibly on a retroactive basis). The discussion does
not address aspects of U.S. federal taxation other than income and estate
taxation and does not address all aspects of federal income and estate
taxation. The discussion does not consider any specific facts or circumstances
that may apply to a particular non-U.S. holder and does not address all aspects
of U.S. federal income tax law that may be relevant to non-U.S. holders that
may be subject to special treatment under such law, such as insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
certain U.S. expatriates, controlled foreign corporations, passive foreign
investment companies or foreign personal holding companies.
Persons considering the purchase of Class B common stock should consult
their tax advisors concerning the application of U.S. federal income tax laws,
as well as the laws of any state, local or foreign taxing jurisdiction to their
particular situations.
Dividends
In general, the gross amount of dividends paid to a non-U.S. holder will
be subject to U.S. withholding tax at a 30% rate, or any lower rate prescribed
by an applicable tax treaty, unless the dividends:
. are effectively connected with a trade or business carried on by the
non-U.S. holder within the United States and a Form 4224 is filed
with the withholding agent, or
. if a tax treaty applies, are attributable to a United States
permanent establishment of the non-U.S. holder.
If either exception applies, the dividend will be taxed at ordinary U.S.
federal income tax rates. A non-U.S. holder may be required to satisfy certain
certification requirements in order to claim the benefit of an applicable
treaty rate or otherwise claim a reduction of, or exemption from, the
withholding obligation under the above described rules. In the case of a non-
U.S. holder that is a corporation, effectively connected income may also be
subject to an additional branch profits tax, which is generally imposed on a
foreign corporation at a rate of 30% of the deemed repatriation from the United
States of "effectively connected earnings and profits" or such lower rate as an
applicable tax treaty may provide. To the extent a distribution exceeds our
current or accumulated earnings or profits, it will be treated first as a
return of the holder's tax basis, and then as a gain from the sale of a capital
asset. Any withholding tax on a distribution in excess of our accumulated
earnings or profits is refundable to the non-U.S. holder upon filing an
appropriate claim with the Internal Revenue Service.
73
<PAGE>
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payor has
knowledge to the contrary) for purposes of the withholding tax discussed above
and, under the current interpretation of United States Treasury regulations,
for purposes of determining the applicability of a tax treaty rate. Under
recently finalized United States Treasury regulations, a non-U.S. holder of
Class B common stock who wishes to claim the benefit of an applicable treaty
rate (and avoid backup withholding as discussed below) for dividends paid after
December 31, 2000, will be required to satisfy applicable certification and
other requirements.
Disposition of Common Stock
Generally, a non-U.S. holder will not be subject to U.S. federal income
tax on any gain recognized upon the disposition of Class B common stock unless:
. the gain is effectively connected with a trade or business carried on
by the non-U.S. holder within the United States, or, alternatively,
if a tax treaty applies, attributable to a United States permanent
establishment maintained by the non-U.S. holder, in which case such
gain will be subject to tax at the rates and in the manner applicable
to U.S. persons, and, if the holder is a foreign corporation, the
branch profits tax may also apply,
. the Class B common stock is disposed of by an individual non-U.S.
holder, who holds the Class B common stock as a capital asset and is
present in the United States for 183 days or more in the taxable year
of the disposition and certain other conditions are met, in which
case such gain will be subject to a flat 30% tax, which may be offset
by United States source capital losses even though the individual is
not considered a resident of the United States, or
. (A) we are or have been a "U.S. real property holding corporation"
within the meaning of Section 897(c)(2) of the Code at any time
within the shorter of the five-year period preceding such disposition
or such non-U.S. holder's holding period and (B) assuming that the
Class B common stock is "regularly traded on an established
securities market" for U.S. federal income tax purposes, the non-U.S.
holder held, directly or indirectly, at any time during the
applicable period from clause (A) above, including on the date of
disposition, more than 5% of the outstanding Class B common stock. We
are not and do not anticipate becoming a "U.S. real property holding
corporation."
Non-U.S. holders should consult applicable treaties, which may exempt
from U.S. taxation gains realized upon the disposition of Class B common stock
in certain cases.
Estate Tax
Common stock owned, or treated as owned, by an individual non-U.S. holder
at the time of death will be includible in the individual's gross estate for
U.S. federal estate tax purposes, and may be subject to U.S. federal estate
tax, unless an applicable treaty provides otherwise.
Information Reporting and Backup Withholding
On October 6, 1997, the Internal Revenue Service issued final regulations
relating to withholding, information reporting and backup withholding that
unify current certification procedures and forms and clarify reliance
standards. The final regulations generally will be effective for payments made
after December 31, 2000.
Except as provided below, this section describes rules applicable to
payments made on or before December 31, 2000. Backup withholding, which
generally is a withholding tax imposed at the rate of 31% on certain payments
to persons that fail to furnish the information required under the U.S.
information reporting
74
<PAGE>
and backup withholding rules, generally will not apply to (1) dividends paid to
non-U.S. holders that are subject to the 30% withholding discussed above, or
that are not so subject because a tax treaty applies that reduces or eliminates
such 30% withholding, or (2) dividends paid on the Class B common stock to a
non-U.S. holder at an address outside the United States, unless the payor has
actual knowledge that the payee is a U.S. person. We will be required to report
annually to the Internal Revenue Service and to each non-U.S. holder the amount
of dividends paid to, and the tax withheld from, such holder, regardless of
whether any tax was actually withheld or whether withholding was required. The
information may also be made available to the tax authorities in the non-U.S.
holder's country of residence.
In the case of a non-U.S. holder that sells Class B common stock to or
through a U.S. office of a broker, the broker must backup withhold at a rate of
31% and report the sale to the Internal Revenue Service, unless the holder
certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. In the case of a non-U.S. holder that sells Class B
common stock to or through the foreign office of a U.S. broker, or a foreign
broker with certain types of relationships to the United States, the broker
must report the sale to the Internal Revenue Service (but not backup withhold)
unless the broker has documentary evidence in its files that the seller is a
non-U.S. holder or certain other conditions are met, or the holder otherwise
establishes an exemption. A non-U.S. holder will generally not be subject to
information reporting or backup withholding if such non-U.S. holder sells the
Class B common stock to or through a foreign office of a non-U.S. broker.
Any amount withheld under the backup withholding rules from a payment to
a holder is allowable as a credit against the holder's U.S. federal income tax,
which may entitle the holder to a refund, provided that the holder furnishes
the required information to the Internal Revenue Service. In addition, certain
penalties may be imposed by the Internal Revenue Service on a holder who is
required to supply information but does not do so in the proper manner.
The final regulations eliminate the general, current legal presumption
that dividends paid to an address in a foreign country are paid to a resident
of that country. The final regulations impose certain certification and
documentation requirements on non-U.S. holders claiming the benefit, under a
tax treaty, of a reduced withholding rate on dividends.
Prospective purchasers of the Class B common stock are urged to consult
their own tax advisors as to the effect, if any, of the final regulations on
their purchase, ownership and disposition of the Class B common stock.
75
<PAGE>
UNDERWRITING
General
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Warburg Dillon
Read LLC, are acting as representatives of each of the underwriters named
below. Subject to the terms and conditions set forth in a purchase agreement
among us, the selling stockholders and the underwriters, we and the selling
stockholders have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us, the
number of shares of Class B common stock set forth opposite its name below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
Warburg Dillon Read LLC.........................................
ABN AMRO Incorporated...........................................
Goldman, Sachs & Co.............................................
Lehman Brothers Inc. ...........................................
Salomon Smith Barney Inc........................................
----------
Total...................................................... 51,282,300
==========
</TABLE>
In the purchase agreement, the underwriters have agreed, subject to the
terms and conditions set forth in the agreement, to purchase all of the shares
of Class B common stock being sold pursuant to the agreement if any of the
shares of Class B common stock being sold under the agreement are purchased. If
an underwriter defaults, the purchase agreement provides that, in specified
circumstances, the purchase commitments of the nondefaulting underwriters may
be increased or the purchase agreement may be terminated.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the securities laws, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.
The shares of Class B common stock are being offered by the underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and
certain other conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part.
The underwriters have represented and agreed that each (or any affiliate)
(i) has not offered or sold and, prior to the expiry of the period of six
months from the date of the offering, will not offer or sell any shares of
Class B common stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995, (ii) has complied and will comply with
all applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the shares of Class B common stock in, from
or otherwise involving the United Kingdom, and (iii) has only issued or passes
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the issue of the shares of Class B common stock to a
person who is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to
whom such document may otherwise lawfully be issued or passed on.
Commissions and Discounts
The representatives have advised us that they propose initially to offer
the shares of Class B common stock to the public at the initial public offering
price set forth on the cover page of this prospectus, and to
76
<PAGE>
certain dealers at that price less a concession not in excess of $ per share
of Class B common stock. The underwriters may allow, and those dealers may
reallow, a discount not in excess of $ per share of Class B common stock to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may change.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us and the selling stockholders to the
underwriters and the proceeds before expenses to us and the selling
stockholders. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment option with respect to the
selling stockholders' shares.
<TABLE>
<CAPTION>
Without With
Per Share Option Option
--------- ------- ------
<S> <C> <C> <C>
Public offering price........................... $ $ $
Underwriting discount........................... $ $ $
Proceeds, before expenses, to Infonet Services
Corporation.................................... $ $ $
Proceeds, before expenses, to the selling
stockholders................................... $ $ $
</TABLE>
The expenses of the offering (exclusive of the underwriting discount and
commissions) are estimated at $3,577,500. The underwriters have agreed to
reimburse us for up to $2.75 million of our expenses incurred in connection
with this offering.
Over-allotment Option
The selling stockholders have granted an option to the underwriters,
exercisable for 30 days after the date of this prospectus, to purchase up to
approximately 7.69 million additional shares of Class B common stock at the
public offering price set forth on the cover page of this prospectus, less the
underwriting discount. The underwriters may exercise this option solely to
cover over-allotments, if any, made on the sale of the Class B common stock
being offered. To the extent that the underwriters exercise this option, each
underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares of Class B common stock proportionate to that
underwriter's initial amount reflected in the above table.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price up to 4,102,584 shares, or eight percent, of the shares
offered by this prospectus to some of our directors, officers, employees,
vendors, business associates and related persons. The number of shares of Class
B common stock available for sale to the general public will be reduced to the
extent those persons purchase reserved shares. Any reserved shares which are
not orally confirmed for purchase within one day of the pricing of this
offering will be offered by the underwriters to the general public on the same
terms as the other shares offered in this prospectus.
No Sales of Similar Securities
For a period of 180 days after the date of this prospectus, we, our
officers, directors and certain stockholders, have agreed not to, directly or
indirectly, subject to certain exceptions, without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the several
underwriters:
. offer, pledge, sell, dispose of or transfer any shares of common
stock or securities convertible into common stock; or
. enter into any agreement that transfers any part of the economic
consequence of ownership of the common stock.
Our stockholders do, however, have the right to:
. transfer the securities as a bona fide gift or to one or more trusts
or by will or intestacy, provided the transferee or transferees
thereof agree in writing to be bound by this restriction, and
77
<PAGE>
. for purposes of a loan, provided that the lender or lenders to whom
the common stock is pledged agree in writing to be bound by the terms
of this restriction.
In addition, we have the right to transfer Class B common stock in
connection with an acquisition, if any recipient of shares agrees to be bound
by provisions of the lock-up agreement. We also have the right to issue shares
upon the exercise of options or warrants currently outstanding and referred to
in this prospectus and to issue shares or grant options to purchase our Class B
common stock pursuant to our existing employee benefit plans referred to in
this prospectus.
Listing on the New York Stock Exchange and the Frankfurt Stock Exchange
In the United States, our Class B common stock will trade on the New York
Stock Exchange under the symbol "IN." In connection with this offering, we
concurrently have applied for the admission of the entirety of our issued Class
B common stock to the Official Quotation (Amtlicher Handel) of the Frankfurt
Stock Exchange. The Frankfurt Stock Exchange issues a trading symbol when a
corporation has been approved for listing. The trading symbol is expected to be
"IN". We cannot assure you that we will be approved for listing on the
Frankfurt Stock Exchange at the same time our Class B common stock trades on
the New York Stock Exchange or at all.
Before this offering, there has been no public market for our Class B
common stock. The initial public offering price has been determined through
negotiations between us and the representatives. The principal factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, were the valuation multiples of publicly-traded
companies that the representatives believe to be comparable to us, some of our
financial information, the history of, and the prospects for, our company and
the industry in which we compete, and an assessment of our management, its past
and present operations, the prospects for, and timing of, our future revenues,
the present state of our development and the above factors in relation to
market values and various value measures of other companies engaged in
activities similar to ours. We cannot assure you that an active trading market
will develop for our Class B common stock or that our Class B common stock will
trade in the public market subsequent to this offering at or above the initial
public offering price.
The underwriters do not expect sales of the Class B common stock to be
made to any accounts over which they exercise discretionary authority to exceed
five percent of the number of shares being offered in this offering.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the Class B common stock is completed, rules of
the SEC may limit the ability of the underwriters and some selling group
members to bid for and purchase our Class B common stock. As an exception to
these rules, the representatives are permitted to engage in transactions that
stabilize the price of our Class B common stock. These transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price
of our Class B common stock.
If the underwriters create a short position in our Class B common stock
in connection with the offering, that is, if they sell more shares of our Class
B common stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our Class B common
stock in the open market. The representatives may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above.
The representatives may also impose a penalty bid on our underwriters and
selling group members. This means that if the representatives purchase shares
of our Class B common stock in the open market to reduce the underwriters'
short position or to stabilize the price of our Class B common stock, they may
reclaim the amount of the selling concession from the underwriters and selling
group members who sold those shares.
78
<PAGE>
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of our Class B common stock to the
extent that it discourages resales of our Class B common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our Class B common stock. In addition,
neither we nor any of the underwriters makes any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued.
This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offerings made outside of the United
States, to persons located in the United States.
Other Relationships
Some of the underwriters and their affiliates have from time to time
provided, and may in the future provide, investment banking and general
financing and banking services to us and our affiliates. Merrill Lynch Capital
Corporation acted as the lender for our $50.0 million bridge loan facility.
Merrill Lynch & Co. acted as Lead Arranger and Syndication Agent to underwrite
and syndicate our $250.0 million senior secured credit facility for which it
received customary compensation. Merrill Lynch Capital Corporation and UBS
A.G., Stamford Branch, an affiliate of Warburg Dillon Read LLC, are also
lenders under the credit facility. In addition, Merrill Lynch & Co. loaned Jose
A. Collazo, our President, $125,000 in November 1999. The loan was a bridge
loan made for estate and tax planning purposes and is unsecured with an annual
interest rate of 8.16%. Warburg Dillon Read LLC acted as our financial advisor
in connection with the AUCS transactions and received customary fees.
LEGAL MATTERS
The validity of the issuance of the shares of Class B common stock to be
sold in the offering will be passed upon for us by Latham & Watkins, Costa
Mesa, California. Certain legal matters in connection with the issuance of the
Class B common stock to be sold in the offering will be passed upon for the
underwriters by Simpson Thacher & Bartlett, New York, New York.
EXPERTS
Our consolidated financial statements as of March 31, 1998 and 1999 and
for each of the years in the three year period ended March 31, 1999 and the
related financial statement schedule included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing in this prospectus and elsewhere in the
registration statement, and are included in reliance upon the reports of that
firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Act with respect to the shares of Class B common stock to be sold in the
offering. This prospectus does not contain all the information set forth in the
registration statement. For further information regarding our company and the
shares of Class B common stock to be sold in this offering, please refer to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. In each case you should read the contract, agreement or
other document, a copy of which is filed as an exhibit to the registration
statement.
79
<PAGE>
You may read and copy all or any portion of the registration statement or
any other information that we file at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
SEC located at Seven World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. You can request copies of these documents, upon payment of a duplicating
fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our SEC filings,
including the registration statement, are also available to you on the SEC's
Web site (http://www.sec.gov).
As a result of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, and, accordingly, will file periodic reports, proxy statements and
other information with the SEC. In addition to being available at the SEC, upon
approval of the Class B common stock for listing on The New York Stock
Exchange, our reports, proxy and information statements and other information
may also be inspected at the offices of The New York Stock Exchange, 20 Broad
Street, New York, New York.
80
<PAGE>
INFONET SERVICES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of March 31, 1998 (as Restated) and 1999
(as Restated) and September 30, 1999 (Unaudited)......................... F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for
the Years Ended March 31, 1997, 1998 (as Restated) and 1999 (as Restated)
and the Six Months Ended September 30, 1998 (Unaudited) and 1999
(Unaudited)............................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended March
31, 1997, 1998 (as Restated) and 1999 (as Restated) and the Six Months
Ended September 30, 1999 (Unaudited)...................................... F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1997,
1998 (as Restated) and 1999 (as Restated) and the Six Months Ended
September 30, 1998 (Unaudited) and 1999 (Unaudited)....................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Infonet Services Corporation
El Segundo, California:
We have audited the accompanying consolidated balance sheets of Infonet
Services Corporation and its subsidiaries (the "Company") as of March 31, 1998
and 1999, and the related consolidated statements of operations and
comprehensive income (loss), stockholders' equity, and cash flows for each of
the three years in the period ended March 31, 1999. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of March 31,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1999 in conformity with generally
accepted accounting principles.
As discussed in Note 16, the accompanying 1998 and 1999 consolidated
financial statements have been restated.
Los Angeles, California
June 14, 1999 (November 19, 1999 as to Note 16 and December , 1999 as to the
last paragraph of Note 17)
The accompanying consolidated financial statements reflect the 29,900-
for-1 split of common stock which is to be effected on or about December 20,
1999. The above report is in the form which will be signed by Deloitte & Touche
LLP upon consummation of such stock split, which is described in the last
paragraph in Note 17 of Notes to Consolidated Financial Statements, and
assuming that from June 14, 1999 to the date of such stock split, no other
events shall have occurred, other than those described in Note 17 of Notes to
Consolidated Financial Statements, that would affect the accompanying
consolidated financial statements and notes thereto.
/s/ Deloitte & Touche LLP
_____________________
Deloitte & Touche LLP
Los Angeles, California
November 19, 1999
F-2
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
March 31,
-------------------- September 30,
1998 1999 1999
--------- --------- -------------
(As Restated,
Note 16) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................. $ 11,449 $ 8,681 $ 39,202
Short-term investments.................... 18,533 8,196 976
Accounts receivable, net of allowances of
$3,851, $3,876 and (unaudited) $3,534 as
of March 31, 1998 and 1999, and September
30, 1999, respectively................... 47,170 58,168 58,849
Deferred income taxes..................... 6,189 5,387 7,577
Prepaid expenses.......................... 7,133 9,345 9,969
Other current assets...................... 283 500 437
--------- --------- ---------
Total current assets..................... 90,757 90,277 117,010
--------- --------- ---------
PROPERTY, EQUIPMENT AND COMMUNICATION
LINES, Net................................ 36,900 52,406 125,634
GOODWILL AND OTHER INTANGIBLE ASSETS, Net.. 5,114 4,573 3,787
OTHER ASSETS............................... 21,028 35,007 45,646
--------- --------- ---------
TOTAL ASSETS............................... $ 153,799 $ 182,263 $ 292,077
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations.. $ -- $ 1,662 $ 500
Current portion of capital lease
obligations.............................. 1,961 1,660 2,293
Accounts payable.......................... 14,564 20,058 31,334
Network communications.................... 5,339 4,112 7,928
Accrued salaries and related benefits..... 10,603 11,262 9,432
Income taxes payable...................... 7,200 10,360 4,060
Advance billings.......................... 12,021 13,999 13,812
Other accrued expenses.................... 11,126 10,158 11,844
--------- --------- ---------
Total current liabilities................ 62,814 73,271 81,203
DEFERRED INCOME AND COMPENSATION........... 16,373 19,252 23,832
CAPITAL LEASE OBLIGATIONS.................. 105 5,262 5,510
LONG-TERM OBLIGATIONS...................... -- 7,253 87,956
MINORITY INTEREST.......................... 376 508 470
COMMON STOCK SUBJECT TO PUT OPTION, Net:
Class C common stock, $0.01 par value per
share:
299,000 shares authorized;
9,445 shares issued and outstanding....... -- -- 7,897
Less notes receivable from issuance of
common stock............................. -- -- (7,910)
--------- --------- ---------
Total common stock subject to put
option, net............................. -- -- (13)
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock, $0.01 par value per
share:
373,750 shares authorized;
373,750 shares issued and 170,993 shares
outstanding; 202,757 shares held in
treasury................................. 67,819 67,819 67,819
Class B common stock, $0.01 par value per
share:
373,750 shares authorized;
202,757, 202,757 and 250,597 shares
issued and outstanding as of March 31,
1998 and 1999, and September 30, 1999,
respectively............................. 124,074 124,074 163,575
Stock subscription receivable............. -- -- (13,333)
Treasury stock, at cost, 202,757 shares... (121,184) (121,184) (121,184)
Retained earnings (accumulated deficit)... 4,515 7,464 (2,810)
Accumulated other comprehensive loss...... (1,093) (1,456) (948)
--------- --------- ---------
Total stockholders' equity.............. 74,131 76,717 93,119
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $ 153,799 $ 182,263 $ 292,077
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(As Restated,
Note 16) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES, Net............... $264,684 $294,244 $302,997 $140,571 $173,219
EXPENSES:
Country representative
compensation............. 35,090 41,136 53,766 24,929 31,035
Bandwidth and related
costs.................... 43,134 48,089 52,700 26,336 35,443
Network operations........ 81,106 77,489 55,041 26,852 32,899
Selling, general and
administrative........... 115,741 130,287 139,663 68,500 83,481
-------- -------- -------- -------- --------
Total expenses.......... 275,071 297,001 301,170 146,617 182,858
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS)..... (10,387) (2,757) 1,827 (6,046) (9,639)
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income........... 1,014 1,515 1,881 1,501 1,073
Interest expense.......... (874) (868) (689) (454) (2,883)
Other, net................ 2,591 2,969 382 (233) (111)
-------- -------- -------- -------- --------
Total other income
(expense), net......... 2,731 3,616 1,574 814 (1,921)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
PROVISION (CREDIT) FOR
INCOME TAXES AND MINORITY
INTEREST................... (7,656) 859 3,401 (5,232) (11,560)
PROVISION (CREDIT) FOR
INCOME TAXES............... (175) 4,446 (180) (255) (1,748)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
MINORITY INTEREST.......... (7,481) (3,587) 3,581 (4,977) (9,812)
MINORITY INTEREST........... -- (143) 132 16 (38)
-------- -------- -------- -------- --------
NET INCOME (LOSS)........... (7,481) (3,444) 3,449 (4,993) (9,774)
-------- -------- -------- -------- --------
OTHER COMPREHENSIVE INCOME
(LOSS):
Foreign currency
translation adjustments.. 56 (626) (241) 1,150 390
Unrealized gains (losses)
on securities............ 2 (10) 16 -- (20)
Minimum pension liability
adjustment, net of tax of
$92...................... -- -- (138) -- 138
-------- -------- -------- -------- --------
Total other
comprehensive income
(loss), net............ 58 (636) (363) 1,150 508
-------- -------- -------- -------- --------
COMPREHENSIVE INCOME
(LOSS)..................... $ (7,423) $ (4,080) $ 3,086 $ (3,843) $ (9,266)
======== ======== ======== ======== ========
BASIC AND DILUTED EARNINGS
(LOSS) PER COMMON SHARE.... $ (0.02) $ (0.01) $ 0.01 $ (0.01) $ (0.03)
======== ======== ======== ======== ========
BASIC AND DILUTED WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING......... 373,750 373,750 373,750 373,750 382,004
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1998 (AS RESTATED, NOTE 16)
AND 1999 (AS RESTATED, NOTE 16), AND
(UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30, 1999
(In Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
Accumulated
Retained Other
Common Stock Treasury Stock Stock Earnings Comprehensive
---------------- ------------------- Subscription (Accumulated Income
Shares Amount Shares Amount Receivable Deficit) (Loss) Total
------- -------- -------- --------- ------------ ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1996.. 547,589 $171,917 (173,839) $(104,495) $ -- $16,440 $ (515) $ 83,347
Common stock issued... 28,918 19,976 -- -- -- -- -- 19,976
Purchase of treasury
stock................ -- -- (28,918) (16,689) -- -- -- (16,689)
Net loss.............. -- -- -- -- -- (7,481) -- (7,481)
Dividends paid ($0.00
per share)........... -- -- -- -- -- (500) -- (500)
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- 56 56
Unrealized gains on
securities........... -- -- -- -- -- -- 2 2
------- -------- -------- --------- -------- ------- ------ --------
BALANCE, MARCH 31,
1997................... 576,507 191,893 (202,757) (121,184) -- 8,459 (457) 78,711
Net loss (as restated,
Note 16)............. -- -- -- -- -- (3,444) -- (3,444)
Dividends paid ($0.00
per share)........... -- -- -- -- -- (500) -- (500)
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- (626) (626)
Unrealized losses on
securities........... -- -- -- -- -- -- (10) (10)
------- -------- -------- --------- -------- ------- ------ --------
BALANCE, MARCH 31, 1998
(AS RESTATED, NOTE
16).................... 576,507 191,893 (202,757) (121,184) -- 4,515 (1,093) 74,131
Net income (as
restated, Note 16)... -- -- -- -- -- 3,449 -- 3,449
Dividends paid ($0.00
per share)........... -- -- -- -- -- (500) -- (500)
Foreign currency
translation
adjustments.......... -- -- -- -- -- -- (241) (241)
Unrealized gains on
securities........... -- -- -- -- -- -- 16 16
Minimum pension
liability
adjustments, net of
tax of $92........... -- -- -- -- -- -- (138) (138)
------- -------- -------- --------- -------- ------- ------ --------
BALANCE, MARCH 31, 1999
(AS RESTATED, NOTE
16).................... 576,507 191,893 (202,757) (121,184) -- 7,464 (1,456) 76,717
Net loss (unaudited).. -- -- -- -- -- (9,774) -- (9,774)
Common stock issued,
net of issuance cost
(unaudited).......... 47,840 39,501 -- -- -- -- -- 39,501
Stock subscription
receivable
(unaudited) ......... -- -- -- -- (13,333) -- -- (13,333)
Dividends paid ($0.00
per share)
(unaudited).......... -- -- -- -- -- (500) -- (500)
Foreign currency
translation
adjustments
(unaudited).......... -- -- -- -- -- -- 390 390
Unrealized losses on
securities
(unaudited).......... -- -- -- -- -- -- (20) (20)
Minimum pension
liability
adjustments, net of
tax of $92
(unaudited).......... -- -- -- -- -- -- 138 138
------- -------- -------- --------- -------- ------- ------ --------
BALANCE, SEPTEMBER 30,
1999 (UNAUDITED)....... 624,347 $231,394 (202,757) $(121,184) $(13,333) $(2,810) $ (948) $ 93,119
======= ======== ======== ========= ======== ======= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended March 31, September 30,
---------------------------- ------------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(As Restated,
Note 16) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (7,481) $ (3,444) $ 3,449 $ (4,993) $ (9,774)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 20,018 20,832 18,785 8,204 13,772
Gain on sale of business and other................... (3,730) (10,696) -- -- --
Gain on sale of property, equipment and communication
lines............................................... (453) -- (283) -- --
Deferred income taxes................................ (7,642) (799) (7,539) (859) (1,803)
Minority interest.................................... -- (143) 132 16 (38)
Changes in assets and liabilities, net of business
sold:
Accounts receivable, net............................. (3,069) (1,489) (10,974) (2,570) (818)
Prepaid expenses..................................... (1,730) (3,732) (2,409) (68) (589)
Other current assets................................. (152) 216 (419) (144) 63
Accounts payable..................................... (420) (504) 5,725 (2,899) 7,856
Network communications............................... (420) 2,412 (1,227) 299 (841)
Accrued salaries and related benefits................ 1,446 (290) 644 31 (1,846)
Income taxes payable................................. 3,629 1,926 3,099 (1,148) (6,408)
Advance billings..................................... 1,566 3,929 1,978 (598) (191)
Other accrued expenses............................... 2,163 2,807 (731) 4,111 5,305
Deferred income and compensation..................... (2,086) 4,743 3,609 2,903 5,574
Purchases of trading securities...................... (403) (7,599) (7,628) (3,952) (12,391)
Proceeds from sale of trading securities............. 147 6,238 5,957 2,978 4,459
Other operating activities........................... -- (1,375) (257) -- (67)
-------- -------- -------- -------- --------
Net cash provided by operating activities........... 1,383 13,032 11,911 1,311 2,263
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and communication
lines................................................ (16,182) (22,635) (27,033) (14,217) (51,518)
Proceeds from sale of property, equipment and
communication lines.................................. 3,194 12,467 902 33 10
Proceeds from sale of business........................ 3,884 33,522 -- -- --
Costs associated with sale of business................ -- (11,531) -- -- --
Purchases of short-term investments................... (3,958) (29,173) (11,115) (4,939) (1,957)
Proceeds from sale of short-term investments.......... 13,134 6,854 9,922 8,938 6,737
Maturities of short-term investments.................. 980 9,575 11,546 9,749 2,440
Purchases of held-to-maturity securities.............. -- (14,194) (4,435) (3,883) (2,467)
Maturity of held-to-maturity securities............... -- 9,540 2,205 1,812 7,975
Acquisition of businesses, net of cash acquired....... (4,095) 44 -- -- --
Other investing activities............................ (1,661) 20 (2,671) (1,886) (3,910)
-------- -------- -------- -------- --------
Net cash used in investing activities............... (4,704) (5,511) (20,679) (4,393) (42,690)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations....... 13,327 -- 16,000 6,500 110,000
Payments on long-term obligations..................... (1,298) (12,029) (7,085) -- (59,040)
Payment of capital lease obligations.................. (1,768) (1,861) (2,587) (747) (1,057)
Net proceeds from issuance of common stock............ 19,976 -- -- -- 26,708
Debt issuance cost.................................... -- -- -- -- (4,938)
Purchase of treasury stock............................ (16,689) -- -- -- --
Dividends paid........................................ (500) (500) (500) (500) (487)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities......................................... 13,048 (14,390) 5,828 5,253 71,186
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................ (269) (588) 172 845 (238)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 9,458 (7,457) (2,768) 3,016 30,521
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........... 9,448 18,906 11,449 11,449 8,681
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR................. $ 18,906 $ 11,449 $ 8,681 $ 14,465 $ 39,202
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes......................................... $ 3,838 $ 3,319 $ 4,913 $ 3,061 $ 6,741
Interest............................................. $ 428 $ 903 $ 698 $ 147 $ 2,642
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisitions of equipment through capital leases...... $ -- $ 584 $ 7,443 $ 4,027 $ 1,938
During June 1999, the Company acquired a right of use
of capacity in a fiberoptic submarine cable system
for a total commitment of $45.0 million. Of the total
commitment, $18.0 million was settled in cash in
June 1999 (unaudited).
During the six months ended September 30, 1999, the
Company issued shares of Class C common stock for
notes receivable amounting to $7,856 and shares of
Class B common stock for a stock subscription
receivable amounting to $13,333 (unaudited).
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
1. GENERAL INFORMATION
Description of Business--Infonet Services Corporation ("Infonet" or the
"Company") provides cross-border managed data communications services to
multinational corporations worldwide. Infonet's stockholders include six of the
world's major telecommunication companies. Infonet provides services directly
through country representatives and indirectly through major international
telecommunications carrriers and value-added resellers.
Fiscal Year--The Company's fiscal year is the 52- or 53-week period
ending on the Friday nearest to March 31. For simplicity of presentation, the
Company has described the 52-week period ended March 28, 1997, the 53-week
period ended April 3, 1998 and the 52-week period ended April 2, 1999 as the
years ended March 31, 1997, 1998 and 1999, respectively, and the 26-week
periods ended October 2, 1998 and October 1, 1999 as the six months ended
September 30, 1998 and 1999, respectively.
Unaudited Condensed Consolidated Interim Financial Statements--The
condensed consolidated financial statements as of September 30, 1999 and for
the six months ended September 30, 1998 and 1999 are unaudited. In the opinion
of management, the unaudited financial statements have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the financial position and the results of operations as of such date and for
such periods. Results of interim periods are not necessarily indicative of the
results to be expected for the entire fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--All majority-owned subsidiaries and
subsidiaries where the Company exercises economic control are included in the
consolidated financial statements. All significant intercompany accounts and
transactions have been eliminated. The Company's investments in 20% to 50%
owned companies in which it has the ability to exercise significant influence
over operating and financial policies of the investee are accounted for using
the equity method.
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. As with any estimates, actual results could differ
from those estimates.
Cash and Cash Equivalents--The Company considers all highly liquid
instruments purchased with an original maturity of three months or less to be
cash equivalents.
Fair Value of Financial Instruments--The carrying amounts of cash and
cash equivalents, short-term investments, accounts receivable, and accounts
payable approximate fair value because of the short-term maturities of these
instruments. The carrying amount of the long-term note payable approximates
fair value since the fixed rate charged on the note approximates the current
market rate.
Concentration of Credit Risk--The Company's financial instruments that
are exposed to concentration of credit risk consist primarily of its cash
equivalents, short-term investments, and accounts receivable. The Company
restricts investments in cash equivalents and short-term investments to
financial institutions with high
F-7
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
credit standing. Credit risk on accounts receivable is minimized as a result of
the large and diverse nature of the Company's worldwide customer base. The
Company performs ongoing credit evaluations of its customers' financial
condition and maintains allowances for potential credit losses.
Revenue Recognition--The Company records revenues for network services;
consulting, integration and provisioning services; applications services; and
other communications services when the services are provided. Such services are
provided under client contracts which generally have a term of 1 to 3 years.
Amounts for services billed in advance of the service period and cash received
in advance of revenues earned are recorded as advance billings and recognized
as revenue when earned. Approximately 14%, 8% and 0% of revenues for fiscal
year 1997, 1998 and 1999, respectively, is derived from long-term fixed priced
contracts with various U.S. government agencies. These long-term contracts are
accounted for utilizing the percentage of completion method of accounting
(cost-to-cost and output methods). An allowance for customer credits is accrued
concurrently with the recognition of revenue.
Depreciation and Amortization--The cost of property, equipment and
communication lines, less applicable estimated residual values, is depreciated
over their useful lives, on the straight-line method, from the date the
specific asset is complete, installed, and ready for normal use, as follows:
<TABLE>
<S> <C>
Communication, computer and
related equipment................ 3 to 5 years
Communication lines............... 10 years
Buildings......................... 40 years
Leasehold improvements............ Shorter of lease term or useful lives
Furniture and other equipment..... 5 to 10 years
</TABLE>
Investments in Securities--Short-term investments are classified as
available-for-sale with unrealized gains and losses reported as a separate
component of stockholders' equity. Cost and realized gains and losses from the
sale of short-term investments are based on the specific identification method.
Securities held in a trust pursuant to the Company's SERP (see Note 9)
are classified as held-to-maturity due to the fact that the Company has the
positive intent and ability to hold the securities to maturity. These
securities are stated at amortized cost, and are included in other assets. Cost
and realized gains and losses from the sale of held-to-maturity securities are
based on the specific identification method.
Securities held in a trust pursuant to the Company's IDIP (see Note 10)
are accounted for as trading securities due to the fact that the securities in
this trust are invested in accordance with the participants' direction. These
securities are recorded in other assets. Both realized and unrealized gains and
losses are included in other income.
Goodwill and Other Intangible Assets--Goodwill arising from the
acquisition of businesses is amortized on a straight-line basis over a period
of 20 years. Intangible assets include customer base and trademarks, which are
amortized over 10 years on a straight-line basis.
Impairment of Long-Lived Assets--The Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may no longer be recoverable. If the estimated
future cash flows (undiscounted and without interest charges) from the use of
an asset are less than the carrying value, a write-down would be recorded to
reduce the related asset to its estimated fair value. For purposes of
estimating future cash flows from possibly impaired assets, the Company groups
assets at the lowest level for which there are identifiable cash flows that are
largely independent of the cash flows of other groups of assets.
F-8
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
Income Taxes--Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and income tax bases
of assets and liabilities. Such deferred income tax asset and liability
computations are based on enacted tax laws and rates applicable to periods in
which the differences are expected to reverse. If necessary, a valuation
allowance is established to reduce deferred income tax assets to the amount
expected to be realized. U.S. income taxes have not been provided for the
undistributed earnings of the Company's foreign subsidiaries, since such
earnings are intended to be permanently reinvested in the operations of those
subsidiaries. At March 31, 1999 the cumulative undistributed earnings of the
Company's foreign subsidiaries was approximately $17,154,000 and unrecognized
deferred taxes were not material.
Foreign Currency Translation--For foreign operations, the balance sheet
accounts are translated at the year-end exchange rate, and income statement
items are translated at the average exchange rate for the year. Resulting
translation adjustments are recorded as a separate component of other
comprehensive income. Assets and liabilities denominated in foreign currencies
are remeasured at the balance sheet date. Resulting exchange rate gains or
losses are included as a component of current period earnings. Exchange gains
and losses are not material in amount in any period.
Treasury Stock--The Company accounts for treasury stock using the cost
method.
New Accounting Pronouncements--The Financial Accounting Standards Board
("FASB") has issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," (as
amended) which establishes new standards for reporting derivative and hedging
information. SFAS 133 (as amended) is effective for periods beginning after
June 15, 2000. Management has not completed its assessment of the impact of the
adoption of SFAS No. 133 (as amended) on the Company's financial position or
results of operations.
Reclassifications--Certain prior year amounts have been reclassified to
conform to current year presentation.
F-9
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
3. INVESTMENTS IN SECURITIES
The following is a summary of the available-for-sale securities
classified as current assets.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -------
<S> <C> <C>
As of March 31, 1998:
U.S. government securities.............................. $ 1,098 $ 1,097
Corporate debt instruments.............................. 17,445 17,436
------- -------
$18,543 $18,533
======= =======
As of March 31, 1999:
U.S. government securities.............................. $ -- $ --
Corporate debt instruments.............................. 8,190 8,196
------- -------
$ 8,190 $ 8,196
======= =======
</TABLE>
As of March 31, 1999, all short-term investments had a maturity of less
than one year. Proceeds from the sale and maturities of available-for-sale
securities amounted to approximately $14.1 million, $16.4 million and
$21.5 million for the years ended March 31, 1997, 1998 and 1999, respectively.
Gross unrealized and realized gains and losses on available-for-sale securities
were not material in any of these years or at March 31, 1998 or 1999.
The following is a summary of the held-to-maturity securities classified
as other assets.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- ------
<S> <C> <C>
As of March 31, 1998:
Mortgage-backed debt securities.......................... $1,713 $1,713
Corporate debt instruments............................... 1,021 1,020
Other debt securities.................................... 334 334
Commercial paper......................................... 1,193 1,193
U.S. government obligations.............................. 393 394
------ ------
$4,654 $4,654
====== ======
As of March 31, 1999:
Mortgage-backed debt securities.......................... $2,761 $2,773
Corporate debt instruments............................... 1,011 1,009
Other debt securities.................................... 3,112 3,112
------ ------
$6,884 $6,894
====== ======
</TABLE>
Gross unrealized gains and losses on held-to-maturity securities were not
material in each of the three years in the period ended March 31, 1999.
Maturities on held-to-maturity debt securities range from overnight to two
years.
The net unrealized holding gains (losses) on trading securities amounted
to $598,000, $798,000 and $96,000 for the years ended March 31, 1997, 1998, and
1999, respectively.
F-10
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
4. INCOME TAXES
The provision for (benefit from) income taxes is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current:
Federal........................................ $ 4,018 $ 2,493 $ 3,729
State.......................................... 796 1,119 1,078
Foreign........................................ 2,653 1,633 2,552
------- ------- -------
7,467 5,245 7,359
------- ------- -------
Deferred:
Federal........................................ (6,656) (180) (6,023)
State.......................................... (986) (619) (1,516)
------- ------- -------
(7,642) (799) (7,539)
------- ------- -------
$ (175) $ 4,446 $ (180)
======= ======= =======
</TABLE>
The components of income (loss) before income taxes and minority
interest are (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
1997 1998 1999
------- ---- -------
<S> <C> <C> <C>
Federal............................................. $(8,229) $669 $(4,537)
Foreign............................................. 573 190 7,938
------- ---- -------
$(7,656) $859 $ 3,401
======= ==== =======
</TABLE>
The following table reconciles the difference between the U.S. federal
statutory tax rate and the rates used by the Company in the determination of
net income (loss) (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------
1997 1998 1999
------- ------ -------
<S> <C> <C> <C>
Provision for income taxes, at 34%................ $(2,603) $ 292 $ 1,156
State taxes, net of federal effect................ (125) 330 (289)
Difference in U.S. federal and foreign tax rates,
net.............................................. 581 188 282
Effect of foreign losses.......................... 1,729 1,283 --
Valuation allowance............................... -- 1,617 (1,617)
Non-deductable expense items...................... 251 269 233
Other............................................. (8) 467 55
------- ------ -------
$ (175) $4,446 $ (180)
======= ====== =======
</TABLE>
F-11
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
The principal components of deferred tax assets and (liabilities) are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Differences between book and tax bases of
property....................................... $(2,543) $ 601 $ 6,155
Compensation and benefit accruals............... 2,839 4,159 5,933
Billings in excess of revenues.................. 2,563 3,346 3,953
Net operating loss benefit...................... 2,656 1,617 --
Alternative minimum tax credit carryforward..... 662 459 --
Accrued contract costs.......................... 1,532 -- --
Other........................................... 383 326 389
------- ------- -------
8,092 10,508 16,430
Valuation allowance............................. -- (1,617) --
------- ------- -------
$ 8,092 $ 8,891 $16,430
======= ======= =======
</TABLE>
Although realization is not assured, management believes that it is more
likely than not that all deferred income tax assets at March 31, 1999 will be
realized. If, however, estimates of future taxable income were to materially
decline, the carrying value of deferred income tax assets could be reduced.
5. COMMITMENTS AND CONTINGENCIES
Leases--Minimum fixed payments required for the next five years and
thereafter under capital and operating leases in effect at March 31, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases
Capital -----------------
Leases Real
Equipment Estate Equipment
--------- ------- ---------
<S> <C> <C> <C>
2000............................................ $ 2,027 $ 3,500 $4,467
2001............................................ 1,932 2,210 2,955
2002............................................ 1,604 1,478 2,204
2003............................................ 1,604 1,046 185
2004............................................ 981 949 34
2005 and thereafter............................. -- 1,604 30
------- ------- ------
8,148 $10,787 $9,875
======= ======
Imputed interest................................ (1,226)
-------
Present value of net minimum lease payments..... $ 6,922
=======
</TABLE>
Rental expense under noncancelable operating leases for the use of real
estate and equipment amounted to approximately $8,480,000, $8,800,000 and
$8,886,000 in 1997, 1998 and 1999, respectively.
The Company leases certain communication lines and related bandwidth for
its backbone network under short-term arrangements which are cancelable by
either party.
Capital leases pertain to amounts due under leases for the use of
communications and related equipment. The net book value at March 31, 1998 and
1999 of the related assets included in property, equipment and communication
lines was approximately $1,055,000 and $8,006,000, respectively.
F-12
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
During November 1999, the Company's existing headquarters facility lease
with Computer Sciences Corporation will expire and the Company is currently
continuing to lease the facility on a month-to-month basis. The Company has
entered into a 12-year lease agreement for a new facility, which will commence
upon completion of construction. The expected date of the relocation to the new
facility is November 1999. The minimum lease payments disclosure above does not
reflect the new facility lease because the rent has not yet been determined.
However, the annual base rent is expected to approximate $3.0 million with
increases every 30 months. The first increase will be 7%, with additional
increases based on a formula using the Consumer Price Index. The terms of the
lease agreement require the Company to maintain certain financial covenants.
Additionally, the lease agreement includes an option to purchase the building
within 90 days of the commencement of the lease. The Company has not determined
whether it will exercise that option.
Litigation--During the normal course of business, the Company may be
subject to litigation involving various business matters. Management believes
that an adverse outcome of any such known matters would not have a material
adverse impact on the Company.
6. PROPERTY, EQUIPMENT AND COMMUNICATION LINES
Property, equipment and communication lines consist of the following (in
thousands):
<TABLE>
<CAPTION>
March 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Communication, computer and related equipment........... $ 96,575 $114,922
Communication lines..................................... -- 9,811
Land, buildings and leasehold improvements.............. 9,927 10,272
Furniture and other equipment........................... 5,621 6,239
-------- --------
112,123 141,244
Less accumulated depreciation and amortization.......... 75,223 88,838
-------- --------
Net property, equipment and communication lines......... $ 36,900 $ 52,406
======== ========
</TABLE>
7. OTHER ASSETS
Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
SERP minimum pension liability (see Note 9)............... $ 3,232 $ 3,014
SERP assets (see Note 9).................................. 4,654 6,884
IDIP assets (see Note 10)................................. 8,829 9,813
Deferred income taxes..................................... 2,702 11,043
Unconsolidated investments in affiliates.................. 621 863
Other..................................................... 990 3,390
------- -------
$21,028 $35,007
======= =======
</TABLE>
8. LONG-TERM OBLIGATIONS
The Company has a $10.0 million credit agreement (the "Credit Agreement")
with a bank, expiring in July 1999, under which no borrowings were outstanding
as of March 31, 1998 or 1999. Borrowings under the Credit Agreement bear
interest, at the Company's option, at either the prime rate or London Interbank
Offering Rate ("LIBOR") plus 1.25%. The terms of the Credit Agreement contain,
among other provisions, requirements for maintaining defined levels of
profitability, tangible net worth, and various financial ratios. The amount of
credit available under the Credit Agreement is reduced by the amount of
outstanding letters of
F-13
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
credit, which totaled $2.5 million at March 31, 1999. Thus, total available
credit under the line was $7.5 million at March 31, 1999.
In December 1998, the Company obtained a $9.5 million note payable with
the same bank. This five-year note accrues interest at a fixed rate of 7.36%
and is collateralized by the leased communication lines.
Maturities of long-term debt for the next five years are as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended:
<S> <C>
2000........................................................... $1,662
2001........................................................... 1,789
2002........................................................... 1,925
2003........................................................... 2,071
2004........................................................... 1,468
------
Total........................................................... 8,915
Less current portion............................................ (1,662)
------
$7,253
======
</TABLE>
F-14
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
9. EMPLOYEE BENEFIT PLANS
Pensions--The Infonet Pension Plan (the "Plan") is a contributory defined
benefit pension plan in which substantially all domestic employees are eligible
to participate. The benefits for the Plan are based on years of participation
and the employee's compensation over the entire period of participation in the
Plan. In addition, the Company has a Supplemental Executive Retirement Plan
(the "SERP"), which is a nonqualified, noncontributory pension plan. The SERP
is a defined benefit retirement plan for designated key officers and executives
and provides for benefits based on years of service, age of participant, and
the participant's average compensation during his or her final period of
employment under the SERP.
The following tables provide a reconciliation of the changes in the
plans' benefit obligations and fair value of assets over the two years, and a
statement of the funded status as of each year-end (dollars in thousands):
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
------------------ ----------------
1998 1999 1998 1999
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of
year.............................. $ 15,784 $ 20,135 $ 690 $ 578
Service cost....................... 835 1,007 -- --
Interest cost...................... 1,199 1,398 51 40
Plan participants' contributions... 494 487 -- --
Amendments......................... 1,309 -- -- --
Actuarial (gain) loss.............. 962 2,418 (140) (37)
Benefits paid...................... (448) (628) (23) (26)
-------- -------- ------- -------
Benefits obligation at end of
year.............................. 20,135 24,817 578 555
-------- -------- ------- -------
Change in plan assets
Fair value of plan assets at
beginning of year................. 10,689 12,250
Actual return on plan assets....... 1,515 2,009
Plan particpants' contributions.... 494 487
Benefits paid...................... (448) (628)
-------- -------- ------- -------
Fair value of plan assets at end of
year.............................. 12,250 14,118
-------- -------- ------- -------
Funded status...................... (7,885) (10,699) (578) (555)
Unrecognized net actuarial loss
(gain)............................ 806 2,219 (853) (836)
Unrecognized prior service cost.... 3,514 3,035 1,089 1,025
-------- -------- ------- -------
Net amount recognized.............. $ (3,565) $ (5,445) $ (342) $ (366)
======== ======== ======= =======
Amounts recognized in the statement
of financial position consist of:
Accrued benefit liability......... $ (6,797) $ (8,689) $ (578) $ (555)
Intangible asset.................. 3,232 3,014 236 189
Accumulated other comprehensive
income........................... -- 230 -- --
-------- -------- ------- -------
Net amount recognized.............. $ (3,565) $ (5,445) $ (342) $ (366)
======== ======== ======= =======
Weighted-average assumptions as of
year-end:
Discount rate..................... 7.00% 6.50% 7.00% 6.50%
Expected return on plan assets.... 9.00% 9.00% N/A N/A
Rate of compensation increase..... 5.43% 4.93% N/A N/A
</TABLE>
F-15
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
The rate of compensation increase shown is for the qualified pension
plan. For the nonqualified pension plan, compensation is assumed to increase at
a 4% annual rate.
For measurement purposes, an 8% annual rate of increase in the per capita
cost of covered health care benefits was assumed in 1999. The rate was assumed
to decrease gradually to 5% for 2002 and remain at that level thereafter.
Net periodic benefit cost for pension plans include the following
components (in thousands):
<TABLE>
<CAPTION>
Other Postretirement
Pension Benefits Benefits
------------------------ ---------------------
1997 1998 1999 1997 1998 1999
------ ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Service cost............ $ 822 $ 835 $ 1,007 $ -- $ -- $ --
Interest cost........... 984 1,199 1,398 90 51 40
Expected return on plan
assets................. (866) (1,023) (1,108) -- -- --
Amortization of prior
service cost........... 327 356 478 64 64 64
Recognized actuarial
(gain)loss............. -- (27) 103 -- (45) (54)
------ ------- ------- ------ ------ ------
Net periodic benefit
cost................... $1,267 $ 1,340 $ 1,878 $ 154 $ 70 $ 50
====== ======= ======= ====== ====== ======
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $5,338, $3,451 and $0, respectively
as of March 31, 1997, $7,549, $5,824, and $0, respectively, as of March 31,
1998 and $10,077, $7,251, and $0, respectively as of March 31, 1999 (all
figures are in thousands).
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
thousands):
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on total service and interest cost
components..................................... $ 2 $ (2)
Effect on postretirement benefit obligation..... $22 $(24)
</TABLE>
At March 31, 1998 and 1999, the Company earmarked a total of $4.7 million
and $6.9 million, respectively, and placed these amounts in a rabbi trust to
satisfy future SERP liabilities. These assets are accounted for as "held-to-
maturity" and included in other assets in the accompanying consolidated
financial statements.
Employees outside the United States are generally enrolled in pension
plans in the country of domicile. These plans are not considered to be
significant individually or in the aggregate to the Company's financial
statements. The pension liabilities and their related costs are computed in
accordance with the laws of the individual countries and appropriate actuarial
practices.
10. STOCK INCENTIVE AND DEFERRED COMPENSATION PLANS
During 1999, the Company's Board of Directors adopted the 1998 Employee
Stock Purchase Plan (the "Purchase Plan"), 1998 Stock Appreciation Rights Plan
(the "SARs Plan"), and 1998 Stock Option Plan (the "Option Plan"). The Company
has elected to account for stock-based compensation in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to
F-16
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
Employees." SFAS No. 123, "Accounting for Stock-Based Compensation," encourages
a fair value-based method of accounting for stock-based compensation. As
permitted by SFAS No. 123, the Company adopted its disclosure-only
requirements.
Under the Purchase Plan, the Company is authorized to issue up to
17,940,000 shares of its newly authorized Class C common stock, $0.01 par value
("Class C Stock") to 35 participants designated by the Committee which
administers the Purchase Plan. The Purchase Plan is a book value plan whereby
participants may purchase shares of the Company's stock at book value at the
date of grant, as calculated in accordance with the Purchase Plan. The Purchase
Plan provides that book value is determined using a formula based on a multiple
of the Company's consolidated revenue. The Purchase Plan also provides that the
Company has a call right to repurchase the shares from stockholders under the
Purchase Plan who leave the Company's employ, or on or after March 15, 2003,
provided that the stock is not publicly traded. The stockholders under the
Purchase Plan also have a right to put the shares purchased under the Purchase
Plan to the Company, which then has to repurchase the shares at its book value
as of that date, provided that the stock is not publicly traded. During 1999,
the Company granted purchase rights with respect to approximately 9,501,622
shares at $0.84 per share.
Pursuant to the Company's SARs Plan, the maximum number of SARs that may
be offered is 1,495,000. The stock referred to in the SARs Plan is the newly
authorized Class C Stock. The SARs vest at 25% per year over four years with
the first quartile vesting on January 1, 2001. The SARs Plan terminates October
20, 2004 or earlier if certain conditions of the SARs Plan have been fully met.
During fiscal 1999, the Company granted 1,207,362 SARs which are indexed to the
Company's Class C common stock at a base price of $0.84 per share.
Under the Option Plan, the Company is authorized to issue options to
purchase up to 8,970,000 shares of its Class C Stock. Options granted under the
Option Plan vest ratably over five years. All options must be exercised within
ten years from the date of original grant. The Option Plan is a book value plan
whereby participants are granted options to purchase shares of the Company's
stock at book value, as determined at the date of grant and as calculated in
accordance with the Option Plan. The Option Plan provides that book value is
determined using a formula based on a multiple of the Company's consolidated
revenue. The Option Plan also provides that the Company has a call right to
repurchase the shares from stockholders under the Option Plan who leave the
Company's employ, or on or after March 15, 2003, provided that the stock is not
publicly traded. The stockholders under the Option Plan also have a right to
put the shares purchased under the Option Plan to the Company, which then has
to repurchase the shares at its book value as of that date, provided that the
stock is not publicly traded. During 1999, no options were granted.
The Company has a nonqualified deferred income plan (the "IDIP") for
employees earning over a prescribed amount. Participants may defer receipt of
compensation, which is held by the Company in trust and is invested in
accordance with the participants' directions. As of March 31, 1998 and 1999,
the trust assets held by the Company aggregated $8,829,000 and $9,813,000,
respectively; the vested portion of trust assets aggregated $6,875,000 and
$8,528,000, respectively. These assets are accounted for as trading securities
and included in other assets in the accompanying financial statements.
In 1995, the Company created an agreement with the participants of the
Infonet Phantom Stock Option Plan (the "Phantom Stock Plan") whereby the
participants could elect either a cash or deferral option for the vested value
of grants under the Phantom Stock Plan at the end of 1994, effectively
terminating the Phantom Stock Plan. Participants who elected the deferral
option are eligible to receive additional amounts through 1999, based on the
Company's achieving revenue and profit goals and the individuals' continued
employment. Under this arrangement, the expense in 1997, 1998 and 1999 was
$900,000, $803,000 and $830,000, respectively. Participants can elect to have
their annual vested portion contributed to their individual account as part of
the IDIP.
F-17
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
11. STOCKHOLDERS' EQUITY
During 1999, the Company amended its Certificate of Incorporation to
establish a third class of common stock. As of March 31, 1999, the Company has
three classes of common stock as follows:
<TABLE>
<CAPTION>
Shares Shares Shares
Authorized Issued Outstanding
----------- ----------- -----------
<S> <C> <C> <C>
Class A, net of 202,756,983 shares of
treasury stock....................... 373,750,000 373,750,000 170,993,017
Class B............................... 373,750,000 202,756,983 202,756,983
Class C............................... 299,000,000 -- --
----------- -----------
576,506,983 373,750,000
=========== ===========
</TABLE>
Class A shares have voting rights. Class B shares are identical in
rights and privileges to Class A, except that Class B does not have voting
rights. Class C shares are identical in rights and privileges to Class B,
except that upon the closing of an underwritten initial public offering, as
defined, each outstanding share of Class C common stock shall automatically
convert into one share of the class of common stock registered in connection
with the initial public offering.
12. RELATED-PARTY TRANSACTIONS
Related parties consist of non-consolidated country representative
organizations in which the Company holds less than a fifty percent ownership
interest and country representative organizations owned directly or indirectly
by the Company's stockholders, and the Company's stockholders.
Related party transactions for the years ended March 31 comprise the
following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues, net........................................ $39,512 $62,594 $88,278
Country representative compensation.................. 19,322 29,261 40,031
Bandwidth and related costs.......................... 7,166 7,347 9,002
Selling, general and administrative.................. 7,856 8,553 9,181
</TABLE>
Related party balances as of March 31 comprise the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Accounts receivable......................................... $10,506 $14,442
Accounts payable............................................ 615 908
Network communications...................................... 1,053 531
</TABLE>
13. ACQUISITIONS AND DIVESTITURES
On January 3, 1997 the Company acquired 95% of the capital stock of
Interpac Belgium S.A. The purchase price was approximately $3,120,000 and the
resulting goodwill recorded was approximately $103,000. Prior to this date the
Company owned a 5% interest in Interpac Belgium S.A. which was accounted for
on the cost basis. In March 1997 the Company acquired an additional 36%
interest in its Luxembourg subsidiary for $330,000 bringing its ownership to
51%.
These acquisitions were accounted for under the purchase method. The
excess of the purchase cost of the acquisitions over the fair value of the net
assets acquired was recorded as goodwill which is being amortized on a
straight-line basis over 20 years.
F-18
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
During fiscal 1997 the Company sold its remaining interest in a foreign
affiliate for a pretax gain of $1,030,000 and Interpac Belgium sold its
Internet business to one of its former shareholders for a net pretax gain of
$2,700,000. These pretax gains are recorded in other income in the statement of
operations and comprehensive income (loss).
In October 1997, the Company sold the net assets of its subsidiary,
Government Systems, Inc. ("GSI"), to a third party for $21.0 million in cash
and received $5.5 million as a working capital adjustment to pay down GSI loans
prior to transfer of the net assets sold. The sale resulted in a pretax gain of
$3.7 million, which is recorded in other income in the statement of operations
and comprehensive income (loss). GSI's results from operations included in the
1998 consolidated statements of operations and comprehensive income (loss) were
revenues of $32.5 million and income before income taxes of $4.0 million.
Additionally, the Company sold its government accounts to the same third party
and entered into an agreement allowing the third party to operate as a country
representative for a total of $7.0 million in cash.
14. EARNINGS PER SHARE
As of March 31, 1997 and 1998, there were no forms of potential common
stock issued by the Company. The Company's outstanding purchase rights
represent the only form of potential common stock at March 31, 1999. All of
these potential common shares were excluded from the computation of diluted
earnings per share ("EPS") because their inclusion would have had an
antidilutive effect on EPS.
Unaudited: As of September 30, 1998, there were no forms of potential
common stock issued by the Company. The Company's outstanding stock options
represent the only form of potential common stock at September 30, 1999. All of
these potential common shares were excluded from the computation of diluted EPS
because their inclusion would have been antidilutive.
15. SEGMENT INFORMATION
The Company conducts business in two operating segments: country
representatives or Direct Sales Channels ("Direct") and Alternate Sales
Channels ("Alternate"). Both these segments generate revenues from providing
customers with a complete global networking solution.
The Company has organized its operating segments around differences in
distribution channels used to deliver its services to customers. These segments
are managed and evaluated separately because each segment possesses different
economic characteristics requiring different marketing strategies.
The accounting policies adopted for each segment are the same as those
described in the summary of significant accounting policies. The Company's
management evaluates performance based on operating contribution, where segment
revenues are reduced by those costs that are allocable to the segments. Costs
relating to operating the Company's core network, and non-allocable general,
administrative, marketing and overhead costs, including income tax expense, are
not charged to the segments. Accordingly, neither assets related to the core
network, nor their associated depreciation expense are allocated to the
segments.
The Company accounts for intersegment transactions on the same terms and
conditions as if the transactions were with third parties.
F-19
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands).
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
-------------------------- -----------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
Reportable segments:
- -------------------- (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues from external customers:
Direct.......................... $258,187 $279,844 $273,150 $128,209 $153,081
Alternate....................... 6,497 14,400 29,847 12,362 20,138
-------- -------- -------- -------- --------
Totals........................ $264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
Operating Contribution:
Direct.......................... $ 93,781 $105,171 $ 97,350 $ 43,272 $ 55,367
Alternate....................... 2,316 7,621 16,975 7,217 11,842
-------- -------- -------- -------- --------
Totals........................ $ 96,097 $112,792 $114,325 $ 50,489 $ 67,209
======== ======== ======== ======== ========
Depreciation and amortization of:
Direct.......................... $ 4,309 $ 4,039 $ 5,163 $ 2,582 $ 3,300
Alternate....................... 4 5 36 2 3
-------- -------- -------- -------- --------
Totals........................ $ 4,313 $ 4,044 $ 5,199 $ 2,584 $ 3,303
======== ======== ======== ======== ========
Total assets:
Direct.......................... $ 76,499 $ 52,031 $ 63,459 $ 58,508 $ 62,808
Alternate....................... 1,192 3,503 8,683 5,240 9,191
-------- -------- -------- -------- --------
Totals........................ $ 77,691 $ 55,534 $ 72,142 $ 63,748 $ 71,999
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
------------------------------- ------------------
1997 1998 1999 1998 1999
--------- --------- --------- -------- --------
Reconciliations: (As Restated, Note
- ---------------- 16) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating contribution
from reportable
segments................ $ 96,097 $ 112,792 $ 114,325 $ 50,489 $ 67,209
Core network, overhead
and other non-allocable
costs................... (103,753) (111,933) (110,924) (55,721) (78,769)
--------- --------- --------- -------- --------
Income (loss) before
income taxes and
minority interest....... $ (7,656) $ 859 $ 3,401 $ (5,232) $(11,560)
========= ========= ========= ======== ========
Total assets of
reportable segments..... $ 77,691 $ 55,534 $ 72,142 $ 63,748 $ 71,999
Core network, corporate
and other non-allocable
assets.................. 81,748 98,265 110,121 98,567 220,078
--------- --------- --------- -------- --------
Total assets............. $ 159,439 $ 153,799 $ 182,263 $162,315 $292,077
========= ========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
-------------------------- -----------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
Geographic Information:
- ----------------------- (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues from external customers
based upon the country in which
invoices are produced are as
follows:
United States.................. $135,460 $129,822 $103,190 $ 48,276 $ 56,448
Netherlands.................... 8,449 20,091 34,944 15,492 21,044
Germany........................ 14,735 17,742 23,438 10,493 13,783
United Kingdom................. 11,488 12,604 19,682 9,310 13,033
Other.......................... 94,552 113,985 121,743 57,000 68,911
-------- -------- -------- -------- --------
$264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
</TABLE>
F-20
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
Six Months Ended
Year Ended March 31, September 30,
-------------------------- -----------------
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
(As Restated,
Note 16) (Unaudited)
Geographic Information:
- -----------------------
<S> <C> <C> <C> <C> <C>
Long-lived assets:
United States................... $ 46,048 $ 29,877 $ 44,529 $ 39,864 $117,031
United Kingdom.................. 2,269 2,604 2,862 2,764 3,379
Other........................... 3,537 4,419 5,015 5,189 5,224
-------- -------- -------- -------- --------
$ 51,854 $ 36,900 $ 52,406 $ 47,817 $125,634
======== ======== ======== ======== ========
<CAPTION>
Services Information:
- ---------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers:
Network services................ $ 66,153 $100,337 $144,642 $ 66,927 $ 95,891
Consulting, integration and
provisioning services.......... 48,264 58,637 78,777 37,090 45,729
Applications services........... 16,604 22,433 20,068 9,000 7,673
Other communications services... 87,897 72,769 59,510 27,554 23,926
Government services............. 45,766 40,068 -- -- --
-------- -------- -------- -------- --------
$264,684 $294,244 $302,997 $140,571 $173,219
======== ======== ======== ======== ========
</TABLE>
16. RESTATEMENT
Subsequent to the issuance of the Company's 1999 financial statements,
the Company's management determined that a charge of $3.3 million related to
certain network equipment taken in 1998 was in error. As a result, the 1998 and
1999 financial statements have been restated from the amounts previously
reported as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
As
Previously As
Reported Restated
---------- --------
<S> <C> <C>
As of March 31, 1998:
Property, Equipment and Communication Lines, net......... $33,583 $36,900
Income Taxes Payable..................................... 5,873 7,200
Retained Earnings........................................ 2,525 4,515
Year ended March 31, 1998:
Network Operations....................................... 80,806 77,489
Net Loss................................................. (5,434) (3,444)
Basic and diluted loss per common share.................. (0.01) (0.01)
As of March 31, 1999:
Property, Equipment and Communication Lines, net......... 51,133 52,406
Income Taxes Payable..................................... 9,851 10,360
Retained Earnings........................................ 6,700 7,464
Year ended March 31, 1999:
Network Operations....................................... 52,997 55,041
Net Income............................................... 4,675 3,449
Basic and diluted earnings per common share.............. 0.01 0.01
</TABLE>
F-21
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
17. SUBSEQUENT EVENTS
During April 1999, 9,444,513 of the 9,501,622 rights to purchase shares
of Class C Stock granted under the Purchase Plan were exercised by employees
and the remaining rights expired unexercised. Of the total shares issued,
9,396,075 shares were purchased with full recourse notes in the amount of
$7,856,000, by the employees to the Company and 48,438 shares issued were
purchased with cash. The notes bear interest at 5% per year and are payable on
January 1, 2002 (the "Maturity Date"); provided however, that if the shares of
common stock, or a class of securities into which such shares are convertible,
are sold in an initial public offering after January 1, 2000, but before the
Maturity Date, the Maturity Date shall be extended by the period of time, if
any, between January 1, 2000 and the date of such initial public offering.
During April 1999, the Company granted options to acquire 3,707,600 shares of
Class C Stock with an exercise price of $0.84 per share. These options vest
ratably over five years.
In May 1999, the Company obtained a $50.0 million bridge loan facility
(the "Bridge Loan") from Merrill Lynch Capital Corporation. The Bridge Loan
bears interest at LIBOR plus 2.5% and expires in November 1999. The Company
used a portion of the proceeds from the Bridge Loan to repay the existing $10.0
million line of credit.
Unaudited
Subsequent to June 14, 1999, the Company amended the SARs Plan by
eliminating the limit on the maximum number of SARs that may be offered and the
termination date of October 20, 2004. The Company also issued 365,079
additional SARs under the SARs Plan which are indexed to the Company's Class C
common stock at a base price of $0.84 per share. As of September 30, 1999,
there were 1,572,441 SARs outstanding.
During June 1999, the Company entered into an agreement for the long-term
right of use of capacity in a fiberoptic submarine cable system (the "Right of
Use"). The Right of Use acquired by the Company is comprised of three units of
capacity at a total commitment of $45.0 million. The first unit of capacity was
activated in June 1999 for a payment of $18.0 million. The second installment
of $12.0 million is due on the earlier of the activation of the second unit of
capacity or June 30, 2000. The third installment of $15.0 million is due on the
earlier of the activation of the third unit of capacity or June 30, 2000. The
Company intends to refinance the second and third installment obligations
through drawdowns on the Senior Secured Credit Facility described below. The
Company has the right to have the capacity activated at any time after the date
of the agreement and has the right to use the capacity to the end of the cable
system's design life which is expected to occur in 2022. The Right of Use was
recorded as communication lines.
On August 17, 1999, the Company entered into a new credit agreement (the
"New Credit Agreement") with a syndicate of lenders to provide credit
facilities to the Company in an aggregate amount of $250.0 million (the "Senior
Secured Credit Facility"). The Senior Secured Credit Facility consists of two
term loan borrowing facilities, in the amount of $100.0 million (the "Delayed
Draw Term Loan") and $50.0 million (the "Tranche B Term Loan"), respectively,
and a revolving credit borrowing facility in the amount of $100.0 million (the
"Revolving Credit Facility"). The Tranche B Term Loan was used to pay down in
full all amounts outstanding on August 20, 1999 under the Bridge Loan and the
$9.5 million note payable. The Tranche B Term Loan bears interest, at the
Company's option, at the Base Rate, as defined below, plus 1.75% or the
eurodollar rate plus 2.75%, and matures in 28 consecutive unequal quarterly
installments, commencing on September 30, 1999. The Delayed Draw Term Loan is
accessible until August 20, 2000, bears interest, at the Company's option, at
the Base Rate, as defined below, plus 1.50% or the eurodollar rate plus 2.50%,
and matures in 20 consecutive unequal quarterly installments, commencing on
September 30, 2001. The Revolving Credit Facility is accessible
F-22
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
until August 20, 2005, bears interest, at the Company's option, at the Base
Rate, as defined below, plus 1.50% or the eurodollar rate plus 2.50% (which
margin will vary after February 20, 2000, depending on the Company's leverage
ratio), and matures on August 17, 2005. The Company is also required, by
February 17, 2000, to enter into hedge agreements to provide that at least 50%
of the outstanding term loans are subject to either a fixed interest rate or
interest rate protection for a period acceptable to the administrative agent.
The Base Rate is defined as the greatest of the Prime Rate, the Base CD
Rate plus 1.00% and the Federal Funds Effective Rate plus 0.50% in effect on a
given day. The loans under the Senior Secured Credit Facility are secured by
substantially all of the domestic tangible assets and all intangible assets of
the Company and its domestic subsidiaries, excluding certain specific assets
identified in the New Credit Agreement. Under the terms of the Senior Secured
Credit Facility the Company is required to maintain certain financial ratios
and other financial conditions, and there are restrictions imposed on certain
transactions of the Company. The Senior Secured Credit Facility also provides
for letters of credit to be available to the Company. Furthermore, the New
Credit Agreement requires the Company to pay commitment fees of between 0.50%
and 1.00% per year calculated quarterly on the average daily amount of
available credit, dependent on the amount of the aggregate principle amounts
outstanding under the Senior Secured Credit Facility. These commitment fees are
payable quarterly in arrears.
In September 1999, the Company committed to a plan to dispose its
subsidiary, ESG Communications Inc. ESG was formed as a wholly owned subsidiary
of the Company in March 1998 to sell telecommunications services over
international bypass routes. Since formation, ESG established seven routes.
However, substantially increased competition and other market factors have
decreased the prices which ESG can charge its customers to less than half of
those anticipated by the Company at the time of formation of ESG. These
decreased prices and less than anticipated volumes have resulted in current and
forecasted negative cash flows from the operation of each of ESG's routes.
Management's plans to dispose of ESG call for the sale or abandonment of those
routes. Two of ESG's routes were shut down and abandoned prior to September 30,
1999, and one was shut down and abandoned in October 1999. Management
anticipates that the remaining routes, if not sold, will be shut down and
abandoned by December 31, 1999.
In connection with its decision to dispose of ESG, the Company recorded a
total charge of $4.0 million. This charge was comprised of $3.6 million related
to the impairment of communication equipment, of which approximately
$1.2 million related to routes abandoned before September 30, 1999, and
$400,000 related to remaining payments, after operations cease, under
communication line leases which have no alternative use to the Company. All
such lease payments will be made in cash within the next twelve months. The
$3.6 million impairment charge and the $400,000 charge for lease payments are
included in network operations, and bandwidth and related costs, respectively,
in the accompanying consolidated statement of operations for the six months
ended September 30, 1999. The impairment charge was determined to be equal to
the carrying value of the equipment as the discounted estimated future cash
flows from each of the routes were negative. Management's efforts to date to
sell the routes or the equipment have been unsuccessful. Management estimates
that the proceeds from the sale of equipment or routes, should the Company be
successful in selling any, will not be material. Revenues and losses from
operations of ESG were $270,000 and $1.4 million, respectively, for the fiscal
year ended March 31, 1999, and $1.7 million and $2.0 million, respectively, for
the six months ended September 30, 1999.
On September 30, 1999, the Company entered into agreements with three of
its stockholders (the "Stockholders") and affiliates of the Stockholders which,
among other things, give the Company access to additional multinational
corporate clients of the Stockholders. In exchange for the right to market the
Company's services to clients of the Stockholders and $40.0 million in cash,
the Company issued
F-23
<PAGE>
INFONET SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
47.84 million shares of the Class B common stock to the Stockholders. The
shares issued were recorded at $40 million, which represents cash received by
the Company of $26.7 million and $13.3 million reflected as a stock
subscription receivable at September 30, 1999. Staff Accounting Bulletin 48,
Transfers of Nonmonetary Assets by Promoters or Shareholders, requires that
transfers of nonmonetary assets to a company by stockholders in exchange for
stock prior to or at the time of the company's initial public offering be
recorded at the transferor's historical cost basis. Accordingly, the right to
market the Company's services to the customers of the Stockholders has been
valued at the Stockholders' basis of $0.
During the six months ended September 30, 1999, the Company's SERP
incurred a settlement of $5.6 million of the vested benefit obligation due to a
transfer of assets by a plan participant from the SERP into the IDIP. The
Company recorded a settlement loss of $1.7 million as a result of this
settlement.
In November, 1999, the Company's board of directors approved the 1999
Stock Option Plan, which authorizes the Company to issue options to purchase up
to 10,614,500 shares of its Class B common stock.
On December , 1999 the Company effected a 29,900-for-1 split of its
Class A, Class B and Class C common stock and increased the authorized shares
of its Class A, Class B and Class C common stock to 400.0 million, 600.0
million and 30.0 million shares, respectively. All share and per share amounts
in the accompanying consolidated financial statements have been retroactively
restated to reflect this stock split.
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
51,282,300 Shares
[LOGO OF INFONET]
Class B Common Stock
-----------------
PROSPECTUS
-----------------
Merrill Lynch & Co.
Warburg Dillon Read LLC
ABN AMRO Rothschild
a division of ABN AMRO Incorporated
Goldman, Sachs & Co.
Lehman Brothers
Salomon Smith Barney
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
the Class B common stock being registered. All amounts are estimates except the
SEC registration fee, the NASD filing fee and The New York Stock Exchange
listing fee.
<TABLE>
<CAPTION>
Amount to
Be Paid
----------
<S> <C>
SEC Registration Fee........................................... $ 319,700
NASD Filing Fee................................................ 30,500
New York Stock Exchange Listing Fee............................ 500,000
Frankfurt Stock Exchange Listing Fee........................... 300,000
Legal Fees and Expenses........................................ 600,000
Accounting Fees and Expenses................................... 1,400,000
Printing and Engraving......................................... 350,000
Blue Sky Fees and Expenses (including Legal Fees).............. 5,000
Transfer Agent Fees............................................ 25,000
Miscellaneous.................................................. 47,300
----------
Total........................................................ $3,577,500
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
The Registrant's Restated Certificate of Incorporation in effect as of
the date hereof, and the Registrant's Second Amended and Restated Certificate
of Incorporation to be in effect upon the closing of this offering
(collectively, the "Certificate") provides that, except to the extent
prohibited by the Delaware General Corporation Law, as amended (the "DGCL"),
the Registrant's directors shall not be personally liable to the Registrant or
its stockholders for monetary damages for any breach of fiduciary duty as
directors of the Registrant. Under the DGCL, the directors have a fiduciary
duty to the Registrant which is not eliminated by this provision of the
Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
for breach of the director's duty of loyalty to the Registrant, for acts or
omissions which are found by a court of competent jurisdiction to be not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by the DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. The Registrant has applied for liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the DGCL and provides that the
Registrant may fully 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 such person is
II-1
<PAGE>
or was a director or officer of the Registrant, or is or was serving at the
request of the Registrant as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
Item 15. Recent Sales of Unregistered Securities
Pursuant to Rule 701 of the Act, in April 1999, we sold 9,444,513 shares
of our Class C common stock to our key employees pursuant to our 1998 Stock
Purchase Plan. In accordance with the provisions of the Stock Purchase Plan,
some employees purchased their shares for cash and other employees received
their shares in exchange for a secured, recourse promissory note held by us.
Part of the security for the promissory notes are the shares sold to each
purchaser. Each share was sold for $0.84, which price was set by the pricing
formula at the time of the sales. Immediately prior to the closing of this
offering, our Class C common stock will be converted to Class B common stock.
During the three months ended September 30, 1999, in exchange for the
right to market our services to their clients and $40.0 million in cash, we
issued an aggregate of 47.84 million shares of our Class B common stock to KPN,
Swisscom and Telia in reliance on Rule 506 of Regulation D under the Act.
In reliance on Rule 506 of Regulation D of the Act, in November 1996, we
sold an aggregate of 28,918,383 shares of our Class B common stock to KDD, KPN,
Swisscom, Telefonica and Telia for approximately $19.0 million. Part of the
proceeds of the sale were used to repurchase our Class A common stock from
Belgacom S.A. As a result of this transaction, Belgacom was no longer one of
our stockholders.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Purchase Agreement*
3.1 Form of Restated Certificate of Incorporation to be in effect upon the
closing of this offering
3.2 Form of Amended and Restated Bylaws to be in effect upon the closing of
this offering
4.1 Specimen Common Stock certificate*
5.1 Opinion of Latham & Watkins*
9.1 Form of Amended and Restated Stockholders Agreement to be in effect
upon the closing of this offering*
10.1 1998 Stock Option Plan#
10.2 1998 Stock Purchase Plan#
10.3 1999 Stock Option Plan*
10.4 Infonet Deferred Income Plan#
10.5 1998 Stock Appreciation Rights Plan#
10.6 Supplemental Executive Retirement Plan
10.7 Senior Secured Credit Agreement, dated as of August 17, 1999#
10.8 Employment Agreement of Jose A. Collazo
10.9 Employment Agreement of Dr. Ernest U. Gambaro
10.10 Standard Infonet Services Agreement#
10.11 Capacity Right of Use Agreement with FLAG Limited dated as of June 25,
1999#
10.12 AUCS Services Agreement, dated as of September 30, 1999#
10.13 AUCS Call Option Deed, dated as of September 30, 1999#
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.14 AUCS Management Agreement, dated as of September 30, 1999#
10.15 AUCS Assignment Agreement, dated as of September 30, 1999#
10.16 Lease for Grand Avenue Corporate Center at 2160 Grand Avenue, El Segundo
California
10.17 Employment Agreement of Mr. Akbar Firdosy
21.1 List of Subsidiaries
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Latham & Watkins (included in Exhibit 5.1)*
24.1 Powers of Attorney#
27.1 Financial Data Schedule#
99.1 Schedule II--Valuation and Qualifying Accounts
</TABLE>
- --------
* To be supplied by amendment.
+ Confidential treatment was requested with respect to certain portions of
this exhibit. Omitted portions were filed separately with the SEC.
# Previously filed.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts, filed as Exhibit 99.1.
All other schedules are omitted because they are not required, are not
applicable or the information is included in our financial statements or the
related notes to those financial statements.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Purchase Agreement, certificates in
such denominations and registered in such names as required by the Underwriter
to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the 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 the securities being
registered, the Registrant will, unless in the opinion of 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 purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424
(b)(1) or (4), or 497(h) under the 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 Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, the Registrant has duly caused
this Amendment No. 1 to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of El Segundo, State
of California, on this 23rd day of November, 1999.
INFONET SERVICES CORPORATION
/s/ Jose A. Collazo
By: _________________________________
Jose A. Collazo
President and Chairman of the
Board of Directors
Pursuant to the requirements of the Act, this Amendment No. 1 to the
Registration Statement has been signed by the following persons on November ,
1999, in the capacities indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* /s/ Jose A. Collazo
__________________________________________ President and Chairman of the Board of
Jose A. Collazo Directors (Principal Executive Officer)
* /s/ Akbar H. Firdosy
__________________________________________ Chief Financial Officer (Principal
Akbar H. Firdosy Financial and Accounting Officer)
* /s/ Douglas Campbell
__________________________________________
Douglas Campbell Director
* /s/ Eric M. de Jong
__________________________________________
Eric M. de Jong Director
* /s/ Morgan Ekberg
__________________________________________
Morgan Ekberg Director
* /s/ Masao Kojima
__________________________________________
Masao Kojima Director
* /s/ Joseph Nancoz
__________________________________________
Joseph Nancoz Director
* /s/ Rafael Sagrario
__________________________________________
Rafael Sagrario Director
</TABLE>
/s/ Jose A. Collazo
*By: __________________________
Jose A. Collazo
Attorney-in-Fact
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1 Form of Purchase Agreement*
3.1 Form of Restated Certificate of Incorporation to be in effect upon the
closing of this offering
3.2 Form of Amended and Restated Bylaws to be in effect upon the closing of
this offering
4.1 Specimen Common Stock certificate*
5.1 Opinion of Latham & Watkins*
9.1 Form of Amended and Restated Stockholders Agreement to be in effect
upon the closing of this offering*
10.1 1998 Stock Option Plan#
10.2 1998 Stock Purchase Plan#
10.3 1999 Stock Option Plan*
10.4 Infonet Deferred Income Plan#
10.5 1998 Stock Appreciation Rights Plan#
10.6 Supplemental Executive Retirement Plan
10.7 Senior Secured Credit Agreement, dated as of August 17, 1999#
10.8 Employment Agreement of Jose A. Collazo
10.9 Employment Agreement of Dr. Ernest U. Gambaro
10.10 Standard Infonet Services Agreement#
10.11 Capacity Right of Use Agreement with FLAG Limited dated as of June 25,
1999+#
10.12 AUCS Services Agreement, dated as of September 30, 1999#
10.13 AUCS Call Option Deed, dated as of September 30, 1999#
10.14 AUCS Management Agreement, dated as of September 30, 1999#
10.15 AUCS Assignment Agreement, dated as of September 30, 1999#
10.16 Lease for Grand Avenue Corporate Center at 2160 Grand Avenue, El
Segundo California
10.17 Employment Agreement of Mr. Akbar Firdosy
21.1 List of Subsidiaries
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Latham & Watkins (included in Exhibit 5.1)*
24.1 Powers of Attorney#
27.1 Financial Data Schedule#
99.1 Schedule II--Valuation and Qualifying Accounts
</TABLE>
- --------
* To be supplied by amendment.
+ Confidential treatment was requested with respect to certain portions of
this exhibit. Omitted portions were filed separately with the SEC.
# Previously filed.
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
INFONET SERVICES CORPORATION
(originally incorporated as:
INTERNATIONAL INFORMATION NETWORK SERVICES, INC.
on March 8, 1988)
Article I
---------
The name of the Corporation is:
INFONET SERVICES CORPORATION
(hereinafter the "Corporation").
Article II
----------
The address of its registered office in the State of Delaware is 32
Loockerman Square, Suite L-100, in the City of Dover, County of Kent. The name
of its registered agent at such address is United States Corporation Company.
Article III
-----------
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
1
<PAGE>
Article IV
----------
(i) The total number of shares of stock which the Corporation shall have
authority to issue is one billion thirty million (1,030,000,000), consisting of:
(A) Four Hundred Million (400,000,000) shares of Class A Stock, par
value $.01 per share;
(B) Six Hundred Million (600,000,000) shares of Class B Stock, par
value $.01 per share; and
(C) Thirty Million (30,000,000) shares of Class C Stock, par value
$.01 per share.
(ii) Upon the effectiveness of this Restated Certificate of Incorporation:
each one (1) share of Class A Stock issued and outstanding immediately prior
thereto shall be subdivided and changed, without any action on the part of the
holder thereof, into 29,900 shares of Class A Stock; each one (1) share of Class
B Stock issued and outstanding immediately prior thereto shall be subdivided and
changed, without any action on the part of the holder thereof, into 29,900
shares of Class B Stock; and each one (1) share of Class C Stock issued and
outstanding immediately prior thereto shall be subdivided and changed, without
any action on the part of the holder thereof, into 29,900 shares of Class C
Stock.
(iii) Subject to the terms hereof, the capital stock of the Corporation
may be issued by the Corporation from time to time for such consideration as may
be fixed from time to time by the Board of Directors. The Corporation shall
have the power to issue fractions of shares of its capital stock.
(iv) The powers, preferences and rights of each class of stock and the
qualifications,
2
<PAGE>
limitations and restrictions thereof are as follows:
(A) Each share of Class A Stock, Class B Stock and Class C Stock shall be
identical in all respects and shall have equal powers, preferences,
rights and privileges except as provided in this Restated Certificate
of Incorporation.
(B) Except as otherwise required by law or pursuant to this Restated
Certificate of Incorporation, the holders of Class A Stock and the
holders of Class B Stock shall vote together as a single class on all
matters to be voted on by the stockholders of the Corporation, with
the holders of Class A Stock entitled to ten (10) votes per share and
the holders of Class B Stock entitled to one (1) vote per share.
(C) The holders of Class A Stock, Class B Stock and Class C Stock shall be
entitled to receive, on an equal, pro rata basis any dividend, other
than a dividend of capital stock of the Corporation, to be declared
and paid on the shares of Class A Stock, Class B Stock and Class C
Stock.
(D) The holders of Class C Stock shall not be entitled to any notice of
stockholders' meetings or to vote upon the election of directors or
upon any other matter.
(v) Upon the closing of an underwritten initial public offering by the
Corporation or its successor in interest after which a class of stock of the
Corporation (or any successor security) is admitted for quotation on the Nasdaq
National Market (or any successor thereto) or listed on a national securities
exchange (a "Qualified IPO"), each outstanding share of Class C Stock shall be
automatically converted into one share of such a class of stock of the
corporation approved for quotation or listing (the "Public Stock") without any
action by the holder thereof. Promptly upon and after the closing of a
Qualified IPO, the Corporation will, upon delivery to
3
<PAGE>
the Corporation by a holder of shares of Class C Stock of the certificate or
certificates representing such shares, deliver a replacement certificate or
certificates representing a like number of shares of Public Stock. Unless and
until a Qualified IPO occurs, no holder of Class C Stock shall have any right to
convert such shares into any other class of the Corporation's stock.
Article V
---------
(i) Conversion of Class A Stock. Any share of Class A Stock may, at the
---------------------------
option of the holder thereof, be converted at any time into a share of Class B
Stock. Any share of Class A Stock transferred in violation of the terms of the
stockholders' agreement dated December __, 1999 (the "Stockholders' Agreement")
entered into among the holders of Class A Stock shall automatically convert,
without any action on the part of the holder thereof or the purported
transferee, into a share of Class B Stock.
(ii) No Public Market for Class A Stock. The Corporation shall have no
----------------------------------
power or authority to authorize or permit any share of Class A Stock to be (a)
admitted for quotation on the Nasdaq National Market (or any successor thereto)
or any similar body in any jurisdiction, (b) listed on a securities exchange in
any jurisdiction or (c) registered under the United States Securities Act of
1933, as amended, or any similar legislation in any jurisdiction.
(iii) Stock Splits and Dividends. The Corporation shall not in any manner
--------------------------
subdivide or combine the outstanding shares of the Class A Stock or the Class B
Stock, without proportionately subdividing or combining the outstanding shares
of such other class of stock. No dividend consisting of capital stock of the
Corporation shall be declared and paid on the Class A Stock unless such dividend
is first approved by the holders of at least a majority of the
4
<PAGE>
outstanding shares of the Class B Stock, voting separately as a class. No
dividend consisting of capital stock of the Corporation other than Class B Stock
shall be declared and paid on the Class B Stock unless such dividend is first
approved by the holders of at least a majority of the outstanding shares of the
Class A Stock, voting separately as a class.
(iv) New Class A Stock. The Corporation shall not issue any further Class
-----------------
A Stock unless such issuance is first approved by the holders of at least a
majority of the outstanding shares of Class B Stock, voting separately as a
class.
Article VI
----------
The following provisions are inserted for the management of the business
and the conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of its directors
and stockholders:
(i) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by statute or this Restated Certificate
of Incorporation or the bylaws of the Corporation, the directors are hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation.
(ii) The directors of the Corporation need not be elected by written
ballot unless the bylaws of the Corporation so provide.
(iii) Special meetings of the stockholders of the Corporation may be called
only by (a) the Chairman of the Board of Directors, (b) the holders of at least
fifty-one percent (51%) of the outstanding shares of the Class A Stock, acting
separately as a class, or (c) the President of the Corporation, acting pursuant
to resolution adopted by a majority of the Whole Board. For
5
<PAGE>
the purposes of this Restated Certificate of Incorporation, the term "Whole
Board" shall mean the total number of authorized directors whether or not there
exist any vacancies in previously authorized directorships.
(iv) Notwithstanding any other provision of this Restated Certificate of
Incorporation, the Board of Directors shall have the power to make, amend,
modify and repeal any or all of the bylaws of the Corporation, pursuant to
resolution adopted by a majority of the Whole Board, and without the approval of
any stockholders of the Corporation.
(v) Pursuant to Section 141(a) of the General Corporation Law of the
State of Delaware (and any successor statutory provision), any decision by the
Board in relation to a contract or transaction between the Corporation and any
holder of Class A Stock (or an affiliate of such holder) which contract or
transaction is not in the ordinary course of business for the Corporation or is
material for the Corporation and the holder of Class A Stock, must be approved
by resolution adopted by a majority of the directors who have not been
designated under the Stockholders' Agreement by the relevant Class A stockholder
or stockholders.
Article VII
-----------
(i) The number of directors shall be fixed from time to time exclusively
by the Board of Directors pursuant to a resolution adopted by a majority of the
Whole Board, but in no event shall be less than seven (7) or more than twelve
(12).
(ii) Except as otherwise provided herein, by law or by resolution of the
Board of Directors, newly created directorships resulting from any increase in
the authorized number of directors or any vacancies on the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause shall be filled only by a majority
6
<PAGE>
vote of the directors then in office, though less than a quorum, or by the sole
remaining director. The directors so chosen shall hold office for a term
expiring at the next annual meeting of stockholders. No decrease in the
authorized number of directors shall shorten the term of any incumbent director.
(iii) Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
bylaws of the Corporation.
(iv) Any directors, or the entire Board of Directors, may be removed from
office at any time, but only by the affirmative vote of the holders of at least
two-thirds of the voting power of all the then-outstanding shares of the Class A
Stock and the Class B Stock, voting together as a single class.
(v) The holders of Class B Stock, voting separately as a class, shall
have the exclusive right to elect two (2) directors of the Corporation. If any
securities of the Corporation are admitted for quotation on the Nasdaq National
Market (or any successor thereto) or any similar body in any jurisdiction or
listed on a securities exchange in any jurisdiction, then, to be eligible for
election by the holders of Class B Stock, these two (2) directors must qualify
as "independent" under the rules of any exchange or quotation system on which
securities of the Corporation are listed and under any applicable rules or
regulations of the Securities and Exchange Commission; if and at such time as
any such director elected by the holders of Class B Stock ceases to be so
qualified, his term shall expire and the vacancy created thereby shall be filled
by the remaining director elected by holders of Class B Stock or by the holders
of Class B Stock voting separately as a class.
7
<PAGE>
Article VIII
------------
(i) The Corporation shall provide indemnification and advancement of
expenses for its directors, officers, employees and agents to the fullest extent
provided in the bylaws of the Corporation or in any contract or agreement with
any such director, officer, employee or agent.
(ii) No director shall be personally liable to the Corporation or any
stockholder for any monetary damages for breach of fiduciary duty as a director,
except for any matter in respect of which such director (a) shall be liable
under Section 174 of the General Corporation Law of the State of Delaware or any
amendment or successor provision thereto, or (b) shall be liable by reason that,
in addition to any and all other requirements for liability, he: (I) shall have
breached his duty of loyalty to the Corporation and its stockholders; (II) shall
not have acted in good faith, or in failing to act, shall have not acted in good
faith; (III) shall have acted in a manner involving intentional misconduct or a
knowing violation of law or, in failing to act, shall have acted in a manner
involving intentional misconduct or a knowing violation of law; or (IV) shall
have derived an improper personal benefit. If the General Corporation Law of the
State of Delaware is hereafter amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the General Corporation Law of the State of Delaware, as so
amended.
Article IX
----------
The affirmative vote of the holders of both (i) at least ninety-five
percent (95%) of the voting power of the Class A Stock, voting separately as a
class, and (ii) at least two-thirds of the voting power of the Class A Stock and
the Class B Stock, voting together as a single class,
8
<PAGE>
shall be required to approve the dissolution of the Corporation, to approve any
merger or consolidation of the Corporation, or to approve any plan to sell,
lease or exchange all or substantially all of the Corporation's assets.
Article X
---------
This Restated Certificate of Incorporation and the bylaws of the
Corporation (subject to Article VI(iv) hereof) may only be amended by the
affirmative vote of the holders of at least two-thirds of the voting power of
the Class A Stock and the Class B Stock, voting together as a single class;
provided, however, that, notwithstanding the foregoing, the affirmative vote of
the holders of both (i) at least ninety-five percent (95%) of the voting power
of the Class A Stock, voting separately as a class, and (ii) at least two-thirds
of the voting power of the Class A Stock and the Class B Stock, voting together
as a single class, shall be required to alter, amend, repeal or replace Article
IV, Article IX, Article XI or this Article X of this Restated Certificate of
Incorporation. Notwithstanding the preceding sentence, if any provision of this
Restated Certificate of Incorporation or the bylaws of the Corporation requires
the vote of a greater number or proportion than two-thirds, then such provision
shall not be altered, amended or repealed except by such greater vote, and no
new measure which would in any way diminish the operation of the relevant
provision shall be introduced without it being approved by both (i) at least
ninety-five percent (95%) of the voting power of the Class A Stock, voting
separately as a class, and (ii) at least two-thirds of the voting power of the
Class A Stock and the Class B Stock, voting together as a single class,.
Article XI
----------
In the event of an issuance or sale by the Corporation of any shares of
Class A Stock, or
9
<PAGE>
securities convertible into or exercisable for Class A Stock, whether such
issuance or sale be of newly issued or treasury shares or securities, each
holder of shares of Class A Stock shall be entitled to purchase or subscribe
for, at a price determined by the Board of Directors of the Corporation to be
the fair market value of such shares or securities on the date of such purchase
or subscription, such number and proportion of such shares or securities issued
or sold as may be required to prevent such stockholder's proportionate ownership
of the then-outstanding shares of Class A Stock from decreasing.
Article XII
-----------
The Corporation elects not to be, and shall not be, governed by Section 203
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Infonet Services Corporation has caused this Restated
Certificate of Incorporation, which restates, integrates and further amends the
Certificate of Incorporation of the Corporation, and which has been duly adopted
in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware, to be signed by Jose A. Collazo, its
duly authorized officer, this ____ day of December, 1999.
-----------------------------------
Jose A. Collazo
President
Attest:
- ---------------------
10
<PAGE>
Ernest U. Gambaro
Senior Vice President and Secretary
11
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
INFONET SERVICES CORPORATION
AS OF
December __, 1999
ARTICLE I
OFFICES
-------
Section I (1). The registered office shall be in the City of Dover, County of
Kent, State of Delaware.
Section I (2). The corporation may also have offices at such other places
both within and without the State of Delaware as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section II (1). Meetings of the stockholders shall be held at any place
within or outside the State of Delaware designated by the Board of Directors.
In the absence of any such designation, stockholders' meetings shall be held at
the principal executive office of the corporation.
Section II (2). The annual meeting of stockholders shall be held each year on
a date and a time designated by the Board of Directors. At each annual meeting
directors shall be elected and any other proper business may be transacted.
<PAGE>
Section II (3). The holders of a majority of the voting power of the stock
issued and outstanding and entitled to vote at any meeting of stockholders,
present in person or represented by proxy, shall constitute a quorum for the
transaction of business except as otherwise provided by the statutes of the
State of Delaware, by the Restated Certificate of Incorporation, or by these
Bylaws. A quorum, once established, shall not be broken by the withdrawal of
enough votes to leave less than a quorum and the votes present may continue to
transact business until adjournment. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the holders of a
majority of the voting power represented in person or by proxy may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote thereat.
Section II (4). When a quorum is present at any meeting, the vote of the
holders of stock representing a majority of the voting power present in person
or represented by proxy thereat shall decide any question brought before such
meeting, unless the question is one upon which by express provision of the
statutes of the State of Delaware, or the Restated Certificate of Incorporation,
or these Bylaws, a different vote is required, in which case such express
provision shall govern and control the decision of such question.
Section II (5). At each meeting of the stockholders, each stockholder having
the
2
<PAGE>
right to vote may vote in person or may authorize another person or persons to
act for him by proxy appointed by an instrument in writing executed by such
stockholder and bearing a date not more than three years prior to said meeting,
unless said instrument provides for a longer period. All proxies must be filed
with the Secretary of the corporation at the beginning of each meeting in order
to be counted in any vote at the meeting.
Section II (6). Special meetings of the stockholders, for any purpose or
purposes, may be called only as permitted by the Restated Certificate of
Incorporation. Business transacted at any special meeting of stockholders shall
be limited to the purposes stated in the notice.
Section II (7). Whenever stockholders are required or permitted to take any
action at a meeting, a written notice of the meeting shall be given. Such
notice shall state the place, date and hour of the meeting, and, in the case of
a special meeting, the purpose or purposes for which the meeting is called.
Except as otherwise required by law, the written notice of any meeting shall,
pursuant to Section VI (6) of these Bylaws, be given to each stockholder
entitled to vote at such meeting not less than ten nor more than sixty days
before the date of the meeting.
Section II (8). The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
3
<PAGE>
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section II (9). Unless otherwise provided in the Restated Certificate of
Incorporation and subject to the rules and regulations of any exchange or
quotation system on which the corporation's securities are traded, any action
required to be taken at any meeting of stockholders, or any action which may be
taken at any meeting of such stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing and who, if the action had been
taken at a meeting, would have been entitled to notice of the meeting if the
record date for such meeting had been the date that written consents signed by a
sufficient number of holders to take the action were delivered to the
corporation in accordance with applicable law.
ARTICLE III
DIRECTORS
---------
Section III (1). The authorized number of directors which shall constitute
the whole Board of Directors shall be such number as is specified in or pursuant
to the Restated Certificate of Incorporation. The directors need not be
stockholders. The directors shall be elected at the annual meeting of the
stockholders, except as provided in Section III (2) of this Article. Each
director elected shall hold office until his successor is duly elected and
qualified.
4
<PAGE>
Section III (2). Except as otherwise provided in the Restated Certificate of
Incorporation, by law or by resolution of the Board of Directors, newly created
directorships resulting from any increase in the authorized number of directors
or any vacancies on the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause shall be filled
only by a majority vote of the directors then in office, though less than a
quorum, and directors so chosen shall hold office for a term expiring at the
next annual meeting of stockholders. No decrease in the authorized number of
directors shall shorten the term of any incumbent director.
Section III (3). The business and affairs of the corporation shall be managed
by or under the direction of its Board of Directors.
MEETINGS OF THE BOARD OF DIRECTORS
----------------------------------
Section III (4). The directors may hold their meetings and have one or more
offices, and keep the books of the corporation outside of the State of Delaware.
Section III (5). Regular meetings of the Board of Directors may be held
without notice at such time and place as shall from time to time be determined
by the Board; provided, however, a meeting of the Board of Directors shall be
-----------------
held at least twice each fiscal year.
Section III (6). Special meetings of the Board of Directors may be called by
the President or by the Secretary at the request of the President or two
directors on not less than five days' notice to each director, which notice
shall be given pursuant to Section VI (6) of these Bylaws.
Section III (7). Except as may be otherwise specifically provided by the
statutes of the State of Delaware, by the Restated Certificate of Incorporation
or by these Bylaws, at all
5
<PAGE>
meetings of the Board of Directors a majority of the directors then in office
shall be necessary and sufficient to constitute a quorum for the transaction of
business, and the vote of a majority of the directors present at any meeting at
which there is a quorum, shall be the act of the Board of Directors. If a quorum
shall not be present at any meeting of the Board of Directors, the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
Section III (8). Unless otherwise restricted by the Restated Certificate of
Incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section III (9). Unless otherwise restricted by the Restated Certificate of
Incorporation or these Bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
COMMITTEES OF DIRECTORS
-----------------------
Section III (10). The Board of Directors may, by resolution passed by a
majority of the Whole Board, designate one or more committees, each such
committee to consist of one or more of the directors of the corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any
6
<PAGE>
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. To the fullest
extent permitted by applicable law, any such committee, to the extent provided
in the resolution of the Board of Directors, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the corporation, and may authorize the seal of the corporation to
be affixed to all papers which may require it. For the purposes of this Restated
Certificate of Incorporation, the term "Whole Board" shall mean the total number
of authorized directors whether or not there exist any vacancies in previously
authorized directorships.
Section III (11). Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
-------------------------
Section III (12). Unless otherwise restricted by the Restated Certificate of
Incorporation or these Bylaws, the Board of Directors shall have the authority
to fix the compensation of directors.
INDEMNIFICATION
---------------
Section III (13). (a) Right to Indemnification. Each person who was
-------------------------
or is made a party or is threatened to be made a party to or is otherwise
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she is or was a director, officer, employee or agent of the
7
<PAGE>
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director, officer,
employee or agent, shall be indemnified and held harmless by the corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the corporation to provide
broader indemnification rights than permitted prior thereto), against all
expense, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered by such indemnitee in connection therewith and such indemnification
shall continue as to an indemnitee who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators; provided, however, that, except as provided in
-------- -------
paragraph (c) hereof with respect to proceedings to enforce rights to
indemnification, the corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the corporation.
(b) Right to Advancement of Expenses. The right to indemnification
--------------------------------
conferred in paragraph (a) of this Section shall include the right to be paid
by the corporation the expenses incurred in defending any proceeding for which
such right to indemnification is applicable in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however,
-------- -------
8
<PAGE>
that, if the Delaware General Corporation Law requires, an advancement of
expenses incurred by an indemnitee in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such indemnitee, including, without limitation, service to an employee benefit
plan) shall be made only upon delivery to the corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise.
(c) Right of Indemnitee to Bring Suit. The rights to indemnification and
---------------------------------
to the advancement of expenses conferred in paragraphs (a) and (b) of this
Section shall be contract rights. If a claim under paragraph (a) or (b) of this
Section is not paid in full by the corporation within sixty days after a written
claim has been received by the corporation, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be twenty
(20) days, the indemnitee may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim. If successful in whole
or in part in any such suit, or in a suit brought by the corporation to recover
an advancement of expenses pursuant to the terms of an undertaking, the
indemnitee shall be entitled to be paid also the expense of prosecuting or
defending such suit. In (i) any suit brought by the indemnitee to enforce a
right to indemnification hereunder (but not in a suit brought by the indemnitee
to enforce a right to an advancement of expenses) it shall be a defense that,
and (ii) in any suit by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has not met
9
<PAGE>
any applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the corporation (including its board of
directors, independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Section or otherwise shall be on the
corporation.
(d) Non-Exclusivity of Rights. The rights to indemnification and to the
-------------------------
advancement of expenses conferred in this Section shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
the corporation's Restated Certificate of Incorporation, bylaw, agreement, vote
of stockholders or disinterested directors or otherwise.
(e) Insurance. The corporation may maintain insurance, at its expense, to
---------
protect itself and any director, officer, employee or agent of the corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
10
<PAGE>
ARTICLE IV
OFFICERS
--------
Section IV (1). The officers of this corporation shall be elected by the
Board of Directors and shall include a President, a Secretary and a Treasurer.
The Board of Directors shall also elect on an annual basis one of its members as
Chairman and another member as Deputy Chairman of the Board. The corporation
may also have at the discretion of the Board of Directors such other officers as
are elected, including one or more Vice Presidents and one or more Assistant
Secretaries and Assistant Treasurers, and such other officers as may be
appointed in accordance with the provisions of Section 3 hereof. The Chairman
of the Board and the Deputy Chairman of the Board shall be elected by the
affirmative vote of at least two-thirds of the Whole Board. In the event there
are two or more Vice Presidents, then one or more may be designed as Executive
Vice President, Senior Vice President, or other similar or dissimilar title.
At the time of election of officers, the directors may by resolution determine
the order of their rank. Any number of offices may be held by the same person,
unless the statutes of the State of Delaware, the Restated Certificate of
Incorporation or these Bylaws otherwise provide.
Section IV (2). The Board of Directors, at its first meeting after each
annual meeting of stockholders, shall elect the officers of the corporation.
The President, when elected, shall advise the Board of Directors on the
selection of subordinate officers.
Section IV (3). The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section IV (4). The salaries of all officers of the corporation shall be
fixed by the
11
<PAGE>
Board of Directors.
Section IV (5). The officers of the corporation shall hold office until
their successors are elected and qualify in their stead. Any officer elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of at least two-thirds of the Whole Board. If the office of any
officer or officers becomes vacant for any reason, the vacancy shall be filled
by the affirmative vote of at least two-thirds of the Whole Board.
CHAIRMAN OF THE BOARD
---------------------
Section IV (6). The Chairman of the Board shall, if present, preside at
all meetings of the Board of Directors and exercise and perform such other
powers and duties as may be from time to time assigned to him by the Board of
Directors or prescribed by these Bylaws.
DEPUTY CHAIRMAN OF THE BOARD
----------------------------
Section IV (7). The Deputy Chairman of the Board shall, if present,
preside at all meetings of the Board of Directors at which the Chairman of the
Board is not present or at which the Chairman of the Board requests that the
Deputy Chairman preside. The Deputy Chairman shall exercise and perform such
other powers and duties as may be from time to time assigned to him by the Board
of Directors or prescribed by these Bylaws.
PRESIDENT
---------
Section IV (8). Subject to such supervisory powers, if any, as may be
given by the Board of Directors to the Chairman of the Board, the President
shall be the Chief Executive Officer of the corporation and shall, subject to
the control of the Board of Directors, have general supervision, direction and
control of the business affairs and officers of the corporation. He shall
12
<PAGE>
preside at all meetings of the stockholders and, in the absence of the Chairman
of the Board and the Deputy Chairman of the Board, or if there be none, at all
meetings of the Board of Directors. He shall be an ex-officio member of all
committees and shall have the general powers and duties of management usually
vested in the office of President and Chief Executive Officer of corporations,
and shall have such other powers and duties as may be prescribed by the Board of
Directors or these Bylaws.
VICE PRESIDENTS
---------------
Section IV (9). In the absence or disability of the President, the Vice
Presidents in order of their rank as fixed by the Board of Directors, or if not
ranked, the Vice President designated by the Board of Directors, shall perform
all of the duties of the President, and when so acting shall have all the powers
of and be subject to all the restrictions upon the President. The Vice
Presidents shall have such other duties as from time to time may be prescribed
for them, respectively, by the Board of Directors.
13
<PAGE>
SECRETARY AND ASSISTANT SECRETARY
---------------------------------
Section IV (10). The Secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose, and shall
perform like duties for the standing committees when required by the Board of
Directors. He shall give, or cause to be given, notice of all meetings of the
stockholders and of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or these Bylaws. He shall keep
in safe custody the seal of the corporation, and when authorized by the Board,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an Assistant Secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the corporation and to attest the affixing by his signature.
Section IV (11). The Assistant Secretary, or if there be more than one,
the Assistant Secretaries in the order determined by the Board of Directors, or
if there be no such determination, the Assistant Secretary designated by the
Board of Directors, shall, in the absence or disability of the Secretary,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
TREASURER AND ASSISTANT TREASURER
---------------------------------
Section IV (12). The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all
moneys, and other valuable effects in the name and to the credit of the
corporation, in such depositories as may be designated by the Board of
14
<PAGE>
Directors. He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and shall
render to the Board of Directors, at its regular meetings, or when the Board of
Directors so requires, an account of all his transactions as Treasurer and of
the financial condition of the corporation. If required by the Board of
Directors, he shall give the corporation a bond, in such sum and with such
surety or sureties as shall be satisfactory to the Board of Directors for the
faithful performance of the duties of his office and for the restoration to the
corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section IV (13). The Assistant Treasurer, of if there shall be more than
one, the Assistant Treasurers in the order determined by the Board of Directors,
or if there be no such determination, the Assistant Treasurer designated by the
Board of Directors, shall, in the absence or disability of the Treasurer,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
ARTICLE V
CERTIFICATES OF STOCK
---------------------
Section V (1). Every holder of stock of the corporation shall be entitled
to have a certificate signed by, or in the name of the corporation by, the
Chairman of the Board, or the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer
of the corporation, certifying the number of shares represented by the
certificate owned by such stockholder in the corporation.
15
<PAGE>
Section V (2). Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent, or registrar at the date of issue.
Section V (3). If the corporation shall be so authorized to issue more
than one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
--------
that, except as otherwise provided in section 202 of the General Corporation Law
of the State of Delaware, in lieu of the foregoing requirements, there may be
set forth on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences or relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
LOST, STOLEN OR DESTROYED CERTIFICATES
--------------------------------------
Section V (4). The Board of Directors, or its designee, may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the taking of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
16
<PAGE>
authorizing such issue of a new certificate or certificates, the Board of
Directors, or its designee, may in its discretion and as a condition precedent
to the issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or its legal representative, or to give the
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
TRANSFER OF STOCK
-----------------
Section V (5). Upon surrender to the corporation, or the transfer agent of
the corporation, of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
The Board of Directors may make other and further rules and regulations
concerning the transfer and registration of shares of the corporation.
FIXING RECORD DATE
------------------
Section V (6). In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors and, subject to the rules and regulations
of any exchange or quotation system on
17
<PAGE>
which the corporation's securities are traded, which record date: (1) in the
case of determination of stockholders entitled to vote at any meeting of
stockholders or adjournment thereof, shall, unless otherwise required by law,
not be more than sixty nor less than ten days before the date of such meeting;
(2) in the case of determination of stockholders entitled to express consent to
corporate action in writing without a meeting, shall not be more than ten days
from the date upon which the resolution fixing the record date is adopted by the
Board of Directors; and (3) in the case of any other action, shall not be more
than sixty days prior to such other action. If no record date is fixed: (1) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting when no prior action of
the Board of Directors is required by law, shall be the first day on which a
signed written consent setting forth the action taken or proposed to be taken is
delivered to the corporation in accordance with applicable law, or, if prior
action by the Board of Directors is required by law, shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action; and (3) the record date for determining stockholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
18
<PAGE>
REGISTERED STOCKHOLDERS
-----------------------
Section V (7). The corporation shall be entitled to treat the holder of
record of any share or shares of stock as the holder in fact thereof and
accordingly shall not be bound to recognize any equitable or other claim or
interest in such share on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the laws of
the State of Delaware.
ARTICLE VI
GENERAL PROVISIONS
------------------
DIVIDENDS
---------
Section VI (1). Dividends upon the capital stock of the corporation,
subject to the provisions of the Restated Certificate of Incorporation, if any,
may be declared by the Board of Directors at any regular or special meeting,
pursuant to law. Dividends may be paid in cash, in property, or in shares of the
capital stock of the corporation, subject to the provisions of the Restated
Certificate of Incorporation.
19
<PAGE>
Section VI (2). Before payment of any dividend there may be set aside out
of any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interests of the
corporation, and the directors may abolish any such reserve.
CHECKS
------
Section VI (3). All checks or demands for money and notes of the
corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
FISCAL YEAR
-----------
Section VI (4). The fiscal year of the corporation shall be fixed by
resolution of the Board of Directors.
SEAL
----
Section VI (5). The corporate seal shall have inscribed thereon the name
of the corporation, the year of its organization and the words "Corporate Seal,
Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
NOTICES
-------
Section VI (6). Whenever, under the provisions of the statutes of the
State of Delaware or of the Restated Certificate of Incorporation or of these
Bylaws, notice is required to be given to any director or stockholder, said
notice shall be in writing and shall be deemed to be
20
<PAGE>
given and effective upon delivery if delivered in person or by courier, or when
sent if by electronic transmission (telex, telecopy or facsimile) or, if mailed,
said notice shall be deemed to be given and effective five days after it is
deposited in the United States airmail postage prepaid, directed to such
stockholder or director, at his address as it appears on the records of the
corporation.
Section VI (7). Whenever any notice is required to be given under the
provisions of the statutes of the State of Delaware or of the Restated
Certificate of Incorporation or of these Bylaws, a waiver thereof in writing,
signed by the person or persons entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent thereto
PRONOUNS AND PLURALS
--------------------
Section VI (8). Whenever the context may require, any pronoun used in
these Bylaws shall include the corresponding masculine, feminine or neuter
forms, and the singular form of nouns, pronouns and verbs shall include the
plural and vice versa.
ARTICLE VII
AMENDMENTS
----------
Section VII (1). Subject to the provisions of the Restated Certificate of
Incorporation, these Bylaws may be altered, amended or repealed or new Bylaws
may be adopted by the stockholders only by the affirmative vote of the holders
of at least two-thirds of the voting power of all issued and outstanding voting
shares, at any regular meeting of the stockholders or at any special meeting of
the stockholders if notice of such alteration, amendment, repeal or adoption of
new Bylaws be contained in the notice of such special meeting.
21
<PAGE>
EXHIBIT 10.6
INFONET SUPPLEMENTAL EXECUTIVE
RETIREMENT PLAN
<PAGE>
FIRST AMENDMENT AND RESTATEMENT OF
THE INFONET SERVICES CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE I
Purpose
-------
(a) The purpose of the Infonet Supplemental Executive Retirement Plan
(the "ISERP") is to provide retirement benefits to designated officers and
designated key executives of Infonet Services Corporation ("Infonet") and
certain of its affiliates in addition to retirement benefits that may be payable
to them under the Infonet Employee Pension Plan (the "IEPP") and any other
retirement plan under which benefits may be payable with respect to such person.
(b) It is intended that the ISERP shall be a non-qualified defined
benefit retirement plan which shall be unfunded and which shall only provide
deferred compensation benefits for a select group of management or highly
compensated employees and, therefore, that the ISERP shall not be subject to
Parts 2, 3 and 4 of Title I of the Employee Retirement Income Security Act of
1974 ("ERISA").
(c) Benefits under the ISERP shall be payable from the general assets
of Infonet or pursuant to such other means as Infonet deems appropriate and no
Participant or other person shall be entitled to look to any source for payment
of such benefits other than the general assets of Infonet.
<PAGE>
ARTICLE II
Effective Date
--------------
The ISERP was originally effective as of January 1, 1993. This First
Amendment and Restatement of the ISERP shall be effective as of January 1, 1997.
ARTICLE III
Definitions
-----------
The capitalized terms used herein shall have the meanings set forth in
the Addendum attached hereto (which Addendum forms an integral part hereof),
unless a different meaning is plainly required by context.
ARTICLE IV
Participants
------------
(a) No person shall be a Participant in the ISERP unless (i) such
individual is a management or highly-compensated employee and is specifically
designated as such in a written instrument executed by the President (or, in the
case of the President, in a written instrument executed by the Secretary), (ii)
such individual has consented to be governed by the terms of the ISERP by
executing a Participation Form and (iii) such individual is a participant in the
IEPP or, in the case of an employee of an Affiliate, such other pension or
retirement plan as is designated in the Participation Form.
(b) A person shall cease to be a Participant in the ISERP upon the
earliest of (i) the adoption by Infonet of an amendment to the ISERP or the
Participant's Participation Form
2
<PAGE>
having such effect, (ii) the occurrence of an event described in the ISERP which
terminates such participation, (iii) the President's written notification of the
Participant's discontinuance of participation or (iv) the Participant's ceasing
to be an active participant in the IEPP or such other pension or retirement plan
as may be designated on the Participant's Participation Form.
(c) In determining whether any person shall commence or cease to be a
Participant in the ISERP, the President, subject to the concurrence of the
Compensation Committee of the Board of Directors, shall have complete and
unfettered discretion.
ARTICLE V
Retirement Benefits
-------------------
Each Participant shall be paid a monthly retirement benefit commencing
on the first day of the first month following the date of the Participant's
Separation from Service and continuing for the Participant's lifetime, which
benefit shall be equal to any positive difference between (i) a percentage of
the Participant's Qualified Compensation based upon the Deemed Age and Deemed
Years of Service attained by the Participant as of the date of the Participant's
Separation from Service attained by the participant as of the date of the
Participant's Separation from Service, all as set forth in the Participant's
Participation Form, and (ii) the Participant's vested accrued monthly benefit
under the IEPP or any such other pension or retirement plan which is designated
on the Participant's Participation Form, assuming that such benefit is payable
to the Participant in the form of a single life annuity commencing on the first
day of the first month after the date of the Participant's Separation from
Service.
3
<PAGE>
ARTICLE VI
Eligibility for Benefits
------------------------
A Participant shall only become eligible to commence receiving
retirement benefits under the ISERP (i) after the Participant's Separation from
Service and (ii) after attaining the Deemed Age and Deemed Years of Service
specified in the Participant's Participation Form.
ARTICLE VII
Form of Benefit Payments
------------------------
(a) Subject to Article VII(b) and Article VII(d), benefits payable
under the ISERP shall be paid to the Participant monthly for the Participant's
life.
(b) Subject to approval in writing by the President at any time prior
to the commencement of a Participant's benefits under the ISERP the Participant
may, in lieu of receiving benefits in the form described in Article VII(a),
elect to receive benefit payments under the ISERP in the form of a joint and
survivor annuity which provides reduced monthly benefits for the lifetime of the
Participant with a stipulated percentage of such reduced amount being payable
after the Participant's death to the spouse to whom the Participant is married
as of the date of the Participant's Separation from Service, for the lifetime of
such spouse. The amount of the monthly benefit payable under this option shall
be determined by reference to factors such as the Participant's life expectancy,
the life expectancy of the Participant's spouse, interest rates and the
percentage of the Participant's monthly benefit which is payable after the
Participant's death to the Participant's spouse, all as determined by the
President, such that the value of the joint and survivor annuity is the
actuarial equivalent of the benefits otherwise payable under Article
4
<PAGE>
VII(a). In determining the monthly amount payable under the joint and survivor
annuity option with respect to any Participant, the President may rely upon such
information as he, in his sole discretion, deems reliable, including but not
limited to, the opinion of an enrolled actuary or annuity purchase rates quoted
by an insurance company licensed to conduct an insurance business in the State
of California.
(c) A Participant's election of a joint and survivor annuity is
irrevocable after benefit payments have commenced and the monthly amount payable
during the lifetime of the Participant shall in no event be adjusted by reason
of the death of the Participant's spouse prior to the death of the Participant,
or by reason of the dissolution of the marriage between the Participant and such
spouse, or for any other reason; provided, however that a Participant whose
marriage is dissolved may designate another beneficiary to receive the benefits
which would otherwise be payable under the ISERP to the Participant's former
spouse under the Participant's joint and survivor annuity.
(d) In lieu of receiving benefits in the form described in either
Article VII(a) or VII(b), a Participant may elect, at least one year prior to
his Separation from Service, to have a lump sum amount which is the actuarial
equivalent (using assumptions referenced in the second sentence of Section 1.05
of the IEPP) of the full amount of benefits otherwise payable to him under
Article VII(a) credited to his account under the Infonet Services Corporation
Deferred Income Plan ("the IDIP") and paid in accordance with his elections
under the IDIP.
5
<PAGE>
ARTICLE VIII
Death Benefits
--------------
In lieu of the retirement benefit provided under Article V, the named
beneficiary of a Participant who dies while he is employed by Infonet or an
Affiliate shall be entitled to receive a lump sum benefit equal to 250% of the
Participant's Qualified Compensation, determined as of the date of his death.
No death benefit hereunder shall be payable with respect to any Participant who
dies after his Separation from Service, provided, however, that the spouse of a
deceased Participant shall continue to receive benefits under the ISERP if the
Participant was receiving retirement benefits at the date of this death in the
form of a joint and survivor annuity.
ARTICLE IX
Disability Benefits
-------------------
No disability benefits shall be payable under the ISERP; provided,
however that a Participant who suffers a Permanent Disability and incurs a
Separation from Service shall be entitled to receive retirement benefits under
the ISERP upon the Participant's Separation from Service as set forth in Article
V.
ARTICLE X
Right to Amend, Modify, Suspend or Terminate Plan
-------------------------------------------------
(a) By action of the Board of Directors, Infonet may amend, modify,
suspend or terminate the ISERP or the Participants' Participation Statements
without further liability to
6
<PAGE>
any Participant, employee, former employee or any other person. Notwithstanding
the preceding sentence; the ISERP and a Participant's Participation Form may not
be amended, modified, suspended or terminated so as to reduce the amount of the
retirement benefit of a Participant whose Separation from Service has occurred
or the amount of the retirement benefit a Participant would be entitled to
receive if the Participant were to incur a Separation from Service on the date
of the Board of Director's action, without the express written consent of such
Participant or, if deceased, such Participant's spouse if the Participant's
benefits are being paid in the form of a joint and survivor annuity.
(b) During the three-year period immediately following any Change in
Control the Board of Directors may not amend, modify, suspend or terminate the
ISERP or a Participant's Participation Form in any respect with respect to any
person who was a Participant in the ISERP on the date of the Change in Control
without the express written consent of such Participant, or if the Participant
is deceased, such Participant's spouse if the Participant's benefits are being
paid in the form of a joint and survivor annuity.
ARTICLE XI
No Assignment
-------------
No benefit payable under, or interest in, the ISERP shall be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, or charge, and any attempt to do so shall be void. Any such
benefit or interest shall not in any manner be liable for or subject to the
debts, contracts, liabilities, engagements, or torts of any Participant or
beneficiary. If any Participant or beneficiary has become bankrupt or any
attempt has been made
7
<PAGE>
to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge any
benefit payable under, or interest in, the ISERP, the Participant's interest
shall be held or applied to or for the benefit of the Participant or
beneficiary.
ARTICLE XII
Administration
--------------
(a) The ISERP shall be administered by the President, who shall have
all such powers as are necessary for the administration of the ISERP, or by such
other person or persons to whom the President may delegate all or part of the
President's powers or responsibilities hereunder. With respect to all matters
pertaining to the ISERP, the President or his designated delegate shall have the
power to interpret the ISERP and all documents relating thereto and to make such
other determinations as may be required or appropriate; any determination of the
President or his designated delegate shall be conclusive and binding on all
persons.
(b) The President shall be eligible to participate in the ISERP in
the same manner as any other employee, provided, however, that the designation
of the President as a Participant and any other action provided herein with
respect to the President's participation in the ISERP shall be taken by the
Compensation Committee of the Board of Directors and implemented by the
Secretary.
8
<PAGE>
ARTICLE XIII
Release
-------
In connection with any benefit or benefit payment under the ISERP, or
the designation of any beneficiary or any election or other action taken or to
be taken under the ISERP by any Participant or any other person, Infonet, acting
through the President or his delegate, may require such consents or releases as
the President or his delegate determines to be appropriate, and further may
require any such designation election or other action to be in writing and in
form satisfactory to the President or his delegate.
ARTICLE XIV
No Waiver
---------
The failure of Infonet, the President or any other person acting on
behalf thereof to demand that a Participant or other person claiming rights with
respect to a Participant perform any act which such Participant or person is or
may be required to perform hereunder shall not constitute a waiver of such
requirement or a waiver of the right to require such act. The exercise of or
failure to exercise any discretion reserved to Infonet, the President or his
delegate, to grant or deny any benefit to any Participant or other person under
the ISERP shall in no way require Infonet, the President or his delegate to
similarly exercise or fail to exercise such discretion with respect to any other
Participant or person.
9
<PAGE>
ARTICLE XV
No Contract
-----------
The ISERP is strictly a voluntary undertaking on the part of Infonet
and shall not be deemed to constitute a contract or part of a contract between
Infonet or an Affiliate and any employee or other person, nor shall it be deemed
to give any employee the right to be retained for any specified period of time
in the employment of Infonet or an Affiliate or to interfere with the right of
Infonet or an Affiliate to discharge or retire any employee at any time, with or
without cause, nor shall the ISERP interfere with the right of Infonet or an
Affiliate to establish the terms and conditions of employment of any employee.
ARTICLE XVI
Indemnification
---------------
Infonet shall defend, indemnify and hold harmless the President and
the Compensation Committee of the Board of Directors (and each member thereof),
and any other person or committee to whom they have delegated any of their
responsibilities hereunder, acting in their capacity as such and not as
Participants herein, from any and all claims, losses, damages, expenses and
liabilities (collectively "Liability") arising from any action, failure to act,
or other conduct in their official capacity under the ISERP, except with respect
to any Liability which results from an individual's own gross negligence or
willful misconduct.
10
<PAGE>
ARTICLE XVII
Claims Procedure
----------------
(a) Any claim for benefits under the ISERP shall be filed in writing
with the President or any person or committee designated by the President as the
ISERP's claims official (the "Claims Official").
(b) If the Claims Official wholly or partially denies the claim, he
shall, within a reasonable period of time after receipt of the claim, provide
the claimant with written notice of such denial setting forth, in a manner
calculated to be understood by the claimant: (i) the specific reason or reasons
for such denial, (ii) specific reference to the pertinent ISERP provisions on
which the denial is based, (iii) a description of any additional material or
information necessary for the claimant to perfect the claim and an explanation
of why such material or information is necessary and (iv) an explanation of the
ISERP's claims review procedure.
(c) The Claims Official shall provide each claimant with a reasonable
opportunity to appeal a denial of a claim and an opportunity for a full and fair
review of such denial. The claimant or his duly authorized representative: (i)
may request a review upon written application to the Claims Official, (ii) may
review pertinent documents and (iii) may submit issues and comments to the
Claims Official in writing.
(d) The Claims Official may establish such time limits within which a
claimant may request review of a denied claim as are reasonable in relation to
the nature of the benefit which is the subject of the claim and to other
attendant circumstance but which, in no event, shall be less than sixty (60)
days after receipt by the claimant of written notice of denial of his claim.
11
<PAGE>
(e) The decision by the Claims Official upon his review of a claim
shall be made not later than sixty (60) days after receipt by the Claims
Official of the request for review, unless special circumstances require an
extension of time for processing, in which case a decision shall be rendered as
soon as possible, but not later than one hundred and twenty (120) days after
receipt of such request for review.
(f) The decision on review shall be in writing and shall include
specific reasons for the decision written in a manner calculated to be
understood by the claimant with specific references to the pertinent ISERP
provisions on which the decision is based.
(g) To the extent permitted by law, the decision of the Claims
Official, when warranted on the record and reasonably based on the law and the
provisions of the ISERP, shall be final and binding on all parties.
(h) If a Participant elects, any dispute under the ISERP between the
Participant and Infonet or an Affiliate, as the case may be, shall be submitted
to private and confidential arbitration by a single neutral arbitrator (unless
otherwise provided pursuant to this Article XVII(h)). Subject to the terms of
this Article XVII(h), the arbitration proceedings shall be governed by the
Commercial Arbitration Rules of the American Arbitration Association and the
arbitrator shall be selected by the Participant and Infonet or the Affiliate,
or, if the Participant and Infonet or the Affiliate cannot agree upon an
arbitrator, at the Participant's option, either the arbitrator shall be selected
by the American Arbitration Association pursuant to its Rules or the Participant
may bring an action in any court having jurisdiction. If the disposition is
arbitrated subject to this Article XVII(h), the decision of the arbitrator shall
be final and binding on the Participant and Infonet or the Affiliate, and
judgment thereon may be entered in any court having
12
<PAGE>
jurisdiction. All of the Participant's and Infonet's or the Affiliate's costs
of any arbitration proceeding or litigation pursuant to this Article XVII,
including attorney's fees and costs, shall be paid by the Infonet or the
Affiliate; provided, however, if the arbitrator or court (as the case may be)
-------- -------
determines that a Participant's claim or defense is frivolous or without merit,
such Participant shall pay his own costs.
ARTICLE XVIII
Miscellaneous Provisions
------------------------
(a) Governing Law. The ISERP shall be construed, administered and
-------------
governed in all respects under and by applicable federal laws and, where state
law is applicable, the laws of the State of California.
(b) Pronouns and Plurality. The masculine pronoun shall include the
----------------------
feminine pronoun, and the singular the plural where the context so indicates.
(c) Titles. Titles are provided herein for convenience only and are
------
not to serve as a basis for interpretation or construction of the ISERP.
(d) References. Unless the context clearly indicates to the
----------
contrary, a reference to a statute, regulation or document shall be construed as
referring to any subsequently enacted, adopted or executed statute, regulation
or document.
(e) Severable Provisions. The provisions of the ISERP are severable
--------------------
and if any one or more articles, sections, subsections, paragraphs, clauses or
provisions of the ISERP is determined to be illegal, indefinite, invalid or
otherwise unenforceable, in whole or in part, the
13
<PAGE>
remaining provisions, and any partially unenforceable provisions to the extent
enforceable in any jurisdiction, shall continue in full force and effect and
shall be binding and enforceable.
(f) Nature of ISERP Benefits. The ISERP shall not be "funded" within
------------------------
the meaning of ERISA and all payments hereunder to Participants or beneficiaries
shall be paid from the general assets of Infonet or an Affiliate. Infonet and
any Affiliate shall not, by virtue of any provisions of the ISERP or by any
action of any person, be deemed to be a trustee or other fiduciary of any
property for any Participant or beneficiary, and the liabilities of Infonet or
any Affiliate to any Participant or beneficiary pursuant to ISERP shall be those
of a debtor pursuant only to such contractual obligations as are created by the
ISERP; no such obligation of Infonet or any Affiliate shall be deemed to be
secured by any pledge or other encumbrance on any property of Infonet or any
Affiliate. To the extent that any Participant or beneficiary acquires a right to
receive payment from Infonet or any Affiliate under the ISERP, such right shall
be no greater than the right of an unsecured general creditor of Infonet or the
Affiliate.
IN WITNESS WHEREOF, Infonet has caused this instrument to be executed
by its officers duly authorized on this 12th day of December, 1997, effective as
of January 1, 1997.
INFONET SERVICES CORPORATION
By: /s/ Jose A. Collazo
------------------------------
By: /s/ Ernest U. Gambaro
------------------------------
<PAGE>
ADDENDUM
Definitions
(a) "Affiliate" means any organization, regardless of legal form,
in which Infonet owns a substantial equity or profits interest or over which
Infonet has the right to exercise significant management control or influence
and which is designated in writing by the President as an "Affiliate".
(b) "Board of Directors" means the Board of Directors of Infonet.
(c) A "Change in Control" shall occur in the event of (i) the
acquisition by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Act")), as if Infonet were a public company, of the beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Act) of capital stock of
Infonet possessing 51% or more of the combined voting power of Infonet's
outstanding capital stock, (ii) if within any two-year period, the majority of
the members of the Board of Directors were to be comprised of individuals other
than those persons who were members at the beginning of such period, unless the
members elected during such period were approved by a majority of the Board of
Directors in office immediately prior to the beginning of such period, (iii) the
sale of all or substantially all of Infonet's assets or (iv) the approval by
Infonet's shareholders of a plan of reorganization, merger or consolidation
unless immediately following such transaction 51% or more of the outstanding
shares of capital stock of the corporation resulting from such transaction is
then beneficially owned by persons who were shareholders of Infonet immediately
prior to such transaction.
<PAGE>
(d) "Continuous Service" means the uninterrupted period of
employment of a person by Infonet or an Affiliate, commencing as of the date of
hire of such person by Infonet or an Affiliate and ending on the date of the
Participant's Separation from Service. A medical leave of absence not exceeding
twelve (12) months authorized by the employer's written policy or any other
leave of absence authorized by the employer's written policy or approved in
writing by the President shall not be deemed and interruption in continuous
Service or a Separation from Service.
(e) "Deemed Age" shall mean the deemed age of a Participant at any
point in time and which shall be the sum of (i) the Participant's deemed age as
determined from time to time by the President and as set forth in the
Participant's Participation Form and (ii) the period of time which has elapsed
since the date of such Participation Form.
(f) "Deemed Years of Service" shall mean the number of years of
service with Infonet or an Affiliate which a Participant shall be deemed to
have completed at any point in time and which shall be the sum of (i) the
Participant's number of Deemed Years of Service as determined from time to time
by the President and as set forth in the Participant's Participation Form and
(ii) the Participant's number of years of Continuous Service which the
Participant has completed since the date of such Participation Form.
(g) "Infonet Employee Pension Plan" (the "IEPP") is the Infonet
contributory, defined benefit pension plan which is generally available to all
employees of Infonet and any successor thereto.
(h) "Participant" means an employee of Infonet or an Affiliate who
has been selected to participate in the ISERP by the President and has executed
the appropriate Participation Form.
<PAGE>
(i) "Participant's Qualified Compensation" means the average
monthly amount of a Participant's salary, commissions, bonuses and/or
compensation earned by, attributed to, or paid or credited to or for the account
of, a Participant from or by Infonet or an Affiliate during the thirty-six (36)
full months immediately preceding the Participant's Separation from Service.
(j) "Participant Form" means the document which extends
participation in the ISERP to an eligible employee and which sets forth the
amount of a Participant's projected retirement benefits under the ISERP and the
key data which will be used to calculate the Participant's retirement benefits.
(k) "Permanent Disability" means permanent and total
disability within the meaning of Infonet's long-term disability plan then in
effect.
(l) "Plan Year" means the fiscal year of the ISERP, which
shall be the calendar year.
(m) "President" shall mean the person who is serving as the
President of Infonet.
(n) "Secretary" shall mean the person who is serving as the
Secretary of Infonet.
(o) "Separation from Service" means a Participant's
termination of employment with Infonet or an Affiliate for any reason.
<PAGE>
EXHIBIT 10.8
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is entered into by
and between Infonet Services Corporation, a Delaware Corporation (the "Company")
and Jose A. Collazo, an individual (the "Executive").
WITNESSETH:
WHEREAS the Board of Directors has resolved that it is in the best interest
of the Company that its officers be subject to the terms of an executive
employment agreement; and
WHEREAS the Company and the Executive now desire to enter into this
Agreement and set forth the terms and conditions of the Executive's employment.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises and covenants set forth below and other good and valuable
consideration, receipt of which is hereby acknowledged, the Company and the
Executive do hereby agree as follows:
ARTICLE I
EMPLOYMENT
----------
The Company hereby employs the Executive to perform the duties and
responsibilities normally associated with the position of Chairman, President
and Chief Executive Officer, or such other position to which the Executive may
be promoted, for the term of this Agreement. The Executive agrees to abide by
the Company's Certificate of Incorporation, its By-Laws and the direction by its
Board of Directors except to the extent such direction would be inconsistent
with applicable law.
ARTICLE II
REMUNERATION
------------
For the first year of this Agreement, the Executive shall be paid the Base
Salary in effect on January 1, 2000. The Executive's Base Salary shall
thereafter be reviewed annually in accordance with the Company's then existing
salary review policies. The Executive shall also be entitled to receive and be
eligible to participate in those Benefits made available by the Company during
the term of this Agreement.
1
<PAGE>
ARTICLE III
TERM AND TERMINATION OF AGREEMENT
---------------------------------
Section 3.1 Term and Expiration of Agreement
- ----------- --------------------------------
This Agreement shall be effective commencing on January 1, 2000 and shall
continue in effect for an initial period of 36 months ("Initial Term") and shall
thereafter be extended without further action of the parties for additional
periods of 24 months ("Extended Term") unless the Executive receives notice from
the Company not later than 24 months prior to the last day of such Initial Term
or any Extended Term of its election not to extend the Agreement. The last day
of the Initial Term or any such Extended Term shall hereinafter be referred to
as the "Expiration Date."
Section 3.2 Death or Disability
- ----------- -------------------
The Company may terminate this Agreement without any further obligation
(except as provided in this Section 3.2) to the Executive on the Death or
Disability of the Executive. If the Executive's Death or Disability occurs in
the course or as the result of the performance of his duties under this
Agreement, however, the Executive's Base Salary shall continue to be paid to the
Executive's estate or the Executive for a period of two (2) years from the date
of Death or Disability. Nothing in this Section 3.2 is intended to effect the
entitlement of the Executive or his estate to any payments or benefits to which
he or it would otherwise be entitled under any other Company plan or program.
Section 3.3 Termination for Cause
- ----------- ---------------------
The Company may terminate this Agreement at any time without any further
obligation to the Executive for Cause as defined herein.
Section 3.4 Retirement
- ----------- ----------
In the event that the Executive voluntarily elects Retirement during the
term of this Agreement, the Executive shall be entitled to the benefits under
the Company's regular Retirement program, or, if a separation Retirement
agreement has been entered into between the Executive and the Company, benefits
shall be provided according to the terms of that agreement.
Section 3.5 Resignation
- ----------- -----------
The Executive is entitled to voluntarily resign his employment with the
Company during the term of this Agreement. If the Executive resigns his
employment with the Company for other than Good Reason, this Agreement shall be
deemed terminated without any further obligation of the Company to the
Executive.
2
<PAGE>
Section 3.6 Termination Without Cause (The "Early Termination Option").
- ----------- ---------------------------------------------------------
The Company has the right to terminate the Executive's employment, without
cause, at any time prior to the Expiration Date by providing the Executive with
a Notice of Termination and, receipt of which, shall cause the Company to pay
the Executive the Separation Payments for the applicable period set forth in
Section 3.8 (the "Early Termination Option").
Section 3.7 Resignation for Good Reason
- ----------- ---------------------------
The Executive shall be entitled to resign his employment with the Company
for Good Reason at any time prior to the Expiration Date and receive the
Separation Payments for the applicable period set forth in Section 3.8 by
providing the Company with a Notice of Termination. The fact that the Executive
may choose not to resign his employment for Good Reason after the occurrence of
any event constituting Good Reason shall in no way affect the Executive's right
to do so upon the occurrence of a subsequent transaction or event which
constitutes a Good Reason.
Section 3.8 Separation Payments
- ----------- -------------------
(a) In the event the Early Termination Option is exercised by the Company
or the Executive resigns his employment with the Company for Good Reason, the
Executive shall be entitled to receive Separation Payments through the
Expiration Date or for a period of two (2) years from the effective date of the
Executive's termination or resignation, whichever period is longer.
(b) Unless otherwise directed by the Executive, the Separation Payments
shall be paid or provided on a continuing monthly basis on the first business
day of each month commencing with the month immediately following the effective
date of the Executive's termination or resignation, whichever is applicable.
(c) Upon the exercise of the Early Termination Option by the Company or the
Executive's resignation for Good Reason, the Executive shall be entitled to
accrue benefits (as defined in Section 5.2) during the period the Executive
receives or is entitled to receive separation payments.
(d) The Company shall use the compensation which the Executive receives or
is entitled to receive as Separation Payments for the purpose of determining the
amount of any benefit to which the Executive may be entitled under any plan or
program.
(e) The Executive agrees that so long as he is receiving Separation
Payments, he shall not become employed by or consult with any company whose
primary business is the provision of public international value added network
services.
3
<PAGE>
(f) The Executive agrees that so long as he is receiving Separation
Payments, he shall not induce or solicit any employee of the Company to
terminate his or her employment with the Company for any purpose.
(g) The Company's obligation to pay the Separation Payments and otherwise
comply with the provisions of this Section 3.8 shall be unconditional. The
Executive shall not be required to mitigate the amount of any payment provided
for in this Section 3.8.
ARTICLE IV
CONFIDENTIAL INFORMATION
------------------------
Section 4.1 Confidential Business Information
- ----------- ---------------------------------
The Executive agrees that he shall hold in strictest confidence and not
disclose, directly or indirectly, to any person, firm or corporation, without
the express prior written consent of the Company, any trade secrets or any
confidential business information of the Company including, but not limited to,
corporate planning, production, distribution or marketing processes;
manufacturing techniques; customer lists or customer leads; marketing
information or procedures; development work; work in process; financial
statements or notes, schedules or supporting financial data; or any other secret
or confidential matter relating to the products, sales or business of the
Company.
Section 4.2 Return of Information
- ----------- ---------------------
The Executive agrees that no later than five (5) days after his employment is
terminated with the Company he will deliver to the Company and will not keep in
his possession or deliver to anyone else, any and all drawings, notes,
memoranda, specifications, financial statements, customer lists, product
surveys, data, documents or other material containing or disclosing any of the
matters referred to in Section 4.1 above.
Section 4.3 Remedy for Breach of this Article
- ----------- ---------------------------------
The Executive acknowledges that any breach of this Article IV by him will
cause irreparable injury to the Company for which the available remedies at law
will not be adequate. Accordingly, in the event of any such breach or
threatened breach of any provision of this Article, in addition to any other
remedy provided by law or in equity, the Company shall be entitled to
appropriate injunctive relief, in any court of competent jurisdiction,
restraining the Executive from any such actual or threatened breach of this
Article. The Executive stipulates to the entry against him of any such
temporary, preliminary or permanent injunction and agrees not to resist the
Company's application for such equitable relief, except on the grounds that the
acts or omissions alleged by the Company did not violate any of the provisions
of this Article.
4
<PAGE>
ARTICLE V
DEFINITIONS
-----------
Whenever the following terms are used below in this Agreement, they shall have
the meaning specified below, and no other, unless the context clearly indicates
to the contrary. The masculine pronoun shall include the feminine and neuter,
and the singular the plural, where the context so indicates.
Section 5.1 Base Salary
- ----------- -----------
"Base Salary" shall mean the Executive's regular annualized rate of pay
exclusive of all other Benefits as that term is defined below.
Section 5.2 Benefits
- ----------- --------
"Benefits" shall mean Benefits pursuant to this contract and all employee
welfare and pension benefit plans or programs and all other plans or programs
including, but not limited to medical and dental insurance, Infonet Stock
Incentive Plan ("ISIP"), 401(k) plans, the Infonet Supplemental Executive
Retirement Plan (the "ISERP"), bonus and incentive compensation plans, vacation
plans, etc. which the Executive or employees of the Company, and, in particular,
employees with senior management responsibility, are eligible for and entitled
to participate in, whether now in effect or added during the term of this
Agreement.
Section 5.3 Cause
- ----------- -----
"Cause" shall mean (i) the Executive's conviction of a felony or a misdemeanor
involving moral turpitude or (ii) the Executive's willful breach or the habitual
neglect of his duties under this Agreement which have a material adverse impact
on the financial condition of the Company; provided, however, that the Company
shall first have given the Executive written notice of the alleged breach or
areas of neglect and a reasonable opportunity to cure.
Section 5.4 Change in Control
- ----------- -----------------
A "Change in Control" shall be deemed to have occurred if (i) 20% or more of
the Company's outstanding securities as owned on January 1, 2000 are sold,
transferred or otherwise alienated; or (ii) after 20% or more of the Company's
outstanding securities as owned on October 19, 1994 are sold, transferred or
otherwise alienated as set forth in (i) above, any additional securities of the
Company or sold, transferred or otherwise alienated; or (iii) the Stockholders
of the Company approve a merger or consolidation of the Company with any other
corporation or entity regardless of which entity is the survivor, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or being converted into voting securities of the
5
<PAGE>
surviving entity) at least 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation; or (iv) the Stockholders of the Company approve a
plan of complete liquidation or winding-up of the Company or an agreement for
the sale or disposition by the Company of all or substantially all of the
Company's assets; or (v) if the director nominees of 3 members of the
Stockholders are not elected; or (vi) any event which the Board of Directors
determines should constitute a Change in Control.
Section 5.5 Disability
- ----------- ----------
"Disability" shall mean the Executive's absence from performance of his
assigned duties for the Company on a full-time basis for six consecutive
calendar months as a result of incapacity due to medically documented physical
or mental illness and which, in the opinion of the Executive's physician, makes
it impossible for the Executive to perform his duties and responsibilities under
this Agreement.
Section 5.6 Good Reason
- ----------- -----------
"Good Reason" shall mean the occurrence of any of the following events without
the Executive's express written consent:
(a) the assignment to the Executive of duties inconsistent with the
position and status of the Executive as set forth in Recital A, a
substantial alteration in the nature or status of the Executive's
responsibilities (other than any such alteration primarily attributable
to a medical or physical infirmity of the Executive which the Company
has attempted to accommodate), or
(b) the failure to pay or a reduction by the Company in the
Executive's Base Salary as the same may be increased from time to time
during the term of this Agreement or the Company's failure to increase
(within 12 months of the Executive's last increase in Base Salary) the
Executive's Base Salary in an amount which at least equals, on a
percentage basis, the average percentage increase in Base Salary for
all key management employees within the Company; or
(c) the elimination or reduction by the Company of any of the
Benefits to which the Executive is eligible for an entitled to
participate in, whether now in effect or added during the term of this
Agreement or the failure of the Company to provide the Executive with
Benefits or facilities at least comparable to those Benefits or
facilities made available to other key management employees within the
Company; or
(d) a Change in Control; or
6
<PAGE>
(e) any purported termination of the employment of the Executive by
the Company which is not effected according to the requirements of this
Agreement.
Section 5.7 Notice of Termination
- ----------- ---------------------
"Notice of Termination" shall mean a notice, in writing, to the
Executive from the Company or to the Company from the Executive, which states
the decision of the Company or the Executive to terminate the Executive's
employment and which (i) indicates the specific termination provision enumerated
in this Agreement relied upon, (ii) sets forth in reasonable detail the facts
and circumstances alleged to provide a basis for termination of the Executive's
employment by the Company or by the Executive and (iii) states the effective
date of the termination which shall not be less than thirty (30) days nor more
than sixty (60) days from the date of the Notice of Termination. Such notice
must be communicated to the Executive or to the Company in accordance with
Section 6.4 herein.
Section 5.8 Retirement
- ----------- ----------
"Retirement" shall mean termination of the Executive's employment on
or after the date on which the Executive attains an age and years of service
which entitles him to retire in accordance with any Retirement plan or program
provided by the Company or agreement entered into between the Executive and the
Company.
Section 5.9 Separation Payments
- ----------- -------------------
"Separation Payments" shall mean for the Executive: (i) the average
annual total monetary consideration received from the Company during the twelve
(12) month period immediately preceding the effective date of his termination or
resignation and (ii) the continuation of his Benefits.
ARTICLE VI
MISCELLANEOUS
-------------
Section 6.1 Action to Challenge or Enforce Agreement
- ----------- ----------------------------------------
Should either (i) the Company, its successors or assigns, or any
person acting on behalf of the Company seek to challenge this Agreement or any
of its terms in any action or legal proceeding or (ii) the Executive seek to
enforce this Agreement or any of its terms in any action or legal proceeding,
the Company shall reimburse the Executive for all costs and attorneys' fees
incurred in connection with any such action or proceeding.
7
<PAGE>
Section 6.2 Successors; Binding Agreement
- ----------- -----------------------------
The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. The failure of
the Company to obtain such assumption agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the same
terms as the Executive would be entitled to hereunder if the Executive had
resigned his employment for Good Reason.
Section 6.3 Successors and Assigns
- ----------- ----------------------
This Agreement shall inure to the benefit of, and be enforceable by,
the personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees of the Executive.
Section 6.4 Notice
- ----------- ------
Notices and all communications provided for in this Agreement shall be
in writing and shall be deemed to have been received when delivered or mailed by
United States registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth at the end of this Agreement,
provided that all notices to the Company shall be directed to the attention of
the President with a copy to the Secretary of the Company, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
receipt.
Section 6.5 Taxes
- ----------- -----
It is expressly understood and agreed by and between the Company and
the Executive that the Executive shall only be responsible for ordinary income
taxes should he receive payments under this Agreement. Any other excise taxes,
penalties, interest or other payments which the Executive may be required to pay
by any taxing authority shall be borne by the Company.
Section 6.6 No Waiver
- ----------- ---------
No provision of this Agreement may be modified, waived or discharged
unless in writing and signed by the Executive and such officer of the Company as
may be specifically designated or authorized by the Board of Directors or by a
Committee of the Board of Directors. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
8
<PAGE>
Section 6.7 Entire Agreement
- ----------- ----------------
This Agreement represents the sole and Entire Agreement among the
parties and supersedes all prior agreements, negotiations, and discussions
between the parties hereto and/or their representatives. Any amendment to this
Agreement must be in writing specifically referring to this Agreement and signed
by duly authorized representatives of all of the parties hereto.
Section 6.8 Controlling Law
- ----------- ---------------
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware.
Section 6.9 Invalid Provision
- ----------- -----------------
The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
Section 6.10 No Attack on Agreement
- ------------ ----------------------
This Agreement shall not be subject to attack on the ground that any
or all of the legal theories or factual assumptions used for negotiating
purposes are for any reason inaccurate or inappropriate. The parties agree that
the language of this Agreement shall not be construed for or against any
particular party.
Section 6.11 Confidentiality
- ------------ ---------------
The Executive agrees to keep confidential and not disclose any of the
terms of this Agreement to any person (including, but not limited to, any
current or former employees of the Company) other than his attorneys and/or tax
advisors unless required to do so by law.
Section 6.12 Counterparts
- ------------ ------------
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original, and all such counterparts together shall
constitute but one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date set forth below.
INFONET SERVICES CORPORATION, Jose A. Collazo
a Delaware Corporation
By: _______________________________ _____________________________
Ernest U. Gambaro, General Counsel
Address: Address:
Infonet Services Corporation Jose A. Collazo
2160 East Grand Avenue 2928 via la Selva
El Segundo, California 90245-1022 Palos Verdes Estates, CA 90274
Date: _____________________________ Date: ________________________
10
<PAGE>
EXHIBIT 10.9
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is entered into by
and between Infonet Services Corporation, a Delaware Corporation (the "Company")
and Ernest U. Gambaro, an individual (the "Executive").
WITNESSETH:
WHEREAS the Board of Directors has resolved that it is in the best interest
of the Company that its officers be subject to the terms of an executive
employment agreement; and
WHEREAS the Company and the Executive now desire to enter into this
Agreement and set forth the terms and conditions of the Executive's employment.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises and covenants set forth below and other good and valuable
consideration, receipt of which is hereby acknowledged, the Company and the
Executive do hereby agree as follows:
ARTICLE I
EMPLOYMENT
----------
The Company hereby employs the Executive to perform the duties and
responsibilities normally associated with the position of Senior Vice President,
General Counsel and Secretary, or such other position to which the Executive may
be promoted, for the term of this Agreement. The Executive agrees to abide by
the Company's Certificate of Incorporation, its By-Laws and the direction by its
Board of Directors except to the extent such direction would be inconsistent
with applicable law.
ARTICLE II
REMUNERATION
------------
For the first year of this Agreement, the Executive shall be paid the Base
Salary in effect on January 1, 2000. The Executive's Base Salary shall
thereafter be reviewed annually in accordance with the Company's then existing
salary review policies. The Executive shall also be entitled to receive and be
eligible to participate in those Benefits made available by the Company during
the term of this Agreement.
1
<PAGE>
ARTICLE III
TERM AND TERMINATION OF AGREEMENT
---------------------------------
Section 3.1 Term and Expiration of Agreement
- ----------- --------------------------------
This Agreement shall be effective commencing on January 1, 2000 and shall
continue in effect for an initial period of 36 months ("Initial Term") and shall
thereafter be extended without further action of the parties for additional
periods of 24 months ("Extended Term") unless the Executive receives notice from
the Company not later than 24 months prior to the last day of such Initial Term
or any Extended Term of its election not to extend the Agreement. The last day
of the Initial Term or any such Extended Term shall hereinafter be referred to
as the "Expiration Date."
Section 3.2 Death or Disability
- ----------- -------------------
The Company may terminate this Agreement without any further obligation
(except as provided in this Section 3.2) to the Executive on the Death or
Disability of the Executive. If the Executive's Death or Disability occurs in
the course or as the result of the performance of his duties under this
Agreement, however, the Executive's Base Salary shall continue to be paid to the
Executive's estate or the Executive for a period of two (2) years from the date
of Death or Disability. Nothing in this Section 3.2 is intended to effect the
entitlement of the Executive or his estate to any payments or benefits to which
he or it would otherwise be entitled under any other Company plan or program.
Section 3.3 Termination for Cause
- ----------- ---------------------
The Company may terminate this Agreement at any time without any further
obligation to the Executive for Cause as defined herein.
Section 3.4 Retirement
- ----------- ----------
In the event that the Executive voluntarily elects Retirement during the
term of this Agreement, the Executive shall be entitled to the benefits under
the Company's regular Retirement program, or, if a separation Retirement
agreement has been entered into between the Executive and the Company, benefits
shall be provided according to the terms of that agreement.
Section 3.5 Resignation
- ----------- -----------
The Executive is entitled to voluntarily resign his employment with the
Company during the term of this Agreement. If the Executive resigns his
employment with the Company for other than Good Reason, this Agreement shall be
deemed terminated without any further obligation of the Company to the
Executive.
2
<PAGE>
Section 3.6 Termination Without Cause (The "Early Termination Option").
- ----------- ---------------------------------------------------------
The Company has the right to terminate the Executive's employment, without
cause, at any time prior to the Expiration Date by providing the Executive with
a Notice of Termination and, receipt of which, shall cause the Company to pay
the Executive the Separation Payments for the applicable period set forth in
Section 3.8 (the "Early Termination Option").
Section 3.7 Resignation for Good Reason
- ----------- ---------------------------
The Executive shall be entitled to resign his employment with the Company
for Good Reason at any time prior to the Expiration Date and receive the
Separation Payments for the applicable period set forth in Section 3.8 by
providing the Company with a Notice of Termination. The fact that the Executive
may choose not to resign his employment for Good Reason after the occurrence of
any event constituting Good Reason shall in no way affect the Executive's right
to do so upon the occurrence of a subsequent transaction or event which
constitutes a Good Reason.
Section 3.8 Separation Payments
- ----------- -------------------
(a) In the event the Early Termination Option is exercised by the Company
or the Executive resigns his employment with the Company for Good Reason, the
Executive shall be entitled to receive Separation Payments through the
Expiration Date or for a period of two (2) years from the effective date of the
Executive's termination or resignation, whichever period is longer.
(b) Unless otherwise directed by the Executive, the Separation Payments
shall be paid or provided on a continuing monthly basis on the first business
day of each month commencing with the month immediately following the effective
date of the Executive's termination or resignation, whichever is applicable.
(c) Upon the exercise of the Early Termination Option by the Company or
the Executive's resignation for Good Reason, the Executive shall be entitled to
accrue benefits (as defined in Section 5.2) during the period the Executive
receives or is entitled to receive separation payments.
(d) The Company shall use the compensation which the Executive receives
or is entitled to receive as Separation Payments for the purpose of determining
the amount of any benefit to which the Executive may be entitled under any plan
or program.
(e) The Executive agrees that so long as he is receiving Separation
Payments, he shall not become employed by or consult with any company whose
primary business is the provision of public international value added network
services.
3
<PAGE>
(f) The Executive agrees that so long as he is receiving Separation
Payments, he shall not induce or solicit any employee of the Company to
terminate his or her employment with the Company for any purpose.
(g) The Company's obligation to pay the Separation Payments and otherwise
comply with the provisions of this Section 3.8 shall be unconditional. The
Executive shall not be required to mitigate the amount of any payment provided
for in this Section 3.8.
ARTICLE IV
CONFIDENTIAL INFORMATION
------------------------
Section 4.1 Confidential Business Information
- ----------- ---------------------------------
The Executive agrees that he shall hold in strictest confidence and not
disclose, directly or indirectly, to any person, firm or corporation, without
the express prior written consent of the Company, any trade secrets or any
confidential business information of the Company including, but not limited to,
corporate planning, production, distribution or marketing processes;
manufacturing techniques; customer lists or customer leads; marketing
information or procedures; development work; work in process; financial
statements or notes, schedules or supporting financial data; or any other secret
or confidential matter relating to the products, sales or business of the
Company.
Section 4.2 Return of Information
- ----------- ---------------------
The Executive agrees that no later than five (5) days after his employment
is terminated with the Company he will deliver to the Company and will not keep
in his possession or deliver to anyone else, any and all drawings, notes,
memoranda, specifications, financial statements, customer lists, product
surveys, data, documents or other material containing or disclosing any of the
matters referred to in Section 4.1 above.
Section 4.3 Remedy for Breach of this Article
- ----------- ---------------------------------
The Executive acknowledges that any breach of this Article IV by him will
cause irreparable injury to the Company for which the available remedies at law
will not be adequate. Accordingly, in the event of any such breach or threatened
breach of any provision of this Article, in addition to any other remedy
provided by law or in equity, the Company shall be entitled to appropriate
injunctive relief, in any court of competent jurisdiction, restraining the
Executive from any such actual or threatened breach of this Article. The
Executive stipulates to the entry against him of any such temporary, preliminary
or permanent injunction and agrees not to resist the Company's application for
such equitable relief, except on the grounds that the acts or omissions alleged
by the Company did not violate any of the provisions of this Article.
4
<PAGE>
ARTICLE V
DEFINITIONS
-----------
Whenever the following terms are used below in this Agreement, they shall
have the meaning specified below, and no other, unless the context clearly
indicates to the contrary. The masculine pronoun shall include the feminine and
neuter, and the singular the plural, where the context so indicates.
Section 5.1 Base Salary
- ----------- -----------
"Base Salary" shall mean the Executive's regular annualized rate of pay
exclusive of all other Benefits as that term is defined below.
Section 5.2 Benefits
- ----------- --------
"Benefits" shall mean Benefits pursuant to this contract and all employee
welfare and pension benefit plans or programs and all other plans or programs
including, but not limited to medical and dental insurance, Infonet Stock
Incentive Plan ("ISIP"), 401(k) plans, the Infonet Supplemental Executive
Retirement Plan (the "ISERP"), bonus and incentive compensation plans, vacation
plans, etc. which the Executive or employees of the Company, and, in particular,
employees with senior management responsibility, are eligible for and entitled
to participate in, whether now in effect or added during the term of this
Agreement.
Section 5.3 Cause
- ----------- -----
"Cause" shall mean (i) the Executive's conviction of a felony or a
misdemeanor involving moral turpitude or (ii) the Executive's willful breach or
the habitual neglect of his duties under this Agreement which have a material
adverse impact on the financial condition of the Company; provided, however,
that the Company shall first have given the Executive written notice of the
alleged breach or areas of neglect and a reasonable opportunity to cure.
Section 5.4 Change in Control
- ----------- -----------------
A "Change in Control" shall be deemed to have occurred if (i) 20% or more
of the Company's outstanding securities as owned on January 1, 2000 are sold,
transferred or otherwise alienated; or (ii) after 20% or more of the Company's
outstanding securities as owned on October 19, 1994 are sold, transferred or
otherwise alienated as set forth in (i) above, any additional securities of the
Company or sold, transferred or otherwise alienated; or (iii) the Stockholders
of the Company approve a merger or consolidation of the Company with any other
corporation or entity regardless of which entity is the survivor, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or being converted into voting securities of the
5
<PAGE>
surviving entity) at least 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation; or (iv) the Stockholders of the Company approve a
plan of complete liquidation or winding-up of the Company or an agreement for
the sale or disposition by the Company of all or substantially all of the
Company's assets; or (v) if the director nominees of 3 members of the
Stockholders are not elected; or (vi) any event which the Board of Directors
determines should constitute a Change in Control.
Section 5.5 Disability
- ----------- ----------
"Disability" shall mean the Executive's absence from performance of his
assigned duties for the Company on a full-time basis for six consecutive
calendar months as a result of incapacity due to medically documented physical
or mental illness and which, in the opinion of the Executive's physician, makes
it impossible for the Executive to perform his duties and responsibilities under
this Agreement.
Section 5.6 Good Reason
- ----------- -----------
"Good Reason" shall mean the occurrence of any of the following events
without the Executive's express written consent:
(a) the assignment to the Executive of duties inconsistent
with the position and status of the Executive as set forth in Recital A, a
substantial alteration in the nature or status of the Executive's
responsibilities (other than any such alteration primarily attributable to a
medical or physical infirmity of the Executive which the Company has
attempted to accommodate), or
(b) the failure to pay or a reduction by the Company in the
Executive's Base Salary as the same may be increased from time to time
during the term of this Agreement or the Company's failure to increase
(within 12 months of the Executive's last increase in Base Salary) the
Executive's Base Salary in an amount which at least equals, on a percentage
basis, the average percentage increase in Base Salary for all key management
employees within the Company; or
(c) the elimination or reduction by the Company of any of the
Benefits to which the Executive is eligible for an entitled to participate
in, whether now in effect or added during the term of this Agreement or the
failure of the Company to provide the Executive with Benefits or facilities
at least comparable to those Benefits or facilities made available to other
key management employees within the Company; or
(d) a Change in Control; or
6
<PAGE>
(e) any purported termination of the employment of the
Executive by the Company which is not effected according to the requirements
of this Agreement.
Section 5.7 Notice of Termination
- ----------- ---------------------
"Notice of Termination" shall mean a notice, in writing, to the Executive
from the Company or to the Company from the Executive, which states the decision
of the Company or the Executive to terminate the Executive's employment and
which (i) indicates the specific termination provision enumerated in this
Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances alleged to provide a basis for termination of the Executive's
employment by the Company or by the Executive and (iii) states the effective
date of the termination which shall not be less than thirty (30) days nor more
than sixty (60) days from the date of the Notice of Termination. Such notice
must be communicated to the Executive or to the Company in accordance with
Section 6.4 herein.
Section 5.8 Retirement
- ----------- ----------
"Retirement" shall mean termination of the Executive's employment on or
after the date on which the Executive attains an age and years of service which
entitles him to retire in accordance with any Retirement plan or program
provided by the Company or agreement entered into between the Executive and the
Company.
Section 5.9 Separation Payments
- ----------- -------------------
"Separation Payments" shall mean for the Executive: (i) the average annual
total monetary consideration received from the Company during the twelve (12)
month period immediately preceding the effective date of his termination or
resignation and (ii) the continuation of his Benefits.
ARTICLE VI
MISCELLANEOUS
-------------
Section 6.1 Action to Challenge or Enforce Agreement
- ----------- ----------------------------------------
Should either (i) the Company, its successors or assigns, or any person
acting on behalf of the Company seek to challenge this Agreement or any of its
terms in any action or legal proceeding or (ii) the Executive seek to enforce
this Agreement or any of its terms in any action or legal proceeding, the
Company shall reimburse the Executive for all costs and attorneys' fees incurred
in connection with any such action or proceeding.
7
<PAGE>
Section 6.2 Successors; Binding Agreement
- ----------- -----------------------------
The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. The failure of
the Company to obtain such assumption agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the same
terms as the Executive would be entitled to hereunder if the Executive had
resigned his employment for Good Reason.
Section 6.3 Successors and Assigns
- ----------- ----------------------
This Agreement shall inure to the benefit of, and be enforceable by, the
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees of the Executive.
Section 6.4 Notice
- ----------- ------
Notices and all communications provided for in this Agreement shall be in
writing and shall be deemed to have been received when delivered or mailed by
United States registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth at the end of this Agreement,
provided that all notices to the Company shall be directed to the attention of
the President with a copy to the Secretary of the Company, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
receipt.
Section 6.5 Taxes
- ----------- -----
It is expressly understood and agreed by and between the Company and the
Executive that the Executive shall only be responsible for ordinary income taxes
should he receive payments under this Agreement. Any other excise taxes,
penalties, interest or other payments which the Executive may be required to pay
by any taxing authority shall be borne by the Company.
Section 6.6 No Waiver
- ----------- ---------
No provision of this Agreement may be modified, waived or discharged
unless in writing and signed by the Executive and such officer of the Company as
may be specifically designated or authorized by the Board of Directors or by a
Committee of the Board of Directors. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
8
<PAGE>
Section 6.7 Entire Agreement
- ----------- ----------------
This Agreement represents the sole and Entire Agreement among the parties
and supersedes all prior agreements, negotiations, and discussions between the
parties hereto and/or their representatives. Any amendment to this Agreement
must be in writing specifically referring to this Agreement and signed by duly
authorized representatives of all of the parties hereto.
Section 6.8 Controlling Law
- ----------- ---------------
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware.
Section 6.9 Invalid Provision
- ----------- -----------------
The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
Section 6.10 No Attack on Agreement
- ------------ ----------------------
This Agreement shall not be subject to attack on the ground that any or
all of the legal theories or factual assumptions used for negotiating purposes
are for any reason inaccurate or inappropriate. The parties agree that the
language of this Agreement shall not be construed for or against any particular
party.
Section 6.11 Confidentiality
- ------------ ---------------
The Executive agrees to keep confidential and not disclose any of the
terms of this Agreement to any person (including, but not limited to, any
current or former employees of the Company) other than his attorneys and/or tax
advisors unless required to do so by law.
Section 6.12 Counterparts
- ------------ ------------
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original, and all such counterparts together shall
constitute but one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date set forth below.
INFONET SERVICES CORPORATION, Ernest U. Gambaro
a Delaware Corporation
By: _______________________________ _____________________________
Jose A. Collazo, President
Address: Address:
Infonet Services Corporation Ernest U. Gambaro
2160 East Grand Avenue P.O. Box 3033
El Segundo, California 90245-1022 Palos Verdes Peninsula, CA 90274
Date: _____________________________ Date: ________________________
10
<PAGE>
LEASE
-----
GRAND AVENUE CORPORATE CENTER
-----------------------------
MS VICKERS II, LLC,
a Delaware limited liability company,
as Landlord
and
INFONET SERVICES CORPORATION,
a Delaware corporation,
as Tenant
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. PREMISES.................................................. 3
1.1 Premises......................................... 3
1.2 Reserved Rights.................................. 3
2. TERM/TERMINATION.......................................... 4
2.1 Commencement Date................................ 4
2.2 Possession....................................... 5
2.3 Options to Extend................................ 5
3. RENT...................................................... 6
3.1 Rent............................................. 6
3.2 Late Charge and Interest......................... 7
3.3 Credit Enhancement............................... 8
4. UTILITIES................................................. 9
5. TAXES..................................................... 9
5.1 Real Property Taxes.............................. 9
5.2 Tenant's Payment of Certain Real Property Taxes.. 10
5.3 Personal Property Taxes.......................... 11
6. TRIPLE NET LEASE.......................................... 11
7. INSURANCE................................................. 11
7.1 Insurance Maintained by Landlord................. 11
7.2 Insurance Maintained by Tenant................... 12
7.3 General.......................................... 12
7.4 Indemnity........................................ 13
7.5 Exemption of Landlord from Liability............. 14
8. REPAIRS AND MAINTENANCE................................... 14
9. ALTERATIONS............................................... 14
9.1 Trade Fixtures; Alterations...................... 14
9.2 Standard of Work................................. 15
9.3 Damage; Removal.................................. 15
9.4 Liens............................................ 15
10. USE....................................................... 15
11. ENVIRONMENTAL MATTERS..................................... 17
11.1 Hazardous Materials.............................. 17
11.2 Indemnification.................................. 17
12. DAMAGE AND DESTRUCTION.................................... 18
13. EMINENT DOMAIN............................................ 19
13.1 Total Condemnation............................... 19
13.2 Partial Condemnation............................. 19
13.3 Award............................................ 20
13.4 Temporary Condemnation........................... 20
</TABLE>
<PAGE>
<TABLE>
<S> <C>
14. DEFAULT................................................... 20
14.1 Events of Defaults............................... 20
14.2 Remedies......................................... 20
14.3 Cumulative....................................... 22
15. ASSIGNMENT AND SUBLETTING................................. 22
16. ESTOPPEL, ATTORNMENT AND SUBORDINATION.................... 23
16.1 Estoppel......................................... 23
16.2 Subordination.................................... 23
16.3 Attornment ...................................... 24
17. MISCELLANEOUS............................................. 24
17.1 General.......................................... 24
17.2 Signs............................................ 25
17.3 Waiver........................................... 25
17.4 Financial Statements............................. 25
17.5 Limitation of Liability.......................... 25
17.6 Notices.......................................... 26
17.7 Brokerage Commission............................. 26
17.8 Authorization.................................... 26
17.9 Holding Over; Surrender.......................... 26
17.10 Joint and Several................................ 26
17.11 Covenants and Conditions......................... 26
17.12 Arbitration...................................... 26
17.13 Covenant of Quiet Enjoyment...................... 28
18. SUBDIVISION............................................... 28
18.1 Legal Parcel..................................... 28
18.2 Conditions to Subdivision........................ 28
18.3 Costs of Entitlements............................ 28
18.4 Conditions to Landlord's Termination............. 29
18.5 Vesting Tentative Map Approval................... 29
18.6 TERMINATION CONSIDERATION/LIQUIDATED DAMAGES..... 29
</TABLE>
(iii)
<PAGE>
LEASE
-----
Effective Date: March 9, 1998
BASIC LEASE INFORMATION
-----------------------
1. Landlord: MS VICKERS II, LLC,
a Delaware limited liability company
2. Landlord's Address For c/o Morgan Stanley Real Estate Fund, Inc.
Payment of Rent and 1999 Avenue of the Stars, Suite 2000
Notices: Los Angeles, CA 90067
Telephone: (310) 788-2200
Fax: (310) 788-2282
3. Tenant: INFONET SERVICES CORPORATION, a Delaware
corporation
4. Tenant's Address For 2100 East Grand Avenue
Notice: El Segundo, California 90245-1022
Attn: Dr. Ernest U. Gambaro
Telephone: (310) 335-2802
Fax: (310) 322-6229
5. Land: That certain parcel of land containing
approximately six and fifty-six hundredths
(6.56) acres or two hundred eighty-five
thousand seven hundred fifty-three and six
tenths (285,753.6) squ are feet, situated in the
City of El Segundo, County of Los Angeles, State
of California, as approximately described in
Exhibit A, attached hereto.
6. Project: That certain master planned development
containing approximately 23 acres, commonly
known as Grand Avenue Corporate Center, situated
in the City of El Segundo, County of Los
Angeles, State of California.
7. Improvements: An office building (the "Building") to contain
approximately 157,000 square feet and other
improvements as shown on the Site Plan attached
hereto as Exhibit C.
8. Term: Twelve (12) years following the "Option Date,"
as that term is defined in Section 3 of that
certain Purchase Option Agreement dated as of
the Effective Date (the "Option Agreement"),
executed b y Landlord and Tenant, subject to
three (3) separate five (5) year options to
extend as set forth in Section 2.3 (the initial
Term, as the same previo usly may have been
extended, being collectively referred to herein
as the "Term").
9. Estimated Approximately October 31, 1999.
Commencement Date:
10. Base Rent: To be determined in accordance with the terms of
Section 3.1 of the Lease.
11. Credit Enhancement: Letter of Credit in the amount of Two Million
Five Hundred Thousand and No/100 Dollars
($2,500,000.00) to be issued by L/C Bank in
accordance with
<PAGE>
Section 3.3.1, below.
12. Broker: The Seeley Company
2050 West 190th Street
Suite 101
Torrance, California 90504
13. Lease Year: Shall refer to each three hundred sixty-five
(365) day period during the Term commencing on
the Commencement Date and on each anniversary
thereof.
14. Permitted Uses: General office use and other ancillary lawful
uses related to Tenant's business and consistent
with a first class office building.
EXHIBITS
- --------
A Description of the Land
B Work Letter
C Site Plan and Elevations
D Commencement Date Memorandum
E Prohibited Uses
F Tenant Estoppel Certificate
G Form of Letter of Credit
The Basic Lease Information set forth above and the Exhibits and Addendum
attached hereto are incorporated into and made a part of the following Lease.
Each reference in this Lease to any of the Basic Lease Information shall mean
the respective information above and shall be construed to incorporate all of
the terms provided under the particular Lease paragraph pertaining to such
information. In the event of any conflict between the Basic Lease Information
and the provisions of the Lease, the latter shall control.
-2-
<PAGE>
1. PREMISES.
--------
1.1 Premises. Landlord hereby leases to Tenant the Premises (as
--------
hereinafter defined). The Land will be improved with the Improvements to be
constructed by Landlord as more fully described in the Work Letter attached
hereto as Exhibit B. The Land and the Improvements (as that term is defined in
the Work Letter) are hereinafter collectively referred to as the "Premises." A
Site Plan and Elevations of the Premises is attached hereto in Exhibit C. Tenant
has determined that the Premises are acceptable for Tenant's use and Tenant
acknowledges that, except as set forth in the Work Letter, neither Landlord nor
any broker or agent has made any representations or warranties in connection
with the physical condition of the Premises or their fitness for Tenant's use
upon which Tenant has relied directly or indirectly for any purpose.
1.2 Reserved Rights. Landlord reserves the right to enter the Premises
---------------
upon reasonable notice to Tenant (during normal business hours except in case of
an emergency) and/or to undertake the following: (i) inspect the Premises and/or
the performance by Tenant of the terms and conditions hereof; (ii) grant
easements on the Project and/or dedicate for public use portions thereof
(provided that any such dedication of a portion of the Premises shall be coupled
with a concomitant reduction in the square footage of the Land and shall not
bisect the Land), provided that either (A) the activities set forth in this item
(ii) of this Section 1.2 shall not unreasonably interfere with Tenant's use of
the Premises, or (B) Landlord shall obtain Tenant's prior written consent to
such activities, which consent shall not be unreasonably withheld, conditioned
or delayed; (iii) record the "Project CC&Rs," as that term is defined below,
and/or modifications to the "CC&Rs," as that term is defined below, in
accordance with the terms and conditions of this Section 1.2; (iv) change the
name of the Project; and (v) during the last twelve (12) months of the Term,
show the Premises to prospective tenants. Tenant agrees that the terms,
covenants and conditions of this Lease, Landlord's and Tenant's rights and
obligations under the Lease, and Tenant's use of the Premises, shall be subject
and subordinate to the terms, covenants and conditions of the "CC&Rs," as that
term is defined below. As used herein, the "CC&Rs" shall mean the "Master CC&Rs"
and the "Project CC&Rs," as those terms are defined below. As used herein, the
"Master CC&Rs" shall mean (i) that certain Declaration of Covenants, Conditions
and Restrictions dated January 4, 1991, executed by Chevron U.S.A. Inc., a
Pennsylvania corporation ("Chevron"), and recorded on January 4, 1991, as
Instrument No. 91-16081 in the Official Records of Los Angeles County,
California (the "Official Records"), as and to the extent amended from time to
time, and (ii) that certain Grant Deed and Environmental Restriction dated March
1, 1996, executed by Chevron, as grantor, and Landlord, as grantee, and recorded
on May 9, 1996, as Instrument No. 96-732208 in the Official Records. As used
herein, the "Project CC&Rs" shall mean a declaration of covenants, conditions
and restrictions to be executed by Landlord, as declarant, and recorded on the
Project following the date hereof, as and to the extent amended from time to
time in accordance with this Section 1.2. Tenant acknowledges that prior to the
execution of this Lease Landlord has provided Tenant with a proposed form of the
Project CC&Rs. Tenant shall not have the right to approve the Project CC&Rs
provided that the terms of the Project CC&Rs, as originally recorded, are in
substantial conformity with the draft of the Project CC&Rs delivered to Tenant
prior to the execution of this Lease. To evidence Tenant's subordination of this
Lease to the Project CC&Rs, Tenant, upon five (5) business days prior request by
Landlord, shall execute, acknowledge and deliver to Landlord a written
agreement, in form and substance reasonably acceptable to Landlord and in
recordable form, pursuant to which Tenant agrees to recognize and be bound by
all of the terms, covenants and conditions of the Project CC&Rs notwithstanding
that this Lease has been executed prior to the recordation of the Project CC&Rs.
Tenant acknowledges and agrees that Landlord, without obtaining Tenant's prior
consent, may modify the terms of the Project CC&Rs and/or cause the terms of the
Master CC&Rs to be modified without affecting Tenant's subordination of this
Lease thereto, so long as such modifications do not materially, adversely affect
Tenant's rights or materially, adversely increase Tenant's obligations
thereunder. Landlord may otherwise modify the Project CC&Rs and/or cause the
terms of the Master CC&Rs to be modified only with Tenant's prior written
consent, which consent shall not be unreasonably withheld, conditioned or
delayed, and which consent shall be granted or denied by Tenant within five (5)
business days following Landlord's delivery of such request to Tenant. To the
extent the CC&Rs are modified pursuant to the terms of this Section 1.2, Tenant,
upon five (5) business days prior request by Landlord, shall execute,
acknowledge and deliver to Landlord a written agreement, in form and substance
reasonably acceptable to Landlord and in recordable form, pursuant to which
Tenant agrees to recognize and be bound by such modifications to the terms,
covenants and conditions of the CC&Rs notwithstanding that this Lease has been
executed prior to the recordation
-3-
<PAGE>
of such modifications to the CC&Rs. Tenant shall comply with the terms of the
CC&Rs as the same apply to Tenant.
2. TERM/TERMINATION.
----------------
2.1 Commencement Date. The Term of this Lease shall commence
("Commencement Date") on the first day of the first full month following the
date on which the Improvements are Substantially Complete (as hereinafter
defined) except that if Substantial Completion occurs on the first day of a
month, that date shall be the Commencement Date, and the Lease shall continue in
full force and effect for the period of time specified as the Term or until this
Lease is terminated as otherwise provided herein. The Improvements shall be
deemed to be "Substantially Complete" on the earliest of the date on which: (1)
Landlord files or causes to be filed with the City of El Segundo (if required)
and delivers to Tenant an architect's notice of substantial completion, or
similar written notice that the Improvements are substantially complete and a
certificate of occupancy (or a reasonably substantial equivalent such as a sign-
off from a building inspector or a temporary certificate of occupancy) (the "C
of O") is issued for the Improvements or (2) Tenant commences substantial
business operations in the Premises. On the Commencement Date, Tenant shall
execute and deliver to Landlord a Commencement Date Memorandum in the form
attached hereto as Exhibit D acknowledging (i) the Commencement Date, (ii) the
final rentable square footage of the Improvements, (iii) the final square
footage of the Land, (iv) the initial "Base Rent," as that term is defined in
Section 3.1.1, below, and (v) Tenant's acceptance of the Premises. If the
Improvements are not Substantially Complete on the Estimated Commencement Date
as extended by "Force Majeure Delay" and "Tenant Delay," as those terms are
defined in the Work Letter, then this Lease shall remain in effect, Landlord
shall not be subject to any liability, and the Commencement Date shall be
delayed until the date the Improvements are Substantially Complete.
Notwithstanding anything to the contrary contained herein, if there is any delay
in the Substantial Completion of the Improvements or in the occurrence of any of
the other conditions precedent to the Commencement Date, and such delay is a
result of Tenant Delay, then regardless of the actual date of Substantial
Completion of the Improvements, the Commencement Date shall be deemed to be the
date the Commencement Date would have occurred if no Tenant Delay had occurred,
as determined in accordance with Section 12 of the Work Letter.
2.1.1 Early Occupancy. Not later than ten (10) days after the
---------------
Building has internal electricity (but subject to all applicable governmental
laws, ordinances, statutes, orders or regulations now or hereafter in effect),
and provided that Tenant and its agents do not unreasonably interfere with the
work of the Contractor (as defined in Section 7 of the Work Letter) on the
Improvements (as defined in Section 1 of the Work Letter), Landlord and the
Contractor shall allow Tenant access to the "Data Center," as that term is
defined below, prior to the Substantial Completion of the Premises for the
purpose of Tenant installing overstandard equipment or fixtures in such portion
of the Premises. As used herein, the "Data Center" shall mean that portion of
the Premises which Tenant shall have previously designated for use as Tenant's
data center either (A) in the Final Plans (as defined in the Work Letter)
approved by Landlord pursuant to the Work Letter, or (B) by written notice to
Landlord to which Landlord has consented in writing (which consent shall not be
unreasonably withheld). In addition, not later than twenty-one (21) days prior
to the Estimated Commencement Date (but subject to all applicable governmental
laws, ordinances, statutes, orders or regulations now or hereafter in effect),
and provided that Tenant and its agents do not materially interfere with the
work of the Contractor on the Improvements, Landlord and the Contractor shall
allow Tenant reasonable access to the Premises to permit Tenant to install cable
and furniture and to conduct other preparatory activities. Such installation and
other preparatory activities shall not constitute "substantial business
operations" for the purpose of determining the Commencement Date, as set forth
above; provided, however, if Tenant commences any business operations in the
Data Center prior to the Possession Date, then Tenant shall be obligated to pay
Rent for such period on a pro-rata basis based upon the ratio which the number
of rentable square feet in the Data Center has to the number of rentable square
feet in the Building and Tenant's occupancy of the Data Center shall be subject
to all provisions of this Lease as though the Commencement Date had occurred
(although the Commencement Date shall not actually occur until the occurrence of
the same pursuant to the terms of this Section 2.1). Prior to Tenant's entry
into the Premises as permitted by the terms of this Section 2.1, Tenant shall
submit a schedule to Landlord and the Contractor, for their approval, which
schedule shall detail the timing and purpose of Tenant's entry. Tenant shall
hold Landlord harmless from and indemnify, protect and defend Landlord against
any loss or damage to the Improvements and against injury to any persons caused
by Tenant's actions pursuant to this
-4-
<PAGE>
Section 2.1. As a condition to Tenant's entry into the Premises prior to the
Commencement Date pursuant to this Section 2.1, Tenant and its contractor shall
carry such insurance as Landlord may reasonably require, it being understood and
agreed that all of Tenant's equipment and fixtures shall be insured by Tenant
pursuant to Article 7 of this Lease immediately upon installation thereof. Such
insurance shall be in amounts and shall include such extended coverage
endorsements as may be reasonably required by Landlord and in form and with
companies as are required to be carried by Tenant as set forth in Article 7 of
this Lease.
2.2 Possession. Tenant's possession of the Premises during the period of
----------
time, if any, from the date on which Landlord tenders possession of the Premises
to Tenant in a Substantially Completed condition (the "Possession Date") to the
Commencement Date, shall be subject to all provisions of this Lease and shall
not advance the expiration date. Rent shall be paid for such period at the rate
stated in the Basic Lease Information, prorated on the basis of a thirty (30)
day month, and shall be due and payable to Landlord on or before the
Commencement Date. Tenant shall acknowledge in writing the Possession Date in
the form attached hereto as Exhibit D.
2.3 Options to Extend.
-----------------
2.3.1 Tenant shall have the right to extend the Term of this Lease
for up to three (3) additional terms of five (5) years each (each, an "Extension
Term") by delivery of written notice to Landlord no later than ninety (90) days
prior to the expiration of the penultimate year of the then-existing Term (the
"Extension Notice"). The Base Rent during the Extension Term, subject to
periodic adjustment as provided in Section 3.1.3, below, shall be the fair
market rent for the Premises as of the date of the Extension Notice (the
"Extended Base Rent"). The determination of fair market rent for the Premises
shall consider the rents and other terms and conditions at which comparable
transactions are being consummated in projects comparable to the Premises in the
El Segundo, California area, which determination of comparable projects shall
duly take into account such projects' age, design and construction relative to
the Premises, and the presence or absence of any remaining Proposition XIII
protection in accordance with Section 5.2.2, below, as such Proposition XIII
protection may be affected by Tenant exercising its right to extend the Term
pursuant to this Section 2.3. Other than the determination of Base Rent for the
Extension Term, the terms and conditions of this Lease shall remain the same for
the Extension Term and Landlord shall have no obligation to grant Tenant any
improvement allowances or concessions in connection with the Extension Term.
Tenant's Extension Notice shall set forth Tenant's opinion of the Extended Base
Rent. Within thirty (30) days after Landlord's receipt of the Extension Notice,
Landlord shall either deliver a notice to Tenant either accepting Tenant's
opinion of the Extended Base Rent or objecting (an "Objection Notice") to
Tenant's determination of the Extended Base Rent. If Landlord delivers an
Objection Notice, then Landlord and Tenant shall negotiate in good faith the
amount of the Extended Base Rent. The right to exercise the Extension Terms are
personal to the originally named Tenant herein (the "Original Tenant") and may
only be exercised by such Original Tenant or a "Survivor" or an "Affiliate," as
those terms are defined in Article 15 below, which Survivor or Affiliate is an
assignee of this Lease, and may not be exercised by any other assignee,
sublessee or transferee of this Lease.
2.3.2 If the parties are unable to agree upon the amount of the
Extended Base Rent within fourteen (14) days after Tenant's receipt of the
Objection Notice, then, within fourteen (14) additional days (the "Initial
Appraiser Selection Period"), each of the parties shall select a qualified real
estate appraiser. Within fourteen (14) days after the date upon which the last
of the two appraisers is so selected, the two appraisers shall select a third
qualified real estate appraiser. Each appraiser selected shall have at least ten
(10) years experience in commercial real estate valuation in the South Bay Basin
of Los Angeles County. The parties shall cause each of the three appraisers to
render and deliver to each party a written appraisal of the Extended Base Rent,
each such appraisal to be so rendered and delivered within twenty-one (21) days
after the date upon which the third appraiser is selected.
2.3.3 The Extended Base Rent shall be equal to the average value of
the two appraised values which have the least difference in absolute value
between them; provided, however, that if each of two of the appraised values has
the same difference in absolute value between it and the third appraised value,
then the Extended Base Rent shall be equal to the third appraised value. By way
of example only: (A) if the three appraised values are 8, 10 and 15, then the
Extended Base Rent shall be 9; (B) if the three appraised values are 8, 10 and
12,
-5-
<PAGE>
then the Extended Base Rent shall be 9; (B) if the three appraised values are 8,
10 and 12, then the Extended Base Rent shall be 10; and (C) if the three
appraised values are 10, 12 and 12, then the Extended Base Rent shall be 12.
2.3.4 Notwithstanding the foregoing terms of Section 2.3.2 and
2.3.3, if only one party selects a qualified real estate appraiser within the
Initial Appraiser Selection Period, then the single appraiser so selected shall
determine the Extended Base Rent. In such event, the parties shall cause the
single appraiser to render and deliver to each party a written appraisal of the
Extended Base Rent within twenty-one (21) days after expiration of the Initial
Appraiser Selection Period. The Extended Base Rent as determine pursuant to
Section 2.3.1, 2.3.3 or this Section 2.3.4, as the case may be, shall be
referred to as the "Appraised Extended Base Rent."
2.3.5 Tenant shall have the option, but no obligation, to
notify Landlord in writing of Tenant's acceptance or rejection of the Appraised
Extended Base Rent, which election shall be made in Tenant's sole and absolute
discretion, at any time prior to the earlier to occur of (i) the expiration of
the penultimate year of the then existing Term, and (ii) the expiration of
fourteen (14) days after the date on which all of the appraisers or the
appraiser, as the case may be, have, or has, notified the parties in writing of
their respective, or its, appraisal(s) of the Extended Base Rent. If Tenant
elects to accept or fails to reject the Appraised Extended Base Rent within such
time period, then Tenant shall be deemed to have irrevocably extended this Lease
for the applicable Extension Term, the Appraised Extended Base Rent shall be
final and binding on the parties with respect to the Extension Term, and each of
the parties shall bear its own expenses, the cost of the appraiser selected by
it and one-half of the cost of the third appraiser. If Tenant elects to reject
the Appraised Extended Base Rent, then (i) Tenant shall be deemed to have
withdrawn its Extension Notice, (ii) Tenant shall bear all costs of the
appraiser(s), any direct out-of-pocket costs incurred by Landlord in connection
with the appraisal process, and (iii) Tenant shall have no further right to or
obligation for any Extension Term.
3. RENT.
----
3.1 Rent. Except as expressly provided in the Lease, Tenant shall pay
----
to Landlord, at Landlord's Address for Payment of Rent and Notices designated in
the Basic Lease Information, or at such other address as Landlord may from time
to time designate in writing to Tenant for the payment of Rent, the Base Rent,
without notice, demand, offset (except as set forth in Section 10, below) or
deduction, in advance, on the first day of each calendar month. If the Term ends
on a date other than the last day of a month, Base Rent shall be prorated on a
per diem basis with respect to the portion of the last month within the Term.
All sums other than Base Rent which Tenant is obligated to pay under this Lease
shall be deemed to be additional rent due hereunder, whether or not such sums
are designated "additional rent." The term "Rent" means the Base Rent and all
additional rent payable hereunder.
3.1.1 Calculation of Base Rent. As used in this Lease, "Base
------------------------
Rent" shall mean monthly base rental in an initial amount equal to the quotient
of (i) the "Annual Base Rent," as defined in Section 3.1.2.1, below, divided by
(ii) twelve (12), as the same may be increased from time to time in accordance
with Section 3.1.3, below.
3.1.2 Base Rent Definitions. As used in this Lease, the
---------------------
following terms shall have the meanings hereinafter set forth:
3.1.2.1 "Annual Base Rent" shall mean the product of (i)
"Total Construction Costs," as defined in Section 3.1.2.2, below, multiplied by
(ii) eleven and twenty-five one-hundredths percent (11.25%), subject to
adjustment, if applicable, pursuant to Section 22 of the Work Letter.
3.1.2.2 "Total Construction Costs" shall mean the sum of
(i) "Land Costs," as defined in Section 3.1.2.3, below, plus (ii) "Construction
Hard Costs," as defined in the Work Letter, plus (iii) "Construction Soft
Costs," as defined in the Work Letter.
3.1.2.3 "Land Costs" shall be mean the product of (i)
Fourteen and No/100 Dollars ($14.00), multiplied by (ii) the square footage of
the Land, provided that in no event shall the Land include more than six and
seventy-five hundredths (6.75) acres.
-6-
<PAGE>
3.1.3 Adjustment to Base Rent. On the first day of the calendar
-----------------------
month which is thirty (30) months after the month containing the Commencement
Date (the "Initial Adjustment Date"), the Base Rent shall be increased to one
hundred seven percent (107%) of the Base Rent in effect immediately prior to the
Initial Adjustment Date. On the first day of the calendar month which is thirty
(30) months after the month containing the Initial Adjustment Date (the "Initial
CPI Adjustment Date") and, on the first day of every next succeeding thirty (30)
month period thereafter (each a "CPI Adjustment Date") during the Term or any
Extended Term, the Base Rent shall be increased to equal the product of (i) the
Base Rent, as the same may have been previously increased pursuant to this
Section 3.1.3, multiplied by (ii) a fraction, the numerator of which is the
"Adjustment Month Index," as that term is defined in Section 3.1.4.1, below,
occurring prior to such CPI Adjustment Date and the denominator of which is
either (A) for the Initial CPI Adjustment Date, the "Base Month Index," as that
term is defined in Section 3.1.4.2, below, or (B) for all subsequent CPI
Adjustment Dates, the Adjustment Month Index used as the numerator for the
previous CPI Adjustment Date; provided, however, in no event shall the Base Rent
commencing on any CPI Adjustment Date be less than the Base Rent in effect
immediately prior to such CPI Adjustment Date.
3.1.4 Base Rent Adjustment Definitions. As used in this Lease,
--------------------------------
the following terms shall have the meanings hereinafter set forth:
3.1.4.1 "Adjustment Month Index" shall mean the "Index,"
as that term is defined in Section 3.1.4.3, below, for the third month
immediately preceding the month in which each succeeding CPI Adjustment Date
occurs.
3.1.4.2 "Base Month Index" shall mean the Index for the
third month immediately preceding the month in which the Initial Adjustment Date
occurs. By way of example only, if the Commencement Date were to occur on
October 1, 1999, then (i) the Initial Adjustment Date would occur on April 1,
2002, and the Base Month Index would be the Index for January 2002; (ii) the
Initial CPI Adjustment Date would occur on October 1, 2004. and the Base Month
Index would be the Index for July 2004; and (iii) the next succeeding CPI
Adjustment Date would be April 1, 2007, and the Base Month Index would be the
Index for January 2007.
3.1.4.3 "Index" shall mean the Consumer Price Index for
all Urban Consumers for the Los Angeles Anaheim Riverside area (base year 1982-
1984=100), published by the United States Department of Labor. Bureau of Labor
Statistics. If the base of the Index changes from the 1982-84 base (100), the
Index shall, thereafter, be adjusted to the 1982-84 base (100) before the
computation indicated above is made. If the Index cannot be converted to the
1982-84 base or if the Index is otherwise revised, the adjustment under this
section shall be made with the use of such conversion factor, formula or table
for converting the Index as may be published by the Bureau of Labor Statistics.
If the Index is at any time no longer published, a comparable index generally
accepted and employed by the real estate profession, as determined by Landlord
in Landlord's sole but reasonable discretion, shall be used.
3.2 Late Charge and Interest. The late payment of any Rent will cause
------------------------
Landlord to incur additional costs, including administration and collection
costs and processing and accounting expenses and increased debt service
(collectively, "Delinquency Costs"). If Landlord has not received any
installment of Rent within five (5) days after Tenant receives notice from
Landlord of such delinquent payment, then Tenant shall pay a late charge of five
percent (5%) of the delinquent amount, which is agreed to represent a reasonable
estimate of the Delinquency Costs incurred by Landlord. In addition, all such
delinquent amounts shall bear interest from the date such amount was due until
paid in full at a rate per annum ("Applicable Interest Rate") equal to the
lesser of (a) the maximum interest rate permitted by law or (b) four percent
(4%) above the rate publicly announced by Bank of America, N.A. (or if Bank of
America, N.A. ceases to exist, the largest bank then headquartered in the State
of California) ("Bank") as its "Reference Rate." If the use of the announced
Reference Rate is discontinued by the Bank, then the term Reference Rate shall
mean the announced rate charged by the Bank which is, from time to time,
substituted for the Reference Rate. Landlord and Tenant recognize that the
damage which Landlord shall suffer as a result of Tenant's failure to pay such
amounts is difficult to ascertain and said late charge and interest are the best
estimate of the damage which Landlord shall suffer in the event of late payment.
If a late charge becomes payable for any three (3)
-7-
<PAGE>
installments of Rent within any twelve (12) month period, then the Rent shall
automatically become due and payable quarterly in advance.
3.3 Credit Enhancement.
------------------
3.3.1 Letter of Credit. Tenant shall deliver to Landlord concurrently
----------------
with Landlord's execution of the Construction Contract, an unconditional, clean,
irrevocable standby letter of credit (the "L/C") issued by Bank of Montreal or
another bank, which bank accepts deposits, maintains accounts, has a local Los
Angeles office, and whose deposits are insured by the FDIC, selected by Tenant
and reasonably acceptable to Landlord ("L/C Bank") in the initial amount of Two
Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00), to Landlord,
its successors or assigns, as beneficiary. The L/C shall be in the form attached
hereto as Exhibit G. Tenant shall pay all expenses, points and/or fees incurred
by Tenant in obtaining the L/C. The L/C shall be held by Landlord as security
for the full and faithful performance by Tenant of all the terms, covenants, and
conditions of this Lease to be kept and performed by Tenant during the Lease
Term. The L/C shall not be mortgaged, assigned or encumbered in any manner
whatsoever by Tenant without the prior written consent of Landlord. If Tenant
defaults with respect to any provisions of this Lease, including, but not
limited to, the provisions relating to the payment of Rent, or if Tenant fails
to renew the L/C at least thirty (30) days before its expiration, if such
renewal is required under the terms of this Section 3.3, then Landlord may, but
shall not be required to, draw upon all or any portion of the L/C for payment of
any Rent or any other sum in default, or for the payment of any amount that
Landlord may reasonably spend or may become obligated to spend by reason of
Tenant's default, including, without limitation, tenant improvements, leasing
commissions and reasonable attorneys' fees. The use, application or retention of
the L/C, or any portion thereof, by Landlord shall not prevent Landlord from
exercising any other right or remedy provided by this Lease or by law, it being
intended that Landlord shall not first be required to proceed against the L/C
and shall not operate as a limitation on any recovery to which Landlord may
otherwise be entitled. Any amount of the L/C which is drawn upon by Landlord,
but is not used or applied by Landlord, shall be held by Landlord and deemed a
security deposit (the "L/C Security Deposit"). If any portion of the L/C is
drawn upon, Tenant shall, within five (5) days after written demand therefor,
either (i) deposit cash with Landlord (which cash shall be applied by Landlord
to the L/C Security Deposit) in an amount sufficient to cause the sum of the L/C
Security Deposit and the amount of the remaining L/C to be equivalent to the
amount of the L/C then required under this Lease or (ii) reinstate the L/C to
the amount which, when combined with the L/C Security Deposit, if any, is equal
to the amount then required under this Lease. If any portion of the L/C Security
Deposit is used or applied, Tenant shall, within five (5) days after written
demand therefor, deposit cash with Landlord (which cash shall be applied by
Landlord to the L/C Security Deposit) in a amount sufficient to restore the L/C
Security Deposit to the amount then required under this Lease, and Tenant's
failure to do so shall be a default under this Lease. Tenant acknowledges that
Landlord has the right to transfer or mortgage its interest in the Premises and
in this Lease and Tenant agrees that in the event of any such transfer or
mortgage, Landlord shall have the right to transfer or assign its rights to and
interest in the L/C Security Deposit and/or the L/C to the transferee or
mortgagee, and in the event of such transfer, Tenant shall look solely to such
transferee or mortgagee for the return of the L/C Security Deposit and/or the
L/C.
3.3.2 Reduction in Credit Enhancement.
-------------------------------
3.3.2.1 Reduction in L/C. If Tenant is not then in default
----------------
under this Lease and if Tenant has satisfied each of the Financial Requirements
for each of the immediately preceding four (4) fiscal quarters, then, on the
third (3rd) Anniversary and thereafter on every Anniversary as Tenant shall have
satisfied the preceding conditions, the L/C shall be reduced by an amount equal
to Five Hundred Thousand and No/100 Dollars ($500,000.00) and Landlord shall
authorize a reduction in the L/C in such amount, provided that in no event shall
the amount of the L/C be reduced below Five Hundred Thousand and No/100 Dollars
($500,000.00). If on any Anniversary Tenant is then in default under this Lease
or Tenant has not satisfied all of the Financial Requirements for each of the
immediately preceding four (4) fiscal quarters, then the L/C shall not be
reduced on such Anniversary, and thereafter shall remain at its then existing
amount unless and until such Anniversary as Tenant shall not then be in default
under this Lease and shall have satisfied each of the Financial Requirements for
each of the immediately preceding four (4) fiscal quarters, on which Anniversary
the L/C shall be reduced by an amount equal to the product of (i) the number of
Anniversaries from and after the third (3rd) Anniversary for which Tenant has
not previously received a reduction in the L/C, multiplied by (ii) Five Hundred
Thousand and No/100 Dollars
-8-
<PAGE>
($500,000.00), subject to the limitation on reduction of the L/C set forth in
this Section 3.3.2.1 that the L/C shall not be reduced below Five Hundred
Thousand and No/100 Dollars ($500,000.00).
3.3.2.2 Financial Requirements. Commencing on the Commencement
----------------------
Date and continuing until Landlord has returned the L/C and the L/C Security
Deposit, if any, to Tenant, all in accordance with Section 3.3.4, below, Tenant
shall provide to Landlord: (i) within ninety (90) days following any fiscal
year, a current, accurate annual financial statement for Tenant and Tenant's
business as of the last day of Tenant's immediately preceding fiscal year,
prepared under generally accepted accounting principles consistently applied and
certified by an outside certified public accountant, which statement is the same
annual financial statement provided to Tenant's shareholders (each an "Annual
Financial Statement"); and (ii) within forty-five (45) days following any fiscal
quarter, a current, accurate quarterly financial statement for Tenant and
Tenant's business as of the last day of Tenant's immediately preceding fiscal
quarter, prepared under the same generally accepted accounting principles
consistently applied as used in preparing the annual financial statement and
certified by Tenant's chief financial officer, which statement is the same
quarterly financial statement provided to Tenant's shareholders (each a
"Quarterly Financial Statement"), together with such other financial information
or tax returns as may be reasonably required by Landlord. For purposes of this
Lease, the "Financial Requirements" shall be satisfied for any given fiscal
quarter if the Quarterly Financial Statement provided to Landlord pursuant to
this Section 3.3.2.2 reflects that (A) Tenant has unrestricted available cash or
cash equivalents equal to or greater than Ten Million and No/100 Dollars
($10,000,000.00); (B) the ratio of Tenant's current assets to Tenant's current
liabilities is equal to or greater than one and thirty hundredths (1.30); (C)
Tenant has a tangible net worth of equal to or greater than Sixty Million and
No/100 Dollars ($60,000,000.00); and (D) Tenant's line of credit with L/C Bank
is in effect and Tenant is in compliance with all of the terms, covenants and
requirements thereof. In addition, concurrently with Landlord's execution of the
Construction Contract and every twelve (12) months thereafter, and upon any
renewal, modification or amendment to Tenant's credit agreement with L/C Bank,
until Landlord has returned the L/C and the L/C Security Deposit, if any, to
Tenant, Tenant shall deliver to Landlord a then current copy of Tenant's credit
agreement with L/C Bank. If, at any time prior to Landlord having returned the
L/C and the L/C Security Deposit, if any, to Tenant, L/C Bank shall increase its
financial requirements of Tenant with respect to the items described in (A)
through (C), above, then Landlord shall have the right, in its reasonable
discretion, to make corresponding increases in the Financial Requirements.
3.3.3 Release of Credit Enhancement. On or after the tenth
-----------------------------
(10th) Anniversary, if Tenant shall not then be in default under this Lease and
if Tenant shall have satisfied each of the Financial Requirements for each of
the immediately preceding four (4) fiscal quarters, then Landlord shall return
the L/C and the L/C Security Deposit, if any, to Tenant within thirty (30) days
following the earlier to occur of (A) such Anniversary as Tenant shall have
satisfied the preceding conditions, or (B) the date which is thirty (30) days
after Tenant vacates the Premises upon the expiration or sooner termination of
this Lease.
4. UTILITIES.
---------
Landlord shall provide connections for utilities in accordance with the
Approved Working Drawings (as defined in the Work Letter). Tenant shall make all
arrangements for and pay all charges for water, sewer, telephone, gas,
electricity and other utilities supplied or used on the Premises including,
without limitation, paying any deposits and "hook up charges." Other than due to
Landlord's negligence or intentional or willful misconduct in connection with
Landlord's development of the remainder of the Project, Landlord shall not be
liable to Tenant for interruption in or curtailment of any utility service, nor
shall any such interruption or curtailment constitute constructive eviction or
grounds for rental abatement.
5. TAXES.
-----
5.1 Real Property Taxes. Tenant shall be liable for, and shall pay to
-------------------
the proper taxing authorities prior to delinquency, all "Real Property Taxes,"
as that term is defined below, applicable to the Premises and relating to the
period of the Term of this Lease; and Tenant shall provide Landlord copies of
receipts for payment of all such Real Property Taxes. Landlord and Tenant
acknowledge and agree that, as of the Commencement Date, the Land upon which the
Building is located shall be a separate tax parcel. The term "Real Property
Taxes" shall be the sum
-9-
<PAGE>
of the following: all real property taxes, possessory interest taxes, business
or license taxes or fees, service payments in lieu of such taxes or fees, annual
or periodic license or use fees, excises, transit and traffic charges, housing
fund assessments, open space charges, childcare fees, school, sewer and parking
fees or any other assessments, levies, fees, exactions or charges, general and
special, ordinary and extraordinary, unforeseen as well as foreseen (including
fees "in lieu" of any such tax or assessment) which are assessed, levied,
charged, conferred or imposed by any public authority upon the Premises (or any
real property comprising any portion thereof) or its operations, together with
all taxes, assessments or other fees imposed by any public authority upon or
measured by any Rent or other charges payable hereunder, including any gross
receipts tax or excise tax levied by any governmental authority with respect to
receipt of rental income, or upon, with respect to or by reason of the
development, possession, leasing, operation, management, maintenance,
alteration, repair, use or occupancy by Tenant of the Premises or any portion
thereof, or documentary transfer taxes upon this transaction or any document to
which Tenant is a party creating or transferring an interest in the Premises,
together with any tax imposed in substitution, partially or totally, of any tax
previously included within the aforesaid definition or any additional tax the
nature of which was previously included within the aforesaid definition,
together with the costs and expenses (including attorneys', administrative and
expert witness fees and costs) of challenging any of the foregoing or seeking
the reduction in or abatement, redemption or return of any of the foregoing, but
only to the extent of any such reduction, abatement, redemption or return. All
references to Real Property Taxes during a particular year shall be deemed to
refer to taxes accrued during such year, including supplemental tax bills
regardless of when they are actually assessed and without regard to when such
taxes are payable. Real Property Taxes for partial tax fiscal years, if any,
falling within the Term, shall be prorated. The obligation of Tenant to pay Real
Property Taxes for the last full or partial year of the term and supplemental
taxes accrued during the Term, whenever assessed, shall survive the expiration
or early termination of this Lease. Nothing contained in this Lease shall
require Tenant to pay any franchise, corporate, estate or inheritance tax of
Landlord, or any income, profits or revenue tax or charge upon the net income of
Landlord.
5.2 Tenant's Payment of Certain Real Property Taxes. Notwithstanding
-----------------------------------------------
anything to the contrary contained in this Lease, in the event that after the
commencement of the Term any sale, refinancing, or change in ownership of the
Premises is consummated, and as a result thereof, and to the extent that in
connection therewith, the Premises is reassessed (a "Reassessment") for real
estate tax purposes by the appropriate governmental authority pursuant to the
terms of Proposition XIII (as adopted by the voters of the State of California
in the June, 1978 election), then the terms of this Section 5.2 shall apply.
-----------
5.2.1 The Tax Increase. For purposes of this Section 5.2, the
---------------- -----------
term "Tax Increase" shall mean that portion of the Real Property Taxes, as
calculated immediately following a Reassessment, which is attributable solely to
the Reassessment. Accordingly, the term Tax Increase shall not include any
portion of the Real Property Taxes, as calculated immediately following a
Reassessment, which (i) is attributable to the initial assessment of the value
of the Premises following the construction of the Improvements pursuant to the
terms of Exhibit B attached hereto, or (ii) is attributable to the annual
---------
inflationary increase to real estate taxes.
5.2.2 Tenant's Protection. Tenant shall be obligated to pay any
-------------------
Tax Increases resulting from the first three (3) Reassessments occurring during
the Term, provided that Tenant shall not be obligated to pay any Tax Increases
resulting from the third (3rd) of such Reassessments if such third (3rd)
Reassessment occurs after the eighth (8th) anniversary of the Commencement Date.
If Tenant exercises its right to extend the Term of this Lease in accordance
with Section 2.3, above, then, for each Extension Term, Tenant shall be
obligated to pay any Tax Increases resulting from one (1) additional
Reassessment occurring at any time during the Term, as extended by all such
Extension Terms. Except as set forth in this Section 5.2.2, Tenant shall not be
obligated to pay any portion of a Tax Increase relating to Reassessments
occurring during the Term. By way of example only: (i) if one (1) Reassessment
were to occur during the initial Term, then (A) upon Tenant exercising its first
(1st) right to extend, Tenant would be obligated to pay any Tax Increases
resulting from the next two (2) Reassessments occurring during the balance of
the Term, as extended (i.e., Tenant would have paid the Tax Increases resulting
from one (1) Reassessment during the initial Term and Tenant would not be
obligated to pay Tax Increases resulting from the later of the remaining two (2)
Reassessments because such Reassessment would not have occurred prior to the
eighth (8th) anniversary of the Commencement Date; nevertheless, Tenant would be
required to pay any Tax Increases resulting from one (1) additional Reassessment
by reason of Tenant exercising its right to extend the
-10-
<PAGE>
Term), and (B) assuming that no Reassessments occurred during the first (1st)
Extension Term, upon Tenant exercising its second (2nd) right to extend, Tenant
would be obligated to pay any Tax Increases resulting from the next three (3)
Reassessments occurring during the balance of the Term, as extended (i.e.,
Tenant would be obligated to pay Tax Increases resulting from the one (1)
Reassessment remaining after the initial Term, from the one (1) additional
Reassessment by reason of Tenant exercising its first (1st) right to extend and
from one (1) additional Reassessment by reason of Tenant exercising its second
(2nd) right to extend); and (ii) if four (4) Reassessments were to occur during
the initial Term (and assuming that the first three (3) Reassessments had
occurred prior to the eighth (8th) anniversary of the Commencement Date), then,
although Tenant would not have been required to pay any Tax Increases resulting
from the fourth (4th) Reassessment, (x) upon Tenant exercising its first (1st)
right to extend, Tenant would be obligated to pay any Tax Increases resulting
from the fifth (5th) Reassessment occurring during the Term, as extended (i.e.,
one (1) additional Reassessment by reason of Tenant exercising its right to
extend the Term), which Tax Increases would be comprised only of that portion of
the Real Property Taxes, as calculated immediately following such fifth (5th)
Reassessment which was attributable solely to such fifth (5th) Reassessment
(i.e., Tenant remains unobligated to pay any Tax Increases which were
attributable solely to the earlier fourth (4th) Reassessment), and (y) assuming
that two (2) Reassessments (i.e., a fifth (5th) and a sixth (6th) Reassessment)
occurred during the first (1st) Extension Term, upon Tenant exercising its
second (2nd) right to extend, Tenant would be obligated to pay any Tax Increases
resulting from the seventh (7th) Reassessment occurring during the Term, as
extended (i.e., one additional Reassessment by reason of Tenant exercising its
second (2nd) right to extend), which Tax Increases would be comprised only of
that portion of the Real Property Taxes, as calculated immediately following
such seventh (7th) Reassessment which was attributable solely to such seventh
(7th) Reassessment (i.e., Tenant remains unobligated to pay any Tax Increases
which were attributable solely to the earlier fourth (4th) and sixth (6th)
Reassessments).
5.3 Personal Property Taxes. Prior to delinquency, Tenant shall pay all
-----------------------
taxes and assessments levied upon trade fixtures, alterations, additions,
improvements, inventories and other personal property located and/or installed
on the Premises by Tenant; and Tenant shall provide Landlord copies of receipts
for payment of all such taxes and assessments. To the extent any such taxes are
not separately assessed or billed to Tenant, Landlord shall deliver notice and
appropriate documentation thereof to Tenant no later than thirty (30) days prior
to the due date, and Tenant shall pay the amount thereof to Landlord within
twenty (20) days after delivery to Tenant by Landlord of an invoice for same and
Landlord shall pay all taxes and assessments prior to delinquency.
6. TRIPLE NET LEASE.
----------------
It is intended that this Lease be a "triple net lease," and that, except as
expressly provided in this Lease, the Rent to be paid hereunder by Tenant will
be received by Landlord without any deduction or offset whatsoever by Tenant,
foreseeable or unforeseeable. Except as expressly provided to the contrary in
this Lease, Landlord shall not be required to make any expenditure, incur any
obligation, or incur any liability of any kind whatsoever in connection with
this Lease or the ownership, construction, maintenance, operation or repair of
the Premises. Tenant's obligation to pay Rent for expenditures and liability
incurred during the Term shall survive the expiration or earlier termination of
the Term.
7. INSURANCE.
---------
7.1 Insurance Maintained by Landlord. Landlord shall maintain insurance
--------------------------------
through individual or blanket policies insuring the Improvements against fire
and extended coverage (including, if Landlord elects, "all risk" coverage,
earthquake/volcanic action, flood and/or surface water insurance) for the full
replacement cost of the Building, with deductibles and the form and endorsements
of such coverage consistent with the casualty insurance coverage procured by
other owners of commercial office buildings in the El Segundo, California area,
together with rental abatement insurance against loss of Rent in an amount equal
to the amount of Rent for a period of at least twelve (12) months commencing on
the date of loss. Landlord may also carry such other insurance as Landlord may
deem prudent or advisable, including, without limitation, liability insurance in
such amounts and on such terms as Landlord shall determine. Tenant shall pay to
Landlord within fifteen (15) days after delivery of an invoice Landlord's
reasonable third-party, out-of-pocket costs of the insurance coverages described
herein, including, in the event of a claim, Landlord's cost of any deductible,
provided that the amount of Landlord's deductible under any
-11-
<PAGE>
insurance carried hereunder other than earthquake insurance shall not exceed
Fifty Thousand and No/100 Dollars ($50,000.00) per claim and the amount of
Landlord's deductible under any earthquake insurance shall be consistent with
the prevailing market deductibles for such earthquake insurance for comparable
projects. Landlord shall deliver to Tenant certificates of insurance for all
insurance required to be maintained by Landlord in a commercially reasonable
form, no later than seven (7) days prior to the date of possession of the
Premises. Landlord shall, at least ten (10) days prior to expiration of the
policy, furnish Tenant with certificates of renewal or "binders" thereof. In the
event any such policy is canceled before expiration, the insuring company will
endeavor to mail thirty (30) days written notice of such cancellation to Tenant
(except in the case of cancellation for nonpayment of premium in which case
cancellation shall not take effect until at least (10) days' notice has been
given to Tenant). If Landlord fails to maintain any insurance required in this
Lease, Landlord shall be liable for all losses and cost resulting from said
failure.
7.2 Insurance Maintained by Tenant. Tenant shall, at Tenant's expense,
------------------------------
obtain and keep in force at all times the following insurance (with deductibles
and the form and endorsements of such coverage as selected by Tenant and
reasonably approved by Landlord):
7.2.1 Commercial General Liability Insurance (Occurrence Form). A
-------------------------------------------------------
policy of commercial general liability insurance (occurrence form) having a
combined single limit of not less than Five Million and No/100 Dollars
($5,000,000.00) per occurrence and Five Million and No/100 Dollars
($5,000,000.00) aggregate per location if Tenant has multiple locations,
providing coverage for, among other things, blanket contractual liability,
premises, products/completed operations and personal and advertising injury
coverage, with deletion of the exclusion for explosion, collapse or underground
hazard, if applicable, and, if necessary, Tenant shall provide for restoration
of the aggregate limit.
7.2.2 Automobile Liability Insurance. Comprehensive automobile
------------------------------
liability insurance having a combined single limit of not less than Three
Million and No/100 Dollars ($3,000,000.00) per occurrence and insuring Tenant
against liability for claims arising out of ownership, maintenance, or use of
any owned, hired or non-owned automobiles.
7.2.3 Workers' Compensation and Employer's Liability Insurance.
--------------------------------------------------------
Workers' compensation insurance having limits not less than those required by
state statute and federal statute, if applicable, and covering all persons
employed by Tenant in the conduct of its operations on the Premises (including
the all states endorsement and, if applicable, the volunteers endorsement),
together with employer's liability insurance coverage in the amount of at least
Two Million Dollars and No/100 ($2,000,000.00).
7.2.4 Property Insurance. "All risk" property insurance including
-------------------
boiler and machinery comprehensive form, if applicable, covering damage to or
loss of any of Tenant's personal property, fixtures, equipment and alterations,
including electronic data processing equipment (collectively "Tenant's
Property"), and coverage for the full replacement cost thereof (including
business interruption of Tenant), together with, if the property of Tenant's
invitees is to be kept in the Premises, warehouser's legal liability or bailee
customers insurance for the full replacement cost of the property belonging to
invitees and located in the Premises, with deductibles and the form and
endorsements of such coverage as reasonably determined by Landlord.
7.3 General.
-------
7.3.1 Insurance Companies. Insurance required to be maintained by
-------------------
Landlord or Tenant shall be written by companies licensed to do business in the
State of California and having a "General Policyholders Rating" of at least
"A" -"VIII" (or such higher rating as may be required by a lender having a lien
on the Premises) as set forth in the most current issue of "Best's Insurance
Guide."
7.3.2 Certificates of Insurance. Tenant shall deliver to Landlord
---------------------------
certificates of insurance for all insurance required to be maintained by Tenant
in a commercially reasonable form, no later than seven (7) days prior to the
date of possession of the Premises. Tenant shall, at least ten (10) days prior
to expiration of the policy, furnish Landlord with certificates of renewal or
"binders" thereof. In the event any such policy is canceled before
-12-
<PAGE>
expiration, the insuring company will endeavor to mail thirty (30) days written
notice of such cancellation to Landlord (except in the case of cancellation for
nonpayment of premium in which case cancellation shall not take effect until at
least (10) days' notice has been given to Landlord). If Tenant fails to maintain
any insurance required in this Lease, Tenant shall be liable for all losses and
cost resulting from said failure.
7.3.3 Additional Insureds. Landlord and any property management
-------------------
company of Landlord for the Premises shall be named as additional insureds under
all of the policies required by Section 7.2. The policies required under Section
7.2 shall provide for severability of interest.
7.3.4 Primary Coverage. All insurance to be maintained by Tenant
-----------------
shall, except for workers' compensation and employer's liability insurance, be
primary, without right of contribution from insurance of Landlord, if any. Any
umbrella liability policy or excess liability policy (which shall be in
"following form") shall provide that if the underlying aggregate is exhausted,
the excess coverage will drop down as primary insurance. The limits of insurance
maintained by Tenant shall not limit Tenant's liability under this Lease.
7.3.5 Waiver of Subrogation. Tenant and Landlord waive any right to
----------------------
recover against the other party for claims for damages to their respective
property to the extent covered by insurance. This provision is intended to waive
fully, and for the benefit of Landlord and Tenant, as the case may be, any
rights and/or claims which might give rise to a right of subrogation in favor of
any insurance carrier. The coverage obtained by each of Landlord and Tenant
pursuant to this Lease shall include, without limitation, a waiver of
subrogation endorsement attached to the certificate of insurance.
7.3.6 Notification of Incidents. Landlord (to the extent of its
--------------------------
actual knowledge) and Tenant shall notify the other party within two business
days hours after the occurrence of any accidents or incidents in the Premises,
the Building or the Project which could give rise to a claim under any of the
insurance policies required under this Article 7.
7.4 Indemnity.
---------
7.4.1 Tenant shall indemnify, protect, defend (by counsel reasonably
acceptable to the Landlord) and hold harmless Landlord and its partners,
directors, officers, employees, shareholders, lenders, agents, contractors and
each of their respective successors and assigns (collectively, "Landlord's"
Parties") from and against any and all claims, judgments, causes of action,
damages, penalties, costs, liabilities, and expenses, including all costs,
attorneys' fees, expenses and liabilities incurred in the defense of any such
claim or any action or proceeding brought thereon (each a "Claim," and
collectively, "Claims"), arising at any time during or after the Term as a
result (directly or indirectly) of or in connection with (i) any default in the
performance of any obligation on Tenant's part to be performed under the terms
of this Lease, (ii) Tenant's use of the Premises, or (iii) the conduct of
Tenant's business or any activity, work or things done, permitted or suffered by
Tenant or caused by the negligent acts or omissions or willful misconduct of
Tenant or of any person claiming by, through or under Tenant or its partners,
directors, officers, employees, shareholders, lenders, agents, contractors or
each of their respective successors and assigns (collectively, "Tenant's
Parties") in, on or about the Premises, the Building, or the Project; provided
that, because Tenant is required to obtain and maintain certain insurance
pursuant to this Lease, Tenant hereby agrees that Tenant shall indemnify,
protect, defend (by counsel reasonably acceptable to Landlord) and hold harmless
Landlord and Landlord's Parties from and against any and all Claims to the
extent such Claims are covered by such required insurance, even if resulting
from the negligent acts, omissions or willful misconduct of Landlord or
Landlord's Parties; provided further that to the extent such Claims result from
the negligent acts, omissions or willful misconduct of Landlord or Landlord's
Parties and such Claims are not covered by Tenant's insurance or are only
covered in part, then Landlord shall be liable for such Claims or such portions
of the Claims which are not covered by Tenant's insurance.
7.4.2 Landlord shall indemnify, protect, defend (by counsel
reasonably acceptable to the Tenant) and hold harmless Tenant and Tenant's
Parties from and against any and all Claims, arising at any time during or after
the Term as a result (directly or indirectly) of or in connection with any
default in the performance of any obligation on Landlord's part to be performed
under the terms of this Lease; provided that, notwithstanding
-13-
<PAGE>
anything to the contrary contained in this Section 7.4, because Tenant is
required to obtain and maintain certain insurance pursuant to this Lease,
Landlord shall not be liable for, nor shall Landlord be required to indemnify,
protect, defend or hold harmless Tenant or Tenant's Parties from and against,
any Claims to the extent such Claims are covered by such required insurance,
even if resulting from the negligent acts, omissions or willful misconduct of
Landlord or Landlord's Parties.
7.4.3 The obligations of each of Tenant and Landlord under this
Section 7.4 shall survive the termination of this Lease with respect to any
claims or liability arising prior to such termination.
7.5 Exemption of Landlord from Liability. Landlord shall not be liable for
------------------------------------
injury or damage to the person or goods, wares, merchandise or other property of
Tenant, Tenant's employees, contractors, invitees, customers or any other person
in or about the Premises, whether such damage or injury is caused by or results
from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or from other sources or places, and regardless of whether the
cause of such damage or injury or the means of repairing the same is accessible
or not. Landlord shall not be liable for any damages arising from any act or
neglect of any other tenant of Landlord. Landlord shall not be liable for injury
to Tenant's business or for any loss of income or profit therefrom.
8. REPAIRS AND MAINTENANCE.
-----------------------
Tenant, at Tenant's sole cost and expense, shall keep, maintain, repair and
replace all structural portions of the Improvements and the Premises, including,
without limitation, all floors, subfloors and floor coverings, walls and wall
coverings, roof and roof materials, mechanical, electrical, and plumbing
systems, elevators, doors, windows, glass, plate glass, ceilings, lighting
systems, parking lots, driveways, parking areas, loading dock areas and doors,
fences, landscaping and any signage in a clean and safe condition, in good
order, condition and repair. Tenant shall enter into regularly scheduled
preventive maintenance/service contracts with maintenance contractors reasonably
acceptable to Landlord for servicing all hot water and heating and air
conditioning systems and equipment in the Premises. Tenant's repair and
maintenance obligations shall include, but not be limited to, the obligation to
maintain and repair the parking area which is a part of the Premises, which
shall include, but not be limited to, slurrycoating the parking area as needed,
and the parking area and driveway sweeping and repaving. There shall be no
abatement of Rent during the performance of such repair or replacement work.
Landlord shall not be liable to Tenant for injury or damage that may result from
any defect in the construction or condition of the Premises or the Improvements,
or for any damage that may result from interruption of Tenant's use of the
Premises during any repairs. In the event Tenant fails, in the reasonable
judgment of Landlord, to maintain the Improvements or the Premises in good
order, condition and repair, which failure continues at the end of ten (10) days
following Tenant's receipt of written notice from Landlord stating with
particularity the nature of the failure, Landlord shall have the right to
perform such maintenance, repairs or refurbishing at Tenant's expense; provided,
however, if the nature of the maintenance or repair is such that it cannot, with
the exercise of reasonable diligence, be completed within ten (10) days of
Tenant's receipt of Landlord's notice, Landlord shall not undertake such
maintenance or repairs at Tenant's expense provided Tenant commences such
maintenance or repairs within said 10 day period and thereafter diligently and
continuously prosecutes the same to completion and provided further, however,
that in the event of an emergency condition, Landlord shall have the right to
make such repairs on behalf of Tenant after giving Tenant such notice, if any,
as is reasonable under the circumstances. Tenant shall maintain written records
of maintenance and repairs, as required by any applicable law, ordinance or
regulation and shall use certified technicians to perform such maintenance and
repairs, as so required. Tenant waives any right to repair at the expense of
Landlord under any applicable governmental laws, ordinances, statutes, orders or
regulations now or hereafter in effect which might otherwise apply.
9. ALTERATIONS.
-----------
9.1 Trade Fixtures; Alterations. Tenant shall not make any improvements,
---------------------------
alterations, additions, changes or installations of trade fixtures, equipment or
furniture to the Premises (collectively, "Alterations") without obtaining the
prior written consent of Landlord to such Alterations, which consent shall be
requested not less than
-14-
<PAGE>
ten (10) days prior to the commencement of such Alterations, and which consent
shall be conditioned upon Tenant's compliance with Landlord's reasonable
requirements regarding construction of such Alterations but shall not be
otherwise unreasonably withheld; provided, however, that Tenant shall have the
right, upon five (5) business days prior notice to Landlord, to make non-
structural additions and alterations to the Premises that (i) do not involve the
expenditure of more than Two Hundred Fifty Thousand and No/100 Dollars
($250,000.00) in the aggregate, (ii) do not materially affect the Premises'
electrical, ventilation, plumbing, elevator, mechanical, air conditioning or
other similar systems, and (iii) are not readily visible from the exterior of
the Premises. Tenant shall submit plans and specifications to Landlord with
Tenant's request for approval and shall reimburse Landlord for all reasonable
costs which Landlord may incur in connection with granting approval to Tenant
for any such alterations and additions, including any costs or expenses which
Landlord may incur in electing in its reasonable discretion to have outside
architects and engineers review said matters. Tenant shall file a notice of
completion after completion of such work and provide Landlord with a copy
thereof. Tenant shall provide Landlord with a set of "as built" drawings for any
such work.
9.2 Standard of Work. All work to be performed by or for Tenant pursuant
----------------
hereto shall be performed diligently and in a first class, workmanlike manner,
and in compliance with all applicable laws, ordinances, regulations and rules of
any public authority having jurisdiction over the Premises and/or Tenant and
Landlord's insurance carriers. Landlord shall have the right, but not the
obligation, to inspect periodically the work on the Premises.
9.3 Damage; Removal. Tenant shall repair all damage to the Premises and/or
---------------
the Building caused by the installation or removal of Alterations, except as
otherwise provided in this Section 9.3. To the extent that Landlord designates
in writing at the time Landlord approves any Alterations, all or any part of
such Alterations so designated by Landlord shall be removed by Tenant at its
expense on or before the expiration of the Term. If Landlord fails to make such
designation, then such Alterations shall remain upon the Premises and be
surrendered therewith upon the expiration or earlier termination of this Lease
as the property of Landlord without disturbance or injury, provided that,
notwithstanding the foregoing, Tenant, at its expense, shall have the right to
remove its trade fixtures, equipment and furniture. If Landlord requires the
removal of all or part of any Alterations (and has made the required prior
designation) or if Tenant elects to remove all or part of any of its trade
fixtures, equipment and furniture, Tenant, at its expense, shall repair any
damage to the Premises or the Building caused by such removal. If Tenant fails
to remove the Alterations upon Landlord's request, then Landlord may (but shall
not be obligated to) remove them and the cost of removal and repair of any
damage together with all other damages which Landlord may suffer by reason of
the failure of Tenant to remove Alterations, shall be paid by Tenant to Landlord
upon demand. Tenant shall not be entitled to any compensation from Landlord for
any Alterations removed by Landlord or at Landlord's direction.
9.4 Liens. Tenant shall promptly pay and discharge all claims for labor
-----
performed, supplies furnished and services rendered at the request of Tenant and
shall keep the Premises free of all mechanics' and materialmen's liens in
connection therewith. Tenant shall provide at least ten (10) business days prior
written notice to Landlord before any labor is performed, supplies furnished or
services rendered on or at the Premises and Landlord shall have the right to
post on the Premises notices of non responsibility. If any lien is filed, Tenant
shall, within ten (10) business days after the date of filing, cause such lien
to be released and removed or shall deposit in a court of competent jurisdiction
a bond for the amount claimed in such lien or provide other security for the
claim of such lien reasonably acceptable to Landlord, and if Tenant fails to do
so, Landlord may take such action as may be reasonably necessary to contest or
to remove such lien and Tenant shall pay Landlord such amounts reasonably
expended by Landlord together with interest thereon at the Applicable Interest
Rate from the date of expenditure.
10. USE.
---
The Premises shall be used only for the Permitted Use set forth in the
Basic Lease Information and for no other use, whatsoever, without the prior
written consent of Landlord, which consent may be withheld at Landlord's sole
discretion. Tenant's use of the Premises and the Project shall be in compliance
with and subject to all applicable governmental laws, ordinances, statutes,
orders and regulations, the CC&Rs and any rights of third parties (which rights
have been recorded in any applicable official or public records) with respect to
the Project or
-15-
<PAGE>
any portion thereof (collectively, "Laws"). Should any Laws now or hereafter be
imposed on Landlord or Tenant by a state, federal or local governmental body,
then Tenant agrees to comply promptly with such standards or regulations,
including the making of substantial or structural modifications to the Premises,
the Building or the Project. Landlord and Tenant shall share the cost of such
modifications, with Tenant paying an amount of the cost ("Tenant's Share") which
is equal to the product of (i) the ratio which the remaining Term of the Lease
(determined assuming Tenant does not exercise any remaining options to extend)
has to the useful life of such modifications, multiplied by (ii) the cost of
such modifications; provided that, if Tenant elects to extend the Term of this
Lease pursuant to Section 2.3, above, then, as of the date on which Tenant is
deemed to have irrevocably extended the Term pursuant to Section 2.3.5, above,
Tenant's Share with respect to any such modifications shall be recalculated
("Tenant's Recalculated Share") to equal the product of (i) the ratio which the
remaining Term of the Lease, including the Extension Term, determined as of the
date on which Tenant's Share was originally calculated, has to the useful life
of such modifications, multiplied by (ii) the cost of such modifications, and
Tenant, within thirty (30) days thereafter, shall pay to Landlord an amount
equal to the difference between Tenant's Recalculated Share less Tenant's Share
(or the prior Tenant's Recalculated Share, as the case may be), but in no event
to exceed "Landlord's Share," as that term is defined below, previously paid to
Tenant by Landlord or offset against Rent by Tenant in accordance with this
Article 10. By way of example only, if, with five (5) years remaining in the
initial Term, Laws were imposed requiring a modification, the useful life of
which modification was fifteen (15) years and the cost of which modification was
Thirty Thousand and No/100 Dollars ($30,000.00), then (A) Tenant's Share would
be Ten Thousand and No/100 Dollars ($10,000.00) (i.e., the product of the ratio
which the remaining term of 5 years had to the 15 year useful life, multiplied
by $30,000.00) and Landlord's Share would be Twenty Thousand and No/100 Dollars
($20,000.00); (B) upon Tenant exercising its first (1st) right to extend,
Tenant's Recalculated Share would be Twenty Thousand and No/100 Dollars
($20,000.00) (i.e., the product of the ratio which the remaining term of 10
years had to the 15 year useful life, multiplied by $30,000.00), and Tenant
would be obligated to pay Landlord Ten Thousand and No/100 Dollars ($10,000.00)
(i.e., the difference between Tenant's Recalculated Share of $20,000.00 less
Tenant's Share of $10,000.00); and (C) upon Tenant exercising its second (2nd)
right to extend, Tenant's Recalculated Share would be Thirty Thousand and No/100
Dollars ($30,000.00) (i.e., the product of the ratio which the remaining term of
15 years had to the 15 year useful life, multiplied by $30,000.00), and Tenant
would be obligated to pay Landlord an additional Ten Thousand and No/100 Dollars
($10,000.00) (i.e., the difference between Tenant's Recalculated Share of
$30,000.00 less the prior Tenant's Recalculated Share of $20,000.00).If Landlord
fails to pay Landlord's share of the cost of such modifications ("Landlord's
Share") in accordance with the terms of this Article 10 and such failure
continues for thirty (30) days following receipt of notice by Landlord (and any
lenders of Landlord of which Tenant has notice) from Tenant specifying the
amount of Landlord's Share and Tenant's intention to offset Landlord's Share
against Rent, then, following Landlord's failure to cure within five (5) days
after receipt of an additional notice by Landlord (and any such lenders of
Landlord) from Tenant, Tenant shall have the right to offset any unpaid portion
of Landlord's Share (together with interest thereon at the Applicable Interest
Rate from the date which is five (5) days after Landlord's receipt of the
additional notice until the date of such offset) against Tenant's obligation for
Rent next coming due under this Lease; provided, however, that Tenant's offset
against Rent in any given month shall be limited to the greater of (i) fifteen
percent (15%) of the Base Rent due for such month, or (ii) the minimum amount
required to fully amortize the unpaid portion of Landlord's Share (together with
interest thereon in accordance with this Section 10) over the remaining Term of
the Lease. In the event of a dispute between Landlord and Tenant regarding
Landlord's Share or Tenant's offset right pursuant to this Section 10, such
dispute shall be submitted to arbitration in accordance with Section 17.12 of
this Lease, below. In no event shall the Premises be used for any of the
Prohibited Uses set forth on Exhibit F attached hereto. Tenant shall not commit
waste, overload the floors or structure of the Premises, subject the Premises or
the Project to any use which would damage the same or increase the risk of loss
or violate any insurance coverage, permit any unreasonable odors, smoke, dust,
gas, substances, noise or vibrations to emanate from the Premises, take any
action which would constitute a nuisance or would disturb, obstruct or endanger
any other tenants of the Project, take any action which would abrogate any
warranties, or use or allow the Premises to be used for any unlawful purpose.
Landlord shall not be liable to Tenant nor shall this Lease be affected if any
parking is impaired by moratorium, initiative, referendum or regulation.
Landlord shall not be responsible for non-compliance by any other tenant or
occupant of the Project with any of the CC&Rs or any other terms or provisions
of such tenant's or occupant's lease, provided that Landlord shall use its
commercially reasonable, good faith efforts to enforce the Project CC&Rs and
applicable lease provisions in a fair and non-discriminatory manner as to all
tenants and occupants of the Project. Tenant shall promptly comply with the
reasonable requirements of any board of fire insurance underwriters or other
-16-
<PAGE>
similar body now or hereafter constituted. Tenant shall not do any act which
shall in any way encumber the title of Landlord in and to the Premises or the
Project.
11. ENVIRONMENTAL MATTERS.
---------------------
11.1 Hazardous Materials. Tenant shall not cause nor permit, nor allow any
-------------------
of Tenant's employees, agents, customers, visitors, invitees, licensees,
contractors, assignees or subtenants (collectively, "Tenant's Parties") to cause
or permit, any "Hazardous Materials," as that term is defined below, to be
brought upon, stored, manufactured, generated, blended, handled, recycled,
treated, disposed or used on, under or about the Premises or the Project, except
for customary use or presence of such Hazardous Materials during construction,
alteration or repair of the Premises and for routine office and janitorial
supplies in usual and customary quantities stored, used and disposed of in
accordance with all applicable "Environmental Laws," as that term is defined
below. As used herein, "Hazardous Materials" means any chemical, substance,
material, controlled substance, object, condition, waste living organism or
combination thereof which is or may be hazardous to human health or safety or to
the environment due to its radioactivity, ignitability, corrosivity, reactivity,
explosivity, toxicity, carcinogenicity, mutagenicity, phytotoxicity,
infectiousness or other harmful or potentially harmful properties or effects,
including, without limitation, petroleum and petroleum products, asbestos,
radon, polychlorinated biphenyls (PCBs), refrigerants (including those
substances defined in the Environmental Protection Agency's "Refrigerant
Recycling Rule," as amended from time to time) and all of those chemicals,
substances, materials, controlled substances, objects, conditions, wastes,
living organisms or combinations thereof which are now or become in the future
listed, defined or regulated in any manner by any Environmental Law based upon,
directly or indirectly, such properties or effects. As used herein,
"Environmental Laws" means any and all federal, state or local environmental,
health and/or safety-related laws, regulations, standards, decisions of courts,
ordinances, rules, codes, orders, decrees, directives, guidelines, permits or
permit conditions, currently existing and as amended, enacted, issued or adopted
in the future which are or become applicable to Tenant, the Premises, the
Building, or the Project. Tenant and Tenant's Parties shall comply with all
Environmental Laws and promptly notify Landlord of the violation of any
Environmental Law or presence of any Hazardous Materials, other than as
permitted above, on the Premises. Landlord shall have the right, upon advance
written notice of at least two business days, to enter upon and inspect the
Premises during normal business hours and to conduct tests, monitoring and
investigations provided that such inspection, testing, monitoring and
investigating does not unreasonably disturb Tenant's normal use of the Premises.
If such tests indicate the presence of any environmental condition which first
occurred during the Term of this Lease, Tenant shall reimburse Landlord for the
cost of conducting such tests. The phrase "environmental condition" shall mean
any adverse condition relating to any Hazardous Materials or the environment,
including surface water, groundwater, drinking water supply, land, surface or
subsurface strata or the ambient air and includes air, land and water
pollutants, noise, vibration, light and odors. In the event of any such
environmental condition which first occurred during the Term of this Lease,
Tenant shall promptly take any and all steps necessary to rectify the same to
Landlord's reasonable satisfaction or shall, at Landlord's election, reimburse
Landlord, upon demand, for the cost to Landlord of performing rectifying work.
The reimbursement shall be paid to Landlord in advance of Landlord's performing
such work, based upon Landlord's reasonable estimate of the cost thereof; and
upon completion of such work by Landlord, Tenant shall pay to Landlord any
shortfall within thirty (30) days after Landlord bills Tenant therefore or
Landlord shall within thirty (30) days refund to Tenant any excess deposit, as
the case may be. In the event of any environmental condition which first
occurred prior to the Term of this Lease, Landlord shall promptly take any and
all steps necessary to rectify the same to Tenant's reasonable satisfaction at
Landlord's sole cost and expense.
11.2 Indemnification.
---------------
11.2.1 Tenant shall indemnify, protect, defend (by counsel
reasonably acceptable to Landlord) and hold harmless Landlord and Landlord's
Parties from and against any and all claims, judgments, causes of action,
damages, penalties, fines, taxes, costs, liabilities, losses and expenses
arising at any time during or after the Term as a result (directly or
indirectly) of or in connection with (a) Tenant's and/or Tenant's Parties'
breach of any prohibition or provision of the preceding section, or (b) the
presence of Hazardous Materials on, under or about the Premises or other
property as a result (directly or indirectly) of Tenant's and/or Tenant's
Parties' activities, or failure to act, in connection with the Premises. This
indemnity shall include the cost of any required or necessary repair,
-17-
<PAGE>
cleanup or detoxification, and the preparation and implementation of any
closure, monitoring or other required plans, whether such action is required or
necessary prior to or following the termination of this Lease. Neither the
written consent by Landlord to the presence of Hazardous Materials on, under or
about the Premises, nor the strict compliance by Tenant with all Environmental
Laws, shall excuse Tenant from Tenant's obligation of indemnification pursuant
hereto. Tenant's obligations pursuant to the foregoing indemnity shall survive
the termination of this Lease.
11.2.2 Landlord shall indemnify, protect, defend (by counsel
reasonably acceptable to Tenant) and hold harmless Tenant and Tenant's Parties
from and against any and all claims, judgments, causes of action, damages,
penalties, fines, taxes, costs, liabilities, losses and expenses arising at any
time during or after the Term as a result (directly or indirectly) of or in
connection with the presence of Hazardous Materials on, under or about the
Premises or other property as a result (directly or indirectly) of any action,
event or condition occurring or existing prior to the Commencement Date, other
than as a result (directly or indirectly) of Tenant's and/or Tenant's Parties'
activities, or failure to act, in connection with the Premises. This indemnity
shall include the cost of any required or necessary repair, cleanup or
detoxification, and the preparation and implementation of any closure,
monitoring or other required plans, whether such action is required or necessary
prior to or following the termination of this Lease. Landlord's obligations
pursuant to the foregoing indemnity shall survive the termination of this Lease.
12. DAMAGE AND DESTRUCTION.
----------------------
If the Improvements should be damaged or destroyed by fire or other
casualty, Tenant shall give immediate written notice to Landlord. Except as
otherwise provided in this Article 12, Tenant shall be obligated to repair all
damage to the Improvements, any alterations made by Tenant and Tenant's Property
existing as of the date of the damage (collectively, the "Existing
Improvements"), regardless of whether or not such Existing Improvements are
covered in full or in part by any insurance carried or required to be carried by
Landlord or Tenant under this Lease and regardless of the length of time which
will be required to complete such repairs. Notwithstanding the foregoing, Tenant
may elect not to rebuild or restore the Existing Improvements or any portion of
the Premises, and instead elect to terminate this Lease in accordance with this
Article 12 by written notice (a "Tenant Termination Notice") delivered to
Landlord within thirty (30) days following the date of the damage, in which
event this Lease shall terminate as of the date specified in such Tenant
Termination Notice, which date shall not be less than sixty (60) days nor more
than ninety (90) days after the date Landlord receives such Tenant Termination
Notice; provided, however, Tenant may terminate this Lease pursuant to a Tenant
Termination Notice only if the Building shall be damaged and if Tenant's
contractor has determined, and Tenant has specified in its Tenant Termination
Notice, that one or more of the following conditions is present: (i) repairs
cannot reasonably be completed within one hundred eighty (180) days after the
issuance of all necessary permits by the appropriate governmental authority, and
Landlord has not objected to such determination by written notice to Tenant
within thirty (30) days after the date Landlord receives such Tenant Termination
Notice, provided that Landlord may so object only if, in the reasonable judgment
of a contractor reasonably selected by Landlord, repairs can be completed within
one hundred eighty (180) days after the issuance of all necessary permits by the
appropriate governmental authority; or (ii) the damage or condition arising as a
result of such damage is not fully covered by the insurance carried or required
to be carried by Landlord and Tenant under this Lease and the amount not covered
by such insurance (including the amount of any deductibles) (the "Shortfall
Amount") is greater than an amount (the "Tenant Contribution") equal to One
Million and No/100 Dollars ($1,000,000.00), Tenant has specified the Shortfall
Amount in its Tenant Termination Notice, and Landlord has not notified Tenant in
writing within thirty (30) days after the date Landlord receives such Tenant
Termination Notice that Landlord will fund an amount (the "Landlord Difference")
equal to the difference between the Shortfall Amount less the Tenant
Contribution on a progress payment basis, which progress payments shall be made
by Landlord only after exhaustion of any available insurance proceeds and the
Tenant Contribution which shall be funded by Tenant, provided that if Landlord
elects to fund the Landlord Difference and if the Landlord Difference exceeds an
amount equal to One Million and No/100 Dollars ($1,000,000.00), then Landlord
shall provide security for Landlord's obligation to pay the Landlord Difference,
which security shall be reasonably acceptable to Tenant. In the event that
neither of the conditions specified in items (i) or (ii) of this Section 12 are
present, Tenant shall not have the right to terminate this Lease pursuant to the
terms of this Section 12 and any Tenant Termination Notice shall be null and
void. If Tenant terminates this Lease pursuant to this Section 12, the Rent
shall be apportioned and paid to the date of termination Prior to commencing
-18-
<PAGE>
any repairs, Tenant shall submit to Landlord, for Landlord's reasonable
approval, any plans and specifications in connection with such repairs. Landlord
shall disburse to Tenant the insurance proceeds received by Landlord for the
Improvements from Landlord's insurance carrier during the repair to the
Improvements pursuant to Landlord's reasonable disbursement process. In no event
will Tenant be entitled to any abatement of Rent payable hereunder even if
Tenant must vacate all or a portion of the Premises during such repair of the
Existing Improvements, except to the extent of any loss of rent insurance
proceeds actually recovered by Landlord. The provisions of this Lease, including
this Article 12, constitute an express agreement between Landlord and Tenant
with respect to any and all damage to, or destruction of, all or any part of the
Premises or Improvements, and any statute or regulations of the State of
California, including, without limitation, Sections 1932(2) and 1933(4) of the
California Civil Code, with respect to any rights or obligations concerning
damage or destruction in the absence of an express agreement between the
parties, and any other statute or regulation, now or hereafter in effect, shall
have no application to this Lease or to any damage or destruction to all or any
part of the Premises or the Improvements.
13. EMINENT DOMAIN.
--------------
13.1 Total Condemnation. If all of the Premises is condemned by eminent
------------------
domain, inversely condemned or sold under threat of condemnation for any public
or quasi-public use or purpose ("Condemned"), this Lease shall terminate as of
the earlier of the date the condemning authority takes title to or possession of
the Premises, and Rent shall be adjusted to the date of termination.
13.2 Partial Condemnation.
--------------------
13.2.1 Use of Premises Materially Impaired. If any portion of the
-----------------------------------
Premises is Condemned and such partial condemnation materially impairs Tenant's
ability to use the Premises for Tenant's business, Landlord shall have the
option of either (i) relocating Tenant to comparable and contiguous space within
the Project, provided that Landlord shall pay the reasonable moving and other
relocation expenses of Tenant incidental to the substitution of the Premises, or
(ii) terminating this Lease as of the earlier of the date title vests in the
condemning authority or as of the date an order of immediate possession is
issued and Rent shall be adjusted to the date of termination. Landlord shall
notify Tenant in writing of Landlord's election within ten (10) business days
after the date of such partial condemnation giving rise to Landlord's option;
Landlord's failure to notify Tenant in a timely manner shall be deemed to be an
election to terminate this Lease.
13.2.2 Use of Premises Not Materially Impaired. If such partial
---------------------------------------
condemnation does not materially impair Tenant's ability to use the Premises for
the business of Tenant, Landlord shall, except as provided in the following
sentence, promptly restore the Premises, excluding the portion thereof lost in
such condemnation, and this Lease shall continue in full force and effect except
that after the date of such title vesting Rent shall be equitably adjusted.
Notwithstanding the preceding sentence, Landlord may elect not to rebuild or
restore the Premises, and instead elect to terminate this Lease in accordance
with this Section 13.2 by written notice (a "Landlord Termination Notice")
delivered to Tenant within thirty (30) days following the date of such partial
condemnation, in which event this Lease shall terminate as of the date specified
in such Landlord Termination Notice which date shall not be less than sixty (60)
days nor more than ninety (90) days after the date Tenant receives such Landlord
Termination Notice; provided, however, Landlord may terminate this Lease
pursuant to a Landlord Termination Notice only if the Premises shall be
partially condemned and if Landlord's contractor has determined, and Landlord
has specified in its Landlord Termination Notice, that the cost to restore the
Premises is not fully covered by the award to which Landlord is entitled
pursuant to Section 13.3, below, and the amount not covered by such award (the
"Condemnation Shortfall Amount") is greater than an amount equal to One Million
and No/100 Dollars ($1,000,000.00) on the date of such partial condemnation (the
"Landlord Contribution"), Landlord has specified its reasonable estimate of the
Condemnation Shortfall Amount in its Landlord Termination Notice, and Tenant has
not notified Landlord in writing within thirty (30) days after the date Tenant
receives such Landlord Termination Notice that Tenant will fund an amount (the
"Tenant Difference") equal to the difference between the Condemnation Shortfall
Amount less the Landlord Contribution on a progress payment basis, which funding
shall be made by Tenant only after exhaustion of any such award and the Landlord
Contribution, provided that if Tenant elects to fund the Tenant Difference and
if the Tenant Difference exceeds an amount equal to One Million and No/100
Dollars ($1,000,000.00), then Tenant shall provide security for Tenant's
obligation to pay the Tenant
-19-
<PAGE>
Difference, which security shall be reasonably acceptable to Landlord. In the
event that the foregoing condition is not present, Landlord shall not have the
right to terminate this Lease for a partial condemnation which does not
materially impair Tenant's ability to use the Premises and any Landlord
Termination Notice shall be null and void.
13.3 Award. If the Premises are wholly or partially, but permanently,
-----
Condemned, Landlord shall be entitled to the entire award paid for such
condemnation, and Tenant waives any claim to any part of the award from Landlord
or the condemning authority; provided, however, Tenant shall have the right to
recover from the condemning authority such compensation as may be separately
awarded to Tenant in connection with damage to Tenant's Property or costs in
moving Tenant's Property to a new location. No condemnation of any kind shall be
construed to constitute an actual or constructive eviction of Tenant or a breach
of any express or implied covenant of quiet enjoyment. Each party waives the
provisions of California Code of Civil Procedure Section 1265.130 allowing
either party to petition the court to terminate this Lease in the event the
Premises are Condemned.
13.4 Temporary Condemnation. In the event of a temporary condemnation not
----------------------
extending beyond the Term, this Lease shall remain in effect, Tenant shall
continue to pay Rent and Tenant shall receive any award made for such
condemnation except damages to any of Landlord's property. If a temporary
condemnation is for a period which extends beyond the Term, this Lease shall
terminate as of the date of initial occupancy by the condemning authority and
any such award shall be distributed in accordance with the preceding section. If
a temporary condemnation remains in effect at the expiration or earlier
termination of this Lease, Tenant shall pay Landlord the reasonable cost of
performing any obligations required of Tenant with respect to the surrender of
the Premises.
14. DEFAULT.
-------
14.1 Events of Defaults. The occurrence of any of the following events
------------------
shall, at Landlord's option, constitute an "Event of Default":
14.1.1 Failure to pay Rent, Real Property Taxes and/or any other
monetary amount due under this Lease on the date when due and the failure
continuing for a period of five (5) days after the date on which Tenant receives
written notice from Landlord of such delinquent payment;
14.1.2 Failure to perform Tenant's material covenants and
obligations hereunder (except default in the payment of Rent) where such failure
continues for a period of thirty (30) days after written notice from Landlord;
provided, however, if the nature of the default is such that more than thirty
(30) days are reasonably required for its cure, Tenant shall not be deemed to be
in default if Tenant commences the cure within the thirty (30) day period and
diligently prosecutes such cure to completion; or
14.1.3 The making of a general assignment by Tenant for the benefit
of creditors; the filing of a voluntary petition by Tenant or the filing of an
involuntary petition by any of Tenant's creditors seeking the rehabilitation
liquidation or reorganization of Tenant under any law relating to bankruptcy,
insolvency or other relief of debtors and, in the case of an involuntary action,
the failure to remove or discharge the same within ninety (90) days of such
filing; the appointment of a receiver or other custodian to take possession of
substantially all of Tenant's assets or this leasehold; Tenant's insolvency or
inability to pay Tenant's debts or failure generally to pay Tenant's debts when
due; any court entering a decree or order directing the winding up or
liquidation of Tenant or of substantially all of Tenant's assets; Tenant taking
any action toward the dissolution or winding up of Tenant's affairs; the
cessation or suspension of Tenant's use of the Premises; or the attachment,
execution or other judicial seizure of substantially all of Tenant's assets or
this leasehold; or
14.1.4 The making of any material misrepresentation or omission by
Tenant or any successor in interest of Tenant in any materials delivered by or
on behalf of Tenant to Landlord or Landlord's lender prior to the effective date
of this Lease upon which Landlord or Landlord's lender relied in order to
proceed with renting the Premises to Tenant or to make any loans, as the case
may be.
14.2 Remedies.
--------
-20-
<PAGE>
14.2.1 Termination. In the event of the occurrence of any Event of
-----------
Default, Landlord shall have the right to give a written termination notice to
Tenant (which notice may be the notice given under Section 14.1 above, if
applicable, and which notice shall be in lieu of any notice required by
California Code of Civil Procedure Section 1161, et seq.) and, on the date
specified in such notice (which date shall be at least three business days after
the day on which Tenant receives such notice), this Lease shall terminate unless
on or before such specified date all arrears of Rent and all other sums payable
by Tenant under this Lease and all costs and expenses incurred by or on behalf
of Landlord hereunder shall have been paid by Tenant and all other Events of
Default at the time existing shall have been fully remedied to the satisfaction
of Landlord.
14.2.1.1 Repossession. Following termination, without
------------
prejudice to other remedies Landlord may have, Landlord may (i) peaceably re-
enter the Premises upon voluntary surrender by Tenant or remove Tenant therefrom
and any other persons occupying the Premises, using such legal proceedings as
may be available; (ii) repossess the Premises or relet the Premises or any part
thereof for such term (which may be for a term extending beyond the Term), at
such rental and upon such other terms and conditions as Landlord in Landlord's
sole discretion shall determine, with the right to make reasonable alterations
and repairs to the Premises; and (iii) remove all personal property therefrom.
14.2.1.2 Unpaid Rent. Landlord shall have all the rights and
-----------
remedies of a landlord provided by applicable law, including the right to
recover from Tenant: (a) the worth, at the time of award, of the unpaid Rent
that had been earned at the time of termination, (b) the worth, at the time of
award, of the amount by which the unpaid Rent that would have been earned after
the date of termination until the time of award exceeds the amount of loss of
rent that Tenant proves could have been reasonably avoided, (c) the worth, at
the time of award, of the amount by which the unpaid Rent for the balance of the
Term after the time of award exceeds the amount of the loss of rent that Tenant
proves could have been reasonably avoided, and (d) any other amount, and court
costs, necessary to compensate Landlord for all detriment proximately caused by
Tenant's default. The phrase "worth, at the time of award," as used in (a) and
(b) above, shall be computed at the Applicable Interest Rate, and as used in (c)
above, shall be computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
14.2.2 Continuation. Even though an Event of Default may have
------------
occurred, this Lease shall continue in effect for so long as Landlord does not
terminate Tenant's right to possession; and Landlord may enforce all of
Landlord's rights and remedies under this Lease, including the remedy described
in California Civil Code Section 1951.4 (lessor may continue Lease in effect
after lessee's breach and abandonment and recover rent as it becomes due, if
lessee has the right to sublet or assign, subject only to reasonable
limitations) to recover Rent as it becomes due. Landlord, without terminating
this Lease, may, during the period Tenant is in default, enter the Premises and
relet the same, or any portion thereof, to third parties for Tenant's account
and Tenant shall be liable to Landlord for all costs Landlord incurs in
reletting the Premises, including, without limitation, brokers' commissions,
expenses of remodeling the Premises and like costs. Reletting may be for a
period shorter or longer than the remaining Term. Tenant shall continue to pay
the Rent on the date the same is due. No act by Landlord hereunder, including
acts of maintenance, preservation or efforts to lease the Premises or the
appointment of a receiver upon application of Landlord to protect Landlord's
interest under this Lease, shall terminate this Lease unless Landlord notifies
Tenant that Landlord elects to terminate this Lease. In the event that Landlord
elects to relet the Premises, the rent that Landlord receives from reletting
shall be applied to the payment of, first, any indebtedness from Tenant to
Landlord other than Base Rent and operating expenses and Real Property Taxes;
second, all costs, including maintenance, incurred by Landlord in reletting;
and, third, Base Rent and operating expenses and Real Property Taxes under this
Lease. After deducting the payments referred to above, any sum remaining from
the rental Landlord receives from reletting shall be held by Landlord and
applied in payment of future Rent as Rent becomes due under this Lease. In no
event, and notwithstanding anything in Article 15 to the contrary, shall Tenant
be entitled to any excess rent received by Landlord. If, on the date Rent is due
under this Lease, the rent received from the reletting is less than the Rent due
on that date, Tenant shall pay to Landlord, in addition to the remaining Rent
due, all costs, including maintenance, which Landlord incurred in reletting the
Premises that remain after applying the rent received from reletting as provided
hereinabove. So long as this Lease is not terminated, Landlord shall have the
right, but not the obligation, to remedy any default of Tenant, to maintain or
improve the Premises, to cause a receiver to be appointed to administer the
Premises and new or existing subleases and to add to the Rent
-21-
<PAGE>
payable hereunder all of Landlord's reasonable costs in so doing, with interest
at the Applicable Interest Rate from the date of such expenditure.
14.3 Cumulative. Each right and remedy of Landlord provided for herein or
----------
now or hereafter existing at law, in equity, by statute or otherwise shall be
cumulative and shall not preclude Landlord from exercising any other rights or
remedies provided for in this Lease or now or hereafter existing at law or in
equity, by statute or otherwise. No payment by Tenant of a lesser amount than
the Rent nor any endorsement on any check or letter accompanying any check or
payment as Rent shall be deemed an accord and satisfaction of full payment of
Rent; and Landlord may accept such payment without prejudice to Landlord's right
to recover the balance of such Rent or to pursue other remedies.
15. ASSIGNMENT AND SUBLETTING.
-------------------------
Tenant acknowledges that the economic concessions and rental rates set
forth in this Lease were negotiated by Landlord and Tenant in consideration of,
and would not have been granted by Landlord but for (i) the high quality, first
class, reputation of Tenant, (ii) the financial strength of Tenant, and (iii)
the specific nature of the leasehold interest granted to Tenant hereunder, as
such interest is limited and defined by various provisions throughout this
Lease, including, but not limited to, the provisions of this Article 15 which
define and limit the transferability of such leasehold interest. Accordingly,
based upon the foregoing, Landlord and Tenant have agreed to the provisions of
this Article 15, and have agreed that Tenant shall not have the right to assign,
transfer, mortgage or otherwise encumber this Lease or sublet or rent (or permit
a third party to occupy or use) (collectively, a "Transfer") the Premises, or
any part thereof, nor shall any Transfer of this Lease or the right of occupancy
be effected by operation of law or otherwise, without first procuring the prior
written consent of Landlord which consent shall not be unreasonably withheld by
Landlord; provided, however, that the parties hereby agree that it shall be
deemed to be reasonable under this Lease and under any applicable law for
Landlord to withhold consent to any proposed Transfer where, without limitation
as to other reasonable grounds for withholding consent: (i) the transferee is of
a character or reputation or engaged in a business which is not consistent with
the quality of the Project; (ii) the transferee is either a governmental agency
or instrumentality thereof (A) which is that of a foreign country, (B) which is
of a character or reputation, is engaged in business, or is of, or is associated
with, a political orientation or faction, which is inconsistent with the quality
of the Project, or which would otherwise reasonably offend a landlord of a
comparable building located in the vicinity of the Project or (C) which is
capable of exercising the power of eminent domain or condemnation; (iii) the
transferee's intended use of the Premises is inconsistent with the Permitted
Uses; (iv) the transferee is not a party of reasonable financial worth and/or
financial stability in light of the responsibilities involved under this Lease
on the date consent is requested; or (v) Tenant is in default of this Lease. The
merger of Tenant with any other entity or the transfer of any controlling or
managing ownership or beneficial interest in Tenant, or the assignment of all or
substantially all of the assets of Tenant, whether or not located at the
Premises, shall not constitute a Transfer hereunder, provided that the surviving
entity (a "Survivor") is not materially financially weaker than Tenant was as of
the day preceding the effective date of the merger, transfer or assignment.
Landlord and Tenant agree that a merger, transfer or assignment to a Survivor
which Survivor is materially financially weaker than Tenant was as of the day
preceding the effective date of such merger, transfer or assignment shall
constitute a Transfer hereunder and shall require the prior written consent of
Landlord in accordance with this Article 15. Tenant shall have the right to
assign this Lease or sublet any or all of the Premises to any person or entity
controlled by, under common control with or controlling Tenant (an "Affiliate"),
provided that Tenant remains primarily liable for the obligations of such
Affiliate to Landlord incurred directly in connection with such assignment or
subletting. If Tenant desires to Transfer this Lease or all or any portion of
the Premises to any person or entity which is not an Affiliate, then Tenant
shall give Landlord written notice thereof with copies of all related documents
and agreements associated with the proposed Transfer, including without
limitation, the financial statements of any proposed assignee or subtenant,
forty five (45) days prior to the anticipated effective date of the proposed
Transfer. Tenant shall pay Landlord's reasonable attorneys' fees and costs
incurred in the review of such documentation plus an administrative fee of Three
Hundred Fifty and No/100 Dollars ($350.00) for each proposed Transfer. Landlord
shall not unreasonably fail to approve any proposed Transfer, and Landlord shall
have a period of thirty (30) days following receipt of such notice and all
related documents and agreements to notify Tenant in writing of Landlord's
approval or disapproval of the proposed Transfer. If Landlord fails to notify
Tenant in writing of such election, then Tenant shall deliver a second notice
requesting such approval
-22-
<PAGE>
of the proposed Transfer. If Landlord fails to notify Tenant in writing of such
election within five (5) business days following the receipt of such second
notice, then Landlord shall be deemed to have approved such Transfer. This Lease
may not be assigned by operation of law except in accordance with the provisions
of this Article 15. Any purported Transfer contrary to the provisions hereof
shall be void and shall constitute an Event of Default hereunder. If Tenant
receives rent or other consideration for any such transfer in excess of the
Rent, or in case of the sublease of a portion of the Premises, in excess of such
Rent that is fairly allocable to such portion, after appropriate adjustments to
assure that all other payments required hereunder are appropriately taken into
account, Tenant shall pay Landlord fifty percent (50%) of any "Transfer
Premium," as that term is defined below. "Transfer Premium" shall mean all rent,
additional rent or other consideration payable by a transferee to Tenant or on
behalf of Tenant in connection with a Transfer in excess of the Rent payable by
Tenant under this Lease during the term of such Transfer on a per rentable
square foot basis if less than all of the Premises is transferred, after
deducting the reasonable expenses incurred by Tenant for (i) any changes,
alterations and improvements to the Premises in connection with such Transfer,
(ii) any brokerage commissions in connection with such Transfer, (iii) legal
fees reasonably incurred in connection with such Transfer, and (iv) any other
"out-of-pocket" monetary concessions (including, but not limited to, improvement
allowances, remodeling or decorating costs), costs and expenses reasonably
incurred in connection with such Transfer. Landlord may, without waiving any
rights or remedies, collect rent from the assignee, subtenant or occupant and
apply the net amount collected to the Rent herein reserved and apportion any
excess rent so collected in accordance with the terms of the preceding sentence.
Tenant shall continue to be liable as a principal and not as a guarantor or
surety to the same extent as though no Transfer had been made. Landlord may
consent to subsequent Transfers of this Lease or amendments or modifications to
the Lease by assignees of Tenant without notifying Tenant or any successor of
Tenant and without obtaining their consent. No permitted Transfer shall be
effective until there has been delivered to Landlord a counterpart of the
Transfer instrument in which the transferee agrees to be and remain jointly and
severally liable with Tenant for the payment of Rent pertaining to the Premises
and for the performance of all the terms and provisions of this Lease relating
thereto arising on or after the date of the Transfer.
16. ESTOPPEL, ATTORNMENT AND SUBORDINATION.
--------------------------------------
16.1 Estoppel. Within ten (10) days after request by Landlord, Tenant
--------
shall deliver an estoppel certificate duly executed (and acknowledged if
required by any lender), in the form attached hereto as Exhibit G, or in such
other form as may be acceptable to the lender, which form may include some or
all of the provisions contained in Exhibit G, and modified by Tenant as
necessary to make such estoppel certificate factually correct, to any proposed
mortgagee, purchaser or Landlord. Tenant's failure to deliver said statement in
such time period shall be an Event of Default hereunder and shall be conclusive
upon Tenant that (a) this Lease is in full force and effect, without
modification except as may be represented by Landlord; (b) there are no uncured
defaults in Landlord's performance and Tenant has no right of offset,
counterclaim or deduction against Rent hereunder; and (c) no more than one
month's Base Rent has been paid in advance. If any financier should require that
this Lease be amended (other than in the description of the Premises, the Term,
the Permitted Use, the Rent, other economic terms or conditions or as will
substantially and adversely affect the rights of Tenant), Landlord shall give
written notice thereof to Tenant, which notice shall be accompanied by a Lease
supplement embodying such amendments providing that Landlord shall reimburse
Tenant for all costs or expenses incurred by Tenant in connection with such
amendment. Tenant shall, within twenty (20) days after the receipt of Landlord's
notice, execute and deliver to Landlord the tendered Lease supplement.
16.2 Subordination. At Landlord's option and subject to Tenant's receipt
-------------
of a commercially reasonable non-disturbance agreement, in a form and containing
terms typically required by institutional lenders who make loans secured by real
property similar to the Premises, this Lease shall be subordinate to any
mortgage, deed of trust or any other hypothecation for security now or later
placed upon the Premises and to any and all advances made on the security
thereof and to all renewals, modifications, consolidations, replacements and
extensions thereof. However, if any mortgagee or trustee shall elect to cause
this Lease to be prior to the lien of its mortgage or deed of trust, and shall
give written notice thereof to Tenant, this Lease shall be deemed prior to such
mortgage or deed of trust, whether this Lease is dated prior or subsequent to
the date of said mortgage or deed of trust or the date of recording thereof.
Tenant agrees to execute any documents in addition to this Lease which may be
required to effectuate such subordination or to make this Lease prior to the
lien of any mortgage or deed of trust, as the case
-23-
<PAGE>
may be, and failing to do so within ten (10) days after written demand, does
hereby make, constitute and irrevocably appoint Landlord as Tenant's
attorney-in-fact and in Tenant's name, place and stead, to do so.
16.3 Attornment. In the event of a foreclosure proceeding, the exercise of
----------
the power of sale under any mortgage or deed of trust or the termination of a
ground lease, Tenant shall, if requested, attorn to the purchaser thereupon and
recognize such purchaser as Landlord under this Lease; provided, however,
Tenant's obligation to attorn to such purchaser shall be conditioned upon
Tenant's receipt of a commercially reasonable non-disturbance agreement, in a
form and containing terms typically required by institutional lenders who make
loans secured by real property similar to the Premises.
17. MISCELLANEOUS.
-------------
17.1 General.
-------
17.1.1 Entire Agreement. This Lease sets forth all the agreements
----------------
between Landlord and Tenant concerning the Premises; and there are no agreements
either oral or written other than as set forth herein.
17.1.2 Time of Essence. Time is of the essence of this Lease.
---------------
17.1.3 Attorneys' Fees. In any action or proceeding which either
---------------
party brings against the other to enforce its rights hereunder, the unsuccessful
party shall pay all third-party, out-of-pocket costs incurred by the prevailing
party, including reasonable attorneys' fees, which amounts shall be a part of
the judgment in said action or proceeding.
17.1.4 Severability. If any provision of this Lease or the
------------
application of any such provision shall be held by a court of competent
jurisdiction to be invalid, void or unenforceable to any extent, the remaining
provisions of this Lease and the application thereof shall remain in full force
and effect and shall not be affected, impaired or invalidated.
17.1.5 Law. This Lease shall be construed and enforced in
---
accordance with the laws of the State of California.
17.1.6 No Option. Submission of this Lease to Tenant for
---------
examination or negotiation does not constitute an option to lease, offer to
lease or a reservation of, or option for, the Premises; and this document shall
become effective and binding only upon the execution and delivery hereof by
Landlord and Tenant.
17.1.7 Successors and Assigns. This Lease shall be binding upon and
----------------------
inure to the benefit of the successors and assigns of Landlord and, subject to
compliance with the terms of Article 15, Tenant.
17.1.8 Third Party Beneficiaries. Nothing herein is intended to
-------------------------
create any third party benefit.
17.1.9 Memorandum of Lease. Tenant shall not record this Lease or a
-------------------
short form memorandum hereof without Landlord's prior written consent which
Landlord can withhold in its reasonable discretion.
17.1.10 Agency, Partnership or Joint Venture. Nothing contained
------------------------------------
herein nor any acts of the parties hereto shall be deemed or construed by the
parties hereto, nor by any third party, as creating the relationship of
principal and agent or of partnership or of joint venture by the parties hereto
or any relationship other than the relationship of landlord and tenant.
17.1.11 Merger. The voluntary or other surrender of this Lease by
------
Tenant or a mutual cancellation thereof or a termination by Landlord shall not
work a merger and shall, at the option of Landlord, terminate all or any
existing subtenancies or may, at the option of Landlord, operate as an
assignment to Landlord of any or all of such subtenancies.
-24-
<PAGE>
17.1.12 Headings. Article and section headings have been inserted
--------
solely as a matter of convenience and are not intended to define or limit the
scope of any of the provisions contained therein.
17.2 Signs. All signs and graphics of every kind visible in or from public
-----
view or corridors or the exterior of the Premises, including, without
limitation, the location, quality, design, style, lighting and size thereof,
shall be subject to Landlord's reasonable prior written approval and shall be
subject to any applicable governmental laws, ordinances, and regulations, and
the CC&Rs, and in compliance with Landlord's signage program as consistently
applied to all tenants and occupants of the Project. Tenant shall remove all
such signs and graphics prior to the termination of this Lease. Such
installations and removals shall be made in such manner as to avoid injury or
defacement of the Premises; and Tenant shall repair any injury or defacement,
including without limitation, discoloration caused by such installation or
removal. Subject to the terms and conditions of this Section 17.2 and the Work
Letter, Landlord acknowledges and agrees that Landlord, at Tenant's request and
as part of Landlord's construction of the Tenant Improvements (as defined in the
Work Letter) in accordance with the Work Letter, shall install parapet and/or
monument signage visible from the exterior of the Building, the cost of which
parapet and/or monument signage shall be included in the cost of the Tenant
Improvements. All signage rights granted to Tenant under this Lease are personal
to the Original Tenant, and may not be assigned or transferred without
Landlord's prior written consent, which consent Landlord may withhold in its
sole discretion; provided however that Tenant may assign or transfer its signage
rights under this Lease to a Survivor or an Affiliate, provided that such
Survivor or Affiliate does not have an "Objectionable Name," as that term is
defined below. Should the name of the Original Tenant be legally changed to
another name, or should Original Tenant assign this Lease to a Survivor or an
Affiliate, Tenant shall be entitled to modify, at Tenant's sole cost and
expense, Tenant's signage to reflect Tenant's new name, but only if Tenant's new
name is not an Objectionable Name. As used in this Lease, "Objectionable Name"
shall mean any name which relates to an entity which is of a character or
reputation, or is associated with a political orientation or faction, which is
inconsistent with the quality of the Project, or which would otherwise
reasonably offend a landlord of comparable buildings in the vicinity of the
Project, taking into consideration the level and visibility of signage rights
inherent in Tenant's signs.
17.3 Waiver. No waiver of any default or breach hereunder shall be implied
------
from any omission to take action on account thereof, notwithstanding any custom
and practice or course of dealing. No waiver by either party of any provision
under this Lease shall be effective unless in writing and signed by such party.
No waiver shall affect any default other than the default specified in the
waiver and then such waiver shall be operative only for the time and to the
extent therein stated. Waivers of any covenant shall not be construed as a
waiver of any subsequent breach of the same.
17.4 Financial Statements. Tenant shall provide to Landlord, any lender
--------------------
which has issued a loan commitment to Landlord or any potential purchaser which
has entered into a purchase and sale agreement with Landlord to purchase
Landlord's fee interest in the Premises, within twenty (20) days after request,
(i) Tenant's most recent Annual Financial Statement, provided that the Annual
Financial Statement for Tenant's immediately preceding fiscal year shall be
available within ninety (90) days after the last day thereof, and (ii) Tenant's
most recent Quarterly Financial Statement, provided that the Quarterly Financial
Statement for Tenant's immediately preceding fiscal quarter shall be available
within sixty (60) days after the last day thereof, together with such other
financial information or tax returns as may be reasonably required by Landlord,
purchaser or any lender of either.
17.5 Limitation of Liability. The obligations of Landlord under this Lease
-----------------------
are not personal obligations of the individual partners, directors, officers,
shareholders, members, agents or employees of Landlord or Landlord's Parties;
and Tenant shall look solely to the greater of (i) Landlord's equity interest in
the Premises or (ii) One Million and No/100 Dollars ($1,000,000.00) for
satisfaction of any liability of Landlord and shall not otherwise look to any
other assets of Landlord or Landlord's Parties nor shall Tenant seek recourse
against the assets of the individual partners, directors, officers,
shareholders, members, agents or employees of Landlord or Landlord's Parties.
Whenever Landlord transfers its interest in the Premises and in this Lease,
Landlord shall be automatically released from further performance under this
Lease and from all further liabilities and expenses hereunder arising after the
effective date of such transfer upon the transferee's agreement to assume all
liabilities and obligations of Landlord hereunder arising from the effective
date of such transfer and Tenant shall attorn to such transferee.
Notwithstanding any contrary provision herein, neither Landlord nor Landlord's
Parties shall be liable under any
-25-
<PAGE>
circumstances for injury or damage to, or interference with, Tenant's business,
including but not limited to, loss of rents or other revenues, loss of business
opportunity, loss of goodwill or loss of use, in each case, however occurring.
17.6 Notices. All notices to be given hereunder shall be in writing and
-------
mailed postage prepaid by certified or registered mail, return receipt
requested, or delivered by personal or courier delivery, or sent by facsimile
(immediately followed by one of the preceding methods), to Landlord's Address
and Tenant's Address, or to such other place as Landlord or Tenant may designate
in a written notice given to the other party. Notices shall be deemed served
upon the earlier of receipt or three (3) days after the date of mailing.
17.7 Brokerage Commission. Landlord shall pay a brokerage commission to
--------------------
Broker in accordance with a separate agreement between Landlord and Broker. Each
of Landlord and Tenant warrant to the other party that its sole contact with the
other party or with the Premises in connection with this transaction has been
directly with the other party and Broker, and that no other broker or finder can
properly claim a right to a commission or a finder's fee based upon contacts
between the claimant and Tenant or Landlord, as the case may be. Tenant agrees
to indemnify and hold Landlord harmless from any claims or liability, including
reasonable attorneys' fees, in connection with a claim by any person (other than
Broker) for a real estate broker's commission, finder's fee or other
compensation based upon any statement, representation or agreement of Tenant,
and Landlord agrees to indemnify and hold Tenant harmless from any such claims
or liability, including reasonable attorneys' fees, based upon any statement,
representation or agreement of Landlord.
17.8 Authorization. Each individual executing this Lease on behalf of
-------------
Tenant and Landlord represents and warrants that he or she is duly authorized to
execute and deliver this Lease on behalf of Tenant or Landlord, as the case may
be, and that such execution is binding upon Tenant or Landlord, as the case may
be.
17.9 Holding Over; Surrender.
-----------------------
17.9.1 Holding Over. If Tenant holds over the Premises or any part
------------
thereof after expiration of the Term, such holding over shall, at Landlord's
option, constitute a month to month tenancy, at a rent equal to one hundred
twenty-five percent (125%) of the Base Rent in effect immediately prior to such
holding over for the first two (2) months following the expiration or earlier
termination of this Lease and thereafter at a rent equal to one hundred fifty
percent (150%) of the Base Rent in effect immediately prior to such holding
over, and shall otherwise be on all the other terms and conditions of this
Lease. This paragraph shall not be construed as Landlord's permission for Tenant
to hold over. Acceptance of Rent by Landlord following expiration or termination
shall not constitute a renewal of this Lease or extension of the Term except as
specifically set forth above. If Tenant fails to surrender the Premises upon
expiration or earlier termination of this Lease, Tenant shall indemnify and hold
Landlord harmless from and against all loss or liability resulting from or
arising out of Tenant's failure to surrender the Premises, including, but not
limited to, any amounts required to be paid to any tenant or prospective tenant
who was to have occupied the Premises after the expiration or earlier
termination of this Lease and any related attorneys' fees and brokerage
commissions.
17.9.2 Surrender. Except as otherwise provided in this Lease, upon
---------
the termination of this Lease or Tenant's right to possession of the Premises,
Tenant will surrender the Premises, together with all keys, in good condition
and repair, reasonable wear and tear excepted. Conditions existing because of
Tenant's failure to perform normal maintenance, repairs or replacements shall
not be deemed "reasonable wear and tear."
17.10 Joint and Several. If Tenant consists of more than one person, the
-----------------
obligation of all such persons shall be joint and several.
17.11 Covenants and Conditions. Each provision to be performed by Tenant
------------------------
hereunder shall be deemed to be both a covenant and a condition.
17.12 Arbitration.
-----------
-26-
<PAGE>
17.12.1. General Submittals to Arbitration. The submittal of all
---------------------------------
matters to arbitration in accordance with the terms of this Section 17.12 is the
sole and exclusive method, means and procedure to resolve any and all claims,
disputes or disagreements arising under this Lease, including, but not limited
to any matter relating to Landlord's failure to approve Transfer of Tenant's
interest in the Lease under Article 15 of this Lease, any other defaults by
Landlord, or any Event of Default or other defaults by Tenant, except for (i)
all claims by either party which (A) seek anything other than enforcement of
rights under this Lease, or (B) are primarily founded upon matters of fraud,
willful misconduct, bad faith or any other allegations of tortious action, and
seek the award of punitive or exemplary damages, (ii) all disputes in connection
with the determination of the Extended Base Rent, which determination shall be
made pursuant to Section 2.3.4, above, and (iii) claims relating to Landlord's
exercise of any unlawful detainer rights pursuant to California law or rights or
remedies used by Landlord to gain possession of the Premises or terminate
Tenant's right of possession to the Premises, which disputes shall be resolved
by suit filed in the Superior Court of Los Angeles County, California, the
decision of which court shall be subject to appeal pursuant to applicable law.
The parties hereby irrevocably waive any and all rights to the contrary and
shall at all times conduct themselves in strict, full, complete and timely
accordance with the terms of this Section 17.12 and all attempts to circumvent
the terms of this Section 17.12 shall be absolutely null and void and of no
force or effect whatsoever. As to any matter submitted to arbitration (except
with respect to the payment of money) to determine whether a matter would, with
the passage of time, constitute an Event of Default, such passage of time shall
not commence to run until any such affirmative arbitrated determination, as long
as it is simultaneously determined in such arbitration that the challenge of
such matter as a potential Event of Default was made in good faith. As to any
matter submitted to arbitration with respect to the payment of money, to
determine whether a matter would, with the passage of time, constitute a Event
of Default, such passage of time shall not commence to run in the event that the
party which is obligated to make the payment does in fact make the payment to
the other party. Such payment can be made "under protest," which shall occur
when such payment is accompanied by a good faith notice stating the reasons that
the party has elected to make a payment under protest. Such protest will be
deemed waived unless the subject matter identified in the protest is submitted
to arbitration as set forth in this Section 17.12.
17.12.2. JAMS. Any dispute to be arbitrated pursuant to the
----
provisions of this Section 17.12 shall be determined by binding arbitration
before a retired judge of the Superior Court of the State of California (the
"Arbitrator") under the auspices of Judicial Arbitration & Mediation Services,
Inc. ("JAMS"). Such arbitration shall be initiated by the parties, or either of
them, within ten (10) days after either party sends written notice (the
"Arbitration Notice") of a demand to arbitrate by registered or certified mail
to the other party and to JAMS. The Arbitration Notice shall contain a
description of the subject matter of the arbitration, the dispute with respect
thereto, the amount involved, if any, and the remedy or determination sought.
The parties may agree on a retired judge from the JAMS panel. If they are unable
to promptly agree, JAMS will provide a list of three available judges and each
party may strike one. The remaining judge (or if there are two, the one selected
by JAMS) will serve as the Arbitrator. In the event that JAMS shall no longer
exist or if JAMS fails or refuses to accept submission of such dispute, then the
dispute shall be resolved by binding arbitration before the American Arbitration
Association ("AAA") under the AAA's commercial arbitration rules then in effect.
17.12.3. Arbitration Procedure.
---------------------
17.12.3.1 Pre-Decision Actions. The Arbitrator shall
--------------------
schedule a pre-hearing conference to resolve procedural matters, arrange for the
exchange of information, obtain stipulations, and narrow the issues. The parties
will submit proposed discovery schedules to the Arbitrator at the pre-hearing
conference. The scope and duration of discovery will be within the sole
discretion of the Arbitrator. The Arbitrator shall have the discretion to order
a pre-hearing exchange of information by the parties, including, without
limitation, production of requested documents, exchange of summaries of
testimony of proposed witnesses, and examination by deposition of parties and
third-party witnesses. This discretion shall be exercised in favor of discovery
reasonable under the circumstances.
17.12.3.2 The Decision. The arbitration shall be conducted
------------
in Los Angeles, California. Any party may be represented by counsel or other
authorized representative. In rendering a decision(s), the Arbitrator shall
determine the rights and obligations of the parties according to the substantive
and procedural laws of the State of California and the terms and provisions of
this Lease. The Arbitrator's decision shall be based
-27-
<PAGE>
on the evidence introduced at the hearing, including all logical and reasonable
inferences therefrom. The Arbitrator may make any determination, and/or grant
any remedy or relief that is just and equitable. The decision must be based on,
and accompanied by, a written statement of decision explaining the factual and
legal basis for the decision as to each of the principal controverted issues.
The decision shall be conclusive and binding, and it may thereafter be confirmed
as a judgment by the Superior Court of the State of California, subject only to
challenge on the grounds set forth in the California Code of Civil Procedure
Sections 1285 et seq. and 1288 et seq. The validity and enforceability of the
Arbitrator's decision is to be determined exclusively by the California courts
pursuant to the provisions of this Lease. The Arbitrator may award costs,
including without limitation attorneys' fees, and expert and witness costs, to
the prevailing party, if any, as determined by the Arbitrator in his discretion.
The Arbitrator's fees and costs shall be paid by the non-prevailing party as
determined by the Arbitrator in his discretion. A party shall be determined by
the Arbitrator to be the prevailing party if its proposal for the resolution of
dispute is the closer to that adopted by the Arbitrator.
17.13 Covenant of Quiet Enjoyment. Landlord covenants that Tenant, on
---------------------------
paying the Rent, charges for services and other payments herein reserved, and on
keeping, observing and performing all the other terms, covenants, conditions,
provisions and agreements herein contained to be kept, observed and performed on
the part of Tenant, shall, during the Term, peaceably and quietly have, hold and
enjoy the Premises, subject to the terms, covenants, conditions, provisions and
agreements hereof, without interference by any persons lawfully claiming by or
through Landlord. The foregoing covenant is in lieu of any other covenant
express or implied.
18. SUBDIVISION.
-----------
18.1 Legal Parcel. The Land is not currently composed of a legal parcel.
------------
Landlord, at its sole cost and expense, shall undertake to obtain from the City
of El Segundo or such other municipal or regulatory authority as may be
appropriate (collectively, the "City") a lot line adjustment, parcel merger, or
other modification under the Subdivision Map Act (the "Act") in order to
subdivide the Project such that the Land shall be one (1) or more legal parcels
(the "Subdivision"). Tenant shall cooperate in Landlord's efforts to effect the
Subdivision. Landlord acknowledges and agrees that Tenant shall have the right
to participate in any meetings between Landlord and the City regarding the
Subdivision, provided that the City does not refuse to allow Tenant to
participate therein. Upon the completion of the Subdivision, the new legal
description for the Land shall be attached to this Lease as Exhibit A.
---------
18.2 Conditions to Subdivision. Landlord and Tenant acknowledge and agree
-------------------------
that, in connection with Landlord's submittal to the City for the Subdivision,
Landlord has requested a floor area ratio for the Project of 1.5:1. If, despite
Landlord's commercially reasonable, good faith efforts, Landlord is unable to
obtain the Subdivision in accordance with Section 18.1, above, or if Landlord
discovers that, in connection with the Subdivision, the City will grant to
Landlord a floor area ratio for the Project of less than 1.3:1, then Landlord
may deliver a notice to Tenant (a "Subdivision Termination Notice") electing to
terminate this Lease effective upon the date of such Subdivision Termination
Notice (the "Subdivision Termination Date"), provided that Landlord shall
deliver to Tenant concurrent with the Subdivision Termination Date cash, by
cashier's check or by wire transfer of immediately available funds, in the
amount of Five Hundred Thousand and No/100 Dollars ($500,000.00) (the
"Subdivision Termination Fee"). A Subdivision Termination Notice must be
delivered by Landlord to Tenant, if at all, not later than May 25, 1998. If the
City is otherwise prepared to issue the Subdivision, then Landlord's inability
to obtain a conditional use permit for a training facility proposed to be
situated on a portion of the Project other than the Land shall not alone
constitute an "inability to obtain the Subdivision" which would allow Landlord
to terminate this Lease in accordance with this Section 18.2.
18.3 Costs of Entitlements. If the cost of satisfying all off-site
---------------------
mitigation measures and exactions in connection with securing all necessary
entitlements for the Project, exceeds Seven Hundred Fifty Thousand and No/100
Dollars ($750,000.00) (the "Entitlement Cost Estimate"), then Landlord, at its
sole cost and expense, shall pay all amounts in excess of the Entitlement Cost
Estimate, which amounts shall not be included in Total Construction Costs except
as set forth in this Section 18.3. Notwithstanding the foregoing, if the cost of
securing all necessary entitlements for the Project, exceeds One Million and
No/100 Dollars ($1,000,000) (the "Entitlement Cost Ceiling"), then Landlord
shall pay all amounts in excess of the Entitlement Cost Estimate, provided that
an amount
-28-
<PAGE>
equal to twenty-five percent (25%) of all amounts in excess of the Entitlement
Cost Ceiling shall be included in Total Construction Costs.
18.4 Conditions to Landlord's Termination. If Landlord terminates this
------------------------------------
Lease in accordance with Section 18.2, above, then Landlord shall not enter into
an agreement with any third party within ninety (90) days following the date of
Landlord's delivery to Tenant of a Subdivision Termination Notice, pursuant to
which agreement Landlord agrees to sell or let the Land to such third party;
provided, however, notwithstanding the foregoing, Landlord shall have the right
at any time following termination of this Lease in accordance with Section 18.2,
above, to enter into an agreement with any third party pursuant to which
Landlord agrees to sell or let to such third party (i) the entire Project, or
(ii) a portion of the Project consisting of greater than fifty percent (50%) of
the square footage of the Project, which portion may be comprised, in part, of
all or any portion of the Land.
18.5 Vesting Tentative Map Approval. If either (i) Landlord has not
------------------------------
obtained vesting tentative map approval, including the expiration of the appeal
period, in connection with the Subdivision ("Map Approval") on or before May 25,
1998, or (ii) prior to May 25, 1998, it becomes impossible for Landlord to
obtain Map Approval on or before May 25, 1998, because Landlord is unable to
obtain a hearing date prior to May 25, 1998, with the planning commission for
the City in connection with such Map Approval, then Tenant may deliver a notice
to Landlord (a "Map Approval Termination Notice") electing to terminate this
Lease effective upon the date of such Map Approval Termination Notice (the "Map
Approval Termination Date"), provided that Tenant shall deliver to Landlord
concurrent with the Map Approval Termination Date cash, by cashier's check or by
wire transfer of immediately available funds, in the amount of Five Hundred
Thousand and No/100 Dollars ($500,000.00) (the "Map Approval Termination Fee").
A Map Approval Termination Notice must be delivered by Tenant to Landlord, if at
all, not later than May 25, 1998.
18.6 TERMINATION CONSIDERATION/LIQUIDATED DAMAGES. IN THE EVENT LANDLORD
--------------------------------------------
ELECTS TO TERMINATE THIS LEASE IN ACCORDANCE WITH SECTION 18.2, ABOVE, TENANT
SHALL RETAIN THE SUBDIVISION TERMINATION FEE AS TERMINATION CONSIDERATION AND
LIQUIDATED DAMAGES. IN THE EVENT THAT TENANT ELECTS TO TERMINATE THIS LEASE IN
ACCORDANCE WITH SECTION 18.5, ABOVE, LANDLORD SHALL RETAIN THE MAP APPROVAL
TERMINATION FEE AS TERMINATION CONSIDERATION AND LIQUIDATED DAMAGES. BY
INITIALING BELOW, LANDLORD AND TENANT AGREE THAT THE AMOUNT OF THE SUBDIVISION
TERMINATION FEE OR THE MAP APPROVAL TERMINATION FEE, AS THE CASE MAY BE,
CONSTITUTES REASONABLE TERMINATION CONSIDERATION AND A FAIR AND REASONABLE
ESTIMATION OF THE DAMAGES WHICH EITHER PARTY WILL SUSTAIN IN THE EVENT THAT THE
OTHER PARTY TERMINATES THIS LEASE IN ACCORDANCE WITH THIS ARTICLE 18, PROVIDED
THAT THIS SECTION 18.6 SHALL NOT APPLY IN THE EVENT THAT LANDLORD VIOLATES THE
CONDITIONS OF SECTION 18.4, ABOVE. THIS SECTION 18.6 SHALL APPLY ONLY TO
LANDLORD'S TERMINATION OF THIS LEASE IN ACCORDANCE WITH SECTION 18.2, ABOVE, OR
TO TENANT'S TERMINATION OF THIS LEASE IN ACCORDANCE WITH SECTION 18.5, ABOVE,
AND SHALL NOT IN ANY WAY LIMIT OR RESTRICT TENANT'S RIGHTS IN CONNECTION WITH
ANY BREACH OR DEFAULT OF LANDLORD'S OTHER OBLIGATIONS UNDER THE LEASE.
Initials: ________________________ ________________________
Landlord Tenant
IN WITNESS WHEREOF, the parties have executed this Lease as of the date set
forth above.
-29-
<PAGE>
"Landlord" "Tenant"
MS VICKERS II, LLC, INFONET SERVICES CORPORATION,
a Delaware limited liability company a Delaware corporation
By:_____________________________________ By:_______________________________
James R. Brooks, Jose Collazo,
Vice President President
By:_______________________________
Ernest U. Gambaro,
Senior Vice President and
General Counsel
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On March ___, 1998, before me, ________________________, a Notary Public in
and for said state, personally appeared James R. Brooks, personally known to me
(or proved to me on the basis of satisfactory evidence) to be the person whose
name is subscribed to the within instrument and acknowledged to me that he/she
executed the same in his/her authorized capacity, and that by his/her signature
on the instrument, the person, or the entity upon behalf of which the person
acted, executed the instrument.
WITNESS my hand and official seal.
----------------------------------------------
Notary Public in and for said State
-30-
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On March 9, 1998, before me, ________________________, a Notary Public
in and for said state, personally appeared Jose Collazo, personally known to me
(or proved to me on the basis of satisfactory evidence) to be the person whose
name is subscribed to the within instrument and acknowledged to me that he/she
executed the same in his/her authorized capacity, and that by his/her signature
on the instrument, the person, or the entity upon behalf of which the person
acted, executed the instrument.
WITNESS my hand and official seal.
-----------------------------------------
Notary Public in and for said State
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES )
On March 9, 1998, before me, ________________________, a Notary Public
in and for said state, personally appeared Ernest U. Gambaro, personally known
to me (or proved to me on the basis of satisfactory evidence) to be the person
whose name is subscribed to the within instrument and acknowledged to me that
he/she executed the same in his/her authorized capacity, and that by his/her
signature on the instrument, the person, or the entity upon behalf of which the
person acted, executed the instrument.
WITNESS my hand and official seal.
-----------------------------------------
Notary Public in and for said State
-31-
<PAGE>
EXHIBIT A
---------
DESCRIPTION OF THE LAND
-----------------------
EXHIBIT A - Page 1
<PAGE>
EXHIBIT B
---------
WORK LETTER
-----------
THIS WORK LETTER ("Work Letter") is entered into as of the Effective Date
of the Lease to which this Work Letter is attached as Exhibit B, by and between
MS VICKERS II, LLC, a Delaware limited liability company ("Landlord"), and
INFONET SERVICES CORPORATION, a Delaware corporation ("Tenant").
R E C I T A L S :
- - - - - - - -
A. Landlord and Tenant have entered into that certain Lease of even date
herewith (the "Lease"), covering certain premises (the "Premises") more
particularly described in the Lease. This Work Letter is attached to the Lease
as Exhibit B. The Lease is hereby incorporated into this Work Letter by this
reference. Capitalized terms not defined in this Work Letter shall have the
meanings given to such terms in the Lease.
B. In consideration of the mutual covenants contained in the Lease and this
Work Letter, Landlord and Tenant hereby agree as follows:
A G R E E M E N T :
- - - - - - - - -
1. Definitions. As used in this Work Letter and in the Lease, the term
-----------
"Shell and Core" shall mean those improvements set forth on the "Final Landlord
Plans," as that term is defined in Section 5(b) of this Work Letter, which shall
include a building (the "Building") to contain approximately one hundred sixty
thousand (160,000) gross square feet of floor area. As used in this Work Letter
and in the Lease, the term "Tenant Improvements" shall mean those improvements
set forth on the "Final Tenant Plans," as that term is defined in Section 5(b)
of this Work Letter. As used in this Work Letter and in the Lease,
"Improvements" shall mean the Shell and Core and the Tenant Improvements. The
construction and installation of the Improvements is sometimes referred to
herein as the "Work".
2. Completion of Improvements. Subject to the terms of the Lease and this
--------------------------
Work Letter and any "Tenant Delay," as that term is defined in Section 13,
below, Landlord shall use its commercially reasonable and diligent efforts to
cause the "Contractor," as that term is defined in Section 7 of this Work
Letter, (i) to commence the construction and installation of the Improvements
within thirty (30) days following issuance of a non-appealable building permit
therefor, and (ii) to complete the construction and installation of the
improvements in accordance with the design and construction schedule attached
hereto as Schedule 1 (the "Project Schedule") and the terms of this Work Letter.
3. Designation of Representatives. With respect to the planning, design
------------------------------
and construction of the Improvements, Landlord hereby designates Gregory B.
Galusha as "Landlord's Representative" and Tenant hereby designates Richard T.
O'Reilly as "Tenant's Representative." Tenant hereby confirms that Tenant's
Representative has full authority to act on behalf of and to bind Tenant with
respect to all matters pertaining to the planning, design and construction of
the Improvements. Landlord hereby confirms that Landlord's Representative has
full authority to act on behalf of and to bind Landlord with respect to all
matters pertaining to the planning, design and construction of the Improvements.
Either party may change its designated representative upon five (5) days prior
written notice to the other party.
<PAGE>
4. Architect Selection.
-------------------
(a) Tenant's Architect. P. Patrick Murray & Associates or such other
------------------
licensed architectural firm selected by Tenant from time to time and reasonably
approved in advance in writing by Landlord ("Tenant's Architect"), shall act as
the architect with respect to the design of the Tenant Improvements. Any change
in Tenant's Architect shall be subject to Landlord's reasonable advance written
approval. Tenant shall enter into a contract with Tenant's Architect for such
services (the "Tenant's Architect Contract"). Landlord shall have the right to
reasonably approve in advance in writing each such Tenant's Architect Contract,
including, but not limited to, the amount and nature of insurance carried by
such Architect, provided that Landlord shall not disapprove such Tenant's
Architect Contract on the basis of insurance carried by such Architect if such
amounts of insurance and coverage are comparable to prevailing levels of
insurance and coverage maintained by similarly situated architects in Southern
California.
(b) Landlord's Architect. Nadel Architects or such other licensed
--------------------
architectural firm selected by Landlord from time to time and reasonably
approved in advance in writing by Tenant ("Landlord's Architect"), shall act as
the architect with respect to the design of the Shell and Core and construction
of the Improvements. Any change in Landlord's Architect shall be subject to
Tenant's reasonable advance written approval. Landlord's Architect may, at
Landlord's election, retain Tenant's Architect as a subconsultant, subject to
Tenant's reasonable advance written approval of each contract to be entered into
between Landlord's Architect and Tenant's Architect with respect to such
services. Landlord shall enter into a contract with Landlord's Architect for
such services (the "Landlord's Architect Contract"). Tenant hereby acknowledges
and agrees that prior to the execution of this Work Letter, Landlord has
provided Tenant Landlord's form of contract for the provision of architectural
and design services ("Landlord's Form Architect Contract"). Tenant shall not
have right to approve the Landlord's Architect Contract, provided that the terms
of the Landlord's Architect Contract is in substantial conformity with
Landlord's Form Architect Contract. Notwithstanding the foregoing, the parties
acknowledge and agree that the Landlord's Architect Contract entered into with
the Landlord's Architect will obligate the Landlord's Architect to issue to both
Landlord and Tenant an architect's certificate ("Architect's Certificate") upon
Substantial Completion (as hereinafter defined) of the Improvements certifying
the Substantial Completion of the Improvements in accordance with the Final
Plans (as hereinafter defined).
5. Improvement Plans.
-----------------
(a) Preliminary Plans. Attached hereto are the following preliminary
-----------------
plans and base building specifications for the Shell and Core and the Tenant
Improvements (collectively, the "Preliminary Plans"), which have been reviewed
and approved by Landlord and Tenant: (i) Schedule 2 is the "Base Building
Specifications" for the Shell and Core; and (ii) Schedule 3 is the "Construction
Cost Estimate" of the costs described in Section 5(c), below, and the cost to
fund the "Allowance," as that term is defined in Section 9, below. The Site Plan
and Elevations are also part of the Preliminary Plans and are attached to the
Lease as Exhibit C.
---------
(b) Final Plans. On or before March 26, 1998, the parties shall agree
-----------
upon final tenant layout drawings (the "TI Layout") which shall be consistent
with the Base Building Specifications for the Shell and Core, except for the
changes, if any, mutually agreed to be made thereto by the parties. On or before
July 1, 1998, the parties shall agree upon final plans and specifications for
the Tenant Improvements ("Final Tenant Plans") which shall be consistent with
the Preliminary Plans and the TI Layout, except for the changes, if any,
mutually agreed to be made thereto by the parties. Included in the Final Tenant
Plans will be the architectural, mechanical, electrical, plumbing and structural
plans for the Tenant Improvements. Notwithstanding anything to the contrary
contained in this Work Letter or in the Lease, the Tenant Improvements shall
include improvement of one hundred percent (100%) of the rentable square footage
(as hereinafter defined) of the Building with heating, ventilation and air
conditioning, electrical distribution, lighting, dropped ceilings and floor
coverings with systems and materials which shall be of equal or greater quality
than comparable standard first class office space, and the Final Tenant Plans
shall include civil, architectural and structural plans therefor. On or before
July 1, 1998, the parties shall agree upon final plans and specifications for
the Shell and Core ("Final Landlord Plans") which shall be consistent with the
EXHIBIT B - Page 2
<PAGE>
Preliminary Plans, except for the changes, if any, mutually agreed to be made
thereto by the parties. Included in the Final Landlord Plans shall be the civil,
architectural and structural plans for the Shell and Core and the landscape plan
for the Premises. The Final Tenant Plans and the Final Landlord Plans are
hereinafter referred to as the "Final Plans." When the Final Landlord Plans have
been approved by Tenant and Landlord, Landlord's Architect shall promptly submit
the Final Landlord Plans to the appropriate governmental agencies for plan
checking and the issuance of a building permit for the Shell and Core. Likewise,
when the Final Tenant Plans have been approved by Landlord and Tenant, Tenant's
Architect shall promptly submit the Final Tenant Plans to the appropriate
governmental agencies for plan checking and the issuance of a building permit
for the Tenant Improvements. Landlord acknowledges and agrees that Landlord's
Architect shall be solely responsible for obtaining the building permit for the
Shell and Core. Tenant acknowledges and agrees that Tenant's Architect shall be
solely responsible for obtaining the building permit for the Tenant
Improvements. Landlord's Architect shall perform its work, including obtaining
the building permit for the Shell and Core, in a timely manner which does not
cause any delay in the Substantial Completion of the Improvements in accordance
with the Project Schedule. Tenant's Architect shall perform its work, including
obtaining the building permit for the Tenant Improvements, in a timely manner
which does not cause any delay in the Substantial Completion of the Improvements
in accordance with the Project Schedule. Landlord shall make available to Tenant
at the "Meetings," as that term is defined in Section 14 of this Work Letter,
below, and upon reasonable prior notice to Landlord at such other times as
Tenant may reasonably request, and Tenant shall have the right to review,
Landlord's Architect's invoices, provided that if Tenant fails to object to such
Landlord's Architect's invoices prior to Landlord's payment of the same in the
ordinary course of Landlord's business, then Tenant shall be deemed to have
approved payment of such Landlord's Architect's invoices. Landlord shall pay
such invoices by direct payment to Landlord's Architect and the total amount of
all such payments made by Landlord to Landlord's Architect shall be included in
Total Construction Costs. Tenant's Architect shall submit its invoices to Tenant
for review and approval, and Tenant shall thereafter submit such invoices to
Landlord. Landlord shall pay such approved invoices by direct payment to
Tenant's Architect and the total amount of all such payments made by Landlord to
Tenant's Architect shall be debited from the Allowance in accordance with
Section 9, below.
(c) Construction Cost Estimate. Landlord and Tenant hereby approve
--------------------------
the Construction Cost Estimate attached hereto as Schedule 5. As used in this
Work Letter and in the Lease, the term "Construction Hard Costs" shall mean the
total actual costs expended by Landlord for those items set forth in the
Construction Cost Estimate, the total estimated costs of which comprise "Total
Hard Costs," as that term is used in the Construction Cost Estimate. As used in
this Work Letter and in the Lease, the term "Construction Soft Costs" shall mean
the total actual costs expended by Landlord for those items set forth in the
Construction Cost Estimate, the total estimated costs of which comprise "Total
Soft Costs," as that term is used in the Construction Cost Estimate.
Construction Soft Costs shall include an administrative and coordination fee
charged by Landlord equal to three percent (3%) of the Construction Hard Costs,
including, without limitation, all costs expended by Landlord to construct the
Tenant Improvements and any and all "Change Order Costs" as that term is defined
in Section 6 of this Work Letter, below. In addition, Landlord shall have the
right to retain certain consultants in connection with expediting the
preparation of the Final Plans and the design, permit and construction of the
Improvements, which consultants shall be paid on an hourly basis and the cost of
which consultants shall be included in Construction Soft Costs. Upon Tenant's
approval of the Final Landlord Plans, Landlord shall have the right to purchase
materials and to commence construction of the Shell and Core. Landlord and
Tenant hereby acknowledge and agree that, although the Land Costs are fixed at
Fourteen and No/100 Dollars ($14.00) per square foot of the Land, the aggregate
of Land Costs, Construction Hard Costs and Construction Soft Costs may exceed
the totals set forth in the Construction Cost Estimate. Landlord shall use its
commercially reasonable efforts to give Tenant prior written notice in the event
that Construction Hard Costs or Construction Soft Costs shall exceed Total Hard
Costs or Total Soft Costs, respectively, as set forth in the Construction Costs
Estimate (such excess, if occurring, being an "Overage"); provided, however, if
the actual cost of any line item in the Construction Cost Estimate shall exceed
the estimated cost therefor by an amount equal to or greater than One Hundred
Fifty Thousand and No/100 Dollars ($150,000.00), then Landlord shall be required
to give Tenant written notice (an "Overage Notice") prior to the occurrence of
such Overage, and to obtain Tenant's prior consent thereto. Concurrently with
Landlord's delivery of an Overage Notice, Landlord shall propose to Tenant
feasible modifications to the Final Landlord Plans to eliminate or reduce such
Overage. The
EXHIBIT B - Page 3
<PAGE>
incorporation of any proposed modifications into the Final Landlord Plans shall
be subject to Tenant's prior written approval which approval shall not be
unreasonably withheld, except that Tenant may withhold its approval in its sole
and absolute discretion if the incorporation of such proposed modifications into
the Final Landlord Plans would delay construction beyond the Project Schedule,
materially reduce the quality of building materials, change the size of the
Building, modify the design appearance of the Improvements, or materially,
adversely impact the structural design of the Building; provided, however, if
Tenant fails to approve any proposed modification within five (5) business days
following Tenant's receipt of the Overage Notice (in which event all such
proposed modifications shall be deemed disapproved by Tenant) or if Tenant
disapproves all such proposed modifications, then Tenant shall be deemed to have
consented to such Overage, Landlord shall proceed in accordance with the Final
Landlord Plans and the amount of such Overage shall be included in Total
Construction Costs. Notwithstanding anything to the contrary contained in this
Work Letter or in the Lease, if, at the time the "Construction Contract," as
that term is defined in Section 8 of this Work Letter, below, is executed by
Landlord and the Contractor, the estimated Total Construction Costs, as
established in the Construction Contract or as reasonably determined by Landlord
and the Contractor, but excluding any costs associated with the Tenant
Improvements in excess of Twenty Six and No/100 Dollars ($26.00) per rentable
square foot of the Building, exceed an amount equal to the product of (i) the
"Total Budget," as that term is used in the Construction Cost Estimate, but
excluding any costs associated with the Tenant Improvements in excess of Twenty
Six and No/100 Dollars ($26.00) per rentable square foot of the Building,
multiplied by (ii) one and one-tenth (1.1), then Tenant may deliver a notice to
Landlord (a "Cost Estimate Termination Notice") electing to terminate the Lease
effective upon the date occurring five (5) business days following receipt by
Landlord of such Cost Estimate Termination Notice. A Cost Estimate Termination
Notice must be delivered by Tenant to Landlord, if at all, not later than five
(5) business days following the date Tenant receives a copy of the Construction
Contract. Upon any termination of the Lease as set forth in this Section 5(c),
Landlord and Tenant shall be relieved from any and all liability to each other
resulting under the Lease or this Work Letter.
(d) TI Cost Estimate. Prior to the commencement of construction of
----------------
any of the Tenant Improvements, Landlord shall submit to Tenant a written
estimate of the cost to complete the Tenant Improvements, which written estimate
will be based upon the Final Tenant Plans taking into account any modifications
which may be required to reflect changes in the Final Tenant Plans required by
the appropriate governmental authorities in connection with the issuance of a
building permit (the "TI Cost Estimate"). Within five (5) business days of
receipt, Tenant will either approve the TI Cost Estimate, or disapprove specific
items, and submit to Landlord revisions to the Final Tenant Plans in the form of
a Change Order. Submission and approval of the TI Cost Estimate will proceed in
accordance with the Project Schedule which shall not be amended or otherwise
modified without Tenant's prior written consent. Upon Tenant's approval of the
TI Cost Estimate (the "TI Cost Statement"), Landlord will have the right to
purchase materials and to commence the construction of the items included in the
TI Cost Statement. Landlord shall use its commercially reasonable efforts to
give Tenant prior written notice in the event that the cost for any item listed
in the TI Cost Statement shall exceed the cost therefor listed in the TI Cost
Statement (such excess, if occurring, being a "TI Overage"); provided, however,
if a TI Overage shall exceed Forty Thousand and No/100 Dollars ($40,000.00) for
any given item or if all TI Overages shall exceed One Hundred Thousand and
No/100 Dollars ($100,000.00) in the aggregate, then Landlord shall be required
to give Tenant prior written notice (a "TI Overage Notice") of such TI Overage
and of each subsequent TI Overage above the $100,000.00 aggregate limit, and to
obtain Tenant's prior consent thereto. Within five (5) business days following
Tenant's receipt of a TI Overage Notice, Tenant shall (i) consent to such TI
Overage(s), or (ii) propose to Landlord feasible Change Orders in accordance
with Section 6, below, to eliminate or reduce such TI Overage(s). Any Change
Orders shall be subject to Landlord's prior written approval, which approval
shall not be unreasonably withheld, except that Landlord may withhold its
approval in its sole and absolute discretion if such Change Orders would delay
construction beyond the Project Schedule, materially reduce the quality of
building materials, modify the design appearance of the Tenant Improvements such
that the Tenant Improvements, as modified, would not be generally usable by
other office tenants, or materially, adversely impact the structural design of
the Building. Thereafter, Landlord shall amend the TI Cost Statement
accordingly. If at any time the total costs reflected in the TI Cost Statement
exceed the Allowance, then such excess shall be treated in accordance with the
terms of Section 9(b), below.
EXHIBIT B - Page 4
<PAGE>
(e) No Representations. Notwithstanding anything to the contrary
------------------
contained in the Lease or herein, Landlord's participation in the preparation of
the Preliminary Plans, the Final Plans, the cost estimates for the Improvements
and the construction thereof shall not constitute any representation or
warranty, express or implied, that the Improvements, if built in accordance with
the Preliminary Plans and/or the Final Plans, will be suitable for Tenant's
intended purpose. Tenant acknowledges and agrees that the Improvements are
intended for use by Tenant and the specifications and design requirements for
such Improvements are not within the special knowledge or experience of
Landlord. Landlord's sole obligation shall be to arrange the construction of the
Improvements in accordance with the requirements of the Final Plans and the
provisions of this Work Letter. Any additional costs or expense required for the
modification thereof to more adequately meet Tenant's use, whether during or
after Landlord's construction thereof, shall be borne entirely by Tenant except
as otherwise provided in this Work Letter. Upon the Substantial Completion of
the Improvements, (i) Landlord shall assign to Tenant all rights of Landlord
under, and the benefit of, the Landlord's and Tenant's Architect Contracts, all
construction contracts and all construction warranties pertaining to the
Improvements, and (ii) contingent upon Substantial Completion of the
Improvements and completion of all Punch List Items, Tenant hereby waives all
claims against Landlord relating to, or arising out of the construction of, the
Improvements. Landlord shall take any and all actions necessary to effect the
foregoing assignments, including, but not limited to, executing any assignment
instruments, and shall otherwise cooperate with Tenant in connection with the
foregoing assignments. Notwithstanding the foregoing, Landlord shall be liable
for claims relating to or arising out of Landlord's gross negligence or willful
misconduct in connection with the construction of the Improvements.
6. Change Orders.
-------------
(a) Processing of Change Orders. After the parties approve the
---------------------------
Final Plans, any further changes to the Final Plans and/or the Base Building
Specifications shall require the prior written approval of Tenant and, in the
circumstances described below, Landlord, which approval shall not be
unreasonably withheld or delayed. If Tenant desires any change in the Final
Plans relative to the Tenant Improvements, such changes may only be requested by
the delivery to Landlord by Tenant of a proposed written "Change Order"
specifically setting forth the requested change. Landlord shall have the right
to disapprove a proposed change only on the bases that such proposed change (i)
is inconsistent with zoning or other legal requirements or any recorded
restrictions affecting the Premises as of the Effective Date or thereafter
imposed on the Premises with the consent of Tenant, (ii) would have a material
adverse impact on the balance of the Project, (iii) is readily visible from and
will adversely affect the appearance of the exterior of the Building, (iv) would
adversely affect the structural integrity of the Building, (v) would materially
adversely affect the Premises' electrical, ventilation, plumbing, elevator,
mechanical, air conditioning or other similar systems, (vi) would materially
affect the layout of the Premises as approved in the Final Plans, or (vii)
involves the use of inferior materials to those approved in the Final Plans;
provided that Landlord shall otherwise have no right to disapprove of a proposed
change. Landlord shall have five (5) business days ("Landlord Change Order
Approval Period") from the receipt of the proposed Change Order to provide
Tenant with Landlord's disapproval stating the reason(s) for such disapproval,
or if the Landlord approves the proposed change, the following items: (i) a
summary of any Change Order Cost, and (ii) a statement of the Change Order Delay
(as defined in Section 6(c), below), if any. Tenant shall then have five (5)
business days ("Tenant Change Order Approval Period") to approve the Change
Order Cost and the Change Order Delay. If Tenant approves these items, Landlord
shall promptly execute the Change Order and cause the appropriate changes to the
Final Plans to be made. If Tenant fails to respond to Landlord within such
Tenant Change Order Approval Period, the Change Order Cost and the Change Order
Delay shall be deemed disapproved by Tenant and Landlord shall have no further
obligation to perform any Work set forth in the proposed Change Order.
(b) Change Order Cost. As used herein, "Change Order Cost" shall
------------------
mean (i) the net increase in costs caused by or resulting from the Change Order
(after reasonable efforts of the parties to minimize such costs), including,
without limitation, architectural fees, engineering fees and construction costs,
together with (ii) a fee in the amount of three percent (3%) of the net increase
in costs resulting from the foregoing item (i) of this Section 6(b), which fee
shall reimburse Landlord for the expense of administration and coordination of
such Change Order by Landlord's Representative.
EXHIBIT B - Page 5
<PAGE>
(c) Change Order Delay. As used herein, "Change Order Delay" shall
------------------
mean the delay caused by or resulting from the Change Order (after reasonable
efforts of the parties to minimize such delay), including, without limitation,
design and construction delays, less the amounts of any time saved by or
resulting from the Change Order, and time saved by or resulting from previous
Change Orders which has not already been offset against previous Change Order
Delays. For any proposed Change Order, the Landlord Change Order Approval Period
and the Tenant Change Order Approval Period shall be included in Change Order
Delay only if such Change Order will delay the critical path deadline of the
construction of either the Shell and Core or the Tenant Improvements; provided,
however, in no event shall the Landlord Change Order Approval Period and the
Tenant Change Order Approval Period be included in Change Order Delay if (i)
Landlord or Tenant proposes such Change Order because materials required by the
Final Plans are not available, or (ii) Landlord proposes such Change Order to
avoid a TI Overage.
7. Contractor. On or before completion of the Final Plans, Landlord shall
----------
submit to Tenant a proposed "bid list" of three (3) or more contractors with
which Landlord intends to negotiate for the construction of the Improvements.
Tenant shall have a period of five (5) business days to approve the bid list or
to suggest up to two (2) additions or deletions to the bid list, provided that
Landlord retains the right to review and approve (in its reasonable discretion)
any proposed additions or deletions to the bid list. Tenant's failure to approve
or disapprove Landlord's bid list within such five (5) business day period shall
be deemed to be Tenant's approval of all such proposed contractors. Once
Landlord and Tenant have approved (or shall be deemed to have approved) the bid
list, Landlord shall solicit qualified bids from the approved contractors and
Landlord and Tenant shall review the bids and shall jointly select one of the
contractors from the approved bid list to act as general contractor for the
construction of the Improvements. The selected contractor shall be referred to
herein as the "Contractor." Any change in the Contractor shall be subject to
Tenant's reasonable advance written approval. In addition, Landlord shall submit
to Tenant a proposed "bid list" of three (3) or more contractors to act as the
subcontractor for the construction of the Tenant Improvements. Tenant shall have
a period of five (5) business days to approve the bid list or to suggest up to
two (2) additions or deletions to the bid list, provided that Landlord retains
the right to review and approve (in its reasonable discretion) any proposed
additions or deletions to the bid list. Tenant's failure to approve or
disapprove Landlord's bid list within such five (5) business day period shall be
deemed to be Tenant's approval of all such proposed subcontractors. Once
Landlord and Tenant have approved (or shall be deemed to have approved) the bid
list, Landlord shall solicit qualified bids from the approved subcontractors and
Landlord and Tenant shall review the bids and shall jointly select one of the
subcontractors from the approved bid list to act as subcontractor for the
construction of the Tenant Improvements. The selected subcontractor shall be
referred to herein as the "TI Subcontractor." Any change in the TI Subcontractor
shall be subject to approval by Landlord and Tenant.
8. Construction of the Improvements. Landlord shall enter into an
--------------------------------
agreement between Landlord and the Contractor where the basis of payment is the
cost of the work plus a fee with a guaranteed maximum price (the "Construction
Contract") for the construction and installation of the Improvements in
accordance with the Final Plans. Tenant hereby acknowledges and agrees that
prior to the execution of this Work Letter, Landlord has provided Tenant
Landlord's standard form of agreement between owner and contractor where the
basis of payment is the cost of the work plus a fee with a guaranteed maximum
price for the provision of construction and installation services ("Landlord's
Form Construction Contract"). Tenant shall not have right to approve the
Construction Contract, provided that the Construction Contract is in substantial
conformity with Landlord's Form Construction Contract. In addition, Tenant shall
not have the right to approve the contract between the Contractor and the TI
Subcontractor, provided that such contract is an agreement where the basis of
payment is the cost of the work plus a fee with a guaranteed maximum price for
the construction and installation of the Tenant Improvements in accordance with
the Final Tenant Plans and is not inconsistent with the terms of the
Construction Contract. Tenant shall not have the right to approve any other
contract to be entered into between Landlord or the Contractor and any other
contractor or subcontractor, if any, provided that such contract is not
inconsistent with the terms of the Construction Contract.
EXHIBIT B - Page 6
<PAGE>
9. Payment for Cost of the Tenant Improvements.
-------------------------------------------
(a) Allowance. Landlord hereby grants to Tenant a tenant improvement
---------
allowance for the work described on the Final Tenant Plans of Thirty Dollars
($30.00) per rentable square foot of the Building (the "Allowance"). The
Allowance shall be used only for the following costs approved by Landlord:
(i) The cost of preparing the Final Tenant Plans relative to
the Tenant Improvements including, without limitation, Tenant's Architect's
costs under the Tenant's Architect Contract, all architectural, mechanical,
electrical, plumbing and structural drawings and all other aspects necessary to
complete the Final Tenant Plans.
(ii) Plan check, permit and license fees relating to
construction of the Tenant Improvements.
(iii) Construction of the Tenant Improvements as provided in the
Final Tenant Plans, including without limitation, the following:
(aa) Installation within the Premises of all
partitioning, doors, floor coverings, ceilings, wall coverings and painting and
similar items;
(bb) All electrical wiring, lighting fixtures, outlets
and switches, and other electrical work necessary for the Premises;
(cc) The furnishing and installation of all HVAC units,
duct work, terminal boxes, diffusers and accessories necessary for the heating,
ventilation and air conditioning systems within the office portions of the
Premises;
(dd) Any additional improvements to the Premises required
for Tenant's use of the Premises including, but not limited to, odor control,
special heating, raised floors, ventilation and air conditioning, noise or
vibration control or other special systems or improvements;
(ee) All fire and life safety control systems such as
fire walls, sprinklers, halon, fire alarms, including piping, wiring and
accessories, necessary for the Premises;
(ff) All plumbing, fixtures, pipes and accessories
necessary for the Premises;
(gg) Testing and inspection costs; and
(hh) Fees for the Contractor and tenant improvement
coordinator including, but not limited to, fees and costs attributable to
general conditions associated with the construction of the Tenant Improvements.
(iv) Any Change Order Cost.
(v) That portion of the administrative and coordination fee
charged by Landlord pursuant to Section 5(c), above, attributable to three
percent (3%) of the total cost to complete the design, permit process and
construction of the Tenant Improvements.
In no event shall Landlord be obligated to make disbursements for the Tenant
Improvements pursuant to this Work Letter in a total amount which exceeds the
Allowance, except in accordance with Section 9(b), below. In no event will the
Allowance be used to pay for Tenant's moving expenses or for furniture,
artifacts, equipment, telephone
EXHIBIT B - Page 7
<PAGE>
systems or any other item of personal property which is not affixed to the
Premises. All Tenant Improvements for which Landlord has paid with the Allowance
or the "Amortized TI Costs," as that term is defined in Section 9(b)(i), below,
shall be the property of Landlord. Upon completion of the Tenant Improvements,
any unused portion of the Allowance shall neither be refunded to Tenant nor
constitute monies to which Tenant is entitled.
(b) Costs in Excess of Allowance.
----------------------------
(i) Amortized TI Costs. The cost of each item referenced in
------------------
Section 9(a), above, shall be charged against the Allowance. All costs of the
Tenant Improvements which exceed the Allowance, but are less than or equal to
Thirty-Five and No/100 Dollars ($35.00) per rentable square foot of the Building
("Amortized TI Costs") shall be included in Total Construction Costs; provided
that, for every One and No/100 Dollar ($1.00) of Amortized TI Costs expended in
connection with the Tenant Improvements, Tenant shall increase the amount of the
L/C by fifty cents ($.50). By way of example only, assuming that the Building
contains one hundred fifty thousand (150,000) rentable square feet and,
therefore, that the Allowance is Four Million Five Hundred Thousand and No/100
Dollars ($4,500,000.00) (i.e., the product of $30.00 per rentable square foot
multiplied by 150,000 rentable square feet), if the total cost of the Tenant
Improvements were to equal Four Million Eight Hundred Thousand and No/100
Dollars ($4,800,000.00) (i.e., $32.00 per rentable square foot of the Building)
and, therefore, the Amortized TI Costs were to equal Three Hundred Thousand and
No/100 Dollars ($300,000.00) (i.e., the difference between the total cost of the
Tenant Improvements less the Allowance), then Tenant would be required to
increase the amount of the L/C by One Hundred Fifty Thousand and No/100 Dollars
($150,000.00).
(ii) Over Allowance Amount. Upon Tenant's approval of the Work
---------------------
Cost Estimate, Tenant shall deliver to Landlord cash in an amount (the "Over-
Allowance Amount") equal to the difference between (i) the amount of the Work
Cost Statement, less (ii) an amount equal to the sum of (A) the amount of the
Allowance plus (B) the Amortized TI Costs. The Over-Allowance Amount shall be
disbursed by Landlord prior to the disbursement of any then remaining portion of
the Allowance or the Amortized TI Costs, and such disbursement shall be pursuant
to the same procedure as the Allowance and the Amortized TI Costs. In the event
that, after the Effective Date, any revisions, changes or substitutions,
including, without limitation, any approved Change Order, shall be made to the
Final Tenant Plans, Tenant shall deliver to Landlord, immediately upon
Landlord's request and as an Over Allowance Amount or as an addition to the
Over-Allowance Amount, cash in an amount equal to the difference between (i) an
amount equal to the sum of (1) the amount of the Work Cost Statement plus (2)
any additional costs which arise in connection with such revisions, changes or
substitutions, including, without limitation, any Change Order Cost therefor,
less (ii) an amount equal to the sum of (x) the amount of the Allowance plus (y)
the maximum amount of Amortized TI Costs permissible hereunder.
10. Payment for Cost of the Shell and Core. Landlord shall pay the cost of
--------------------------------------
designing and constructing the Shell and Core as provided in the Final Landlord
Plans, which cost shall be included in the Total Construction Costs.
11. Financing of Construction of Improvements. Landlord may elect to
-----------------------------------------
finance the construction of the Improvements with the proceeds of a loan
("Project Loan") from a third party lender ("Lender") at the then prevailing
market rate and market terms for similar projects. The documents securing or
given in connection with the Project Loan, if any, are herein collectively
called "Loan Documents." Any Project Loan may be secured by the lien of a deed
of trust encumbering the Land and Improvements. Tenant agrees to execute and/or
provide all documents reasonably required by any Lender in connection with any
Project Loan, including, without limitation, estoppel certificates,
subordination agreements (subject to a commercially reasonable non-disturbance
agreement), consents to the collateral assignment of this Agreement, written
confirmation of the satisfaction of closing conditions, and evidence of the due
execution, validity and enforceability of this Agreement.
12. Substantial Completion. Except as provided in this Work Letter, the
----------------------
Commencement Date shall occur as set forth in Section 2.1 of the Lease. If there
is any delay in the Substantial Completion of the Improvements or in the
occurrence of any of the other conditions precedent to the Commencement Date, as
set forth
EXHIBIT B - Page 8
<PAGE>
in Article 3 of the Lease, and such delay is a result of a Tenant Delay, then
notwithstanding anything to the contrary set forth in the Lease or this Work
Letter and regardless of the actual date of Substantial Completion of the
Improvements, the Commencement Date shall be deemed to be the date the
Commencement Date would have occurred if no Tenant Delay had occurred; provided,
however, except in connection with a Change Order Delay, no Tenant Delay shall
be deemed to have occurred unless and until Landlord has provided written notice
to Tenant ("Delay Notice"), specifying the action or inaction by Tenant which
Landlord contends constitutes the Tenant Delay. If such action or inaction is
not cured by Tenant within two (2) business days ("Grace Period") following
receipt of such Delay Notice, then a Tenant Delay, as set forth in such Delay
Notice, shall be deemed to have occurred commencing as of the expiration of such
Grace Period, provided that Tenant shall only be permitted an aggregate of five
(5) Grace Periods, and thereafter, if a Tenant Delay occurs, such Tenant Delay
shall commence upon the receipt of the applicable Delay Notice.
13. Tenant Delay. As used herein, "Tenant Delay" means any actual delay
------------
in the completion of the Improvements resulting from any or all of the
following: (1) Tenant's failure to timely perform any of its obligations
pursuant to this Work Letter, including Tenant's Architect's failure to timely
process the building permit for the Tenant Improvements, and any failure to
complete, on or before the due date therefor, any action item which is Tenant's
responsibility pursuant to this Work Letter, including Tenant's failure to
prepare and to provide to Landlord a draft of the Final Tenant Plans in
accordance with the Project Schedule, subject only to "Force Majeure Delay," as
that term is defined in Section 20 of this Work Letter, below, resulting from
either "Acts of God" or "Governmental Permitting Failures," as those terms are
defined in Section 20 of this Work Letter, below; (2) Tenant's request for
materials, finishes, or installations which at the time of such request are not
readily available; (3) Change Order Delays; (4) Tenant's failure to timely
approve or disapprove any matter requiring Tenant's approval hereunder, unless
such matter is thereby deemed approved in accordance with the terms of this Work
Letter; (5) the failure of any of Tenant's millwork, furniture, cabling,
equipment or carpeting to be available at the Building to be installed by
Contractor or by Tenant or Tenant's contractors when required in order to not
(i) delay the critical path construction schedule of the Improvements or (ii)
prevent or delay the receipt of the required inspection sign-offs or the C of O
in connection with the Improvements; or (6) any other act by Tenant, Tenant's
Representative, Tenant's Architect, Tenant's employees, agents, independent
contractors, consultants and/or any other person performing or required to
perform services on behalf of Tenant.
14. Tenant's Inspection Rights. Two (2) times per month, Landlord shall
--------------------------
schedule and attend progress meetings, walk-throughs or other meetings with the
Landlord's Architect, the Contractor, Tenant, Tenant's Representative, and
Tenant's Architect to discuss the progress of the construction of the
Improvements ("Meetings"). Prior to the first day of each month, Landlord shall
deliver to Tenant a written schedule of all such Meetings for such month, and
shall otherwise give Tenant at least seventy-two (72) hours prior notice
(written or telephonic) of all changes to such schedule and of any additional
Meetings. Tenant shall designate in writing the person or persons appointed by
Tenant in addition Tenant's Representative and Tenant's Architect to attend the
Meetings and such designated parties shall be entitled to be present at and to
participate in the discussions during all Meetings, but Landlord may conduct the
Meetings even if Tenant's appointees are not present. At the Meetings, Tenant
shall have the opportunity to review Landlord's books and records pertaining to
the construction of the Improvements for the purpose of monitoring amounts
expended by Landlord in connection therewith. Tenant or its agents shall have
the right at any and all reasonable times to conduct inspections, tests, surveys
and reports of work in progress ("Inspections") for the purpose of reviewing
whether the Improvements are being constructed in accordance with the Final
Plans, as amended by any approved Change Orders or other agreed upon changes;
provided that such Inspections are to be conducted in such a manner as to not
unreasonably or unnecessarily interfere with the Work. Tenant agrees to protect,
defend, hold harmless and indemnify Landlord from all claims, demands, costs and
liabilities (including reasonable attorneys' fees) arising from Tenant's or
Tenant's agents entry onto the Land for the purpose of conducting Inspections,
other than such claims, demands, costs and liabilities (including reasonably
attorney's fees) arising from Landlord's, Landlord's Representative's,
Landlord's Architect's, Contractor's or Landlord's other agents' negligence or
willful misconduct.
EXHIBIT B - Page 9
<PAGE>
15. Walk-Through and Punch List. Upon Substantial Completion of the
---------------------------
Improvements, Tenant, Landlord, Tenant's Representative, Tenant's Architect and
Landlord's Architect shall jointly conduct a walk-through of the Improvements
and shall jointly prepare a punch list ("Punch List") of items needing
additional work ("Punch List Items"); provided, however, the Punch List shall be
limited to items which are required by the Construction Contract, the Final
Plans, Change Orders and any other changes agreed to by the parties. Landlord
shall cause the Punch List Items to be timely completed (and in no event later
than forty-five (45) days after the date the Punch List is finalized), and for
such completion to be performed in such a manner as to not unreasonably or
unnecessarily interfere with Tenant's occupancy and use of the Premises.
16. Miscellaneous Construction Covenants.
------------------------------------
(a) Coordination with Lease. Nothing herein contained shall be
------------------------
construed as (i) constituting Tenant as Landlord's agent for any purpose
whatsoever, or (ii) a waiver by Landlord or Tenant of any of the terms or
provisions of the Lease. Any material default by either party with respect to
any portion of this Work Letter, shall be deemed a breach of the Lease for which
Landlord and Tenant shall have all the rights and remedies as in the case of a
breach of the Lease by the other party.
(b) Cooperation. Landlord and Tenant agree to cooperate with one
-----------
another and to cause their respective employees, agents and contractors to
cooperate with one another to coordinate any work being performed by Landlord
and/or Tenant under this Work Letter, and their respective employees, agents and
contractors so as to avoid unnecessary interference and delays with the
completion of the Work.
17. No Representations. Landlord does not warrant that the Building or
------------------
any component thereof will be free of latent defects or that it will not require
maintenance and/or repair within any particular period of time, except as
expressly provided herein. Tenant acknowledges and agrees that it shall rely
solely on the warranty or guaranty, if any, from Contractor, Landlord's
Architect, Tenant's Architect or other material and/or service providers, and on
those rights and benefits assigned from Landlord to Tenant pursuant to Section
5(e), relative to the proper design and construction of the Improvements or any
component thereof.
18. Arbitration. The submittal of all matters to arbitration in
-----------
accordance with the terms of Section 17.12 of the Lease is the sole and
exclusive method, means and procedure to resolve any and all claims, disputes or
disagreements arising under this Agreement, except for all claims by either
party which (i) seek anything other than enforcement of rights under this
Agreement, or (ii) are primarily founded upon matters of fraud, willful
misconduct, bad faith or any other allegations of tortious action, and seek the
award of punitive or exemplary damages. The parties hereby irrevocably waive any
and all rights to the contrary and shall at all times conduct themselves in
strict, full, complete and timely accordance with the terms of Section 17.12 of
the Lease and all attempts to circumvent the terms of Section 17.12 of the Lease
shall be absolutely null and void and of no force or effect whatsoever.
Notwithstanding anything to the contrary contained herein, Work shall continue
pending resolution of any dispute with respect to the occurrence or extent of
any Tenant Delay and, at Landlord's option, Work shall cease pending resolution
of any other dispute, provided that in the event Landlord is the prevailing
party in such other dispute, any delay caused by such cessation of Work shall be
deemed to be a Tenant Delay.
19. Rentable Square Footage. Prior to the Commencement Date, Landlord
will cause Pace Compumetrics (the "Measuring Architect") to measure and certify
in writing to Landlord the rentable square footage of the Building, which shall
be determined in accordance with the standards set forth in ANSI Z65.1-1996, as
promulgated by the Building Owners and Managers Association. The cost of such
measurement and certification shall be included in Total Construction Costs.
Following the Measuring Architect's certification of the rentable square footage
of the Building, the Allowance, and other figures based upon the rentable square
feet contained in the Building, shall be determined in accordance with the terms
of this Work Letter or the Lease. Except in the case of manifest error, the
certification from the Measuring Architect of the rentable square footage of the
Building shall be binding upon Landlord and Tenant.
EXHIBIT B - Page 10
<PAGE>
20. Force Majeure Delay. As used herein, the term "Force Majeure Delay"
-------------------
shall mean only an actual delay resulting from (i) fire, earthquake, explosion,
flood, hurricane, the elements, acts of God or the public enemy, war, invasion,
insurrection, rebellion or riots (collectively, "Acts of God"); (ii) industry-
wide labor strikes or lockouts which objectively preclude Landlord from
obtaining union labor or substitute materials necessary for completing the
Improvements from any reasonable source at a reasonable cost; (iii) governmental
acts which do not specifically relate to plan checking or the issuance of
building permits or certificates of occupancy in connection with the
Improvements and which objectively preclude plan checking or the issuance of
building permits or certificates of occupancy in connection with improvements on
the Premises by any person (collectively, "Governmental Permitting Failures");
or (iv) governmental acts which do not specifically relate to the construction
of the Improvements and which objectively preclude construction of improvements
on the Premises by any person.
21. Construction and Completion Dates.
(a) Outside Construction Date. If Landlord does not commence
-------------------------
construction on or before November 30, 1998 (the "Outside Construction Date"),
then the sole remedy of Tenant for such failure shall be the right to deliver a
notice to Landlord (a "Construction Termination Notice") electing to terminate
the Lease effective upon that date occurring five (5) business days following
receipt by Landlord of such Construction Termination Notice. For purposes of the
foregoing sentence of this Section 21(a), "commencement of construction" shall
mean and refer to commencement of grading upon the Land and the commencement of
excavation of the foundation of the Building in accordance with any necessary
permits. A Construction Termination Notice must be delivered by Tenant to
Landlord, if at all, not earlier than the Outside Construction Date, as the same
may be extended pursuant to Section 21(c), below, nor later than five (5)
business days following the Outside Construction Date. Within five (5) business
days following receipt by Landlord of such Construction Termination Notice,
Landlord shall have the right, in its sole and absolute discretion, to deliver a
"Hold Over Allowance Notice," as that term is defined below, to Tenant, in which
event Tenant shall have no right to terminate the Lease in accordance with this
Section 21 and the Construction Termination Notice shall be of no force or
effect; provided that, if Landlord does not deliver a Hold Over Allowance Notice
to Tenant during such five (5) business day period, then the Lease shall
terminate in accordance with such Construction Termination Notice. Landlord
acknowledges that, as of the Effective Date, Tenant leases certain premises
("Tenant's Prior Premises") pursuant to that certain Office Lease dated
September 1, 1988 ("Tenant's Prior Lease"), by and between Computer Sciences
Corporation, as lessor ("Tenant's Prior Landlord"), and Tenant, formerly known
as International Information Network Services, Inc., as lessee. As used herein,
a "Hold Over Allowance Notice" shall mean a written notice delivered by Landlord
to Tenant pursuant to which Landlord agrees that Tenant shall be entitled to a
monthly allowance (the "Hold Over Allowance") in an amount equal to the
difference between (i) twice the monthly rental payable under Tenant's Prior
Lease (which is required to be paid by Tenant pursuant to Section 27 of Tenant's
Prior Lease in the event that Tenant holds over after the expiration of Tenant's
Prior Lease) less (ii) the monthly rental otherwise payable under Tenant's Prior
Lease pursuant to Section 2 thereof ("Tenant's Prior Rent"), but in no event to
exceed One Hundred Forty Thousand and No/100 Dollars ($140,000.00) per month
which Tenant represents to Landlord shall be Tenant's Prior Rent immediately
prior to the expiration of Tenant's Prior Lease, from and after the "Outside
Completion Date," as that term is defined in Section 21(b), below, through and
including that date on which the Commencement Date actually occurs. All or the
applicable portion of the Hold Over Allowance shall be paid directly to Tenant's
Prior Landlord, its successors or assigns, in an amount ("Tenant's Hold Over
Rent") equal to the difference between (A) any so-called hold over rental
actually required by Tenant's Prior Landlord to be paid each month pursuant to
Section 27 of Tenant's Prior Lease less (B) Tenant's Prior Rent; provided that,
if Tenant's Prior Landlord refuses to accept payment of Tenant's Hold Over Rent
directly from Landlord, then Landlord shall pay Tenant's Hold Over Rent directly
to Tenant, and Tenant, within twenty-four (24) hours thereafter, shall pay such
Tenant's Hold Over Rent directly to Tenant's Prior Landlord. Tenant acknowledges
and agrees that, in the event Landlord delivers a Hold Over Allowance Notice to
Tenant at any time in accordance with this Section 21, Landlord shall have the
right to participate in Tenant's negotiations with Tenant's Prior Landlord, or
to negotiate directly with Tenant's Prior Landlord, regarding Tenant's Hold Over
Rent. In the event that Tenant's Prior Landlord requires Tenant to vacate
Tenant's Prior Premises prior to the Commencement Date, after Tenant relocates
to and occupies certain other premises ("Tenant's Temporary Premises") pursuant
to a month-to-month lease ("Tenant's Temporary Lease") from
EXHIBIT B - Page 11
<PAGE>
the landlord of such Tenant's Temporary Premises ("Tenant's Temporary
Landlord"), Landlord shall disburse all or the applicable portion of the Hold
Over Allowance for "Tenant's Hold Over Expenses," as that term is defined below,
in accordance with this Section 21. As used herein, "Tenant's Hold Over
Expenses" shall mean (i) out-of-pocket costs and expenses actually incurred by
Tenant relating to the relocation of Tenant's business from Tenant's Prior
Premises to Tenant's Temporary Premises (collectively, "Tenant's Hold Over
Moving Expenses"), and (ii) an amount per month ("Tenant's Temporary Rent
Overage") equal to the difference between (A) the monthly rental actually paid
by Tenant under Tenant's Temporary Lease less (B) Tenant's Prior Rent. Landlord
shall disburse the Hold Over Allowance for Tenant's Hold Over Moving Expenses
upon receipt by Landlord of invoices marked as having been paid or other
evidence in form and content satisfactory to Landlord in support of such
Tenant's Hold Over Moving Expenses and Tenant's payment thereof. Disbursements
of the Hold Over Allowance for Tenant's Temporary Rent Overage shall be paid by
Landlord directly to Tenant's Temporary Landlord, its successors or assigns;
provided that, if Tenant's Temporary Landlord refuses to accept payment of
Tenant's Temporary Rent Overage directly from Landlord, then Landlord shall pay
Tenant's Temporary Rent Overage directly to Tenant, and Tenant, within twenty-
four (24) hours thereafter, shall pay such Tenant's Temporary Rent Overage
directly to Tenant's Temporary Landlord. Tenant acknowledges and agrees that
Landlord shall have the right to participate in Tenant's negotiations with
Tenant's Temporary Landlord, or to negotiate directly with Tenant's Temporary
Landlord, regarding the monthly rental payable under Tenant's Temporary Lease.
In no event shall Landlord be obligated to make disbursements pursuant to this
Section 21 in a total amount which exceeds the Hold Over Allowance and no
portion of the Hold Over Allowance, if any, remaining after payment of Tenant's
Hold Over Rent and/or Tenant's Hold Over Expenses shall be available for use by
Tenant.
(b) Outside Completion Date. If the Commencement Date does not occur
-----------------------
on or before November 1, 1999 (the "Outside Completion Date"), then the sole
remedy of Tenant for such failure shall be the right to deliver a notice to
Landlord (a "Completion Termination Notice") electing to terminate the Lease
effective upon that date occurring five (5) business days following receipt by
Landlord of such Completion Termination Notice. A Completion Termination Notice
must be delivered by Tenant to Landlord, if at all, not earlier than the Outside
Completion Date, as the same may be extended pursuant to Section 21(c), below,
nor later than five (5) business days following the Outside Completion Date.
Within five (5) business days following receipt by Landlord of such Completion
Termination Notice, Landlord shall have the right, in its sole and absolute
discretion, to deliver a Hold Over Allowance Notice to Tenant, in which event
Tenant shall have no right to terminate the Lease in accordance with this
Section 21 and the Completion Termination Notice shall be of no force or effect;
provided that, if Landlord does not deliver a Hold Over Allowance Notice to
Tenant during such five (5) business day period, then the Lease shall terminate
in accordance with such Completion Termination Notice.
(c) Other Terms. The Outside Construction Date and the Outside
-----------
Completion Date shall be extended to the extent of any Tenant Delay or Force
Majeure Delay. Upon any termination of the Lease as set forth in this Section
21, Landlord and Tenant shall be relieved from any and all liability to each
other resulting under the Lease or this Work Letter, except that Landlord shall
return to Tenant the L/C and any portion of the Over-Allowance Amount which has
not been expended by Landlord in connection with the construction of the
Improvements. Tenant's rights to terminate this Lease, as set forth in this
Section 21, shall be Tenant's sole and exclusive remedy at law or in equity for
Landlord's failure to commence construction on or before the Outside
Construction Date or for Landlord's failure to obtain a certificate of
occupancy, temporary certificate of occupancy or its equivalent for the Shell
and Core on or before the Outside Completion Date.
22. Construction Overage.
(a) Adjustment of Annual Base Rent. If that portion of the actual
------------------------------
Total Construction Costs attributable to Work performed pursuant to the
Construction Contract (less the amount thereof attributable to Change Orders)
exceeds the estimated costs for such Work as set forth in the Construction
Contract (such excess being referred to herein as the "Construction Overage"),
then notwithstanding anything to the contrary contained in Article 3 of the
Lease or elsewhere in the Lease or this Work Letter, that portion of the Annual
Base Rent which is attributable solely to the Construction Overage (the
"Construction Overage Base Rent") shall be determined in
EXHIBIT B - Page 12
<PAGE>
accordance with this Section 22. Landlord and Tenant acknowledge and agree that
the Annual Base Rent is calculated to provide Landlord an annual rate of return
of one thousand one hundred twenty-five (1,125) basis points or eleven and
twenty-five hundredths percent (11.25%) on Total Construction Costs. In the
event of a Construction Overage, for each successive increment of the
Construction Overage in the amount of Five Hundred Thousand and No/100 Dollars
($500,000.00) (each a "Construction Overage Increment"), the Annual Base Rent
shall be adjusted such that Landlord's rate of return only on such Construction
Overage Increment or portion thereof shall be reduced by an additional twenty-
five (25) basis points or twenty-five hundredths percent (.25%). By way of
example only, (i) if the Construction Overage were equal to or less than Five
Hundred Thousand and No/100 Dollars ($500,000.00), then the Annual Base Rent
attributable to such Five Hundred Thousand and No/100 Dollars ($500,000.00)
would be adjusted such that Landlord's rate of return only on such Construction
Overage would be reduced by twenty-five (25) basis points from eleven and
twenty-five hundredths percent (11.25%) to eleven percent (11%); (ii) if the
Construction Overage were greater than the initial Construction Overage
Increment of Five Hundred Thousand and No/100 Dollars ($500,000.00) but equal to
or less than One Million and No/100 Dollars ($1,000,000.00), then (A) the Annual
Base Rent attributable to the initial Five Hundred Thousand and No/100 Dollar
($500,000.00) Construction Overage Increment would be adjusted such that
Landlord's rate of return only on such initial Construction Overage Increment
would be eleven percent (11%), and (B) the Annual Base Rent attributable to the
second (2nd) Construction Overage Increment (i.e., the amount of the difference
between the Construction Overage less $500,000.00) would be adjusted such that
Landlord's rate of return only on such second (2nd) Construction Overage
Increment would be reduced by an additional twenty-five (25) basis points from
eleven percent (11%) to ten and seventy-five hundredths percent (10.75%); (iii)
if the Construction Overage were greater than the One Million and No/100 Dollars
($1,000,000.00) but equal to or less than One Million Five Hundred Thousand and
No/100 Dollars ($1,500,000.00), then (x) the Annual Base Rent attributable to
the initial Five Hundred Thousand and No/100 Dollar ($500,000.00) Construction
Overage Increment would be adjusted such that Landlord's rate of return only on
such initial Construction Overage Increment would be eleven percent (11%), (y)
the Annual Base Rent attributable to the second (2nd) Five Hundred Thousand and
No/100 Dollar ($500,000.00) Construction Overage Increment would be adjusted
such that Landlord's rate of return only on such second (2nd) Construction
Overage Increment would be ten and seventy-five hundredths percent (10.75%), and
(z) the Annual Base Rent attributable to the third (3rd) Construction Overage
Increment (i.e., the amount of the difference between the Construction Overage
less $1,000,000.00) would be adjusted such that Landlord's rate of return only
on such third (3rd) Construction Overage Increment would be reduced by an
additional twenty-five (25) basis points from ten and seventy-five hundredths
percent (10.75%) to ten and fifty hundredths percent (10.50%).
(b) Limitation on Construction Overage. Notwithstanding anything to
----------------------------------
the contrary contained in this Work Letter or in the Lease, if the Construction
Overage exceeds an amount (the "Maximum Construction Overage") equal the product
of (i) the estimated cost for Work performed pursuant to the Construction
Contract as set forth in the Construction Contract multiplied by (ii) one tenth
(0.1), then the sole remedy of Tenant for such Construction Overage shall be the
right to deliver a notice to Landlord (a "Construction Overage Termination
Notice") electing to terminate the Lease effective upon the date occurring five
(5) business days following receipt by Landlord of such Construction Overage
Termination Notice. A Construction Overage Termination Notice must be delivered
by Tenant to Landlord, if at all, not later than five (5) business days
following the date on which Tenant has written notice that the Construction
Overage exceeds the Maximum Construction Overage. Within five (5) business days
following receipt by Landlord of such Construction Overage Termination Notice,
Landlord shall have the right, in its sole and absolute discretion, to deliver a
"Construction Overage Fixed Rent Notice," as that term is defined below, to
Tenant, in which event Tenant shall have no right to terminate the Lease in
accordance with this Section 22 and the Construction Overage Termination Notice
shall be of no force or effect; provided that, if Landlord does not deliver a
Construction Overage Fixed Rent Notice to Tenant during such five (5) business
day period, then the Lease shall terminate in accordance with such Construction
Overage Termination Notice. As used herein, a "Construction Overage Fixed Rent
Notice" shall mean a written notice delivered by Landlord to Tenant pursuant to
which Landlord agrees that the portion of Annual Base Rent which is determined
by the cost of the work performed pursuant to the Construction Contract will not
exceed the amount which such portion of the Annual Base Rent would be if the
Construction Overage were equal to the Maximum Construction Overage, and the
Annual Base Rent shall thereafter be adjusted in accordance with Section 22(a),
EXHIBIT B - Page 13
<PAGE>
above. Upon any termination of the Lease as set forth in this Section 22(b),
Landlord and Tenant shall be relieved from any and all liability to each other
resulting under the Lease or this Work Letter, except that Landlord shall return
to Tenant the L/C and any portion of the Over-Allowance Amount which has not
been expended by Landlord in connection with the construction of the
Improvements. Tenant's rights to terminate this Lease, as set forth in this
Section 22(b), shall be Tenant's sole and exclusive remedy at law or in equity
for a Construction Overage in excess of the Maximum Construction Overage. If
Tenant fails to timely deliver a Construction Overage Termination Notice in
accordance with this Section 22(b), then Tenant shall be deemed to have approved
such Construction Overage in excess of the Maximum Construction Overage, and the
Annual Base Rent shall be calculated based on the full amount of such
Construction Overage and adjusted in accordance with Section 22(a), above.
IN WITNESS WHEREOF, this Work Letter is executed as of the same date as
the execution of the Lease.
"LANDLORD" "TENANT"
MS VICKERS II, LLC, INFONET SERVICES CORPORATION,
a Delaware limited liability company a Delaware corporation
By:____________________________ By:_________________________________
James R. Brooks, Jose Collazo,
Vice President President
By:_________________________________
Ernest U. Gambaro,
Senior Vice President and General
Counsel
EXHIBIT B - Page 14
<PAGE>
SCHEDULE 1 TO EXHIBIT B
-----------------------
PROJECT SCHEDULE
----------------
SCHEDULE 1 TO EXHIBIT B - Page 1
<PAGE>
SCHEDULE 2 TO EXHIBIT B
-----------------------
BASE BUILDING SPECIFICATION
---------------------------
1. Exterior Walls
--------------
a. The exterior walls should have the prerequisite insulation per Title
24. Furring and gypsum board finished ready to paint at the interior
face should be carried to slab above. There was some discussion about
eliminating this interior finish with the tilt-up alternative;
however, it is remote that the Title 24 calculations would work.
b. Window Covering: The window treatment should be provided if it is
required by Title 24. In consultation with a mechanical engineer, in
most cases, Title 24 calculations utilizing window covering are not
accepted by the local jurisdictions. Therefore, this will not be
provided under core/shell.
2. Core Walls and Column Covers
----------------------------
All walls and column covers will be carried up to the deck above including
the gypsum board. Recessed fire extinguisher cabinets shall be provided
where required in the core.
3. Floor Construction
------------------
The raised flooring system will be part of Tenant Improvements. It is
anticipated that the structural floor will be at the raised floor elevation
for toilet rooms, elevator lobbies, etc. and depressed elsewhere.
4. Lobby Finishes
--------------
The two-story lobby will be complete to the extent that it is code
compliant. An allowance will be given for the floor finish. Ceiling will be
a gypsum board coffer with some acoustical tile insets. The surrounding
walls will be gypsum board partitions. Glazed openings will be under Tenant
Improvements.
a. The monumental stair including rails and second floor balcony railings
will be provided under core/shell.
b. Upper Floor Elevation Lobbies: Vestibule walls, doors and ceiling will
be provided as appropriate.
SCHEDULE 2 TO EXHIBIT B - Page 1
<PAGE>
5. Toilet Rooms
------------
The following finishes and accessories are to be provided:
a. Ceramic tile on wet walls and vinyl wall covering on other walls.
b. Ceramic tile floor and base.
c. Granite lavatory counters.
d. Plastic laminate toilet partitions.
e. Cove light over lavatory counter with downlights elsewhere.
6. Stairwells
----------
Stairs are to be metal pan with concrete fill. Metal work is to be painted.
Interior walls of stairwells are to be drywall painted. Standard stairwell
wall or soffit-mounted flourescent lighting is to be provided with an
alternate to do specialty indirect lighting with gypsum board soffits under
stair landings.
7. Elevator Cabs
-------------
A cost per cab to be provided as an allowance based on the following:
a. Floor: Stone finish.
b. Walls: A panelized wood wall system.
c. Brushed stainless steel flat ceiling and front fascias.
d. Pads for one designated freight elevator.
e. Provide programmable card-key access.
f. Elevator system will be hydraulic.
8. Interior Doors
--------------
Shall be solid core wood for natural finish. Hardware would be mortise
type.
SCHEDULE 2 TO EXHIBIT B - Page 1
<PAGE>
9. Mechanical System
-----------------
The basic H.V.A.C. system will consist of the supply mains run to each
floor and the required vertical return-air ducts. With the underfloor
H.V.A.C. distribution system, no loops will be provided.
a. An energy management system will be provided which will integrate with
the security system under the T.I. work.
b. An FM 200 fire suppression system will be provided for the computer
room area (approximately 15,000 s.f.) under Tenant Improvements.
c. Sprinkler System: A main loop will be provided at each floor plus the
prerequisite risers and code required control systems. Branch piping
will be under T.I. work.
d. Code required drinking fountains.
10. Electrical
----------
Provide the following under core/shell:
a. Fire alarm system per code.
b. Front and back door card readers.
c. Electrical service shall be based on a total watt per square foot
available. P. Patrick Murray to assist in defining what is required.
d. Electrical room with panel on each floor.
e. Telecommunication shall be provided throughout the building, i.e.,
each floor shall be provided with a backboard and riser access.
f. Data and telephone service lines to the building will be based on a
speculative building standard. A 6' x 10' entrance room will be
provided. More definition will be necessary for service requirements
(fiberoptic, etc.) by Infonet.
g. Emergency power will be by battery packs.
h. A location for the emergency generator and tank will be indicated to
be provided under Tenant Improvements.
11. Site Work
---------
Site work will include the required parking area, code-required
landscape, concrete entry plaza, etc.
a. No parking control system will be provided.
b. One loading dock will be provided.
SCHEDULE 2 TO EXHIBIT B - Page 3
<PAGE>
12. At Tenant's request, the Base Building will be designed for
seismic force levels beyond that required by the 1994 Uniform
Building Code. For comparison purposes code requires a seismic
design importance factor of "1" whereas essential buildings such
as hospitals or fire stations require a factor of "1.5". The
Building will be designed to a maximum factor of "1.25" by
enhancing the seismic reliability of the structural system. This
will be achieved with the addition of bracing elements in the
perimeter structure in combination with an upgrade of code
required general specifications.
SCHEDULE 2 TO EXHIBIT B - Page 4
<PAGE>
SCHEDULE 3 TO EXHIBIT B
-----------------------
CONSTRUCTION COST ESTIMATE
--------------------------
Building Areas Area(sf)
- -------------- --------
Site Area 285,754 6.56 acres
Gross Building Area 159,000 56% FAR
Rentable Building Area 159,000
Building Area Footprint 53,000 550 Surface parking spaces
Parking Deck Area -- 3.5 Parking Ratio (per 1,000 sf)
Parking Deck Area Footprint --
Site Work Area 232,754
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Construction Costs Cost/Bsf Cost
- ------------------ -------- ----
<S> <C> <C> <C> <C> <C>
Land $ 25.16 $4,000,550 $ 4,000,550 16%
Shell & Core Construction 62.00 $9,858,000
Site Work 9.15 1,454,710
Seismic Upgrade 4.00 636,000
Tenant Improvement Allowance 30.00 4,770,000
Methane Improvements 1.38 219,950
-------- ----------
Total Hard Costs 106.53 16,938,660 65
A&E $ 5.26 $ 836,800
Legal and Accounting Fees 1.10 175,000
Permits, Traffic and other Fees Land 5.22 830,275
Property Taxes 0.33 52,315
Builder's Risk Insurance 0.35 55,650
Brokerage Fee 4.72 750,000
Construction Interest & Loan Fee 5.28 840,000
Misc/Contingency 4.40 700,00
Development Fee (3.0% of hard cost 3.20 508.160
------- ---------
Total Soft Costs 29.86 4,748,200 18
Total Budget $161.56 $25,687,410 100%
======= =========== ===
Net Rental Rate/Month $ 1.51 $ 240,819
Leveraged Yield-on-Cost 11.250%
</TABLE>
3/6/98
__________________________________
Grand Avenue Corporate Center
SCHEDULE 3 TO EXHIBIT B - Page 1
<PAGE>
EXHIBIT C
---------
SITE PLAN AND ELEVATIONS
------------------------
EXHIBIT C - Page 1
<PAGE>
EXHIBIT D
---------
COMMENCEMENT DATE MEMORANDUM
----------------------------
With respect to that certain lease ("Lease") dated ________________, 19_,
between __________________________, a________________________("Tenant"), and MS
Vickers II, LLC, a Delaware limited liability company ("Landlord"), whereby
Landlord leased to Tenant and Tenant leased from Landlord approximately
____________ rentable square feet of the building located at
______________________________ ("Premises"), Tenant hereby acknowledges and
certifies to Landlord as follows:
(1) Landlord delivered possession of the Premises to Tenant in a
Substantially completed condition on ______________ ("Possession Date");
(2) The Commencement Date is ___________;
(3) The Premises contain __________ square feet of space;
(4) The Land contains ____________ square feet;
(5) The initial monthly Base Rent is $________; and
(6) Tenant has accepted and is currently in possession of the Premises and
the Premises are acceptable for Tenant's use.
IN WITNESS WHEREOF, this Commencement Date Memorandum is executed this
_____ day of ___________________, 19___.
"Tenant"
___________________________
___________________________
By:________________________
Its:______________________
By:________________________
Its:______________________
EXHIBIT D - Page 1
<PAGE>
EXHIBIT E
---------
PROHIBITED USES
---------------
Except as provided to the contrary in the Lease, the following types of
operations and activities are expressly prohibited on the Premises:
1. automobile/truck maintenance, repair or fueling;
2. battery manufacturing or reclamation;
3. ceramics and jewelry manufacturing or finishing;
4. chemical (organic or inorganic) storage, use or manufacturing;
5. drum recycling;
6. dry cleaning;
7. electronic components manufacturing;
8. electroplating and metal finishing;
9. explosives manufacturing, use or storage;
10. hazardous waste treatment, storage, or disposal;
11. leather production, tanning or finishing;
12. machinery and tool manufacturing;
13. medical equipment manufacturing and hospitals;
14. metal shredding, recycling or reclamation;
15. metal smelting and refining;
16. mining;
17. paint, pigment and coating operations;
18. petroleum refining;
19. plastic and synthetic materials manufacturing;
20. solvent reclamation;
21. tire and rubber manufacturing;
22. above and/or underground storage tanks; and
23. residential use or occupancy.
EXHIBIT E - Page 1
<PAGE>
EXHIBIT F
---------
TENANT ESTOPPEL CERTIFICATE
---------------------------
To:____________________________
_______________________________
Attn:__________________________
Re: Lease Dated:______________
Current Landlord:______________
Current Tenant:________________
Square Feet: Approximately____
Floor(s):______________________
Located at:____________________
_____________("Tenant") hereby certifies that as of ______________, [199__]
[20__]:
1. Tenant is the present owner and holder of the tenant's interest under
the lease described above, as it may be amended to date (the "Lease") with
__________________ as Landlord (who is called "Borrower" for the purposes of
this Certificate). (USE THE NEXT SENTENCE IF THE LANDLORD OR TENANT NAMED IN THE
LEASE IS A PREDECESSOR TO THE CURRENT LANDLORD OR TENANT.) [The original
landlord under the Lease was ______________, and the original tenant under the
Lease was __________________.] The Lease covers the premises commonly known as
___________________ (the "Premises") in the building (the "Building") at the
address set forth above.
2. (a) A true, correct and complete copy of the Lease (including all
modifications, amendments, supplements, side letters, addenda and riders of and
to it) is attached to this Certificate as Exhibit A.
(b) [Intentionally omitted]
(c) The term of the Lease commenced on ______________, 199__ and will
expire on ______________, including any presently exercised option or renewal
term. Except as specified in Section 2.3 of the Lease, Tenant has no option or
right to renew, extend or cancel the Lease or to lease additional space in the
Premises or Building.
(d) Except as specified in Paragraph(s) __________ of the Lease (copy
attached), Tenant has no option or preferential right to purchase all or any
part of the Premises (or the land of which the Premises are a part). Except for
the foregoing, Tenant has no right or interest with respect to the Premises or
the Building other than as Tenant under the Lease.
(e) The annual minimum rent currently payable under the Lease is
$__________ and such rent has been paid through ______________, 199__.
(f) Additional rent is payable under the Lease for (i) operating,
maintenance or repair expenses and (ii) property taxes. Such additional rent has
been paid in accordance with Borrower's rendered bills through _______________,
199__.
(g) Tenant has made no agreement with Borrower or any agent,
representative or employee of Borrower concerning free rent, partial rent,
rebate of rental payments or any other similar rent concession.
(h) Borrower currently holds a security deposit in the amount of
$___________ which is to be applied by Borrower or returned to Tenant in
accordance with Paragraph(s) ____ of the Lease. Tenant acknowledges and agrees
that Bank shall have no responsibility or liability for any security deposit,
except to the extent that any security deposit shall have been actually received
by Bank.
EXHIBIT F - Page 1
<PAGE>
3. (a) The Lease constitutes the entire agreement between Tenant and
Borrower with respect to the Premises, has not been modified, changed, altered
or amended and is in full force and effect in the form attached as Exhibit A.
There are no other agreements, written or oral, which affect Tenant's occupancy
of the Premises.
(b) All insurance required of Tenant under the Lease has been
provided by Tenant and all premiums have been paid.
(c) To the best knowledge of Tenant, no party is in default under the
Lease. To the best knowledge of Tenant, no event has occurred which, with the
giving of notice or passage of time, or both, would constitute such a default.
(d) The interest of Tenant in the Lease has not been assigned or
encumbered. Tenant is not entitled to any credit against any rent or other
charge or rent concession under the Lease except as set forth in the Lease. No
rental payments have been made more than one month in advance.
4. All contributions required to be paid by Borrower to date for
improvements to the Premises have been paid in full and all of Borrower's
obligations with respect to tenant improvements have been fully performed.
Tenant has accepted the Premises, subject to no conditions other than those set
forth in the Lease.
5. Neither Tenant nor any guarantor of Tenant's obligations under the
Lease is the subject of any bankruptcy or other voluntary or involuntary
proceeding, in or out of court, for the adjustment of debtor creditor
relationships.
6. (a) As used here, "Hazardous Substance" means any substance, material
or waste (including petroleum and petroleum products) which is designated,
classified or regulated as being "toxic" or "hazardous" or a "pollutant" or
which is similarly designated, classified or regulated, under any federal, state
or local law, regulation or ordinance.
(b) Except as allowed under the Lease, Tenant represents and warrants
that (i) it has not used, generated, released, discharged, stored or disposed of
any Hazardous Substances on, under, in or about the Building or the land on
which the Building is located and (ii) it has no actual knowledge that any
Hazardous Substance is present, or has been used, generated, released,
discharged, stored or disposed of by any party, on, under, in or about such
Building or land.
7. Tenant hereby acknowledges that Borrower (CHOOSE ONE) [intends to
encumber/has encumbered] the property containing the Premises with a Deed of
Trust in favor of Bank. Tenant acknowledges the right of Borrower, Bank and any
and all of Borrower's present and future lenders to rely upon the statements and
representations of Tenant contained in this Certificate and further acknowledges
that any loan secured by any such Deed of Trust or further deeds of trust will
be made and entered into in material reliance on this Certificate.
By:_______________________
Name:__________________
Title:_________________
EXHIBIT F - Page 2
<PAGE>
Exhibit G
---------
FORM OF LETTER OF CREDIT
------------------------
(Letterhead of a money center bank
acceptable to the Landlord)
______________, 1998
________________________
________________________
________________________
________________________
Gentlemen:
We hereby establish our Irrevocable Letter of Credit and authorize you to
draw on us at sight for the account of _____________________, a
___________________________, the aggregate amount of
______________________________________________________ ($__________).
Funds under this Letter of Credit are available to the beneficiary hereof
as follows:
Any or all of the sums hereunder may be drawn down at any time and from
time to time from and after the date hereof by ___________________
("Beneficiary") when accompanied by this Letter of Credit and a written state
ment signed by __________________________, certifying that such moneys are due
and owing to Beneficiary, together with a certificate of incumbency executed by
___________________ certifying the position and signature of the officer signing
the statement, and a sight draft executed and endorsed by _____________, as a
______________ of Beneficiary.
This Letter of Credit is transferable in whole through ourselves. At the
time of transfer this original Letter of Credit must be surrendered to us along
with a complete transfer application (attached). Transfer charges, in the amount
of $300, must accompany any transfer request.
The amount of each draft must be endorsed on the reverse hereof by the
negotiating bank. We hereby agree that this Letter of Credit shall be duly
honored upon presentation and delivery of the certification specified above.
This Letter of Credit shall expire on ____________.
Notwithstanding the above expiration date of this Letter of Credit, the
term of this Letter of Credit shall be automatically renewed for successive,
additional one (1) year periods unless, at least thirty (30) days prior to any
such date of expiration, the undersigned shall give written notice to Holder, by
certified mail, return receipt requested and at the address set forth above or
at such other address as may be given to the undersigned by Holder, that this
Letter of Credit will not be renewed.
EXHIBIT G - Page 1
<PAGE>
THIS DOCUMENTARY CREDIT IS GOVERNED BY THE "UNIFORM CUSTOMS AND PRACTICE
FOR DOCUMENTARY CREDITS" (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE
PUBLICATION NUMBER 500.
Very truly yours,
(Name of Issuing Bank)
By:__________________________
EXHIBIT G - Page 2
<PAGE>
REQUEST FORM FOR FULL TRANSFER
------------------------------
NOTE: THIS FORM IS TO BE USED WHERE A LETTER OF CREDIT IS TRANSFERRED IN ITS
ENTIRETY AND NO SUBSTITUTION OF INVOICE IS INVOLVED.
HARRIS TRUST AND SAVINGS BANK DATE:______________________
LETTER OF CREDIT PROCESSING CENTER
311 WEST MONROE STREET, 13TH FLOOR
CHICAGO, ILLINOIS 60690
RE: L/C NO._______________________ ISSUED ON:_________________
DEAR SIR(S) OR MADAM(S):
FOR VALUE RECEIVED, THE UNDERSIGNED BENEFICIARY HEREBY IRREVOCABLY
TRANSFERS TO:___________________________________________________________________
(NAME OF TRANSFEREE)
________________________________________________________________________________
(ADDRESS OF TRANSFEREE)
________________________________________________________________________________
(OTHER TRANSFEREE INFORMATION)
------------------------------
ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY TO DRAW UNDER THE ABOVE LETTER OF
CREDIT IN ITS ENTIRETY.
BY THIS TRANSFER, ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY IN SUCH LETTER OF
CREDIT ARE TRANSFERRED TO THE TRANSFEREE, AND THE TRANSFEREE SHALL HAVE THE SOLE
RIGHTS AS BENEFICIARY THEREOF, INCLUDING SOLE RIGHTS RELATING TO ANY AMENDMENTS
NOW EXISTING OR HEREAFTER MADE. ALL AMENDMENTS ARE TO BE ADVISED DIRECTLY TO THE
TRANSFEREE WITHOUT NECESSITY OF ANY CONSENT NOR NOTICE TO THE UNDERSIGNED
BENEFICIARY.
THE ADVICE OF SUCH LETTER OF CREDIT IS RETURNED HEREWITH TOGETHER WITH ANY AND
ALL AMENDMENTS, AND WE ASK YOU TO ENDORSE THE TRANSFER ON THE REVERSE OF THE
ADVICE, AND FORWARD IT DIRECTLY TO THE TRANSFEREE WITH YOUR CUSTOMARY NOTICE OF
TRANSFER.
ENCLOSED IS OUR REMITTANCE OF $300 IN PAYMENT OF YOUR TRANSFER COMMISSION, AND
ANY EXPENSES WHICH MAY BE INCURRED BY YOU IN CONNECTION WITH THIS TRANSFER.
SIGNATURE AUTHENTICATION
________________________________ ________________________________________
(BANK) (CURRENT BENEFICIARY'S NAME AS PER L/C)
________________________________ ________________________________________
(AUTHORIZED SIGNATURE) (SIGNATURE OF BENEFICIARY)
EXHIBIT G - Page 3
<PAGE>
EXHIBIT 10.17
EXECUTIVE EMPLOYMENT AGREEMENT
This Executive Employment Agreement (the "Agreement") is entered into by
and between Infonet Services Corporation, a Delaware Corporation (the "Company")
and Akbar H. Firdosy, an individual (the "Executive").
WITNESSETH:
WHEREAS the Board of Directors has resolved that it is in the best interest
of the Company that its officers be subject to the terms of an executive
employment agreement; and
WHEREAS the Company and the Executive now desire to enter into this
Agreement and set forth the terms and conditions of the Executive's employment.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
promises and covenants set forth below and other good and valuable
consideration, receipt of which is hereby acknowledged, the Company and the
Executive do hereby agree as follows:
ARTICLE I
EMPLOYMENT
----------
The Company hereby employs the Executive to perform the duties and
responsibilities normally associated with the position of Vice President,
Treasurer and Chief Financial Officer, or such other position to which the
Executive may be promoted, for the term of this Agreement. The Executive agrees
to abide by the Company's Certificate of Incorporation, its By-Laws and the
direction by its Board of Directors except to the extent such direction would be
inconsistent with applicable law.
ARTICLE II
REMUNERATION
------------
For the first year of this Agreement, the Executive shall be paid the Base
Salary in effect on January 1, 2000. The Executive's Base Salary shall
thereafter be reviewed annually in accordance with the Company's then existing
salary review policies. The Executive shall also be entitled to receive and be
eligible to participate in those Benefits made available by the Company during
the term of this Agreement.
1
<PAGE>
ARTICLE III
TERM AND TERMINATION OF AGREEMENT
---------------------------------
Section 3.1 Term and Expiration of Agreement
- ----------- --------------------------------
This Agreement shall be effective commencing on January 1, 2000 and shall
continue in effect for an initial period of 36 months ("Initial Term") and shall
thereafter be extended without further action of the parties for additional
periods of 24 months ("Extended Term") unless the Executive receives notice from
the Company not later than 24 months prior to the last day of such Initial Term
or any Extended Term of its election not to extend the Agreement. The last day
of the Initial Term or any such Extended Term shall hereinafter be referred to
as the "Expiration Date."
Section 3.2 Death or Disability
- ----------- -------------------
The Company may terminate this Agreement without any further obligation
(except as provided in this Section 3.2) to the Executive on the Death or
Disability of the Executive. If the Executive's Death or Disability occurs in
the course or as the result of the performance of his duties under this
Agreement, however, the Executive's Base Salary shall continue to be paid to the
Executive's estate or the Executive for a period of two (2) years from the date
of Death or Disability. Nothing in this Section 3.2 is intended to effect the
entitlement of the Executive or his estate to any payments or benefits to which
he or it would otherwise be entitled under any other Company plan or program.
Section 3.3 Termination for Cause
- ----------- ---------------------
The Company may terminate this Agreement at any time without any further
obligation to the Executive for Cause as defined herein.
Section 3.4 Retirement
- ----------- ----------
In the event that the Executive voluntarily elects Retirement during the
term of this Agreement, the Executive shall be entitled to the benefits under
the Company's regular Retirement program, or, if a separation Retirement
agreement has been entered into between the Executive and the Company, benefits
shall be provided according to the terms of that agreement.
Section 3.5 Resignation
- ----------- -----------
The Executive is entitled to voluntarily resign his employment with the
Company during the term of this Agreement. If the Executive resigns his
employment with the Company for other than Good Reason, this Agreement shall be
deemed terminated without any further obligation of the Company to the
Executive.
2
<PAGE>
Section 3.6 Termination Without Cause (The "Early Termination Option").
- ----------- ---------------------------------------------------------
The Company has the right to terminate the Executive's employment, without
cause, at any time prior to the Expiration Date by providing the Executive with
a Notice of Termination and, receipt of which, shall cause the Company to pay
the Executive the Separation Payments for the applicable period set forth in
Section 3.8 (the "Early Termination Option").
Section 3.7 Resignation for Good Reason
- ----------- ---------------------------
The Executive shall be entitled to resign his employment with the Company
for Good Reason at any time prior to the Expiration Date and receive the
Separation Payments for the applicable period set forth in Section 3.8 by
providing the Company with a Notice of Termination. The fact that the Executive
may choose not to resign his employment for Good Reason after the occurrence of
any event constituting Good Reason shall in no way affect the Executive's right
to do so upon the occurrence of a subsequent transaction or event which
constitutes a Good Reason.
Section 3.8 Separation Payments
- ----------- -------------------
(a) In the event the Early Termination Option is exercised by the Company
or the Executive resigns his employment with the Company for Good Reason, the
Executive shall be entitled to receive Separation Payments through the
Expiration Date or for a period of two (2) years from the effective date of the
Executive's termination or resignation, whichever period is longer.
(b) Unless otherwise directed by the Executive, the Separation Payments
shall be paid or provided on a continuing monthly basis on the first business
day of each month commencing with the month immediately following the effective
date of the Executive's termination or resignation, whichever is applicable.
(c) Upon the exercise of the Early Termination Option by the Company or
the Executive's resignation for Good Reason, the Executive shall be entitled to
accrue benefits (as defined in Section 5.2) during the period the Executive
receives or is entitled to receive separation payments.
(d) The Company shall use the compensation which the Executive receives or
is entitled to receive as Separation Payments for the purpose of determining the
amount of any benefit to which the Executive may be entitled under any plan or
program.
(e) The Executive agrees that so long as he is receiving Separation
Payments, he shall not become employed by or consult with any company whose
primary business is the provision of public international value added network
services.
3
<PAGE>
(f) The Executive agrees that so long as he is receiving Separation
Payments, he shall not induce or solicit any employee of the Company to
terminate his or her employment with the Company for any purpose.
(g) The Company's obligation to pay the Separation Payments and otherwise
comply with the provisions of this Section 3.8 shall be unconditional. The
Executive shall not be required to mitigate the amount of any payment provided
for in this Section 3.8.
ARTICLE IV
CONFIDENTIAL INFORMATION
------------------------
Section 4.1 Confidential Business Information
- ----------- ---------------------------------
The Executive agrees that he shall hold in strictest confidence and not
disclose, directly or indirectly, to any person, firm or corporation, without
the express prior written consent of the Company, any trade secrets or any
confidential business information of the Company including, but not limited to,
corporate planning, production, distribution or marketing processes;
manufacturing techniques; customer lists or customer leads; marketing
information or procedures; development work; work in process; financial
statements or notes, schedules or supporting financial data; or any other secret
or confidential matter relating to the products, sales or business of the
Company.
Section 4.2 Return of Information
- ----------- ---------------------
The Executive agrees that no later than five (5) days after his employment
is terminated with the Company he will deliver to the Company and will not keep
in his possession or deliver to anyone else, any and all drawings, notes,
memoranda, specifications, financial statements, customer lists, product
surveys, data, documents or other material containing or disclosing any of the
matters referred to in Section 4.1 above.
Section 4.3 Remedy for Breach of this Article
- ----------- ---------------------------------
The Executive acknowledges that any breach of this Article IV by him will
cause irreparable injury to the Company for which the available remedies at law
will not be adequate. Accordingly, in the event of any such breach or
threatened breach of any provision of this Article, in addition to any other
remedy provided by law or in equity, the Company shall be entitled to
appropriate injunctive relief, in any court of competent jurisdiction,
restraining the Executive from any such actual or threatened breach of this
Article. The Executive stipulates to the entry against him of any such
temporary, preliminary or permanent injunction and agrees not to resist the
Company's application for such equitable relief, except on the grounds that the
acts or omissions alleged by the Company did not violate any of the provisions
of this Article.
4
<PAGE>
ARTICLE V
DEFINITIONS
-----------
Whenever the following terms are used below in this Agreement, they shall
have the meaning specified below, and no other, unless the context clearly
indicates to the contrary. The masculine pronoun shall include the feminine and
neuter, and the singular the plural, where the context so indicates.
Section 5.1 Base Salary
- ----------- -----------
"Base Salary" shall mean the Executive's regular annualized rate of pay
exclusive of all other Benefits as that term is defined below.
Section 5.2 Benefits
- ----------- --------
"Benefits" shall mean Benefits pursuant to this contract and all employee
welfare and pension benefit plans or programs and all other plans or programs
including, but not limited to medical and dental insurance, Infonet Stock
Incentive Plan ("ISIP"), 401(k) plans, the Infonet Supplemental Executive
Retirement Plan (the "ISERP"), bonus and incentive compensation plans, vacation
plans, etc. which the Executive or employees of the Company, and, in particular,
employees with senior management responsibility, are eligible for and entitled
to participate in, whether now in effect or added during the term of this
Agreement.
Section 5.3 Cause
- ----------- -----
"Cause" shall mean (i) the Executive's conviction of a felony or a
misdemeanor involving moral turpitude or (ii) the Executive's willful breach or
the habitual neglect of his duties under this Agreement which have a material
adverse impact on the financial condition of the Company; provided, however,
that the Company shall first have given the Executive written notice of the
alleged breach or areas of neglect and a reasonable opportunity to cure.
Section 5.4 Change in Control
- ----------- -----------------
A "Change in Control" shall be deemed to have occurred if (i) 20% or more
of the Company's outstanding securities as owned on January 1, 2000 are sold,
transferred or otherwise alienated; or (ii) after 20% or more of the Company's
outstanding securities as owned on October 19, 1994 are sold, transferred or
otherwise alienated as set forth in (i) above, any additional securities of the
Company or sold, transferred or otherwise alienated; or (iii) the Stockholders
of the Company approve a merger or consolidation of the Company with any other
corporation or entity regardless of which entity is the survivor, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or being converted into voting securities of the
5
<PAGE>
surviving entity) at least 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation; or (iv) the Stockholders of the Company approve a
plan of complete liquidation or winding-up of the Company or an agreement for
the sale or disposition by the Company of all or substantially all of the
Company's assets; or (v) if the director nominees of 3 members of the
Stockholders are not elected; or (vi) any event which the Board of Directors
determines should constitute a Change in Control.
Section 5.5 Disability
- ----------- ----------
"Disability" shall mean the Executive's absence from performance of his
assigned duties for the Company on a full-time basis for six consecutive
calendar months as a result of incapacity due to medically documented physical
or mental illness and which, in the opinion of the Executive's physician, makes
it impossible for the Executive to perform his duties and responsibilities under
this Agreement.
Section 5.6 Good Reason
- ----------- -----------
"Good Reason" shall mean the occurrence of any of the following events
without the Executive's express written consent:
(a) the assignment to the Executive of duties inconsistent with the
position and status of the Executive as set forth in Recital A, a substantial
alteration in the nature or status of the Executive's responsibilities (other
than any such alteration primarily attributable to a medical or physical
infirmity of the Executive which the Company has attempted to accommodate), or
(b) the failure to pay or a reduction by the Company in the Executive's
Base Salary as the same may be increased from time to time during the term of
this Agreement or the Company's failure to increase (within 12 months of the
Executive's last increase in Base Salary) the Executive's Base Salary in an
amount which at least equals, on a percentage basis, the average percentage
increase in Base Salary for all key management employees within the Company; or
(c) the elimination or reduction by the Company of any of the Benefits to
which the Executive is eligible for an entitled to participate in, whether now
in effect or added during the term of this Agreement or the failure of the
Company to provide the Executive with Benefits or facilities at least comparable
to those Benefits or facilities made available to other key management employees
within the Company; or
(d) a Change in Control; or
6
<PAGE>
(e) any purported termination of the employment of the Executive by the
Company which is not effected according to the requirements of this Agreement.
Section 5.7 Notice of Termination
- ----------- ---------------------
"Notice of Termination" shall mean a notice, in writing, to the Executive
from the Company or to the Company from the Executive, which states the decision
of the Company or the Executive to terminate the Executive's employment and
which (i) indicates the specific termination provision enumerated in this
Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances alleged to provide a basis for termination of the Executive's
employment by the Company or by the Executive and (iii) states the effective
date of the termination which shall not be less than thirty (30) days nor more
than sixty (60) days from the date of the Notice of Termination. Such notice
must be communicated to the Executive or to the Company in accordance with
Section 6.4 herein.
Section 5.8 Retirement
- ----------- ----------
"Retirement" shall mean termination of the Executive's employment on or
after the date on which the Executive attains an age and years of service which
entitles him to retire in accordance with any Retirement plan or program
provided by the Company or agreement entered into between the Executive and the
Company.
Section 5.9 Separation Payments
- ----------- -------------------
"Separation Payments" shall mean for the Executive: (i) the average annual
total monetary consideration received from the Company during the twelve (12)
month period immediately preceding the effective date of his termination or
resignation and (ii) the continuation of his Benefits.
ARTICLE VI
MISCELLANEOUS
-------------
Section 6.1 Action to Challenge or Enforce Agreement
- ----------- ----------------------------------------
Should either (i) the Company, its successors or assigns, or any person
acting on behalf of the Company seek to challenge this Agreement or any of its
terms in any action or legal proceeding or (ii) the Executive seek to enforce
this Agreement or any of its terms in any action or legal proceeding, the
Company shall reimburse the Executive for all costs and attorneys' fees incurred
in connection with any such action or proceeding.
7
<PAGE>
Section 6.2 Successors; Binding Agreement
- ----------- -----------------------------
The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place. The failure of
the Company to obtain such assumption agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the same
terms as the Executive would be entitled to hereunder if the Executive had
resigned his employment for Good Reason.
Section 6.3 Successors and Assigns
- ----------- ----------------------
This Agreement shall inure to the benefit of, and be enforceable by, the
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees of the Executive.
Section 6.4 Notice
- ----------- ------
Notices and all communications provided for in this Agreement shall be in
writing and shall be deemed to have been received when delivered or mailed by
United States registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth at the end of this Agreement,
provided that all notices to the Company shall be directed to the attention of
the President with a copy to the Secretary of the Company, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
receipt.
Section 6.5 Taxes
- ----------- -----
It is expressly understood and agreed by and between the Company and the
Executive that the Executive shall only be responsible for ordinary income taxes
should he receive payments under this Agreement. Any other excise taxes,
penalties, interest or other payments which the Executive may be required to pay
by any taxing authority shall be borne by the Company.
Section 6.6 No Waiver
- ----------- ---------
No provision of this Agreement may be modified, waived or discharged unless
in writing and signed by the Executive and such officer of the Company as may be
specifically designated or authorized by the Board of Directors or by a
Committee of the Board of Directors. No waiver by either party hereto at any
time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
8
<PAGE>
Section 6.7 Entire Agreement
- ----------- ----------------
This Agreement represents the sole and Entire Agreement among the parties
and supersedes all prior agreements, negotiations, and discussions between the
parties hereto and/or their representatives. Any amendment to this Agreement
must be in writing specifically referring to this Agreement and signed by duly
authorized representatives of all of the parties hereto.
Section 6.8 Controlling Law
- ----------- ---------------
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Delaware.
Section 6.9 Invalid Provision
- ----------- -----------------
The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
Section 6.10 No Attack on Agreement
- ------------ ----------------------
This Agreement shall not be subject to attack on the ground that any or all
of the legal theories or factual assumptions used for negotiating purposes are
for any reason inaccurate or inappropriate. The parties agree that the language
of this Agreement shall not be construed for or against any particular party.
Section 6.11 Confidentiality
- ------------ ---------------
The Executive agrees to keep confidential and not disclose any of the terms
of this Agreement to any person (including, but not limited to, any current or
former employees of the Company) other than his attorneys and/or tax advisors
unless required to do so by law.
Section 6.12 Counterparts
- ------------ ------------
This Agreement may be executed in several counterparts, each of which shall
be deemed to be an original, and all such counterparts together shall constitute
but one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth below.
INFONET SERVICES CORPORATION, Akbar H. Firdosy
a Delaware Corporation
By: _______________________________ ____________________________________
Jose A. Collazo, President
Address: Address:
Infonet Services Corporation Akbar H. Firdosy
2160 East Grand Avenue 1948 N. Onyx Drive
El Segundo, California 90245-1022 Walnut, California 91789
Date: _____________________________ Date: _____________________________
10
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<S> <C>
ESG Communications Inc. Delaware
IINS, Inc. Delaware
Infonet Broadband Services Corporation Delaware
Infonet USA Corporation Delaware
NetWorks Telephony Corporation Delaware
Infonet N.V./S.A. Belgium
Interpac Belgium S.A. Belgium
Infonet Software Solutions Canada
Infonet China Limited China
Infonet France S.A. France
Osiware International, S.A. France
Infonet Italia S.p.A. Italy
Interpac Luxembourg S.A. Luxembourg
Infonet Servicios de Communicaciones, S.A. de C.V. Mexico
Infonet Taiwan Taiwan
Infonet UK, Ltd. UK
IBSC Limited UK
</TABLE>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
33-88799 of Infonet Services Corporation of our report dated November 19, 1999
appearing in the Prospectus, which is a part of such Registration Statement,
and of our report dated November 19, 1999, relating to the financial statement
schedule appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
- ------------------------
Deloitte & Touche LLP
Los Angeles, California
November 23, 1999
<PAGE>
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Infonet Services Corporation
El Segundo, California
We have audited the consolidated financial statements of Infonet Services
Corporation and its subsidiaries as of March 31, 1998 and 1999, and for each of
the three years in the period ended March 31, 1999, and have issued our report
thereon dated June 14, 1999 (November 19, 1999 as to Note 16 and December ,
1999 as to the last paragraph of Note 17) (which expresses an unqualified
opinion and includes an explanatory paragraph related to the restatement of the
1998 and 1999 consolidated financial statements) included elsewhere in this
Registration Statement. Our audits also included the financial statements
schedule listed in Item 16 of this Registration Statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Los Angeles, California
June 14, 1999 (November 19, 1999 as to Note 16 and December , 1999 as to the
last paragraph of Note 17 included elsewhere in this Registration Statement)
The accompanying consolidated financial statements reflect the 29,900-
for-1 split of common stock which is to be effected on our about December 20,
1999. The above report is in the form which will be signed by Deloitte & Touche
LLP upon consummation of such stock split, which is described in the last
paragraph in Note 17 of Notes to Consolidated Financial Statements, and
assuming that from June 14, 1999 to the date of such stock split no other
events shall have occurred, other than those described in Note 17 of Notes to
Consolidated Financial Statements, that would affect the accompanying
consolidated financial statements and notes thereto.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Los Angeles, California
November 19, 1999
