THIS DOCUMENT IS A COPY OF THE FORM 10-KSB FILED ON MARCH 31, 1998 PERUANT TO A
RULE 201 TEMPORARY HARDSHIP EXEMPTION.
EDGAR ONLY TABLE:
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to ____________
Commission file number 0-20843
CHARTER COMMUNICATIONS
INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 84-1097751
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2839 PACES FERRY ROAD
ATLANTA, GEORGIA 30339
(Address of Principal Executive Offices) (Zip Code)
770-468-6800
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.00001 PAR VALUE
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No .
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB ____.
State issuer's revenues for its most recent fiscal year: $12,951,422
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
The aggregate market value of such stock on March 27, 1998, based on the
average of the bid and asked prices on that date was $30,495,583.
The number of shares of the issuer's common stock outstanding on March 27,
1998 was 43,134,776.
PART I
FORWARD-LOOKING STATEMENTS. This report on Form 10-KSB contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ from those projected in any
forward-looking statements for the reasons detailed in the "Risk Factors" below
as well as in other sections of this report on Form 10-KSB. The forward-looking
statements contained herein are made as of the date of this report and the
Company assumes no obligation to update such forward-looking statements, or to
update the reasons why actual results could differ from those projected in such
forward-looking statements. Investors should consult the Risk Factors and the
other information set forth from time to time in the Company's reports on Forms
10-Q, 8-K, 10-KSB and Annual Report to Stockholders.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Charter Communications International, Inc. (the "Company"), and its
subsidiaries provide enhanced telecommunications products and services,
including international private line telecommunications services, switched voice
and data products, Internet access, enhanced calling cards and telecommuting
services, both domestically and internationally. The Company's primary
international focus is in North, Central and South America. The Company
believes that the 1996 acquisitions, as outlined below, have combined companies
with complementary technology, products and services. These capabilities, now
integrated, combine to deliver a unique "solutions oriented" product set that
the Company provides to businesses in its target markets. Additional
information on the products and services offered by the Company and its
subsidiaries is set forth below.
HISTORY OF THE COMPANY
The Company was incorporated in Nevada on April 10, 1996, as a wholly owned
subsidiary of Maui Capital Corporation, a Colorado Corporation ("Maui Capital").
On April 21, 1996, Maui Capital and the Company merged with the Company being
the surviving corporation and succeeding to all the business, properties, assets
and liabilities of Maui Capital. The effect of the merger of Maui Capital and
the Company was to change the name of the corporation and the state of its
incorporation.
Maui Capital had no material assets or liabilities prior to September 1995,
when it acquired a Nevada corporation, now called Tops Corporation ("Tops"), in
exchange for the issuace of 5,798,391 shares of common stock, 550 shares of
Series A Preferred Stock, and warrants to purchase 854,231 shares of common
stock. At the time of the acquisition, Tops was engaged, through its
subsidiary, Charter Communicaciones Internacionales Grupo, S.A., a Panama
corporation ("Charter Panama"), in developing a private line telecommunications
system in Panama and pursuing licenses to provide such services in various other
Latin American countries.
In January 1996, the Company acquired Phoenix DataNet, Inc., a Texas
corporation ("PDN"), in exchange for $525,000 cash and 150,000 shares of Common
Stock. PDN provides Internet access and a full range of Internet services to
individual and commercial subscribers, predominately in the Houston, Texas area.
In March 1996, the Company acquired Phoenix Data Systems, Inc., a Texas
corporation ("PDS"), in exchange for 1,000,000 shares of Common Stock. PDS was
in the business of designing, installing, modifying and managing computer
networks. During 1997, the Company decided to exit the network integration
business and the net assets of PDS, including the remaining identifiable
intangible assets and goodwill, were written off and included in the Company's
Statement of Operations as part of the nonrecurring charge to operating income.
In September 1996, the Company acquired Overlook Communications
International Corporation, a North Carolina corporation ("OCI"), in exchange for
8,999,960 shares of Common Stock. OCI is in the business of reselling
long-distance services, providing interactive voice response services and
selling prepaid and post-paid calling cards.
In October 1996, the Company acquired WorldLink Communications, Inc., a
Georgia corporation ("Worldlink"), in exchange for 1,850,000 shares of Common
Stock. WorldLink is in the business of reselling long-distance services and
selling prepaid and post-paid calling cards.
The Company's principal office is located at 2839 Paces Ferry Road,
Atlanta, Georgia, 30339, and its telephone number at such address is (770)
432-6800.
MISSION
The Company's mission is to deliver superior telecommunications value
through innovative implementation of voice, data, video and Internet
technologies. This mission is accomplished by focusing on customer's needs and
implementing appropriate technologies to deliver solutions to those needs. The
Company provides or intends to provide these solutions throughout the Americas.
PRODUCTS AND SERVICES
Calling Card Products. The Company has used its technological capabilities
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to develop a set of consumer calling card products which include pre-paid and
post-paid calling cards, pre-paid Internet access cards and enhanced and
promotional services cards. The primary target market is the US Hispanic
population which, internal market studies have shown, is one of the largest
segments of the pre-paid calling card market. However, cards are also marketed
to other market segments in both the US and Latin America. By leveraging its
relationship with certain Latin American carriers, the Company is able to
provide calling cards with originating access from certain Latin American
countries, as well as the US. Calling card products are sold through a network
of distributors located throughout the US and in Latin America. During 1998,
the Company added an enhanced self-contained calling card platform to its
network in order to provide additional capacity, speed and reliability. Also
during 1998, the Company has formed strategic alliances with certain facilities
based carriers in Colorodo, Florida and California in order to expand its
network and product offerings.
International Private Line (IPL) Services. The Company currently provides
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or can provide IPL services in Mexico, Panama, Venezuela, El Salvador, Honduras
and Costa Rica. The Company also has obtained licenses to provide such services
and is in the process of constructing, or intends to construct in the near
future, the facilities to provide such services in Guatemala, Nicaragua, and
Peru. The Company's licenses for IPL services are either "on premise" or
country "gateway" stations and are composed of a satellite earth station located
in the service area and an earth station located in the U.S. Earth stations may
be located directly on customer premises or at local telephone company
facilities (with users connected to the earth station via local lines). In
instances where the local telephone company does not have the capability to
provide this local "loop," the Company can provide wireless terrestrial systems
to connect to the earth station and will lease this service to the customer on a
monthly basis in cooperation with the local telephone company.
Internet Services. The Company provides a complete array of Internet
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services including dedicated and dial-up Internet access, virtual web hosting,
web page development, e-mail, web commerce, database management and remote
Internet access. The Company focuses on providing defined Internet applications
to businesses instead of simply selling the underlying component services. When
applicable, the Company's Internet Solutions are enhanced through the addition
of telephony applications such as Integrated Voice Response (IVR), call center
services, and 800 services.
Telecommuting Services. The Company can provide complete solutions to
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telecommuting/outsourcing needs. Telecommuting traditionally requires advanced
integration of telephony and data services. Most businesses that have employed
telecommuting have discovered that there is an array of maintenance, human
resource and management issues involved in supporting the program. The Company
offers complete turnkey services that include the technical and non-technical
aspects of telecommuting in a single program. The Company has demonstrated its
ability to successfully implement telecommuting programs with Fortune 500 firms
and strongly believes that these services will become increasingly important.
Dedicated Switched Voice Services. During 1997, the Company provided
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dedicated switched voice services to certain customers. During 1998, in
addition to expanding its switched voice services, the Company intends to expand
into the carrier terminating business. The Company will leverage its
relationships and its network in Central and South America to provide high
quality, cost competitive services. These services will take advantage of the
Company's expanded network and capacity primarily into Mexico, Costa Rica, El
Salvador, Honduras and Panama.
SALES, MARKETING AND DISTRIBUTION
The Company has three general market categories - major accounts, general
business and consumer business and has developed and implemented specific
strategies to address each market category.
"Major Accounts" are mid to large businesses, often national or
international in scope, and marketing will be by an internal direct sales
organization located in six major metropolitan markets in the US (Atlanta,
Houston, New York, Chicago, Los Angeles, Dallas and Washington, D.C.), as well
as various Central and South American cities.
"General Business" consists of small businesses and marketing will be by a
local sales organization using traditional advertising (radio, print) to
generate consumer awareness. Today, General Business is only pursued in
Atlanta, Houston and certain international markets (see International Strategy).
"Consumer Business" is retail consumer sales and is marketed by
distributors or private branding. Existing distributor networks or large
consumer products companies are identified which can support the distribution of
the Company's products. The products are then sold through these networks to
consumers. The distributor largely dictates the promotional and sales efforts.
The Company supports such efforts with point of sale materials.
The Company is strategically positioned to address the markets for its
products with both direct and distributor based sales organizations. The
Company believes it has a competitive advantage created by its open architecture
product platform and infrastructure, which supports the quick development and
introduction of new and enhanced product offerings.
INTERNATIONAL STRATEGY
The Company believes that many Latin American countries have
telecommunication infrastructure inadequacies and, as a result, offer the
opportunity for the Company to establish and deliver a superior quality
telecommunication alternative. The Company's international telecommunications
goal is to become the preferred International Private Line (IPL) and Internet
carrier in Latin America by focusing on:
Developing systems in areas where telephone facilities are insufficient.
The Company intends to focus on developing and acquiring licenses in markets
where the populations are greatest and economic/political conditions are
conducive to the economical transmission of private satellite signals.
Typically, Latin American governments will only allow the "privatization" of
PTT's (Postal, Telephone and Telegraph companys), where it is perceived that
additional facilities to serve the business community are needed.
Developing a partnership with the proper government agency or telephone
company authority. In most Latin American countries, the PTT or an equivalent
administrative system exercises near total control of communications and
communications related activities and makes substantially all decisions relating
to the provision of telecommunication services. To be successful, the Company
must obtain the agreement of the proper authorities and be licensed to offer
private international services.
Maintaining a low cost structure to provide customers international
services at affordable prices. For those countries which have inadequate access
to sub-oceanic fiber optic cables, the Company believes that communication via
satellite is the most economical technology currently available for
international telecommunication services.
Making a commitment to system performance and customer service. The
Company intends to differentiate itself from competitors by maintaining high
levels of system performance and customer service and believes that its
responsiveness will minimize customer turnover and provide it with a competitive
advantage.
Adapting to new technologies such as digital compression and other network
management systems. The Company believes its deployed international network
will have the flexibility to adapt to new technologies, such as digital
compression and DAMA (Demand Assigned, Multiple Access) space segment management
systems, while continuing to maintain its competitive economic advantage.
As the Company constructs telecommunications facilities in appropriate
international markets, a local sales and support organization is established in
the local market to sell directly to local customers. When appropriate this
organization will jointly market to international organizations with the U.S.
sales organization.
INTERNATIONAL LICENSES
In most foreign countries in which the Company operates, telecommunications
licenses must be held by a corporation organized under the laws of that country.
In Panama, Venezuela, Mexico, Honduras, and Costa Rica, the Company has created
a corporation in each such country, obtained appropriate licenses with the
assistance of local partners and obtained a majority ownership position in
exchange for the capital required to build out the system. The Company intends
to operate only in Latin American countries where foreign majority ownership of
the license-holding corporation is permitted.
In the case of Venezuela, the Company owns seventy-eight percent of the
local corporation. The remaining twenty-two percent of the stock of the
Venezuelan corporation is convertible into stock of the Company according to a
formula which provides that the Company will issue a number of shares of common
stock based upon certain defined performance threshholds which the Venezuelan
entity must meet.
The Company has been successful in negotiating and consummating the license
agreements described below in Central and South America.
PANAMA. Satellite license granted December, 1995 as a joint venture with
INTEL (defined below). The Company is authorized to provide international
carrier voice and data via the Solidaridad Satellite system. The Company was
granted a separate license in December, 1995 by INTEL to provide Internet
services retail and wholesale within Panama. These satellite licenses permit
the Company to provide "other communications services" which may be agreed on by
the parties.
HONDURAS. Communications license to provide "on premise" authorized earth
stations, issued December 5, 1995 by HONDUTEL for private line and data
services. Pending final approval before year end, the Company has requested a
license to establish teleports for multiple users.
EL SALVADOR. Satellite license issued by ANATEL July 10, 1996 to provide
"on premise" private satellite earth stations using the Solidaridad Satellite
system.
GUATEMALA. The Company has secured two licenses. The first, issued by
GUATEL August 12, 1996 approves the Company to provide Internet services. The
second approved license is to provide satellite and teleport operations
effective February 1, 1997.
COSTA RICA. The Company has secured licenses to establish and operate "on
premise" private satellite earth stations from both RACSA and ICE of Costa Rica.
In January 98, an additional license to establish teleport services was issued
by RACSA.
NICARAGUA. The Company has secured licenses to provide internet and
teleport services in Nicaragua.
MEXICO. The Company signed agreements with TELECOMM de Mexico on July 15,
1995 which permit it to provide satellite services within Mexico and for
complete use of the Mexican Solidaridad satellite system. In January, 1998,
the Company was issued a value added Communications Services licnese by Telecom
de Mexico.
VENEZUELA. The Company was fully authorized by CONATEL on April 18, 1996 to
provide voice, data, and video point to point and point to multipoint services
throughout Venezuela and internationally. The Company also received a
concession from CONATEL on July 19, 1996 to offer domestic and international
access to databases for offering enhanced services such as Internet services,
E-Mail, etc.
PERU. The Company has received a license from Telefonica de Espana on
October 17, 1996 to provide satellite communications and from OSIPTEL October
17, 1996 to provide Internet services.
The Company is actively pursuing expanded licensing authority in the
countries mentioned above and has licensees and concessions pending with several
additional foreign governments. Additionally, on April 24, 1995, the Company
was licensed by the United States Federal Communication Commission as an
international facilities based carrier.
PANAMA AGREEMENT. The Company has an agreement (the "Intel Agreement")
with Instituto Nacional de Telecomunicaciones de Panama ("Intel"), the national
telephone company of the Republic of Panama, pursuant to which it has
constructed a digital teleport to provide IPL services for Panamanian customers.
The Company invoices and collects revenues from customers at predetermined
tariff rates for the services provided and distributes one-half of its gross IPL
revenues to Intel.
The initial term of the Intel Agreement is five years from the date service
began for the first customer (January 8, 1996), and will automatically renew for
subsequent one year terms unless terminated in writing twelve months prior to
the expiration of the current term. The Intel Agreement may be terminated prior
to the end of the initial term due to insufficient utilization, failure to
perform or comply with the terms of such agreement, and upon other usual and
customary conditions. In the event of termination, Intel has the option to
purchase the satellite hub facility from the Company based on a value determined
by two appraisers, one each being appointed by Intel and the Company. The
option price arrived at by the appraisers is to be determined based on the
following factors: the cost of replacement equipment; gross revenue for the
previous three years; total of the system's current customers; and the net book
value of the facility.
VENEZUELAN AGREEMENT. The Company has an agreement with Commision Nacional
de Telecomunicaciones ("Contel") pursuant to which it has constructed a digital
teleport to provide IPL services for Venezuelan customers. The term of the
contract is for 10 years from March 28, 1997 with a possible extension for an
additional term of 10 years. The Conatel Agreement may be terminated prior to
the end of the initial term for noncompliance with its provisions. In the event
the Agreement is terminated for any reason, all real estate and equipment may
become the property of Conatel upon the payment to the Company of the value
determined by an independent and expert appraiser selected by mutual agreement
of the parties, which amount must be paid within 1 year of the date of such
valuation. Pursuant to the license, the Company pays Conatel on an annual basis
the equivalent of 1/2 of 1% of gross invoicing for the services provided under
the Agreement.
HONDURAN AGREEMENT. The Company has an agreement with Honduran
Telecommunications Company ("HONDUTEL") pursuant to which it provides IPL
services in Honduras. The term of the contract is 5 years running from December
5, 1996, and may be extended for subsequent periods of 1 year. The contract may
be terminated for failure of the parties to abide by the terms of the contract
and a variety of other usual and customary conditions. Payments under the
agreement are graduated depending upon transmission velocity and commitments for
capacity.
COSTA RICA AGREEMENT. The Company has an agreement with Instituto
Costarricense de Electricidad (ICE) and Radiografica Costarricense S.A. (RACSA)
for private satellite stations. The agreements are for five years and renewable
subject to legal performance. The Company is obligated to pay Costa Rican
tariff for satellite services but a discounted tariff is provided for when the
satellite station is provided by the Company. In January, the Company reached
agreement with RACSA for teleport services which will avoid the cost of single
user private satellite stations. The Company will begin operations of its first
teleport in April 98 and has been operating private stations since August 97.
NICARAGUAN AGREEMENT. The Company has an agreement with the Nicaraguan
Government for teleports. This agreement provides the Company the right to sell
dedicated international private lines. The Company has also agreed to an
international switched voice agreement. A teleport is under construction and
will become operational in April 98.
NETWORK FACILITIES
Historically, telecommunications networks were implemented in a closed
environment using proprietary hardware and software. These "legacy" systems
were not designed for the rapid deployment of enhanced services, the support of
heterogeneous network elements or adaptation to changing service provider and
subscriber requirements. The Company's platform has been assembled with
flexibility, reliability, and scale-ability as the basis for all development. It
is based on central office technology interfacing in a client/server-based
environment. The Company believes that it is this architecture matched with an
equally flexible development organization, which is expected to give the Company
a competitive advantage.
INTERNET NETWORK
The Company's network has been designed for reliability, high speed,
efficient routing and low latency. The Company currently supports 6 Internet
access points of presence (POPs) in the United States and four in Latin America.
Each POP is located in secured facilities or computer rooms that have 7x24
secured access. Each POP has high performance Cisco or Xyplex routers with
multiple redundant Unix based servers on an FDDI ring. Dial in access
facilities are provided via fully managed Motorola modems. Each facility is
backed up by UPS, Uninterupted Power Supply, backup generators, and dual
entrance fiber facilities when available.
SATELLITE NETWORK
The Company's satellite network is comprised of a series of large
mutli-user fixed satellite ground stations as well as a number of smaller single
user on-premise satellite ground stations.
The Houston facility acts as the primary network control center. The
Houston facility is outfitted with two satellite ground stations designed to
support C-band communication links between Central/South America and the United
States and a Ku-band ground earth station used to carry services from the United
States to Mexico. The system has been sized with growth in mind and can easily
be expanded should growth surpass Company projections.
The Company uses Metropolitan Fiber Systems ("MFS"), Cable & Wireless, Bell
South and Southwestern Bell, on an as needed basis, to accommodate extension of
its satellite based service to any office site customer facilities. Use of these
providers permits the Company to be an "On Net" facility able to offer
competitive terrestrial connections to its US customer base.
All of the Company's satellite services are carried over the Solidaridad
satellite system. The Solidaridad system is a Mexican owned and operated
satellite system that offers a broad coverage area from the US to Agrentina that
supports the Company's stated mission, of servicing the Central/South American
community with first class communications services. Through the Company's
agreements with the Mexican government it can offer space segment to support
services via Solidaridad 1 or 2 to any locations covered by either of these
satellites.
TELEPORT SERVICES
The Company operates teleports in Panama, Venezuela and the United States.
Teleports are under construction in Colon, Panama, San Jose, Costa Rica and
Mananagua, Nicaragua. All will become operational during April 98. During 1998
the Company anticipates additional teleports wil be constructed in El Salvador,
Mexico, Honduras, Venezuela and Columbia. However, construction will begin only
if and when adequate capital sources have been arranged.
The teleports are capable of prividing international satellite services
within Latin America, the Carribean and the United States.
The teleports also provide the Company with the ability to provide high
quality internet services.
ENHANCED VOICE FACILITIES
The Company's enhanced voice services are provided via dual Summa 4
switches driven by Unix host integrated with a SQL server backend. IVR,
Intractive Voice Response, capability is provided using Dialogic technology and
again supported with a SQL backend. These technologies are integrated with the
Company's Internet capability through a combination of dedicated point-to-point
and co-located facilities.
The Company recently added an enhanced self contained calling card platform
to its network, which provides additional capacity, speed and reliability.
COMPETITION
The Company operates in extremely competitive service and geographical
markets which are influenced significantly by larger industry participants and
are expected to become more competitive in the future. There are no substantial
barriers to the entry of additional participants into any of the services in
which the Company competes in the US. In general, provision of service in
Central and South America requires a license from the local PTT.
TELECOMMUNICATIONS
The Company is seeking international telecommunications licenses in various
foreign countries. The Company faces competition for such licenses from major
international telecommunications entities as well as from local competitors in
each country. If a communications license is obtained, the Company's
international telecommunications operations will face competition from existing
government owned or monopolistic telephone service companies, and from other
operators who receive licenses. The Company may also face significant potential
competition from other communication technologies that are being or may be
developed or perfected in the future. Some of the Company's competitors have
substantially greater financial, marketing, and technical resources than does
the Company. Accordingly, there can be no assurance that the Company will be
able to obtain any additional licenses or that its international
telecommunication operations will be able to compete effectively.
The Company competes with (i) IXCs engaged in the provision of
long-distance access and other long-distance resellers and providers, including
large U.S. carriers, (ii) foreign PTTs, (iii) other marketers of international
long-distance and call reorigination services, (iv) wholesale providers of
international long distance services, (v) alliances for providing wholesale
carrier services, (vi) new entrants to the long distance market such as the
regional telephone operations companies (RBOCs) in the United States, who have
entered or have announced plans to enter the U.S. interstate long-distance
market pursuant to recent legislation authorizing such entry, and utilities, and
(vii) small resellers and facility-based IXCs. Many of the Company's
competitors are significantly larger and have substantially greater market
presence and financial, technical, operational, marketing and other resources
and experience than the Company.
Because of their close ties to their national regulatory authorities,
foreign PTTs and newly-privatized successors thereto can influence their
national regulatory authorities to the detriment of the Company. With the
increasing privatization of international telecommunications in foreign
countries, it is also possible that new foreign service providers, with close
ties to their national regulatory authorities and customer bases, will enter
into competition with the Company, or that PTTs will become deregulated and gain
the pricing flexibility to compete more effectively with the Company. The
ability of a deregulated PTT to compete on the basis of greater size and
resources and long-standing relationships with customers in its own country
could have a material adverse effect on the Company's business, financial
condition or results of operations.
The large U.S. long-distance carriers have, in the past, been reluctant to
compete directly with the PTTs. However, there can be no assurance that other
large carriers will not begin to compete in the industry. Because of their
ability to compete on the basis of superior financial and technical resources,
the entry of any large U.S. long-distance carrier into the business could have a
material adverse effect on the Company's business, financial condition or
results of operations.
Competition for customers in the Company's telecommunication markets is
primarily on the basis of price and, to a lesser extent, on the basis of the
type and quality of service offered. Increased competition could force the
Company to reduce its prices and profit margins if the Company's competitors are
able to procure rates or enter into service agreements comparable to or better
than those the Company obtains, or to offer other incentives to existing and
potential customers. Similarly, the Company has no control over the prices set
by its competitors in the long-distance resale carrier-to-carrier market. The
Company could also face significant pricing pressure if it experiences a
decrease in its market share of international long-distance traffic, as the
Company's ability to obtain favorable rates and tariffs depends, in large part,
on the volume of international long-distance call traffic the Company can
generate for third-party IXCs. There is no guarantee that the Company will be
able to maintain the volume of domestic and international long distance traffic
necessary to obtain favorable rates and tariffs. In addition, the Company is
aware that its ability to market its carrier services depends upon the existence
of spreads between the rates offered by the Company and those offered by the
IXCs with whom it competes as well as those from whom it obtains service. A
decrease in such spreads could have a material adverse effect on the Company's
business, financial condition or results of operations.
INTERNET ACCESS
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, operational, marketing and other resources and experience than the
Company. The Company's Internet access business competes or expects to compete
directly or indirectly with the following categories of companies: (i) other
national and regional commercial Internet access providers; (ii) established
on-line services companies that offer Internet access; (iii) software and
technology companies; (iv) national long-distance telecommunications carriers;
(v) RBOCs; (vi) cable television operators; (vii) nonprofit or educational
Internet service providers; and (viii) newly licensed providers of
spectrum-based wireless data services.
Many of the established on-line services companies and telecommunications
companies have begun to offer or announced plans to offer expanded Internet
access services. The Company expects that all of the major on-line services
companies will eventually compete fully in the Internet access market. In
addition, the Company believes that new competitors, including large computer
hardware and software, cable, media, wireless, and wireline telecommunications
companies such as the RBOCs, will enter the Internet access market, resulting in
even greater competition for the Company. The ability of these competitors or
others to bundle services and products not offered by the Company with Internet
access services could place the Company at a significant competitive
disadvantage. In addition, certain of the Company's competitors that are
telecommunications companies may be able to offer customers reduced
communications charges in connection with their Internet access services or
other incentives, reducing the overall cost of their Internet access solution
and increasing price pressures on the Company. This price competition could
reduce the average selling price of the Company's services. In addition,
increased competition for new subscribers could result in increased sales and
marketing expenses and related subscriber acquisition costs, which could
materially adversely affect the Company's profitability. There can be no
assurance that the Company will be able to offset the effects of any such price
reductions or incentives with an increase in the number of its customers, higher
revenue from enhanced services, cost reductions or otherwise.
Competition is also expected to increase in overseas markets, where
Internet access services are just beginning to be introduced. There can be no
assurance that the Company will be able to increase its presence in the overseas
markets it presently serves, or to enter other overseas markets. There can be no
assurance that the Company will be able to obtain the capital required to
finance such continued expansion. In addition, there can be no assurance that
the Company will be able to obtain the permits and operating licenses required
for it to operate, hire and train employees or market, sell and deliver services
in foreign countries. Further, entry into foreign markets will result in
competition from companies that may have long-standing relationships with or
possess a better understanding of their local markets, regulatory authorities,
customers and suppliers. There can be no assurance that the Company can obtain
similar levels of local knowledge, and failure to obtain that knowledge could
place the Company at a serious competitive disadvantage. To the extent the
ability to provide access to locations and services overseas becomes a
competitive advantage in the Internet access industry, failure of the Company to
penetrate overseas markets or to increase its presence in the overseas markets
it presently serves may result in the Company being at a competitive
disadvantage relative to other Internet access providers.
The Company believes that its ability to compete successfully in the
Internet access market depends upon a number of factors, including: market
presence; the adequacy of the Company's customer support services; the capacity,
reliability and security of its network infrastructure; the ease of access to
and navigation of the Internet; the pricing policies of its competitors and
suppliers; regulatory price requirements for interconnection to and use of
existing local exchange networks by Internet services; the timing of
introductions of new products and services by the Company and its competitors;
the Company's ability to support existing and emerging industry standards; and
trends within the industry as well as the general economy. There can be no
assurance that the Company will have the financial resources, technical
expertise or marketing and support capabilities to continue to compete
successfully in the Internet access market.
REGULATION
TELECOMMUNICATIONS
While the domestic interstate long-distance business is generally not
subject to substantial regulation, domestic intrastate service is subject to
regulation that varies by state and can be substantial. The international long-
distance business is subject to the jurisdiction of the FCC at the US end and
at the foreign end foreign governments, some of which limit or prohibit the
Company's services. Local laws and regulations differ significantly among the
foreign jurisdictions in which the Company operates, and the interpretation and
enforcement of such laws and regulations vary and are often based on the
informal views of the local government ministries which, in some cases, are
subject to influence by the local PTTs. Accordingly, in certain of the Company's
principal existing and target markets, there are laws and regulations that
either prohibit or limit, or could be used to prohibit or limit, certain
services the Company markets. The Company intends to provide its services to the
maximum extent it believes permissible under applicable local laws and
regulations and the licenses it has obtained. There can be no assurance that a
portion of the services the Company markets and provides will not be or will not
continue to be prohibited in certain jurisdictions.
There can be no assurance that the Company has accurately predicted or will
accurately predict the interpretation of applicable laws and regulations or
regulatory and enforcement trends in state, federal and foreign jurisdictions or
will be found to be in compliance with all such laws and regulations. Failure
to predict accurately the enforcement of applicable laws and regulations in
particular jurisdictions, or incorrect interpretation of applicable laws and
regulations, could cause the Company to lose, or be unable to obtain, regulatory
approvals necessary for it to be able to provide certain of its services in such
jurisdictions or to use certain of its transmission methods and could have
monetary penalties imposed against the Company that could be significant.
The Telecommunications Act of 1996 (the "1996 Telecommunications Act")
substantially alters the regulatory framework for the telecommunications
industry for domestic and international telecommunications services. The
Company cannot predict the ultimate effects of this legislation or the outcome
of the FCC rulemakings required by the 1996 Telecommunications Act. The
legislation does not impose substantial regulatory burdens on the Company's
international long-distance, Internet access or domestic interstate
telecommunications operations. However, depending on the outcome of FCC
rulemakings required by the 1996 Telecommunications Act, the Company will be
subjected to additional regulatory requirements, including that it contribute
some portion of its telecommunications revenues to subsidy mechanisms for
universal service. In addition, the legislation could result in increased
competition and affect interconnections and costs. Although the Company does
not believe that these changes will have a material effect on its business, no
assurance can be given at this time regarding the extent or impact of such
changes.
The regulatory framework in certain geographic regions in which the Company
operates is briefly discussed below.
UNITED STATES
The Company provides both telecommunications and information services. The
terms and conditions under which the Company provides its services are
potentially subject to regulation by the state and federal government agencies.
With regard to the Company's domestic telecommunications services, federal laws
and FCC regulations generally apply to interstate telecommunications, while
state regulatory authorities generally have jurisdiction over telecommunications
that originate and terminate within the same state.
The Telecommunications Act of 1996, will allow local exchange carriers,
including RBOC's, to provide inter-LATA long distance service and also grants
the FCC the authority to deregulate other aspects of the telecommunications
industry. The Company is classified by the FCC as a non-dominant carrier for
its common carrier telecommunications services. The Company has applied for and
received all necessary authority from the FCC to provide international
telecommunications service. The FCC reserves the right to condition, modify, or
revoke such international authority for violations of the Federal Communications
Act or the FCC's rules and policies.
The FCC and the state commissions have jurisdiction to act upon complaints
against any common carrier for failure to comply with its statutory obligations.
If the FCC or state regulators find that the Company was engaging in activities
that required authorizations which the Company currently does not hold or
violated the regulatory requirements established by the relevant commissions,
the FCC or state regulators could impose financial penalties and order the
Company to comply with the applicable regulations or cease doing business. Such
penalties or action could have a material adverse effect on the Company's
business, financial condition or results of operations.
As a telecommunications carrier, the Company will be required to
contribute to universal service funds established by the FCC, the states or
both. Federal contribution factors have been established by the FCC and have
become effective. Federal universal service requirements are now under review by
both Congress and appellate court. Whether the Company's universal service
contributions can be passed on to customers depends upon the competitive carrier
market and potential FCC regulation. Certain states are in the porcess of
determining what universal service contribution requirements to adopt and others
have already made such determinations. Current proposals to change the universal
service support system do not entail the imposition of universalservices fees on
enhanced service providers. However, there can be no guaranteethat such fees
will not be assessed in the future. Similarly, individual statesmay determine
that enhanced services providers should be required to contributeto state
universal service funding mechanisms.
Moreover, information service providers traditionally have been treated by
the FCC as providing an "enhanced" computer processing service rather than a
"basic" telecommunications transmission service and, as a result, were thought
to be beyond the FCC's regulatory authority. A large portion of the Company's
business involves such unregulated enhanced services. Although the 1996 Act
continues to distinguish between unregulated information or enhanced and
regulated telecommunications or basic services, the changes made by the 1996 Act
may have important implications for the providers of unregulated enhanced
services.
The intrastate long distance telecommunications operations continue to be
subject to various state laws and regulations, including prior certification,
notification and registration requirements. In certain states, prior regulatory
approval may be required for changes in control of telecommunications
operations. The Company is currently subject to varying levels of regulation in
the states in which it provides "1+" and card services (which are both generally
considered "1+" services by the states). The vast majority of states require the
Company to apply for certification to provide telecommunications services, or at
least register or to be found exempt from regulation, before commencing
intrastate service. The vast majority of the states require the Company to file
and maintain detailed tariffs listing rates for intrastate service. Many states
also impose various reporting requirements and/or require prior approval for
transfers of control of certified carriers, assignments of carrier assets,
including customer bases, carrier stock offerings and incurrence by carriers by
significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and/or the rules regulations
and policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state, may be imposed for such violations.
The Company has made the filings and taken the actions it believes are
necessary to become certified or tariffed to provide intrastate long distance
and card services to customers throughout the United States except for Hawaii
and Alaska. The Company has received authorization to provide intrastate long
distance and card services in 46 states and the District of Columbia.
The Company uses LEC, Local Exchange Carrier, networks to connect its
Internet customers to its POPs. Under current federal and state regulations, the
Company and its Internet customers pay no charges for this use of the LECs'
networks other than the flat-rate, monthly service charges that apply to basic
telephone service. The LECs have asked the FCC to change its rules and require
Internet access providers to pay additional, per minute charges for their use of
local networks. Per minute access charges could significantly increase the
Company's cost of doing business and could, therefore, have a material adverse
effect on the Company's business, financial condition or results of operations.
The FCC is currently considering whether to propose such rule changes.
OTHER OVERSEAS MARKETS
The Company is subject to the regulatory regimes in each of the countries
in which it conducts business. Local regulations range from permissive to
restrictive, depending upon the country. In general, provision of
telecommunications services in these countries is permitted only through
obtaining proper licesure and service is limited to that specifically provided
for within the license. The World Trade Organization Basic Telecommunications
Agreement ("WTO Agreement"), which became effective in February 1998, is
intended to open foreign telecommunications markets of signatory countries. The
Company cannot predict whether or how the WTO Agreement will be implemented by
foreign governments.
INTERNET
Data network access providers are generally not regulated under the laws
and regulations governing the telecommunications industry. Accordingly, except
for regulations governing the ability of the Company to disclose the contents of
communications by its customers, no state or federal regulations currently
exists pertaining to the pricing, service characteristics or capabilities,
geographic distribution or quality control features of Internet access services.
The Company cannot predict the impact that future regulation or regulatory
changes, if any, may have on its Internet access business.
The 1996 Telecommunications Act imposes criminal liability on persons
sending or displaying in a manner available to minors indecent material on an
interactive computer service such as the Internet. The 1996 Telecommunications
Act also imposes criminal liability on an entity knowingly permitting facilities
under its control to be used for such activities. Entities solely providing
access to facilities not under their control are exempted from liability, as are
service providers that take good faith, reasonable, effective and appropriate
actions to restrict access by minors to the prohibited communications. The
constitutionality of these provisions has been successfully challenged in lower
federal courts and is now before the U.S. Supreme Court; the final
interpretation and enforcement of these provisions is uncertain. The Act may
decrease demand for Internet access, chill the development of Internet content,
or have other adverse effects on Internet access providers such as the Company.
In addition, in light of the uncertainty attached to interpretation and
application of this law, there can be no assurances that the Company would not
have to modify its operations to comply with the statute, including prohibiting
users from maintaining home pages on the WWW.
EMPLOYEES
As of March 31, 1998, the Company had 127 full-time employees and 14 part-
time employees. None of the Company's employees is represented by a labor union
or covered by a collective bargaining agreement and the Company has never
experienced a work stoppage. The Company believes that its relations with its
employees are good.
RISK FACTORS
Limited Operating History; Operating Losses. The Company has only a
-----------------------------------------------
limited history upon which an evaluation of it and its prospects can be based.
Although the Company has experienced substantial revenue growth since the
inception of its business in April 1995, it has incurred losses totaling
approximately $21,605,578 as of December 31, 1997. As of December 31, 1997, the
Company had stockholder's equity of $14,376,403. The Company expects that it
will continue to incur net losses at least through the end of the second quarter
of 1998. There can be no assurance that revenue growth will continue or that
the Company will in the future achieve or sustain profitability on either a
quarterly or annual basis.
The Company may implement its strategy to grow its customer and subscriber
bases through methods that may result in increases in costs as a percentage of
revenues, such as expansions of its promotional programs and implementation of
new pricing programs. In addition, an acceleration in the growth of the
Company's subscriber and customer bases or changes in usage patterns among
subscribers may also increase costs as a percentage of revenues. Consequently,
there can be no assurance that the Company's operating margins will not be
adversely affected in the future by these strategies or events.
Need for Additional Capital to Finance Growth and Capital Requirements.
--------------------------------------------------------------------------
The Company must continue to enhance and expand its network in order to maintain
its competitive position and continue to meet the increasing demands for service
quality, availability and competitive pricing. The Company's ability to grow
depends, in part, on its ability to expand its operations through the
establishment of new POP's and earth stations, each of which requires
significant advance capital equipment expenditures as well as advance
expenditures and commitments for leased telephone company facilities and
circuits and advertising. The Company will need to raise additional capital
from equity or debt sources to fund its anticipated development. There can be
no assurance that the Company will be able to raise such capital on favorable
terms or at all. If the Company is unable to obtain such additional capital,
the Company may be required to reduce the scope of its anticipated expansion,
which could have a material adverse effect on the Company's business, financial
condition or results of operations and its ability to compete.
Risks of Growth and Expansion. The number of the Company's employees has
-------------------------------
grown rapidly and several members of the Company's current management team have
joined the Company recently. The Company's growth has placed, and is expected
to continue to place, a significant strain on the Company's management,
administrative, operational, financial and technical resources and increased
demands on its systems and controls. The Company believes that it will need, in
the long term, to hire additional qualified administrative management personnel
in the accounting and finance areas to manage its financial control systems. In
addition, there can be no assurance that the Company's operating and financial
control systems, infrastructure and existing facilities will be adequate to
support the Company's future operations or maintain and effectively monitor
future growth. Failure to manage the Company's growth properly could have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company plans to build additional points-of-presence ("POPs"). There
can be no assurance that the Company will be able to add service in new cities
at the rate presently planned by it. In addition, increases in the Internet
subscriber base will result in additional demands on its customer support,
sales, marketing, administrative and technical resources and network
infrastructure. Increases in the Company's telecommunications customer base
will also produce increased demands on its sales, marketing and administrative
resources, as well as on its engineering resources and on its switching and
routing capabilities. The Company anticipates that its continued growth will
require it to recruit and hire a substantial number of new managerial, technical
and sales and marketing personnel. The inability to continue to upgrade the
networking systems of the operation and financial control systems, the inability
to recruit and hire necessary personnel or the emergence of unexpected expansion
difficulties could have a material adverse effect on the Company's business,
financial condition or results of operations.
Demands on the Company's network infrastructure and technical staff and
resources have grown rapidly with the Company's expanding customer base, and the
Company has in the past experienced difficulties satisfying the requests for its
Internet access and telecommunications services. The Company expects to
experience even greater strain on its billing and operational systems as it
develops, operates and maintains its network. There can be no assurance that
the Company's finance and technical staff will be adequate to facilitate the
Company's growth. The Company believes that its ability to provide timely
access for subscribers and adequate customer support services will largely
depend upon the Company's ability to attract, identify, train, integrate and
retain qualified personnel. There can be no assurance that the Company will be
able to do this. A failure to effectively manage its customer base and reduce
its subscriber cancellation rate and could therefore have a material adverse
effect on the Company's business, financial condition or results of operations.
Dependence on Key Personnel; Need to Hire Additional Qualified Personnel.
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The Company is highly dependent on the technical and management skills of its
key employees, including technical, sales, marketing, financial and executive
personnel, and on its ability to identify, hire and retain additional personnel.
Competition for such personnel is intense and there can be no assurance that the
Company will be able to retain existing personnel or identify or hire additional
personnel. In addition, the Company is highly dependent on the services of
Stephen E. Raville, Chairman of the Board and Chief Executive Officer; David G.
Olson, Chief Operating Officer; William C. Comee, Director of International
Operations; and Patrick E. Delaney, Chief Financial Officer. The loss of the
services of any of them could have a material adverse effect on the Company's
business, financial condition or results of operations.
Shares Available for Future Sale. The Company has financed its operations
---------------------------------
and acquisitions principally through the issuance of securities in "private
placements" exempt from registration under federal and applicable state
securities laws. As a consequence, approximately 55% of the Company's issued
and outstanding common stock at March 31, 1998 are restricted
securities which cannot be resold except in compliance with similar exemptions
from federal and applicable state securities laws. Under Rule 144 as currently
in effect, restricted securities are generally available for public resale after
such securities have been held by the purchasers thereof for a period of one
year. After the expiration of the one year holding period, such securities may
be sold in "broker's transactions" provided that certain requirements are met
and that the sales by a holder of such securities during any three month period
do not exceed the greater of one percent (1%) of the then issued and outstanding
shares of the issuer or the average weekly trading volume of such shares in the
over-the counter market during the four calendar weeks preceding the date on
which a notice of such sale is sent to the Securities and Exchange Commission.
At the end of two years, persons not "affiliated" with the issuer may sell
restricted securities without regard to the volume limitations imposed by Rule
144. Persons "affiliated" with the issuer are persons deemed to be in control of
the issuer, including executive officers, directors and ten percent or greater
shareholders; such persons may sell shares only in compliance with the
requirements of Rule 144, including the volume limitations imposed thereby,
regardless of the length of time such securities have been held. As of March
31, 1998, approximately 36% of the Company's issued and outstanding stock is
held by affiliates. Most of the Company's common stock either has or will become
available for sale in the next twelve months. The large numbers of the
Company's shares which have or will become available for public sale in the near
future, along with the demand and piggyback registration rights granted by the
Company (described elsewhere herein) create the possibility of volatility in the
market for the Company's stock and the possibility of adverse effects on the
prevailing market price of the Company's stock.
Dependence on Technological Development. The markets the Company serves
------------------------------------------
are characterized by rapidly changing technology, evolving industry standards,
emerging competition and frequent new service and product introductions. There
can be no assurance that the Company can successfully identify new service
opportunities and develop and bring new products and services to market in a
timely and cost-effective manner, or that products, services or technologies
developed by others will not render the Company's products, services or
technologies noncompetitive or obsolete. In addition, there can be no assurance
that product or service developments or enhancements introduced by the Company
will achieve or sustain market acceptance or be able to effectively address the
compatibility and inoperability issues raised by technological changes or new
industry standards.
The Company is also at risk to fundamental changes in the way Internet
access services are delivered. Currently, Internet services are accessed
primarily by computers through telephone lines. However, several companies have
introduced delivery of Internet access services through cable television lines.
If the Internet becomes widely accessible by cable modem, screen-based
telephones, television or other consumer electronic devices, or customer
requirements change the way Internet access is provided, the Company will need
to develop new technology or modify its existing technology to accommodate these
developments. Required technological advances by the Company as the industry
evolves could include compression, full motion video, and integration of video,
voice, data and graphics. The Company's pursuit of these technological advances
may require substantial time and expense, and there can be no assurance that the
Company will succeed in adapting its Internet service business to alternate
access devices and conduits.
The Company's success is dependent in part upon its ability to enhance
existing products and services and to develop new products and services that
meet changing customer requirements on a timely and cost-effective basis. There
can be no assurance that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In addition, there can be no assurance that licenses for
any intellectual property that might be required for the Company's services or
products would be available on reasonable terms if at all.
Dependence on Suppliers. The Company is dependent on third party suppliers
-----------------------
of hardware and network connectivity for many of its products and services and
generally does not have long-term contracts with suppliers. Certain of these
suppliers are or may become competitors of the Company, and such suppliers are
not subject to restrictions upon their ability to compete with the Company. To
the extent that any of these suppliers change their pricing structure or
terminate service, as did Sprint in December 1996, the Company may be adversely
affected. The Company is dependent upon third party providers which are the
primary providers to the Company of data communications facilities and capacity
and lease to the Company physical space for switches, modems and other
equipment. If these suppliers are unable to expand their networks or unwilling
to provide or expand their current level of service to the Company in the
future, the Company's operations could be adversely affected.
The Company has from time to time experienced delays in the receipt of
network access and telecommunications services. In addition, the Company has
also from time to time experienced delays in the receipt of certain hardware
components. A failure by a supplier to deliver quality services or products on
a timely basis, or the inability to develop alternative sources if and as
required, could result in delays which could have a material adverse effect on
the Company. In addition, the Company maintains relationships with certain
equipment suppliers in the design of products which they sell to the Company.
The Company's remedies against suppliers who fail to deliver products on a
timely basis are limited, in many cases, by practical considerations relating to
the Company's desire to maintain relationships with the suppliers. As the
Company's suppliers revise and upgrade the technology of their equipment, the
Company may encounter difficulties in integrating the new technology into its
network.
International Expansion. The Company's strategy includes expansion of its
------------------------
business into international markets. There can be no assurance that the Company
will be able to obtain the permits and operating license, if any are required,
necessary for it to operate, to hire and train employees or to market, sell and
deliver high quality services in these markets. In many countries, the Company
may need to enter into a joint venture or other strategic relationship with one
or more third parties in order to successfully conduct its operations. There
can be no assurance that such factors will not have a material adverse effect on
the Company's future international operations and, consequently, on the
Company's business, financial condition or results of operations.
New and Uncertain Market. The market for Internet connectivity services
---------------------------
and related software products is in an early stage of growth. Since this market
is relatively new and because current and future competitors are likely to
introduce Internet connectivity and/or online services and products, it is
difficult to predict the rate at which the market will grow or at which new or
increased connection will result in market saturation. The novelty of the
market for Internet access services may also adversely affect the Company's
ability to retain new customers, as customers unfamiliar with the Internet may
be more likely to discontinue the Company's services after an initial trial
period than other subscribers. If demand for Internet services fails to grow,
grows more slowly than anticipated, or becomes saturated with competitors, the
Company's business, operating results and financial condition will be adversely
affected.
To continue to realize customer growth in all its markets, the Company must
continue to replace terminating customers and attract additional customers.
However, the sales and marketing expenses and acquisition costs associated with
attracting new customers are substantial. Accordingly, the Company's ability to
improve operating margins will depend in part on the Company's ability to retain
its customers. The Company continues to invest significant resources in its
telecommunications infrastructure and customer support resources in connection
with all its businesses. There can be no assurance that the Company's
investments in telecommunications infrastructure and customer support
capabilities will improve customer retention. Since the Company's markets are
new and the utility of available service is not well understood by new and
potential customers, the Company is unable to predict future customer retention
rates.
Risk of System Failure. The success of the Company is largely dependent
-------------------------
upon its ability to deliver high quality, uninterrupted access to the Internet
and other telecommunication services. Any system failure that causes
interruptions in the Company's operations could have a material adverse effect
on the Company. The Company has experienced failure relating to individual POP's
and the Company's customers have experienced difficulties in accessing, and
maintaining connection to the Internet. The backbone of the Company's network,
in addition to the Company's overall telecommunications and Internet network, is
currently leased from certain suppliers, such as IXC, LCI, Digex, MCI, Sprint
and Worldcom. If these suppliers are unable to expand their networks or are
unwilling to provide or expand their current level of service to the Company in
the future, the Company's operations could be adversely affected. As the
Company attempts to expand its network and data traffic grows, there will be
increased stress on network hardware and traffic management systems. However,
there can be no assurance that the Company will not experience failures relating
to individual POP's or even failure of the entire network. The Company's
operations also are dependent on its ability to successfully expand its network
and integrate new and emerging technologies and equipment into its network,
which are likely to increase the risk of system failure and cause unforeseen
strains upon the network. The Company attempts to minimize customer
inconvenience in the event of a system disruption by high quality services and
redundancy. However, significant or prolonged system failures, or difficulties
for subscribers in accessing, and maintaining connection with the Internet could
damage the reputation of the Company and result in the loss of subscribers.
Such damage or losses could have a material adverse effect on the Company's
ability to obtain new subscribers and on the Company's business, financial
condition or results of operations.
The Company's operations are dependent on its ability to protect its
software and hardware against damage from fire, earthquake, power loss,
telecommunications failure, natural disaster and similar events. A significant
portion of the Company's computer equipment is located at its facilities in
Houston, Texas. The Company's switches and other telephone equipment are located
in Houston, Panama City, Panama, Caracas, Venezuela and Atlanta, Georgia. Any
damage or failure that causes interruptions in the Company's operations could
have a material adverse effect on the Company's business and results of
operations. While the Company and its subsidiaries carry some property and
business interruption insurance, such coverage may not be adequate to compensate
the Company for all losses that may occur.
Security Risks. Despite the implementation of network security measures by
--------------
the Company, such as limiting physical and network access to its routers, its
telecommunications infrastructure is vulnerable to computer viruses, break-ins
and similar disruptive problems caused by its customers or other Internet users.
Computer viruses, break-ins or other problems caused by third parties could lead
to interruption, delays or cessation in service to not only the Company's
Internet customers, but also the Company's telecommunication users.
Furthermore, such inappropriate use of the voice and data systems by third
parties could also potentially jeopardize the security of confidential
information stored in the computer systems of the Company's customers and other
parties which may deter potential subscribers. Persistent security problems
continue to plague public and private data networks. Recent break-ins reported
in the press and otherwise have reached computers connected to the Internet at
major corporations and Internet access providers and have included incidents
involving hackers by-passing fire-walls by posing as trusted computers and
involving the theft of information. Alleviating problems caused by computer
viruses, break-ins or other problems caused by third parties may require
significant expenditures of capital and resources by the Company, which could
have a material adverse effect on the Company. Moreover, until more
comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet service industry in general and the Company's customer base and
revenues in particular.
Potential Liability for Information Disseminated Through Network. Internet
----------------------------------------------------------------
service providers face potential liability of uncertain scope for the actions of
subscribers and others using their systems, including liability for infringement
of intellectual property rights, rights of publicity, defamation, libel and
criminal activity under the laws of the U.S. and foreign jurisdictions. For
example, an action against Prodigy alleging libel and negligence in connection
with an electronic message posted by a Prodigy subscriber through Prodigy's
Internet access system presents the potential for increased focus and attempts
to impose liability upon Internet service providers for information, messages
and other materials disseminated across and through their systems. The Company
carries errors and omissions insurance; however, such insurance may not be
adequate to compensate the Company for all liability that may be imposed. Any
imposition of liability in excess of the Company's coverage could have a
material adverse effect on the Company. In addition, recent legislative
enactments and pending legislative proposals aimed at limiting the use of the
Internet to transmit indecent or pornographic materials could, depending upon
their interpretation and application, result in significant potential liability
to Internet access and service providers including the Company, as well as
additional costs and technological challenges in complying with any statutory or
regulatory requirements imposed by such legislation.
Fluctuations in Quarterly Operating Results. The Company's quarterly
-----------------------------------------------
operating results have fluctuated in the past and may fluctuate significantly in
the future as a result of a variety of factors, some of which are outside the
Company's control. These factors include general economic conditions,
acceptance and use of the Internet, user demand for long distance
telecommunication services, capital expenditures and other costs relating to the
expansion of operations, the timing of new product announcements by the Company
or its competitors, changes in pricing strategies by the Company or its
competitors, market availability and acceptance of new and enhanced versions of
the Company's or its competitors' products and services and the rates of new
subscriber and customer acquisition and retention. These factors could also
have a material adverse effect on the Company's annual results of operation and
financial condition.
Voltility of Stock Price. The market price of the Company's Common Stock
--------------------------
may be highly volatile. The "public float" of the Company's common stock is a
relatively small percentage of the total issued and outstanding shares of common
stock and substantial numbers of shares have been subject to restrictions on
transfer which have either recently terminated or will terminate in the near
future. Factors such as variations in the Company's revenue, earnings and cash
flow and announcements of new service offerings, technological innovations or
price reductions by the Company, its competitors or providers or alternative
services could cause the market price of the Common Stock to fluctuate
substantially. In addition, the stock markets recently have experienced
significant price and volume fluctuations that particularly have affected
companies in the technology sector and resulted in changes in the market price
of the stocks of many companies that have not been directly related to the
operating performance of those companies.
Ability of Management to Dictate Corporate Policy and the Composition of
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the Board of Directors. Management and certain members of the Board of
- -------------------------
Directors of the Company own or control, directly or indirectly, approximately
36% of the issued and outstanding shares of the Common Stock of the Company.
The Articles of Incorporation and Bylaws of the Company provide that: (1) the
presence of a majority of the shareholders eligible to vote is required to
constitute a quorum at shareholders' meetings; (2) the vote of the holders of a
majority of the shares present at a meeting where a quorum is constituted is
required to adopt any resolution, unless a greater percentage is required by
statute, in which case a majority of the outstanding shares will be required;
(3) shareholder action may be taken by written consent, without prior notice,
signed by the holder(s) of the number of shares necessary to approve such
action; and (4) voting is noncumulative. As a consequence of the concentrations
of stock ownership in the hands of such persons, they have the ability to
significantly influence corporate policy, the persons elected to the Board of
Directors of the Company and may be able to block certain corporate actions.
Year 2000. The Year 2000 Issue is a problem resulting from computer
----------
programs being written using two digits rather then four digits to define the
applicable year. Date-sensitive software may recognize a date using 00 as the
year 1900 rather than 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among other, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities. The Company has addressed and continues to assess
the impact of the Year 2000 Issue on its reporting and operating systems. Due
to the proprietary nature of many of the Company's operating platforms,
including its billing and accounts receivable, systems, the Company has limited
reliance on external vendors and third party network providers with Year 2000
exposure. The Company has addressed programming issues to ensure that its
programs are capable of handling the change that will result from the turn of
the century. Any costs incurred with the Year 2000 compliance are being
expensed as incurred and are not expected to be material to the financial
statements.
No Dividends. The Company does not anticipate that it will pay any
-------------
dividends in the foreseeable future but plans to reinvest in the Company's
business any funds which might otherwise be available for the payment of
dividends. The payment of dividends out of legally available funds thereafter,
if such funds are available, will be at the discretion of the Company's Board of
Directors.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company has its principal offices in Houston, Texas and Atlanta,
Georgia. The Company leases approximately 10,000 square feet of office space at
17100 El Camino Real, Houston, Texas 77058. The lease is for an initial term of
five years and expires on June 30, 2001, unless the Company exercises its
contractual right to renew the lease for two additional terms of five years
each. The monthly rental under the lease is currently $9,800.
The Company has office and telecommunication operations located in Atlanta
and leases approximately 11,500 square feet of office space at 2839 Paces Ferry
Road, Suites 500 and 250, Atlanta, Georgia 30339. The term of the lease
commenced on October 1, 1995 and continues for sixty months, expiring September
30, 2000 with a base rent of $18,267.63 per month.
The Company has additional office space of approximately 5,600 square feet
leased in Atlanta which has been subleased as of May 1, 1997 to a third party.
The office space is located at 4360 Chamblee-Dunwoody Road, Suite 400, Atlanta,
Georgia. The lease has monthly rent of $8,368.50 and a term from September 1,
1996 to August 31, 1999. The sublease rental is $8,368.50 per month and extends
for the full term of the original lease to August 31, 1999.
Charter Panama leases approximately 1,600 square feet of office space in a
high rise office building in Panama City, Republic of Panama. The lease is for
a term of five years and expires on May 31, 2001. The monthly rental under the
lease is currently $4,500. Charter Panama's offices include Panamanian earth
station operations, local marketing activities, and administrative services.
Charter Panama's earth station antenna is mounted on the roof of the building in
which its offices are located.
The physical properties of the Company are in good condition.
ITEM 3. LEGAL PROCEEDINGS.
Other than the matters discussed below, the Company is not a party to any
legal proceeding or dispute which is not routine and incidental to the business
or which involves an amount, exclusive of interest and costs, which exceeds ten
percent of the current assets of the Company.
Since mid-1996, the Company has been negotiating with Sprint Communications
L.P. (" Sprint ") to resolve a dispute involving Sprint's past services to the
Company. On March 11, 1997, Sprint sent a letter to the Company, claiming that
the Company owes Sprint $4,044,835 for telecommunications services already
provided. As of December 31, 1996, the Company had accrued the entire amount
which Sprint claimed was due. During 1997, the Company reached a settlement
with Sprint to pay $100,000 down and $50,000 per month for 18 months for a total
of $1,000,000 with release of all claims regarding the remaining balance. The
settlement is expected to be memorialized in the second quarter of 1998, at
which time payments will commence.
During 1997, the Company was party to arbitration proceedings related to an
employee terminated subject to an employment contract. The arbitrator ruled in
favor of the employee and awarded approximately $300,000 plus 80,000 options to
purchase the Company's stock at a price of $6.00 per share.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted by the Company to a vote of the Company's
security holders, through the solicitation of proxies or otherwise, during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market. The
table set forth below reflects high and low closing bid prices on a quarterly
basis for the period beginning January 1, 1996 and ending December 31, 1997.
The quotations in the following table reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not represent actual
transactions.
<TABLE>
<CAPTION>
1997 HIGH BID LOW BID
<C> <S> <C> <C>
First Quarter 3.312 1.25
Second Quarter 2.75 .875
Third Quarter 2.50 1.287
Fourth Quarter 2.625 1.1875
1996
First Quarter 3.375 .50
Second Quarter 7.75 3.25
Third Quarter 6.25 4.625
Fourth Quarter 5.375 1.4375
============== ======= ======
</TABLE>
As of March 31, 1998, the Company's common stock was held by approximately
325 holders of record. The Company estimates that it has a significantly larger
number of shareholders because a substantial number of the Company's shares are
held by broker-dealers for their customers in street name. The Company has not
paid any cash dividends on its common stock to date. There are no restrictions
which limit the Company's ability to pay cash dividends on its common stock;
however, the Company's current policy is to retain earnings to provide funds for
the operation and expansion of its business.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Over the next twelve months, the Company plans to pursue the expansion of
its International Private Lines, Telecommute Solutions, Long Distance Telephone,
Calling Card, and Internet Access services. The Company intends to
Capitalize on the growing demand for these services and gain market share by
building its subscriber base both domestically and internationally. Management
believes the expansion will be accomplished through the acquisition of
additional licenses and concessions allowing the Company to provide these
services both in the United States and in targeted Latin American countries.
The Company intends to aggressively pursue new customers by combining the
highest possible level of service with an expanded sales force and intensive
marketing efforts. After thoroughly investigating market demand, the Company
intends to expand in major cities in the United States ( US ) and Latin America.
Strategic alliances have been and will continue to be formed with local business
groups and individuals to create successful operations within the respective
target Latin Countries.
Subject to the capital limitations discussed below, the Company intends to
continue to build an International Private Line communication network that will
provide voice, data, facsimile, Internet, intranet, telecommuting, and video
services to government and commercial organizations operating throughout the
United States and Latin America. The building of this private line network is
complementary to the Company's objective of providing Internet access services.
The Company is currently licensed to provide various telecommunication services
in the US, Peru, Honduras, Venezuela, Mexico, El Salvador, Guatemala, Nicaragua
Costa Rica, and Panama. As of December 31, 1997, the Company is providing
telecommunication and/or Internet service in the United States, Panama,
Venezuela, El Salvador, Costa Rica and Mexico and will shortly begin providing
service in Nicaragua. Over the next twelve months, the Company intends to seek,
through public and private markets, an additional $2-3 million to build - out
and operate facilities in these and other countries. The Company will, however,
only begin expansion on a project by project basis upon securing appropriate
financing. While the Company's telecommunication business in Latin America is
currently focused on the provision of international private lines and internet
services, it is actively pursuing other opportunities to provide long distance
services in Latin American countries.
The Company intends to vigorously pursue expansion of its telecommuting
services through its subsidiary Telecommute Solutions. After thorough research,
the Company believes demand for telecommuting services in the US will grow
significantly as a result of corporate pressure to reduce operating cost, comply
with government regulation, and attract and retain employees. The Company has
developed a complete turnkey telecommuting solution, which is scalable and can
be deployed nationally. In November 1997, the Company signed a master agreement
with a Fortune 100 financial services corporation to provide telecommuting
outsourcing services. The first telecommuters were brought online under this
agreement in the first quarter of 1998. The Company intends to expand this line
of business through its direct sales force, located in major metropolitan areas
(Atlanta, Houston, New York, Chicago, Los Angeles, Dallas and Washington, D.C.),
where telecommuting is of greatest demand, and through strategic alliances with
equipment vendors, consultants and Regional Bell Operating Companies. The
Company intends to seek, through public and private markets, $5 - $10 million in
order to fund expansion of its telecommuting network and services in additional
cities.
The Company's calling card business is expanding. During 1997, by
leveraging its relationship with certain Latin American carriers, the Company
was able to introduce calling cards with originating access from certain Latin
American countries. During 1998, the Company has added an enhanced
self-contained calling card platform to its network in order to provide
additional capacity, speed and reliability. Also, the Company has formed
strategic alliances with certain facilities based carriers in Colorodo, Florida
and California in order to expand its network and product offerings.
The Company's Internet business continues to expand both domestically and
in Latin America. In March of 1996, the Company formed Phoenix DataNet de
Panama, S.A. and commenced the offering of Internet services to business and
residential customers in Panama City, Panama. In December of 1996, the Company
began offering Internet Service in Caracas, Venezuela. Shortly, the Company
will begin to offer Internet service in Colon, Panama. The Company anticipates
it be required to spend approximately $130,000 per site in order to provide
Internet services in the other Latin American sites targeted for private line
services.
See "Liquidity and Capital Resources" for a discussion of the Company's
ability to meet these capital needs.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the years ended
December 31, 1997 and 1996. Operating results for any period are not
necessarily indicative of results for any future period. Dollar amounts (except
per share data) are shown in thousands.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
% of Revenues % of Revenues
<S> <C> <C> <C> <C>
Revenues
Communications services $ 9,379 72.5% $ 3,162 38.4%
Hardware and software 369 2.8 2,356 28.6
sales
Internet connection services 2,748 21.2 1,827 22.2
Network services 455 3.5 886 10.8
----------- --------
Total revenues 12,951 100.0 8,231 100.0
Cost and expenses:
Cost of services 9,482 73.2 4,342 52.8
Cost of hardware
and software 284 2.2 1,933 23.5
Selling, general,
and administrative 8,766 67.7 7,816 95.0
Nonrecurring
charges 2,677 20.7 - -
Depreciation and
amortization 2,995 23.1 1,429 17.4
----------- ------------ -------- -----------
Total costs
and expenses 24,204 186.9 15,520 188.7
Operating loss <11,253> <86.9> <7,289> <88.7>
----------- ------------ -------- -----------
Minority interest - - 13 0.3
Interest expense, net <481> <3.7> <482> <5.9>
Extinguisment of <242> <1.9> - -
debt ----------- ------------ -------- -----------
Net Loss <11,976> <92.5> <7,758> <94.3>
----------- ------------ -------- -----------
Net loss per share $ <.39> $ <.51>
Shares used in computing
net loss per share: 31,084,693 15,088,376
</TABLE>
In the first quarter of 1996, the Company's first international private
line customers went on - line, the acquisitions of Phoenix DataNet and Phoenix
Data Systems were completed, and the military phone centers in Panama were
purchased. During the third quarter of 1996, the Company completed the
acquisitions of OCI and Worldlink. These acquisitions are more fully described
in Footnotes to the Financial Statements (Item 7) and Forms 8-K filed previously
by the Company.
Consolidated revenues for the combined lines of business for the years
ended December 31, 1997 and 1996 were $12,951,000 and $8,231,000, respectively.
The increase in revenue is principally related to the acquisitions in 1996 and
relative change in revenue mix. Cost of services and hardware and software
costs were $9,766,000 in 1997 and $6,275,000 for the comparable period in 1996
yielding a gross profit margin of 24.6% for 1997 and 23.8% for the same period
in 1996. Gross profit margins were adversely effected in the first and fourth
quarters of 1997, respectively, by a delay in the implementation of the
Company's least cost routing plan to improve network costs and by reduction of
prices in anticipation of lower costs on international traffic, which were not
realized during the quarter. The Company expects gross profit margins to
improve further during 1998 as its international least cost routing plan is
further implemented and as higher margin product sales, such as private line and
telecommuting services, grow.
Selling, general, and administrative ( SG&A ) expenses for 1997 were
$8,766,000 or 67.7% of sales compared to $7,816,000 or 95.0% of sales for 1996.
The overall increase in SG&A expenses was primarily attributable to acquisitions
and expansion of the Company's operations. Growth in SG&A from 1996 to 1997 was
12.2%, while growth in revenue for the same period was 57.3%. The Company
anticipates benefiting further from economies of scale, as costs such as
salaries and wages are not expected to increase in direct proportion to
increases in revenues. Additionally, management anticipates cost reduction as a
result of certain cost control efforts, including a reduction of the workforce,
implemented during the last quarter of 1997 and first quarter of 1998.
Depreciation and amortization expense was $2,995,000 for 1997 compared to
$1,429,000 for the prior year. The increase is attributable to the increase in
property, plant and equipment related to the acquisitions and expansion of
operations and the amortization associated with the acquisitions completed
during 1996.
Interest expense was $481,000 and $482,000 for the years ended December 31,
1997 and 1996. Interest expense for 1997 was primarily from the 12% Senior
Subordinated Notes, Convertible Debentures, bank credit facilities and financing
lease obligations. The Company is seeking additional debt financing, which may
result in additional indebtedness, and as such, an increase in interest expense.
Such financing traditionally contains interest rates tied to the prime interest
rate. Increases in the prime rate could increase interest expense and
negatively affect the Company's earnings. The Company incurred a $242,000 loss
on extinguishment of debt in relation to the conversion of a portion of its 12%
senior subordinated debentures, which had been reported net of discount at the
time of the conversion.
There was no income tax benefit recorded in either 1997 or 1996, as
management recorded a valuation reserve due to the uncertainty of the timing of
future taxable income. The net losses for the years ended December 31, 1997 and
1996 were $11,976,000 and $7,758,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has not generated net cash from operations for any period
presented. The Company has primarily financed its operations to date through
private sales of equity securities and debt to affiliates and outside investors.
The Company intends to raise the balance of required funding through various
sources including, but not limited to, the exercise of warrants and private
placements of debt and/or equity. However, there can be no assurance that the
Company will be able to raise any such capital on terms acceptable to the
Company, or at all.
During the first quarter of 1997, the Company had a private placement
offering of its common stock and received cash in the amount of approximately
$4.5 million and reduced its liabilities (through the conversion of debt and
current liabilities to common stock) by approximately $3.4 million. All
conversions were effected at the rate of one dollar of the liability to one
share of common stock. During the second quarter of 1997, the Company raised $1
million through a private placement of its common stock and $1 million through
the issuance of convertible debentures in a foreign market. During the third
quarter of 1997, the Company raised $1,180,000 through a private placement of
convertible debentures. During the fourth quarter of 1997, the Company raised
$300,000 through a private placement of its common stock and $2.1 million net
proceeds through a sale leaseback of certain designated assets. These funds
were used to partially offset a net operating cash flow deficiency of
approximately $6,470,000 through December 31, 1997, as well as capital
expenditures of $2,577,000, and repayment of lines of credit and loans from
shareholders in the amount of $1,161,000 and $282,000, respectively.
Subsequent to year end, the Company completed a private placement offering
of 9,000,000 shares of common stock at a price of $.50 per share for proceeds
totaling $4,500,000 (4,000,000 shares included in this offering were purchased
by directors), entered into an additional sale leaseback transaction of certain
assets for proceeds totaling approximately $400,000, and entered into a
Receivable Purchase Facility Agreement, which enables it to sell its receivables
to the purchaser, up to the maximum facility amount of $600,000. Receivables
are sold at 80% of book value with the additional 20% representing collateral
until the receivables are paid, repurchased or substituted with other
receivables, at which time the 20% is returned to the Company. Interest accrues
on the purchase amount at a rate of prime (8.5% at December 31, 1997) plus 2%,
per annum, until the receivables are paid, repurchased or substituted. As of the
date of this report, the Company has received approximately $600,000 for
receivables sold under this facility.
The Company estimates that it will need approximately $7.5 million to fund
existing operations including approximately $1 million through April 1998 to
fund operating cash deficiencies, $1.5 million to fund debt due in 1998, $1
million to fund the Sprint and employment arbitration settlements and $4
million to fund 1998 capital expenditures. Through March 31, 1998, the Company
has raised approximately $5.5 million. The Company intends to raise the
remaining $2 million through additional debt and equity private placements and
exercise of warrants. Failure of the Company to raise all or a significant
portion of the funds needed could materially and adversely affect the Company's
continuing and its planned operations. At December 31, 1997, the Company had a
significant working capital deficit and at times has borrowed funds and sold
equity to affiliates/shareholders to fund essential obligations. While the
Company has been able to fund such essential obligations to date and while
management believes its current business activity is such that operating funds
will be available to it as needed to continue operations and to fund planned
growth, no assurance can be given that the Company will be able to raise such
funds on a timely basis or at all. Failure to raise such funds could have
material adverse consequences to the Company and its continuing and planned
operations.
Any increases in the Company's growth rate, shortfalls in anticipated
revenues, increases in anticipated expenses, or significant acquisition or
expansion opportunities could have a material adverse effect on the Company's
liquidity and capital resources and would either require the Company to raise
additional capital from public or private equity or scale back operations. The
Company does not currently have adequate resources available to achieve all of
the potential expansion plans noted in Management's Discussion and Analysis
and will not engage in such expansion until adequate capital sources have been
arranged. Accordingly, the Company anticipates additional future private
placements and/or public offerings of debt or equity securities will be
necessary to fund such plans. If such sources of financing are insufficient or
unavailable, the Company will be required to significantly change or scale back
its operating plans to the extent of available funding. The Company may need to
raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisitions of complementary businesses or the
development of new products, or to otherwise respond to unanticipated
competitive pressures. There can be no assurance that the Company will be able
to raise any such capital on terms acceptable to the Company or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In February, 1997, the Financial Accounting Standards Board ( FASB ) issued
Statement 128, "Earnings per share" ("SFAS 128"). This standard requires the
computation of basic earnings per share using only the weighted average common
shares outstanding, and diluted earnings per share, using the weighted average
common shares outstanding, adjusted for potentially dilutive instruments using
either the if converted or treasury stock method as appropriate if dilutive.
This statement is effective for periods ending after December 15, 1997 and
requires restatement of all prior period earnings per share data presented.
Effective with the fourth quarter of 1997, the Company adopted SFAS 128. The
adoption of this statement had no effect on the Company, as for all periods the
effect of any dilutive instruments was antidilutive. Accordingly, for all
periods presented basic and diluted earnings per share are the same.
In July 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income ( SFAS 130 ), and No. 131, Disclosures About Segments of an Enterprise
and Related Information ( SFAS 131 ). Both statements are effective for fiscal
years beginning after December 15, 1997. The Company does not expect SFAS 130
and 131 to have a material impact on the Company's financial statements.
YEAR 2000
The Year 2000 Issue is a problem resulting from computer programs being
written using two digits rather then four digits to define the applicable year.
Date-sensitive software may recognize a date using 00 as the year 1900 rather
than 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities. The Company has addressed and continues to assess the impact of the
Year 2000 Issue on its reporting and operating systems. Due to the proprietary
nature of many of the Company's operating platforms, including its billing and
accounts receivable, systems, the Company has limited reliance on external
vendors and third party network providers with Year 2000 exposure. The Company
has addressed programming issues to ensure that its programs are capable of
handling the change that will result from the turn of the century. Any costs
incurred with the Year 2000 compliance are being expensed as incurred and are
not expected to be material to the financial statements.
ITEM 7. FINANCIAL STATEMENTS.
Attached following the Signature Pages and Exhibits. See the index to the
financial statements following the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has not had any disagreements with its independent accountants
and auditors.
<PAGE>
PART III
Pursuant to instruction E(3) to Form 10-KSB, the information in Items 9-12
is incorporated by reference from the Company's definitive proxy statement which
will be filed with the Commission pursuant to Regulation 14A on or about April
30, 1997.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibit
No. Description Location
<C> <S> <C>
3.01 Articles of Incorporation Form 10-QSB for the quarter
ended March 31, 1996
3.03 Bylaws Form 10-QSB for the quarter
ended June 30, 1996
4.1 Form of 12% Promissory Note and Form 10-KSB for year ended
Warrant 12/31/95
4.2 Form of 18% Convertible, Subordinated Filed herewith
Debenture
10.1 Consulting Agreement with Charter Form 10-KSB for the year
Trading Corporation ended 12/31/95
10.2 Consulting Agreement with Potere Form 10-KSB for the year
Management, Inc. ended 12/31/95
10.3 Contract with INTEL Form 10-KSB for the year
ended 12/31/95
10.4 1996 Nonemployee Director Stock Form 10-KSB for the year
Option Plan and Agreement ended 12/31/95
10.5 Agreement with Hondutel Form 10-QSB for the quarter
ended June 30, 1996
10.6 Agreement with Telecommunicaciones Form 10-QSB for the quarter
de Mexico ended June 30, 1996
10.7 Agreement with Comison Nacional de Form 10-QSB for the quarter
Telecommunications (Conatel) ended June 30, 1996
10.8 Registration Rights Agreement Form 10-KSB for the year
ended December 31, 1996
10.9 Form of Purchase and Sale Agreement Filed herewith
10.10 Form of Equipment Lease Agreement Filed herewith
10.11 Form of Security Agreement Filed herewith
10.12 Receivable Purchase Facility Agreement Filed herewith
10.13 Registration Rights and Minimum Value Filed herewith
Guarantee Agreement
10.14 Master Lease Agreement and Warrant Filed herewith
11.1 Earnings Per Share Calculation Filed herewith
21.1 List of subsidiaries Filed herewith
23.1 Consent of Arthur Anderson LLP. Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
<PAGE>
The Company filed a report on Form 8-K on August 15, 1997, reporting the
sale of equity securities under Regulation S on May 15, 1997. On March 5, 1998,
the Company filed a Form 8-K/A amending its previously filed Form 8-K dated
August 15, 1997.
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY
AUTHORIZED.
CHARTER COMMUNICATIONS INTERNATIONAL, INC.
By: /s/ STEPHEN E. RAVILLE Date: March 31, 1998
-------------------------
STEPHEN E. RAVILLE, CHIEF EXECUTIVE OFFICER
IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON
THE DATE INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------- --------------------------- --------------
<S> <C> <C>
By: /s/ STEPHEN E. RAVILLE Chief Executive Officer and March 31, 1998
- ---------------------------
Stephen E. Raville Director
By: /s/ DAVID G. OLSON Chief Operating Officer March 31, 1998
- ---------------------------
David G. Olson Director
By: /s/ PATRICK E. DELANEY Chief Financial Officer and March 31, 1998
- ---------------------------
Patrick E. Delaney Director
By: /s/ RICHARD P. HALEVY Treasurer March 31, 1998
- ---------------------------
Richard P. Halevy
By: Director March 31, 1998
- ---------------------------
Robert E. Conn
By: Director March 31, 1998
- ---------------------------
William P. O'Reilly
By: /s/ GERALD F. SCHMIDT Director March 31, 1998
- ---------------------------
Gerald F. Schmidt
By: /s/ F. SCOTT YEAGER Director March 31, 1998
- ---------------------------
F. Scott Yeager
By: /s/ JAMES R. DORSEY Director March 31, 1998
- ---------------------------
James R. Dorsey
</TABLE>
<PAGE>
EDGAR ONLY TABLE: INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charter Communications International, Inc.:
We have audited the accompanying Consolidated balance sheets of CHARTER
COMMUNICATIONS INTERNATIONAL, INC. and Subsidiaries (a Nevada corporation)
(formerly, "Maui Capital Corporation") as of December 31, 1997 and 1996 and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Charter Communications
International, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 31, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . $ 155,503 $ 320,252
Restricted cash . . . . . . . . . . . . . . . 135,000 -
Accounts receivable, net of allowance for
doubtful accounts of $650,000 and $435,000
at December 31, 1997 and 1996, respectively . 2,606,104 1,675,939
Accounts receivable-- affiliate, net. . . . . - 385,951
Inventory, net. . . . . . . . . . . . . . . . 252,120 307,940
Prepaid expenses and other. . . . . . . . . . 224,595 248,427
------------ ------------
Total current assets. . . . . . . . . . . . 3,373,322 2,938,509
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment and machinery . . . . . . . . . . . 6,058,943 4,345,137
Earth station facility. . . . . . . . . . . . 618,497 618,497
Software. . . . . . . . . . . . . . . . . . . 1,121,248 664,486
Furniture and fixtures. . . . . . . . . . . . 360,694 297,329
Other . . . . . . . . . . . . . . . . . . . . 583,861 240,714
------------ ------------
8,743,243 6,166,163
Accumulated depreciation and amortization . . (2,113,198) (791,892)
------------ ------------
Property and equipment, net . . . . . . . . 6,630,045 5,374,271
------------ ------------
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $865,087 and $378,895,
at December 31, 1997 and 1996, respectively 17,391,398 22,077,423
Acquired customer bases, net of accumulated
amortization of $579,369 and $261,151
at December 31, 1997 and 1996, respectively 1,181,651 1,867,117
Other intangibles, net of accumulated
amortization of $590,884 and $186,888
at December 31, 1997 and 1996, respectively 1,938,582 2,369,390
Other . . . . . . . . . . . . . . . . . . . . 551,087 164,894
------------ ------------
Total other assets. . . . . . . . . . . . . 21,062,718 26,478,824
------------ ------------
TOTAL ASSETS. . . . . . . . . . . . . . . . $31,066,085 $34,791,604
============ ============
<FN>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these Statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMEMBER 31, 1997 AND 1996
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of notes payable . . . . . . . . . . . . . $ 175,001 $ 50,264
Current portion of lease obligation. . . . . . . . . . . . 342,249 -
Lines of credit. . . . . . . . . . . . . . . . . . . . . . 485,000 1,646,092
Loans from stockholders. . . . . . . . . . . . . . . . . . 520,000 1,740,548
Accounts payable . . . . . . . . . . . . . . . . . . . . . 4,889,518 7,234,129
Accounts payable-- affiliate . . . . . . . . . . . . . . . 249,655 222,999
Accrued liabilities. . . . . . . . . . . . . . . . . . . . 1,676,547 870,804
Unearned revenue . . . . . . . . . . . . . . . . . . . . . 1,645,722 1,830,731
------------- ------------
Total current liabilities. . . . . . . . . . . . . . . . 9,983,692 13,595,567
------------- ------------
LONG TERM LIABILITIES:
Financing lease obligation . . . . . . . . . . . . . . . . 1,397,473 -
Convertible debentures . . . . . . . . . . . . . . . . . . 1,180,000 -
Senior subordinated notes. . . . . . . . . . . . . . . . . 660,278 2,513,492
Notes payable and other long term obligations. . . . . . . 711,110 9,801
------------- ------------
Total long term liabilities. . . . . . . . . . . . . . . 3,948,861 2,523,293
------------- ------------
Deferred settlement gain . . . . . . . . . . . . . . . . . 2,757,132 -
------------- ------------
COMMITMENTS AND CONTINGENCIES (Note 4 and 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 100,000 shares
authorized, 550 shares issued, 0 shares
outstanding at both December 31, 1997 and 1996 . . . . . - -
Common stock, $0.00001 par value; 45,000,000
shares authorized; 34,134,776 and 24,202,779 shares
outstanding at December 31, 1997 and 1996, respectively. 341 242
Additional paid-in-capital . . . . . . . . . . . . . . . . 35,981,440 28,302,025
Accumulated deficit. . . . . . . . . . . . . . . . . . . . (21,605,381) (9,629,523)
------------- ------------
Total stockholders' equity . . . . . . . . . . . . . . . 14,376,400 18,672,744
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . $ 31,066,085 $34,791,604
============= ============
<FN>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these Statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMEMBER 31, 1997 AND 1996
1997 1996
------------- ------------
<S> <C> <C>
REVENUES:
Communications services. . . . . . . $ 9,379,496 $ 3,161,957
Hardware and software. . . . . . . . 368,818 2,356,436
Internet connection services . . . . 2,747,635 1,826,742
Network services . . . . . . . . . . 455,473 886,467
------------- ------------
Total revenues . . . . . . . . . . . 12,951,422 8,231,602
------------- ------------
COSTS AND EXPENSES:
Cost of services . . . . . . . . . . 9,481,498 4,341,432
Cost of hardware and software. . . . 284,358 1,933,401
Selling, general, and administrative 8,766,282 7,816,076
Nonrecurring charge. . . . . . . . . 2,677,099 -
Depreciation and amortization. . . . 2,995,334 1,429,243
------------- ------------
Total costs and expenses . . . . . . 24,204,571 15,520,152
------------- ------------
OPERATING LOSS . . . . . . . . . . . . (11,253,149) (7,288,550)
------------- ------------
MINORITY INTEREST. . . . . . . . . . . - 12,783
INTEREST EXPENSE, NET. . . . . . . . . (480,924) (482,081)
LOSS ON EXTINGUISHMENT OF DEBT . . . . (241,785) -
------------- ------------
NET LOSS BEFORE INCOME TAXES . . . . . (11,975,858) (7,757,848)
INCOME TAX BENEFIT . . . . . . . . . . - -
------------- ------------
NET LOSS . . . . . . . . . . . . . . . $(11,975,858) $(7,757,848)
============= ============
NET LOSS PER SHARE . . . . . . . . . . $ (0.39) $ (0.51)
============= ============
SUPPLEMENTARY NET LOSS PER SHARE . . . $ (0.39) $ (0.50)
============= ============
SHARES USED IN COMPUTING
NET LOSS PER SHARE . . . . . . . . . . 31,084,693 15,088,376
============= ============
SHARES USED IN COMPUTING
SUPPLEMENTARY NET LOSS PER SHARE . . . 31,084,693 15,603,250
============= ============
<FN>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these Statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMEMBER 31, 1997 AND 1996
Preferred Stock Common Stock Additional
----------------- --------------------- Paid-In
Shares Amount Shares Amount Capital
------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995. . . . . . . . . . . . . . . . . 550 $ 6 7,298,393 $ 73 $ 2,235,901
Issuance of common stock ($.070 per share). . . . . . . . . . - - 303,428 5 212,395
Issuance of common stock in exchange for services
($2.65 per share). . . . . . . . . . . . . . . . . . . . . . - - 25,586 - 67,763
Issuance of common stock in conjunction with PDS acquisition
(Note 3) ($2.00 per share) . . . . . . . . . . . . . . . . . - - 1,000,000 10 1,999,990
Issuance of common stock in conjunction with PDN acquisition
(Note 3) ($2.00 per share) . . . . . . . . . . . . . . . . . - - 150,000 2 299,999
Conversion of preferred stock into common stock (Note 6). . . (550) (6) 2,847,412 28 (22)
Issuance of common stock in conjunction with OCI acquisition
(Note 3) ($2.00 per share) . . . . . . . . . . . . . . . . . - - 8,999,960 90 17,999,830
Issuance of common stock in conjunction with Worldlink
acquisition (Note 3) ($2.00 per share) . . . . . . . . . . . - - 1,850,000 18 3,699,982
Issuance of common stock in conjunction with Panama Phone
purchase (Note 3) ($2.00 per share). . . . . . . . . . . . . - - 2,000 - 4,000
Issuance of common stock warrants in exchange for
Telecommute Solutions (Note 3) ($2.38 per share) . . . . . . - - - - 47,500
Issuance of common stock warrants in exchange for services
($0.1642 per warrant). . . . . . . . . . . . . . . . . . . . - - - - 3,677
Exercise of service warrants ($0.70 per warrant). . . . . . . - - 186,000 - 130,200
Issuance of common stock warrants in conjunction with
senior subordinated debt ($0.1679 per warrant) . . . . . . . - - - - 318,047
Exercise of debt warrants ($0.70 per warrant) . . . . . . . . - - 1,540,000 16 1,077,984
Issuance of common stock options for services ($0.594 per
option). . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - 204,779
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - -
------- -------- ----------- -------- ------------
Balance at December 31, 1996. . . . . . . . . . . . . . . . . - $ 0 24,202,779 $ 242 $28,302,025
Issuance of common stock ($1.00 per share) (Note 6) . . . . . - - 9,283,997 93 9,203,844
Retirement of shares in conjunction with a contribution
agreement executed by certain members of management . . . . - - (2,500,000) (25) (3,538,698)
Issuance of common stock in conjunction with
conversion of debenture, net ($.50 per share) (Note 6) . . . - - 2,200,000 22 999,978
Issuance of common stock in conjunction with
the acquisition of communications operating licenses . . . . - - 400,000 4 399,996
Issuance of common stock in conjunction with
financing lease transaction (Note 4) . . . . . . . . . . . . - - 450,000 5 449,995
Issuance of common stock in conjunction with debt
issuance . . . . . . . . . . . . . . . . . . . . . . . . . . - - 98,000 - 98,000
Issuance of common stock warrants in conjunction with
operating lease ($0.34 per warrant). . . . . . . . . . . . . - - - - 66,300
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - -
------- -------- ----------- -------- ------------
Balance at December 31, 1997. . . . . . . . . . . . . . . . . - $ - 34,134,776 $ 341 $35,981,440
======= ======== =========== ======== ============
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMEMBER 31, 1997 AND 1996
Accumulated Stockholders'
Deficit Equity
------------- ---------------
<S> <C> <C>
Balance at December 31, 1995. . . . . . . . . . . . . . . . . ($1,871,675) $ 364,305
Issuance of common stock ($0.70 per share). . . . . . . . . . - 212,400
Issuance of common stock in exchange for services
($2.65 per share). . . . . . . . . . . . . . . . . . . . . . - 67,763
Issuance of common stock in conjunction with PDS acquisition
(Note 3) ($2.00 per share) . . . . . . . . . . . . . . . . . - 2,000,000
Issuance of common stock in conjunction with PDN acquisition
(Note 3) ($2.00 per share) . . . . . . . . . . . . . . . . . - 300,001
Conversion of preferred stock into common stock (Note 6). . . - -
Issuance of common stock in conjunction with OCI acquisition
(Note 3) ($2.00 per share) . . . . . . . . . . . . . . . . . - 17,999,920
Issuance of common stock in conjunction with Worldlink
acquisition (Note 3) ($2.00 per share) . . . . . . . . . . . - 3,700,000
Issuance of common stock in conjunction with Panama Phone
purchase (Note 3) ($2.00 per share). . . . . . . . . . . . . - 4,000
Issuance of common stock warrants in exchange for services
Telecommute Solutions (Note 3) ($2.38 per share) . . . . . . - 47,500
Issuance of common stock warrants in exchange for services
($0.1642 per share). . . . . . . . . . . . . . . . . . . . . - 3,677
Exercise of service warrants ($0.70 per warrant). . . . . . . - 130,200
Issuance of common stock warrants in conjunction with
senior subordinate debt ($0.1679 per warrant). . . . . . . . - 318,047
Exercise of debt warrants ($0.70 per warrant) . . . . . . . . - 1,078,000
Issuance of common stock options for services
($0.594 per option). . . . . . . . . . . . . . . . . . . . . - 204,779
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . (7,757,848) (7,757,848)
------------- ---------------
Balance at December 31, 1996. . . . . . . . . . . . . . . . . ($9,629,523) $ 18,672,744
Issuance of common stock ($1.00 per share) (Note 6) . . . . . - 9,203,937
Retirement of shares in conjunction with a contribution
agreement executed by certain members of management . . . . - (3,538,723)
Issuance of common stock in conjunction with
conversion of debenture ($.50 per share) (Note 6). . . . . . - 1,000,000
Issuance of common stock in conjunction with
the acquisition of communications operating licenses . . . . - 400,000
Issuance of common stock in conjunction with
financing lease transaction (Note 4) . . . . . . . . . . . . - 450,000
Issuance of common stock in conjunction with debt
issuance . . . . . . . . . . . . . . . . . . . . . . . . . . - 98,000
Issuance of common stock warrants in conjunction with
operating lease ($0.34 per warrant). . . . . . . . . . . . . - 66,300
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . (11,975,858) (11,975,858)
------------- ---------------
Balance at December 31, 1997. . . . . . . . . . . . . . . . . ($21,605,381) $ 14,376,400
============= ===============
<FN>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these Statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMEMBER 31, 1997 AND 1996
1997 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,975,858) $(7,757,848)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,995,334 1,429,243
Noncash consulting and service expenses - 276,219
Bad debt expense 586,687 461,060
Amortization of discounts on debt and lease
obligations 56,891 45,492
Loss on extinguishment of debt 241,785 -
Nonrecurring charge 2,677,099 -
Changes in operating assets and liabilities:
Accounts receivable, net (1,645,919) 375,307
Accounts receivable-- affiliate, net 63,802 (351,720)
Inventory (194,180) (104,565)
Prepaid expenses 23,832 (133,838)
Other assets (279,893) (74,274)
Accounts payable, accrued and other liabilities 971,375 3,560,968
Accounts payable-- affiliate 26,656 (35,206)
Unearned revenue (185,009) 439,009
Other 54,758 -
------------- ------------
Total Adjustments 5,393,218 5,887,695
------------- ------------
Net cash used in operating activities (6,582,640) (1,870,153)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,577,080) (3,581,874)
Restricted cash (135,000) -
Acquisition of subsidiary - (483,186)
------------- ------------
Net cash used in investing activities (2,712,080) (4,065,060)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,831,604 1,420,600
Proceeds from financing lease 2,086,096 274,165
Proceeds from issuance of convertible debentures 2,180,000 -
Proceeds from exercise of stock warrants - 317,968
Proceeds from senior subordinated notes - 2,327,032
Proceeds from prefered stock - -
(Repayment of)/Proceeds from line of credit, net (1,161,092) 1,046,092
(Repayment of)/Proceeds from loans from shareholders (282,683) 1,000,000
Proceeds from/(Repayment of) notes payable, net 476,046 (174,233)
------------- ------------
Net cash provided by financing activities 9,129,971 6,211,624
------------- ------------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (164,749) 276,411
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 320,252 43,841
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 155,503 $ 320,252
============= ============
Supplemental Non-Cash Disclosures:
- --------------------------------------------------------
Cash paid for interest 339,874 279,698
Cash paid for income taxes - -
Assets acquired in excess of liabilities assumed:
PDS acquisition - 2,000,000
PDN acquisition - 300,000
Telecommute acquisition - (47,500)
OCI acquisition - 18,000,000
Worldlink acquisition - 3,700,000
Purchase price adjustments 864,612
Conversion of Liabilities to Equity
Subordinated debentures 2,115,000 -
Shareholder loans 937,865 -
Accrued liabilities 319,468 -
Giveback of shares by members of management 3,538,723 -
Deferred settlement gain 2,757,132
Conversion of subordinated debenture 1,000,000
Shares issued for operating licenses 400,000
</TABLE>
The accompanying Notes to the Consolidated Financial Statements
are an integral part of these Statements.
F-7
<PAGE>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND NATURE OF BUSINESS
Charter Communications International, Inc. ("Charter" or the "Company"),
was incorporated in Nevada on April 10, 1996, as a wholly owned subsidiary of
Maui Capital Corporation, a Colorado Corporation ("Maui Capital"), which
incorporated on August 8, 1988. On April 21, 1996, Maui Capital and the Company
merged with the Company being the surviving corporation and succeeding to all
the business, properties, assets and liabilities of Maui Capital. The purpose
of the merger of Maui Capital and the Company was to change the name and state
of incorporation of Maui Capital. Maui Capital had no business or assets prior
to September 21, 1995, when it acquired TOPS Corporation, a Nevada corporation
("TOPS") (TOPS was named Charter Communications International, Inc., until April
10, 1996, when its name was changed so that the Company could be formed in
Nevada with the same name). At the time of the acquisition, TOPS was the sole
stockholder of Charter Communicaciones Internacionales Grupo, S.A., a Panama
corporation ("Charter Panama"), which was engaged in developing a private line
telecommunication system in Panama and pursuing licenses to provide such
services in various other Latin American countries. Since the acquisition of
TOPS, the Company (and Maui Capital, its predecessor) has endeavored to grow
both through the development of its existing businesses and through the
acquisition of complementary businesses. Proceeds from private placements of
securities with principals and outside investors have funded the development of
the Company to date.
The Company was formed to provide enhanced telecommunication products and
services to domestic and international markets, with a primary focus on Latin
America. The telecommunication services and products provided include enhanced
calling cards, switch voice products, international private line services,
Internet access, and telecommuting services.
On January 8, 1996, Charter completed the cash acquisition of 90% of
Phoenix DataNet ("PDN"), a provider of domestic and international Internet
access. On March 21, 1996, the Company acquired Phoenix Data Systems ("PDS")
and the remaining 10% of PDN in a stock transaction that allowed the Company to
enter the network integration business. On July 31, 1996, the Company acquired
Telecommute Solutions, Inc. ("Telecommute") in a stock transaction that allowed
the Company to offer various telecommuting services. On September 21, 1996, the
Company acquired Overlook Communications International Corporation ("OCI") in a
stock transaction that allowed the Company to offer a variety of both domestic
and international enhanced telecommunications and long distance services,
including prepaid phone calling cards. On October 5, 1996, the Company acquired
Worldlink Communications, Inc. ("Worldlink"), a provider of prepaid
long-distance calling cards in a stock transaction. See Note 3.
Some of the telecommunication services offered by Charter require licensing
by United States federal and state agencies and the foreign countries wherein
services are offered. Charter has formed wholly owned or majority owned foreign
corporations. Charter maintains financial control of all subsidiaries.
The Company has been licensed by the United States Federal Communication
Commission as a facilities based carrier. Charter has selected the Mexican
Solidaridad system as its primary satellite carrier. A variety of U.S. carriers
are used to provide domestic long-distance services. The Company is licensed to
provide enhanced communications services in Panama, Mexico, Honduras, Venezuela,
El Salvador, Guatemala, Costa Rica, Nicaragua and Peru. Generally, licensing of
Enhanced services in the United States is not required. As of December 31, 1997,
The Company was operating in the United States, Panama, Venezuela, Costa Rica,
Mexico and El Salvador.
The Company is seeking international telecommunication licenses in various
foreign countries. The Company faces competition for such licenses from major
international telecommunications entities as well as from local competitors in
each country. If a communications license is obtained, the Company's
international telecommunications operations will face competition from existing
government owned or monopolistic telephone service companies and from other
operators who receive licenses. The Company may also face significant potential
competition from other communication technologies that are being or may be
developed or perfected in the future. Some of the Company's competitors have
substantially greater financial, marketing, and technical resources than does
the Company. Accordingly, there can be no assurance that the Company will be
able to obtain any additional licenses or that its international
telecommunications operations will be able to compete effectively.
Operations prior to 1996 consisted primarily of raising capital, obtaining
financing, locating and acquiring equipment, obtaining customers and suppliers,
installing and testing equipment, and administrative activities. Since the
Company has only recently made the transition to an operating company, the
Company's ability to manage its growth and expansion will require it to
implement and continually expand its operational and financial systems, recruit
additional employees, and train and manage both current and new employees.
Growth may place a significant strain on the Company's operational resources and
systems, and failure to effectively manage this projected growth would have a
material adverse effect on the Company's business.
The Company, which has never operated at a profit, has experienced
increasing operating losses since its inception as a result of efforts to build
its customer base and develop its operations. The Company estimates that its
cash and financing needs for its current business through 1998 will be met by
the cash on hand following the private placement offerings of its common stock,
proceeds from an additional sale leaseback, and proceeds from a receivable
credit facility all executed in the first quarter of 1998 (see Note 13) and cash
flows from operations plus additional private placements and exercise of
warrants. However, any increases in the Company's growth rate, shortfalls in
anticipated revenues, increases in anticipated expenses, or significant
acquisition or expansion opportunities could have a material adverse effect on
the Company's liquidity and capital resources and would require the Company to
raise additional capital from public or private equity or debt sources in order
to finance operating losses, anticipated growth, and contemplated capital
expenditures and expansions. The Company has significant expansion plans but
does not currently have adequate resources available to achieve all of its
potential expansion plans. The Company will not engage in such expansion until
adequate capital sources have been arranged. Accordingly, the Company
anticipates additional future private placements and/or public offerings of debt
or equity securities will be necessary to fund such plans. If such sources of
financing are insufficient or unavailable, the Company will be required to
modify its growth and operating plans or scale back operations to the extent of
available funding. The Company may need to raise additional funds in order to
take advantage of unanticipated opportunities, such as acquisitions of
complementary businesses or the development of new products, or otherwise
respond to unanticipated competitive pressures. There can be no assurance that
the Company will be able to raise any such capital on terms acceptable to the
Company or at all.
F-8
<PAGE>
The Company expects to continue to focus on developing and expanding its
enhanced telecommunication services offerings, while continuing to expand its
current operation market penetration. Accordingly, the Company expects its
capital expenditures and cost of revenues and depreciation and amortization
expenses will continue to increase significantly, all of which could have a
negative impact on short-term operating results. In addition, the Company may
change its strategy to respond to a changing competitive environment. There can
be no assurance that growth in the Company's revenue or market penetration will
continue, that its expansion efforts will be profitable, or that the Company
will be able to achieve or sustain profitability or positive cash flow. Further,
the Company will require substantial financing to accomplish any significant
acquisition or merger transaction and for working capital to operate its current
and proposed expanded operations until profitability is achieved, if ever.
While the Company currently expects to meet its 1998 operating cash flow and
capital expenditure requirements through cash on hand after the various first
quarter 1998 financing activities and additional private placements and exercise
of warrants combined with internally generated funds, there can be no assurance
that this will be achieved. The Company does not currently have commitments or
arrangements for such financing, and accordingly, the availability of such
financing on terms acceptable to the Company is not assured. Accordingly, there
can be no assurance that the Company's planned expansion of its operations will
be successful.
2. SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting and include the accounts of the Company and all of
its majority-owned subsidiaries. All significant intercompany balances have been
eliminated.
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. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
SOURCE OF SUPPLIES
The Company relies on local and long distance telephone companies to
provide certain communications services. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results. During
December 1996, the Company's long-distance provider discontinued service in a
dispute over payment of invoices resulting in the Company's prepaid calling card
platform not being accessible for a period of approximately ten days.
Subsequently, alternative long distance providers have been found, but any such
recurrence of this situation could have a material adverse effect on the
Company's operating results.
PRESENTATION
Certain prior year amounts have been reclassified to conform with the
current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits, and
short-term investments with original maturities of three months or less. The
carrying value of the cash and cash equivalents approximates fair market value
at December 31, 1997 and 1996.
RESTRICTED CASH
The Company's restricted cash represents deposits on hand with a bank as
security for letters of credit.
CONCENTRATION OF RISK
A portion of the Company's assets and operations are located in various
South and Central American countries. The Company's business cannot operate
unless the governments of these countries provide licenses, privileges or other
regulatory clearances. No such assurance can be given that such rights, once
granted, could not be revoked without due cause.
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The concentration of credit risk is
mitigated by the large number of customers comprising the customer base. The
carrying amount of the Company's receivables approximates their fair value.
INVENTORIES
Inventories consist of computer products, prepackaged software used for
Internet access, and debit cards. All inventory is recorded as finished goods
and is available for sale. Inventories are stated at the lower of cost or
market. Cost is determined on the first-in, first-out method.
PROPERTY AND DEPRECIATION
Property and equipment are recorded at cost, including certain engineering
costs. The property and equipment acquired in conjunction with the 1996
acquisitions was recorded on the Company's books at net book value, which
approximated fair market value at the dates of acquisition. The Company records
depreciation using the straight-line method over the estimated useful lives of
the assets, which are:
<TABLE>
<CAPTION>
Classification Estimated Useful Lives
<S> <C>
Equipment and machinery 5-7 years
Earth station facility 10 years
Software 5 years
Furniture and fixtures 5-7 years
Other property 3-7 years
</TABLE>
Leasehold improvements are amortized over the shorter of the useful life of
the improvement or the life of the lease. The Company's policy is to remove the
cost and accumulated depreciation of retirements from the accounts and recognize
the related gain or loss upon the disposition of assets. Such gains and losses
were not material for any period presented. Property and equipment recorded
under financing leases are included with the Company's owned assets.
Amortization of assets recorded under capital leases is included in depreciation
expense.
INTANGIBLES
In conjunction with the mergers in 1996 (see Note 3), the Company recorded
intangible assets of approximately $27,140,000 due to the purchase prices
exceeding the values of the tangible net assets acquired subject to adjustment
for up to one year from the date of acquisition. After identifying the tangible
assets and liabilities, the Company allocated the excess to identifiable
intangible assets and the remainder to goodwill. Amortization of these costs is
included in depreciation and amortization in the accompanying statements of
operations. During 1997, the Company reduced these intangible assets by
$3,538,698 for the value of 1,769,349 shares returned by certain major
shareholders for no consideration, to extinguish potential guaranties in
conjunction with the OCI and Worldlink acquisitions. Such shares were retired
by the Company. Also during 1997, the Company increased these intangible assets
by $864,612 for certain contingencies, which were unrecorded as of the
acquisition dates of OCI and Worldlink. Finally, during 1997, the Company
reduced these assets by $1,889,138 related to the PDS acquisition in conjunction
with exiting the network integration business (See Note 8). The following
table summarizes the intangible assets' respective amortization periods and
their respective amortization periods:
<TABLE>
<CAPTION>
Category Amortization Period
<S> <C>
Acquired Customer Base 3-10 years
Other Intangibles 3- 5 years
Goodwill 3-30 years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
including property and equipment and intangibles, to determine if any
impairments are other than temporary. During 1997, the Company decided to exit
the PDS line of business, and accordingly, determined that certain assets were
impaired (see Note 8). Management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
MINORITY INTEREST
Minority interest represents the 10% ownership interest in PDN not acquired
in the initial acquisition. As noted previously, this 10% was outstanding from
January 8, 1996 to March 21, 1996.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Effective in 1996, the Company adopted the disclosure
option of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") (Note 7), for all options granted
subsequent to January 1, 1995. SFAS 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. SFAS 123 requires that companies which do not
choose to account for stock-based compensation as prescribed by this statement
shall disclose the pro forma effects on earnings and earnings per share as if
SFAS 123 had been adopted. Additionally, certain other disclosures are required
with respect to stock compensation and the assumptions used to determine the pro
forma effects of SFAS 123.
REVENUE RECOGNITION
Revenues from telecommunications, Internet access services, and network
computer sales and services are generally recognized when the services are
provided. Invoices rendered and payments received for telecommunications
services and Internet access in advance of the period when revenues are earned
are recorded as unearned revenues and are recognized ratably over the period the
services are provided or the term of the Internet subscription agreements, which
are generally 3 to 12 months. Sales of prepaid phone calling cards are recorded
as unearned revenues and revenue is recognized as minutes are used or when the
cards expire. Sales of hardware are recognized when installation has occurred
and no further performance obligation remains. Sales of prepackaged software
are recognized upon delivery of the product.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
exchange rates in effect at the balance sheet date, except that fixed assets are
translated at exchange rates in effect when these assets are acquired. Revenues
and expenses of foreign operations are translated at average monthly exchange
rates prevailing during the year, except that depreciation and amortization
charges are translated at the exchange rates in effect when the related assets
are acquired.
The national currency of Panama is the U.S. dollar. The currency of Mexico
is considered hyper-inflationary; therefore, the US dollar is the functional
currency. Accordingly, no foreign currency translation is required upon the
consolidation of the Company's Panamanian or Mexican operations. The effects of
foreign currency translation on the Company's Venezuelan operations, which began
in the fourth quarter of 1996, and Costa Rican operations, which began in the
third quarter of 1997, were not material. Prior to 1996, the Company had no
foreign operations outside of Panama, and no foreign currency translation was
required.
NET LOSS PER SHARE
Effective with the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." This standard
requires the computation of basic earnings per share using only the weighted
average common shares outstanding, and diluted earnings per share, using the
weighted average common shares outstanding, adjusted for potentially dilutive
instruments using either the if converted or treasury stock method as
appropriate if dilutive. This statement required retroactive restatement of all
prior period earnings per share data presented. The adoption of this statement
had no effect on the Company, as for all periods, the effect of any dilutive
instruments was antidilutive. Accordingly, for all periods presented basic and
diluted earnings per share are the same.
SUPPLEMENTARY NET LOSS PER SHARE
On March 8, 1996, the Series A Preferred Stock was automatically converted
into 2,847,412 shares of the Company's common stock. Supplementary loss per
share is the loss per share amount adjusted to reflect the conversion of
preferred stock on March 8, 1996 as if the conversion had occurred on the day
that the preferred stock was issued.
3. BUSINESS COMBINATIONS AND ACQUISITIONS
BUSINESS COMBINATIONS
Effective September 21, 1995, Charter consummated a reverse triangular
merger with Maui Acquisition Corp., a subsidiary of Maui. Maui was a public
shell having essentially no operations, cash, or stockholders' equity. In
connection with the reverse triangular merger, each share of the Company's
common stock was converted into 5,177.136 shares of newly issued Maui common
stock so that Charter's stockholders received 5,798,393 shares of Maui common
stock, 550 shares of Maui Series A preferred stock (convertible into 2,847,412
shares of Maui common stock), and warrants to purchase 854,231 shares of Maui
common stock. Maui previously had issued and outstanding 1,250,000 shares of
common stock; therefore, Charter obtained control. In connection with the
merger, Maui changed its name to Charter, members of Maui's Board of Directors
resigned and were replaced by Directors of Charter and Charter's management
assumed direct control of Maui. For accounting purposes, the transaction has
been accounted for as an acquisition of Maui and a 5,177.136-for-1 common stock
split by Charter. The financial advisors of the Company were issued 250,000
shares of Maui common stock in exchange for services.
Charter Panama was combined with the Company in a transaction accounted for
as a combination of entities under common control effective May 15, 1995. The
shares exchanged represent all outstanding common stock of the Company and of
Charter Panama at the time of the business combination.
The financial statements for all periods presented reflect the results of
these business combinations as if they had occurred at the inception of the
Company.
ACQUISITIONS
During 1996, the Company engaged in the following significant acquisitions
(see Note 2 for description of the purchase price allocation):
PDN
On January 8, 1996, the Company acquired 90% of the issued and outstanding
capital stock of PDN, in exchange for $525,000 in cash. PDN, a Texas
corporation, was formerly a subsidiary of Phoenix Data Systems, Inc. ("PDS").
PDN was originally incorporated on February 21, 1995 and prior to that date had
operated as a division of PDS. PDS entered into an agreement on December 22,
1995 to sell its 90% ownership of the issued and outstanding shares of common
stock of PDN. On March 21, 1996, the Company acquired the remaining 10% in PDN
through the issuance of 150,000 shares of the Company's common stock, at an
estimated fair market value of $2 per share at the time the transaction was
consummated. The acquisition has been accounted for as a purchase.
PDN engages in the business of providing Internet access to businesses and
individuals and a full range of related services, including the creation and
development on behalf of its customers of Internet based advertising, customer
service functions, on-line sales and services, and other on-line interactive
services. Additionally, PDN sells and services a complete line of products for
Internet access.
PDS
On March 21, 1996, the Company acquired 100% of the issued and outstanding
capital stock of PDS. PDS is in the business of providing computer network
integration, service, consulting, and support for commercial businesses. The
transaction involved the exchange of 1,000,000 shares of the Company's common
stock, 825,000 shares of which were immediately issued free and clear of any
adverse claims or encumbrances and 175,000 shares of which were retained by the
Company in order to secure representations and warranties and covenants of PDS
and PDS shareholders and will be subject to offset against claims against PDS.
All claims against PDS have been settled, and the 175,000 shares were issued on
September 20, 1996. The shares issued in the transaction were valued at $2 per
share, the estimated fair market value as of the date the transaction was
consummated. The acquisition has been accounted for as a purchase. During
1997, the Company made the decision to exit the network integration business.
In conjunction with this decision, the net assets of PDS, including the
remaining identifiable intangible assets and goodwill, were written off and
included in the Company's Statement of Operations as part of the nonrecurring
charge. (See Note 8).
OCI
On July 15, 1996, the Company entered into an agreement to acquire 100% of
the issued and outstanding capital stock of OCI. OCI, a North Carolina
corporation, is an independent telecommunications service bureau and reseller of
domestic and international long-distance services including prepaid calling
cards and 800 and 900 traffic to customers in the United States. OCI's
operations commenced in 1992. The transaction was consummated on September 21,
1996 and involved the issuance of 8,999,960 shares of the Company's common
stock. The shares issued in the transaction were valued at $2 per share, the
estimated fair market value as of the date the transaction was consummated. The
acquisition has been accounted for as a purchase.
WORLDLINK
On September 13, 1996, the Company entered into an agreement to acquire
100% of the issued and outstanding capital stock of Worldlink. Worldlink, a
Georgia corporation, is a switch based reseller of long distance service which
uses debit cards to market its service. The transaction was consummated on
October 1, 1996, and involved the issuance of 1,850,000 shares of the Company's
common stock. The shares issued in the transaction were valued at $2 per share,
the estimated fair market value as of the date the transaction was consummated.
The acquisition has been accounted for as a purchase.
The following unaudited pro forma condensed consolidated statement of
operations assumes the acquisitions occurred at the beginning of the period
presented. In the opinion of management, all adjustments necessary to present
fairly such unaudited pro forma condensed statement of operations have been
made.
<TABLE>
<CAPTION>
1996
<S> <C>
Revenues $ 13,245,000
Net loss (12,310,000)
Net loss per share $ (0.48)
</TABLE>
OTHER
PANAMA PHONE CENTERS
On March 30, 1996, the Company acquired the assets and rights to operate
long-distance telephone centers at various U.S. military installations in the
Republic of Panama. Prior to March 30, 1996, the Company had been receiving
royalties from telephone calls placed at these phone centers, under a separate
contract. The phone centers and rights to provide these services were acquired
for $224,000 in cash and 2,000 shares of common stock of the Company valued at
$2 per share. Simultaneously with the purchase, the Company entered into an
agreement with a lease finance company to sell and lease back a portion of the
assets acquired. Lease financing was obtained in the amount of $168,000, the
acquisition price of the majority of the phone center assets. The term of the
lease provides for monthly payments of $5,712, beginning on April 1, 1996 and
continuing through March 1, 1999. This transaction is not considered to be a
significant business combination, and accordingly, no pro forma information is
presented.
TELECOMMUTE
In July 1996, the Company entered into an agreement to acquire 100% of the
issued and outstanding capital stock of Telecommute, a provider of telecommuting
hardware and services. The transaction was consummated on July 31, 1996, and
involved the issuance of 20,000 warrants to purchase shares of the Company's
common stock. The shares issued in the transaction were valued at $2.38 per
share, the estimated fair market value as of the date the transaction was
consummated. The acquisition has been accounted for as a purchase. This
transaction is not considered to be a significant business combination, and
accordingly, no pro forma information is presented.
JOINT VENTURE AGREEMENT
On January 24, 1996, the Company entered into an agreement for joint
operations of international telecommunications service into and out of various
locations in the country of Mexico. The Company has agreed to incur various
expenses to reactivate the international telecommunications service to various
hotel facilities, arrange for agreements with international carriers to provide
call termination and other services, and contribute future funds for equipment
to connect new customers. During the first quarter of 1997, this agreement was
terminated.
4. LONG-TERM OBLIGATIONS
Obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
18% Convertible Debentures due October 1, 2002 $ 1,180,000 $ 0
Financing Lease Obligation, net of discount
of $429,308 as of December 31, 1997 1,739,722 0
12% Senior Subordinated Notes due December
2000, net of discount of $69,722 and $331,508
as of December 31, 1997 and 1996, respectively 660,278 2,513,492
Notes Payable and other obligations 886,111 60,065
Lines of Credit:
Due December, 1996 0 96,092
Due February, 1997 0 600,000
Due May, 1998 485,000 500,000
Due June, 1997 0 450,000
Loans from stockholders 520,000 1,740,548
------------- -------------
5,471,111 5,960,197
Less current portion 1,522,250 3,436,904
------------- -------------
Long-term obligations $ 3,948,861 $ 2,523,293
------------- -------------
</TABLE>
During 1997, the Company issued, in a private offering, $1,180,000
principal amount 18% Convertible Subordinated Debentures due October 1, 2002.
The Debentures are convertible at any time into shares of common stock at a
price of $1.20 per share. Interest is payable quarterly at a rate of 18% per
annum, in arrears. The debentures are non-callable for a period of one year and
are not secured by any assets of the Company or guaranty.
During 1997, the Company entered into a sale leaseback transaction with
regard to certain of its assets included in property and equipment. For
accounting purposes, the lease is being accounted for as a financing type lease
as it does not meet the criteria for sale. Net proceeds received in the sale
were $2,086,096. The lease term is five years commencing December 1, 1997.
Lease payments are due monthly, in arrears. The lease includes an option for
the Company to repurchase the equipment at the end of the lease term for $100.
In conjunction with the lease, a security agreement was signed granting the
lessor a security interest in all current and future purchases (for the life of
the lease) of plant and equipment, receivables and inventory. Also, in
conjunction with the lease, 450,000 shares of common stock were granted to the
lessor and its agent. The Company entered into an agreement with regard to the
shares whereby the holders may not sell the shares until June 30, 1998. The
Company has guaranteed the holders $2.33 per share and will make up any short
fall between the average stock price for the twenty days proceeding June 30,
1998 and $2.33 with either cash or additional shares or combingation of the two
at the Company's discretion. The fair market value of the shares of common stock
was estimated by the Company to be $450,000 and was recorded as additional
paid-in capital and a discount on the lease obligation. The lease obligation is
stated net of discount, which is being amortized over the term of the lease.
During 1995 and 1996, the Company issued, in a private offering, $2,845,000
12% Senior Subordinated Notes due December 31, 2000 with attached warrants which
grant the purchasers of the Notes the right to buy 2,244,000 shares of the
Company's common stock. The warrants grant the purchasers the right to exercise
the warrants at prices of $1.75 in 1998, $2.25 in 1999 and $2.50 in 2000.
Interest is payable quarterly at the rate of 12% per annum, in arrears. The
fair market value of the 2,244,000 warrants issued in conjunction with the notes
was estimated by the Company to be $345,000 and was recorded as additional
paid-in capital and a discount on the notes. The notes are stated net of
discount, which is being amortized over the term of the notes. Amortization of
this discount is included in the accompanying financial statements as interest
expense. The notes are not secured by any assets of the Company or guaranty.
During 1997, principal amounts of $2,115,000 of the Senior Subordinated Notes
were converted to common stock in the January private placement.
The Company has $520,000 in Stockholder loans outstanding at December 31,
1997. Interest rates on the loans range from 10% - 12%. The Company had
Stockholder loans of $1,740,548 outstanding at December 31, 1996, of which
$937,865 were converted to common stock in the January private placement.
The Company has established one line of credit with a commercial bank that
provides for borrowings up to $500,000. The revolving credit line is secured by
marketable securities of an affiliate of a shareholder of the Company and
guaranteed by that shareholder. Interest is payable quarterly at the bank's
prime rate (8.5% at December 31, 1997) plus 1.5%. Repayments of principal on
the line of credit are due as follows, $15,000 due February 1998 and $470,000
due May 1998. During 1997, the Company repaid a total of $1,161,092, net, on
lines of credit outstanding at December 31, 1996.
At December 31, 1997, the Company had other outstanding term notes payable
with varying terms and conditions in the total amount of $586,111. The interest
rates on these notes are at prime (8.5% at December 31, 1997), with maturity
dates between March 1999 and February 2001. A portion of these notes is secured
by the guaranties of shareholders. The portion of the total notes payable that
will become due within the next twelve months amounted to $175,001 at December
31, 1997.
The carrying value of the Notes and Lines of Credit approximated
market value at December 31, 1997.
Scheduled maturities of long-term obligations are as follows for years
ended December 31:
<TABLE>
<CAPTION>
<S> <C>
1998 $1,522,250
1999 907,550
2000 1,343,096
2001 537,648
2002 1,659,597
Total $5,970,141
</TABLE>
5. DEFERRED SETTLEMENT
Since mid-1996, OCI has been negotiating with Sprint Communications L.P.
("Sprint") to resolve a dispute involving Sprint's past services to OCI. As of
December 31, 1996, OCI had accrued the entire amount which Sprint claimed was
due. During 1997, OCI reached an agreement in principal with Sprint to pay
$100,000 down and $50,000 per month for 18 months for a total of $1,000,000 with
release of all claims regarding the remaining balance. A definitive settlement
agreement is expected to be memorialized in the second quarter of 1998, at which
time payments will commence. At December 31, 1997, the Company has included
$700,000 in accounts payable, $300,000 in other long term obligations and the
balance of $2,757,132 as a deferred credit. Upon memorializing the settlement
agreement, the Company will recognize the gain relating to the settlement.
6. STOCKHOLDERS' EQUITY
The articles of incorporation provide for the issuance of 45,000,000 shares
of $0.00001 par value Common Stock and 100,000 shares of $0.01 par value
preferred stock. All of the preferred stock has been designated as Series A
Convertible Preferred Stock by the Board of Directors.
PREFERRED STOCK
On August 3, 1995, the Company received subscriptions for 550 shares of
Series A Convertible Preferred Stock at the rate of $3,636 per share, or gross
proceeds of $1,999,800. Additionally, the subscribers to the Series A
Convertible Preferred Stock were issued warrants to purchase a total of 854,231
shares of common stock at a price of $0.70 per share, exercisable for three
years from the date of issuance of the warrants. The shares and warrants were
issued to existing shareholders as well as other outside investors. On March 8,
1996, the Series A Preferred Stock was automatically converted into 2,847,412
shares of the Company's common stock.
COMMON STOCK
During 1997, the Company issued 5,911,664 shares of common stock at $1 per
share, or $5,911,664 gross proceeds; 2,115,000 shares of common stock for
conversion of senior subordinated debt; 937,865 shares of common stock for
conversion of shareholder loans; 319,468 shares of common stock for conversion
of other accrued liabilities; and 400,000 shares of common stock to an agent in
conjunction with securing licenses to operate in two Latin American countries.
All of the preceding conversions of stock for liabilities were executed at a
rate of $1 of the related liability for $1 of common stock. Also, during 1997,
the Company issued 2,000,000 shares of common stock for conversion of the
$1,000,000 par value subordinated debenture issued to offshore investors at a
rate of $.50 per share. In conjunction with the issuance of these shares,
holders were granted 2,000,000 warrants to purchase the Company's common stock
at $1.50 per share. In conjunction with the placement of the subordinated
debenture, the Company issued 200,000 shares to the placement agent in an
offshore market. In conjunction with the January 1997 private placement,
certain major shareholders returned 2,500,000 shares of common stock to the
Company for no consideration and such shares were retired.
During 1996, the Company issued 303,428 shares of common stock at $0.70 per
share, or $212,400. Additionally, the Company issued 25,586 shares of common
stock at $2.65 per share, or $67,763, for services rendered. In addition, the
Company issued 12,001,960 shares of common stock at $2 per share in connection
with the acquisitions discussed in Note 3 during 1996. During 1995, the company
issued 103,544 shares of common stock at $0.0966 per share, or $10,000, for
services rendered.
COMMON STOCK WARRANTS
At December 31, 1997, the Company had outstanding warrants that gave the
holders the right to purchase 1,937,631 shares of the Company's common stock at
$0.70 per share, 20,000 shares at $4 per share, 160,000 shares at $1 per share,
2,000,000 shares at $1.50 per share, and 195,000 shares at $3.00. The 2,000,000
warrants at $1.50 per share were issued in conjunction with the common stock
issued to offshore investors pursuant to the conversion of the convertible
debenture. The Company retains the right to require exercise of these warrants
since the criteria that the stock price trade above $1.75 for at least 20 of 30
trading days was met in the third quarter of 1997. Additionally, 195,000
warrants at $3.00 per share were granted as additional rent in conjunction with
operating leases of earth stations in Panama, Costa Rica and Nicaragua (See Note
10).
7. STOCK OPTION PLANS
1995 OPTIONS
During 1995, the Company granted 1,250,000 stock options to certain key
employees and directors. The director shares were subsequently changed to be
issued under the Nonemployee Director Stock Option Plan ("NEDSOP"). The
exercise price of the stock options granted to the employees and directors is
$0.70 per share, the estimated fair market value of the Company's common stock
at the date of grant. Options generally vest ratably over four years and expire
five years after becoming fully vested. As of December 31, 1997, 250,000
non-NEDSOP issued in 1995 were still outstanding, of which, 160,000 were
exercisable.
1996 STOCK OPTION PLANS
During 1996, the Company established three stock option plans: Long-Term
Stock Option Plan ("LTSOP"), the Incentive Stock Option Plan ("ISOP"), and the
NEDSOP (collectively, the "1996 Plans"); 1,000,000, 2,000,000 and 1,000.000
shares of Common Stock are authorized for issuance in each respective plan.
Options are exercisable at the fair market value of the Common Stock
(as determined by the Board of Directors) on the date of grant. Options
generally vest ratably over 4 years and expire three years after becoming
fully vested. The plans contain various provisions pertaining to
accelerated vesting in the event of significant corporate changes.The following
table summarizes the status of the 1996 Plans as of December 31, 1997:
<TABLE>
<CAPTION>
LTSOP ISOP NEDSOP
<S> <C> <C> <C>
Balance at December 31, 1996 260,002 392,000 400,000
Granted 464,000 1,380,964 200,000
Forfeited (120,002) (376,500) 0
Exercised 0 0 0
Balance at December 31, 1997 604,000 1,396,464 600,000
Exercisable 487,334 112,577 175,000
</TABLE>
In addition to the amounts under the above plans, the Company had 80,000
options outstanding as of December 31, 1997 at a price of $6.00 per share, which
vest ratably over three years.
The exercise price of the stock options granted to the employees is equal
to the estimated fair market value of the Company's common stock at the date of
grant. Subsequent to year end, the Company re-established the exercise price of
all options under the 1996 plans, with a strike price greater than $1.00, at
$1.00 per share.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company accounts for its stock-based compensation related to the Stock
Option Plans under APB 25; accordingly, no compensation expense has been
recognized, as all options have been granted with an exercise price equal to the
fair value of the Company's stock on the date of grant. For SFAS 123 pro forma
purposes, the fair value of each option grant has been estimated as of the date
of grant using the Black-Scholes option pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Risk-free interest rate 5.705% 6.29%
Expected dividend yield 0 0
Expected lives 5.0 years 6.2 years
Expected volatility 64% 64%
</TABLE>
Using these assumptions, the fair value of the stock options granted in
1997 and 1996 is $1,157,130, and $440,891, respectively, which
would be amortized as compensation expense over the vesting period of the
options. The 1997 fair value of stock options granted was calculated using the
revised price of $1 per share. Had compensation cost been determined consistent
with the provisions of SFAS 123, the Company's net loss and pro forma net loss
per share for 1997 and 1996 would have been as follows :
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net loss:
As reported ($11,975,858) ($7,757,848)
Pro forma ($12,382,414) ($8,188,359)
Net loss per share:
As reported ($0.39) ($0.51)
Pro forma ($0.40) ($0.54)
</TABLE>
There were no issues prior to January 1, 1995 and the resulting pro forma
compensation cost may not be representative of that expected in future years.
A summary of the status of the Company's Stock Plans at December 31, 1995,
1996, and 1997 and changes during the years ended December 31, 1996 and 1997
is presented in the following table:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
<S> <C> <C>
Outstanding at December 31, 1995 1,650,000 $ 0.70
Granted 1,091,002 2.79
Forfeited (309,000) 3.77
Exercised 0 0.00
Outstanding at December 31, 1996 2,432,002 $ 1.27
Granted 2,049,964 1.06
Forfeited (1,551,502) 1.05
Exercised 0 0.00
Outstanding at December 31, 1997 2,930,464 $ 1.22
</TABLE>
The following table summarizes, as of December 31, 1997, the number of
options outstanding, the exercise price range, weighted average exercise price,
and remaining contractual lives by year of grant:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Weighted Remaining
Grant Shares Price Range Average Price Contractual Life
<S> <C> <C> <C> <C>
1997 1,677,000 $ 1.00-$1.25 $ 1.06 5.5 years
1996 703,464 $ 1.00-$7.00 $ 1.99 5.2 years
1995 550,000 $ 0.70 $ 0.70 3.4 years
</TABLE>
Total stock options exercisable at December 31, 1997 were 934,911 at a
weighted average exercise price of $1.14.
8. NONRECURRING CHARGE
In March 1996, the Company purchased PDS (Note 3), which engaged in the
business of providing computer network integration. During 1997, in an effort
to narrow the scope of the Company's product offering and to focus resources on
its core competencies, the Company decided to exit the computer network
integration business. As a result, the assets related to PDS, including
approximately $1,889,000 of goodwill and other intangibles and $250,000 of
hardware and software inventory, were written off and approximately $80,000 in
severance and other related costs were accrued. The associated charges are
included in the nonrecurring charge to operations.
Also during 1997, the Company was party to arbitration proceedings related
to an employee terminated subject to an employment contract. The arbitrator
ruled in favor of the employee and awarded approximately $300,000 plus 80,000
options to purchase the Company's stock at a price of $6.00 per share. The
liability is included in accrued liabilities at December 31, 1997, and the
associated charge, including related legal fees, is included in the nonrecurring
charge to operations.
9. INCOME TAXES
The following is a summary of the items which caused recorded income
taxes to differ from taxes computed using the statutory federal income tax rate:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1997 1996
<S> <C> <C>
Statutory federal tax benefit (34)% (34)%
Increase (decrease) in tax benefit
resulting from --
State taxes, net of federal benefit (3) (2)
Nonrecurring charges 6 0
Goodwill amortization 5 2
Other 1 0
Valuation Allowance 25 34
----- -----
Actual income tax benefit 0% 0%
----- -----
</TABLE>
The sources of differences between the financial accounting and tax
bases of assets and liabilities which gave rise to the net deferred tax asset
are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Deferred assets:
Net operating loss carryforwards $ 3,759,000 $ 1,388,000
Unearned revenue 624,000 660,000
Accrued expenses 1,244,000 1,061,000
Accounts receivable 422,000 160,000
Other 106,000 132,000
-------------- --------------
6,155,000 3,401,000
-------------- --------------
Deferred liabilities
Depreciation (236,000) (441,000)
-------------- --------------
Net deferred tax asset before valuation
allowance 5,919,000 2,960,000
Valuation allowance (5,919,000) (2,960,000)
-------------- --------------
Net Deferred Tax Asset $ 0 $ 0
============== ==============
</TABLE>
The Tax Reform Act of 1986 provided for certain limitations on the
utilization of net operating loss carryforwards ("NOLs") if certain events
occur, such as a 50% change in ownership. The reverse merger in 1995 and the
1996 acquisitions were such events and, accordingly, the Company's ability to
utilize the carryforwards is limited. Also, the NOLs used to affect any taxes
calculated as alternative minimum tax could be significantly less than the
regular tax NOLs. Further, each of the companies acquired in 1996 had available
NOLs that the Company acquired and will be able to be utilized subject to the
aforementioned limitations. The NOLs will be utilized to offset taxable income
generated in future years, subject to the applicable limitations and their
expiration between 2006 and 2012. Since it currently cannot be determined that
it is not more likely than not that the net deferred tax assets resulting from
the NOLs and other temporary items will be realized, a valuation allowance for
the full amount of the net deferred asset has been provided in the accompanying
consolidated financial statements.
10. COMMITMENTS AND CONTINGENCIES
LEASES
Lease expenses primarily relate to the lease of office space and equipment
and include leases with affiliates. Rents charged to expense were approximately
$680,000 and $312,000 for the years ended December 31, 1997 and 1996,
respectively.
At December 31, 1997, future minimum lease payments under non-cancelable
operating leases with initial remaining terms of more than one year are as
follows for the years ended December 31:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 846,264
1999 763,324
2000 513,883
2001 196,332
2002 61,420
----------
Total $2,381,223
==========
</TABLE>
During 1997, the Company entered into an agreement to sublease the office
space formerly utilized by Worldlink at a price equal to the scheduled lease
payments exclusive of the escalation provisions of the
original lease. The current lease payment is $8,369 per month and the rent
received under the sub-lease is $8,369 per month.
LITIGATION
The Company is subject to litigation related to matters arising in the
normal course of business. Management is not aware of any asserted or pending
litigation or claims against the Company that would have a material adverse
effect on the results of operations or liquidity.
11. TRANSACTIONS WITH AFFILIATES
The Company has a consulting agreement with Charter Trading Corporation
("CTC"), an unaffiliated company whose president and principal stockholder is a
former director. The Company compensated CTC $100,000 per annum for consulting
services through December 31, 1997. The Company has a similar arrangement with
Potere Management, Inc., of which the Company's Vice-Chairman and member of the
Board of Directors is President and controlling shareholder. The Company has
accrued approximately $68,000 related to this arrangement, which is payable on
demand.
The Company subleased office space from CTC for $2,000 per month during
1996. During 1997 and 1996, CTC administered payroll for certain Charter Panama
employees and received 15% in excess of the payroll amount to cover related
payroll taxes, benefits and administrative costs, which totaled approximately
$30,000 for each year.
During 1996 and part of 1997, the Company leased office space from a
company whose only shareholder is a former officer of the Company and a former
member of the Board of Directors. The Company has a five year lease agreement
with monthly payments of $9,800. This individual also owned in excess of 90% of
the capital stock of PDS at the time of the acquisition of PDS by the Company
and was a member of the board of directors and an officer of the Company. This
individual also owned 10% of PDN at the time of its acquisition by the Company.
During 1997, this individual sold the property to an unaffiliated company, which
assumed the lease for the same terms.
The Chairman of the Company's Board of Directors and the Company's Chief
Financial Officer were significant shareholders, officers, and directors of OCI
at the time of its acquisition by the Company. Further, the OCI's Chairman of
the board of directors was on the Company's Board of Directors at the time of
the acquisition. These individuals were both serving as directors of the
Company at the time of the acquisition of Worldlink, of which they were also
significant shareholders.
As discussed in Note 4, the Company's lines of credit and certain notes
payable have been guaranteed by the Aurum Group Limited Partnership ("Aurum")
and the Chairman of the Company's Board of Directors and its Chief Financial
Officer. 100,000, 30,000, and 30,000 warrants to purchase shares of Common
Stock at $1 per share have been granted to this group and individuals,
respectively. The Company's Chief Executive Officer and member of the Board of
Directors controls Aurum, a significant stockholder and debt holder of the
Company.
During 1997, the Company entered into a five year operating lease of earth
station equipment located in Panama, Costa Rica and Nicaragua. There are two
lessors, one of which is a company whose principal shareholder is the Chairman
of the Company's Board of Directors, and the other is a director. The lease
obligations total approximately $70,000 per annum payable quarterly in arrears.
In conjunction with the lease, the Company issued 195,000 warrants, which grant
the holders the right to purchase shares of the Company's common stock at a
price of $3.00 per share. The Company has reflected the fair value of these
warrants (computed using the Black-Scholes model) in the accompanying financial
statements.
Accounts payable--affiliate represents payables to CTC, Poterie and
officers for services and advances.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes the Company's quarterly results of
operations for 1997 and 1996:
<TABLE>
<CAPTION>
1997 Quarters FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C>
Revenues $ 2,749,355 $ 3,321,055 $ 3,197,172 $ 3,683,840
Operating Loss (2,156,847) (1,778,036) (1,516,171) (5,802,095)
Net Loss (2,540,621) (1,857,555) (1,405,009) (6,172,673)
Net Loss Per Share ($0.09) ($0.06) ($0.04) ($0.18)
1996 Quarters FIRST SECOND THIRD FOURTH
Revenues $ 431,722 $ 2,282,705 $ 2,589,805 $ 2,927,370
Operating Loss (676,855) (994,760) (1,742,629) (3,874,306)
Net Loss (707,652) (1,103,575) (1,874,750) (4,071,871)
Net Loss Per Share ($0.09) ($0.09) ($0.12) ($0.27)
</TABLE>
13. SUBSEQUENT EVENTS
Subsequent to year end, the Company entered into a Receivable Purchase
Facility Agreement, which enables it to sell its receivables to the purchaser,
up to the maximum facility amount of $600,000. Receivables are sold at 80% of
book value with the additional 20% representing collateral until the receivables
are paid, repurchased or substituted with other receivables, at which time the
20% is returned to the Company. Interest accrues on the purchase amount at a
rate of prime (8.5% at December 31, 1997) plus 2%, per annum, until the
receivables are paid, repurchased or substituted. As of the date of this
report, the Company has received approximately $600,000 for receivables sold
under this facility.
Also, subsequent to year end, the Company completed a private placement
offering of 9,000,000 shares of common stock at a price of $.50 per share for
proceeds totaling $4,500,000 and entered into an additional sale leaseback
transaction of certain assets for proceeds totaling approximately $400,000.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of CHARTER COMMUNICATIONS INTERNATIONAL,
INC. and its Subsidiaries as of and for the year ended December 31, 1997
included in this Form 10-KSB and have issued our report thereon dated March 31,
1998. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management, and is presented for purposes of
complying with the Securities and Exchange Commission's rules, and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 31, 1998
<PAGE>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------ ---------- --------- ------------ ----------
Balance at Write-offs, Balance at
Beginning Net of End of
Classification of Period Additions Recoveries Period
- ------------------------------------ ---------- --------- ------------ ----------
For the Year Ended December 31, 1997
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts 435,000 715,737 (507,737) 650,000
Allowance for Obsolete Inventory 70,000 250,000 0 320,000
---------- --------- ------------ ----------
505,000 965,737 (507,737) 970,000
========== ========= ============ ==========
For the Year Ended December 31, 1996
Allowance for Doubtful Accounts 3,762 1,040,275 (609,037) 435,000
Allowance for Obsolete Inventory 0 70,000 0 70,000
---------- --------- ------------ ----------
3,762 1,110,275 (609,037) 505,000
========== ========= ============ ==========
</TABLE>
<PAGE>
NEITHER THIS DEBENTURE NOR THE UNDERLYING COMMON SHARES HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THE CORPORATION WILL NOT TRANSFER THIS
DEBENTURE, OR ANY COMMON SHARES ISSUED PURSUANT TO ITS CONVERSION PROVISION,
UNLESS (i) THERE IS AN EFFECTIVE REGISTRATION COVERING SUCH NOTE OR SHARES UNDER
THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS, (ii) IT FIRST
RECEIVES AN OPINION FROM AN ATTORNEY, ACCEPTABLE TO THE CORPORATION, STATING
THAT IN THE OPINION OF THE ATTORNEY THE PROPOSED TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND UNDER ALL APPLICABLE STATE
SECURITIES LAWS, OR (iii) THE TRANSFER IS MADE PURSUANT TO RULE 144 UNDER THE
SECURITIES ACT OF 1933.
CHARTER COMMUNICATIONS INTERNATIONAL, INC.
a Nevada corporation
FORM OF 18% CONVERTIBLE, SUBORDINATED
DEBENTURE DUE 2002
Section Terms. Charter Communications International, Inc, a Nevada
- ------- -----
corporation ("Corporation"), which term includes any successor corporation, for
value received, hereby promises to pay to _____________________________
("Holder"), or subject to Section 14 herein the Holder's assigns, the principal
amount of ___________________________ No/00 Dollars ($__________) on October 1,
2002, and on the 15th day of each January, April, July and October of each year
beginning on January 15, 1998 to pay all accrued but as yet unpaid interest on
such outstanding principal, accrued as of the previous quarter, until this
Debenture has been paid in full or converted pursuant to Section 6 hereto.
Interest on the outstanding principal amount hereof shall accrue at the rate of
18% per annum.
Section Payments. Payments of interest shall be made in lawful money of the
- ------- --------
United States of America to Holder, by registered US mail on the payment date,
as indicated in Section 1 hereof, or within ten (10) days thereof, at the
address provided to the Corporation by the Holder, as it appears on this
instrument below, or at such other addresses as sent by Holder to the
Corporation.
Section Default. The occurrence of one or more of the following events
- ------- -------
shall constitute an event of default:
Continued nonpayment of the interest due on this debenture for more than
forty-five (45) days beyond the payment date when due.
The nonpayment of the principal of this debenture when the same shall have
become due and payable.
<PAGE>
The entry of a decree or order by a court having jurisdiction in the
premises adjudging the Corporation a bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment, or
composition of or in respect of the Corporation under the federal Bankruptcy Act
or any other applicable federal or state law, or appointing a receiver,
liquidator, assignee, or trustee of the Corporation, or any substan-tial part if
its property, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period of
sixty (60) consecutive days.
The institution by the Corporation of proceedings to be adjudi-cated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under the federal Bankruptcy Act or
any other applicable federal or state law, or the consent by it to the filing of
any such petition or to the appointment of a receiver, liquidator, assignee, or
trustee of the Corporation, or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the admission by
it in writing of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Corporation in furtherance of any such
action.
Section Acceleration.
- ------- ------------
At the option of the Holder, and upon demand, allprincipal and any unpaid
interest shall become immediately due and payable upon a default as set forth
in Section 3 above.
Section Subordination.
- ------- -------------
The rights of the Holder under the terms of this debenture shall be
subordinated to:
the principal of, premium, if any, and accrued and unpaid interest
(whether accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Corporation) on (i) any secured indebtedness of
the Corporation for money borrowed, whether outstanding on the date of execution
of this debenture or thereafter created, incurred or assumed, (ii) guarantees by
the Corporation of any secured indebtedness for money borrowed by any other
person, whether outstanding on the date of execution of this debenture or
thereafter created, incurred or assumed, (iii) any secured indebtedness
evidenced by notes, debentures, bonds or other instruments of indebtedness for
the payment of which the Corporation is responsible or liable, by guarantees or
otherwise, whether outstanding on the date of execution of this debenture or
thereafter created, incurred or assumed, (iv) obligations of the Corporation
under any agreement to lease, or lease of, any real or personal property,
whether outstanding on the date of execution of this debenture or thereafter
created, incurred or assumed;
any other secured indebtedness, liability, or obligation, contingent
or otherwise, of the Corporation and any guarantee, endorsement, or other
contingent obligation in respect thereof, whether outstanding on the date of
execution of this debenture or thereafter created, incurred or assumed; and
modifications, renewals, extensions, and refundings of any such
indebtedness, liabilities, or obligations; unless, in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such indebtedness, liabilities, or obligations or such modification,
renewal, extension, or refunding thereof, or the obligations of the Corporation
pursuant to such a guarantee, are not superior in right of payment to the
debentures.
<PAGE>
In the event that the assets of the Corporation are insufficient to satisfy
this debenture and all other debentures issued contemporaneously by the
Corporation, the available assets of the Corporation shall be distributed pro
rata to all such Holders based on the total principal and interest then due to
each such Holder.
The rights of the Holder, under the terms of this debenture shall be
superior to any obligation due any holder of the Common Stock of the Corporation
arising solely out of the fact that such person is an owner of the Common Stock
of the Corporation.
Section Conversion Privilege.
- ------- ---------------------
The Holder of this debenture shall have the right, at Holder's option at
any time from the execution hereof until October 1, 2002, to convert the
principal and accrued, but unpaid, interest of this deben-ture into shares of
Common Stock of the Corporation ("Common Stock") at the per share price of One
Dollar and Twenty Cents ($1.20) per share. The Holder must convert all of the
principal and accrued, but unpaid, interest if any is converted. In order to
convert, the Holder must surrender this debenture to the Corporation at the
Corporation's principal offices and the Corporation shall, as promptly as
practicable after the surrender, deliver to the Holder a certificate or
certifi-cates representing the number of fully paid and nonassessable Common
Stock of the Corporation into which such debenture may be converted.
No payment or adjustment shall be made upon any conversion with respect to
any interest accrued on any debenture surrendered for conversion prior to an
interest payment date or to any dividend on the Common Stock delivered upon
conversion.
The Corporation shall deliver cash in lieu of fractional shares of Common
Stock.
Section Call by Corporation. Provided that this debenture has not been
- ------- -------------------
converted pursuant to Section 6 hereof, the Corporation may, at its sole
discretion, call this debenture at any time after October 1, 1998, by the
delivery of a notice of such call to the Holder hereof, if and only if, for
twenty (20) out of thirty (30) consecutive trading days prior to such
conversion, the average closing bid and ask price as quoted on the NASD
Over-the-Counter Bulletin Board market or the closing price, if exchange traded,
of the Corporation's stock is no less than $3.00 per share. Upon such call, the
Holder shall have a fifteen (15) calendar days after delivery of the
Corporation's notice pursuant hereto to convert the Holder's debenture pursuant
to Section 6 hereof. Unless so converted, the Holder shall thereafter
immediately deliver this debenture to the Corporation, and the Corporation shall
pay the Holder upon delivery a sum equal to all outstanding principal and
accrued, but unpaid, interest through the date of deliver of the notice from the
Corporation.
Section Corporation to Reserve Common Stock. The Corporation covenants that
- ------- -----------------------------------
it will at all times reserve and keep available, free from preemptive rights,
out of the aggregate of its authorized but unissued Common Stock, or its issued
Common Stock held in its treasury, or both, for the purpose of effecting
conversions of debentures, the full number of Common Stock of then deliverable
upon the conversion of all outstanding debentures not theretofore converted; and
if at any time the number of authorized but unissued Common Stock shall not be
sufficient to effect the conversion of all said outstanding debentures, the
Corporation will take such corporate action as may in the opinion of its counsel
be necessary to increase its authorized but unissued Common Stock to such number
of shares as shall be sufficient for that purpose.
Section Usury Laws. Should the usury laws of any state be deemed applicable
- ------- ----------
with respect to the debentures, the Corporation will not assert such laws as a
defense.
Section Assignment, Exchange, or Loss of Debenture.
- ------- -----------------------------------------------
Subject to the restrictions contained herein, upon presentation and
surrender of this debenture to the Corpo-ration at its principal office or at
the office of its stock transfer agent, if any, with the assignment form annexed
hereto duly executed and funds sufficient to pay any transfer tax, the
Corpo-ration shall, without charge, execute and deliver a new debenture in the
name of the assignee named in such instrument of assignment and this debenture
shall promptly be canceled.
This debenture is exchangeable, without expense, at the option of the
Holder, upon presentation and surrender hereof to the Corporation at its
principal office, or at the office of its stock transfer agent, if any, for
other debentures of different denomina-tions entitling the Holder to purchase,
in the aggregate, the same number of Shares purchasable hereunder.
Upon receipt by the Corporation of evidence satisfactory to it of the loss,
theft, destruction, or mutilation of this debenture, and (in the case of loss,
theft, or destruction) of reasonably satisfactory indemnification, and (in the
case of mutilation) upon surrender and cancellation of this debenture, the
Corporation will execute and deliver a new debenture, which shall constitute an
additional contractual obligation on the part of the Corporation, whether or not
this debenture so lost, stolen, destroyed, or muti-lated shall be at any time
enforceable by anyone.
Section Rights of the Holder. The Holder shall not, by virtue hereof, be
- ------- --------------------
entitled to any rights of a shareholder in the Corporation, either at law or
equity. The rights of the Holder are limit-ed to those expressed in this
debenture and are not enforceable against the Corporation except to the extent
set forth herein.
Section Anti-Dilution Provisions. The number and kind of securities
- ------- -------------------------
purchasable upon the conversion of this debenture shall be subject to adjustment
from time to time as follows:
In case the Corporation shall (i) pay a dividend or make a distribution on
the outstanding Common Stock payable in Common Stock, (ii) subdivide the
outstand-ing Common Stock into a greater number of shares, (iii) combine the
outstanding Common Stock into a lesser number of shares, or (iv) issue by
reclassification of the Common Stock any Common Stock of the Corporation, the
Holder of this debenture shall thereafter be entitled, upon conversion, to
receive the number and kind of shares which, if this debenture had been
converted immediately prior to the happening of such event, the Holder would
have owned upon such conversion and been entitled to receive upon such dividend,
distribution, subdivision, combination, or reclassification. Such adjustment
shall become effective on the day next following (x) the record date of such
dividend or distribution or (y) the day upon which such subdivision,
combination, or reclassification shall become effective.
<PAGE>
In case the Corporation shall consolidate or merge into or with another
corporation, or in case the Corporation shall sell or convey to any other person
or persons all or substantially all the property of the Corporation, the Holder
of this debenture shall thereafter be entitled, upon conversion, to receive the
kind and amount of shares, other securities, cash, and property receivable upon
such consolidation, merger, sale, or conveyance by a holder of the number of
Common Stock which might have been received upon conversion of this debenture
immediately prior to such consolidation, merger, sale, or conveyance, and shall
have no other conversion rights. In any such event, effective provision shall
be made, in the certificate or articles of incorporation of the resulting or
surviving corporation, in any contracts of sale and conveyance, or otherwise so
that, so far as appropriate and as nearly as reasonably may be, the provisions
set forth herein for the protection of the rights of the Holder of this
debenture shall thereafter be made applicable.
If at any time the Corporation is required to issue shares of its Common
Stock in excess of the number of Common Stock then authorized, both the
Corporation and the Holder shall cooperate in taking any and all steps necessary
to increase the number of authorized Common Stock of the Corporation to
effectuate the purposes of this Section 12.
Irrespective of any adjustments in the number or kind of shares to be
received upon conversion of this debenture, the form of debentures theretofore
or thereafter issued may continue to express the number and kind of shares as
are stated in this debenture.
Section Officer's Certificate. Whenever the number or kind of securities
- ------- ---------------------
purchasable upon conversion of this debenture shall be adjusted as required by
the provisions of Section 12, the Corporation shall forthwith file with its
Secretary or Assistant Secretary at its principal office, an officer's
certificate showing the adjusted number of kind of securities purchasable upon
conversion of this debenture determined as herein provided and setting forth in
reasonable detail such facts as shall be necessary to show the reason for and
the manner of computing such adjustments. Each such officer's certificate shall
be made available at all reasonable times for inspection by the Holder and the
Corporation shall, forthwith after each such adjustment, mail a copy of such
certificate to the Holder.
Section Restrictions on Transfer. This debenture has not been registered
- ------- ------------------------
under the Securities Act of 1933. Neither this debenture, nor the Common Stock
issued upon conversion hereof, may be assigned or transferred by any Holder
unless (i) there is an effective registration covering the debenture or
underlying Common Stock under the Securities Act of 1933 and applicable state
securities laws, or (ii) the Corporation receives an opinion of an attorney,
licensed to practice within the United States, that the transfer of the
debenture, or underlying Common Stock, complies with the requirements of the
Securities Act of 1933 and any relevant state securities law.
Section Notices. All notices and other communications required or permitted
- ------- -------
under this debenture shall be validly given, made, or served if in writing and
delivered personally or sent by registered mail, to the Corporation at the
following address:
Charter Communications International, Inc.
2839 Paces Ferry Road, Suite 500
Atlanta, Georgia 30339
Attn: General Counsel
All notices and other communications required or permitted under this debenture
shall be validly given, made or served if in writing and delivered personally or
sent by registered mail, to the Holder at the following address:
___________________
___________________
___________________
Section Pronouns. Any masculine personal pronoun shall be considered to
- ------- --------
mean the corresponding feminine or neuter personal pro-noun, as the context
requires.
Section Law Governing. This Agreement shall be governed by and construed in
- ------- -------------
accordance with the laws of the State of Georgia, United States of America.
Section Titles and Captions. All section titles or captions contained in
- ------- -------------------
this Agreement are for convenience only and shall not be deemed part of the
context nor effect the interpretation of this Agreement.
Section Computation of Time. In computing any period of time pursuant to
- ------- -------------------
this Agreement, the day of the act, event or default from which the designated
period of time begins to run shall be included, unless it is a Saturday, Sunday,
or a legal holiday, in which event the period shall begin to run on the next day
which is not a Saturday, Sunday, or legal holiday, in which event the period
shall run until the end of the next day thereafter which is not a Saturday,
Sunday, or legal holiday.
Section Presumption. This Agreement or any section thereof shall not be
- ------- -----------
construed against any party due to the fact that said Agreement or any section
thereof was drafted by said party.
Section Further Action. The parties hereto shall execute and deliver all
- ------- --------------
documents, provide all information and take or forbear from all such action as
may be necessary or appropriate to achieve the purposes of the Agreement.
Section Parties in Interest. Nothing herein shall be construed to be to the
- ------- -------------------
benefit of any third party, nor is it intended that any provision shall be for
the benefit of any third party.
Section Arbitration. In the event any dispute arises between the parties as
- ------- -----------
to the amount or responsibility for any and all losses, damages, costs,
expenses, or other liabilities, the parties agree to arbitrate such dispute in
Atlanta, Georgia, in accordance with the Rules of the American Arbitration
Association then existing, and the expenses of the prevailing party (including
legal expenses) will be paid as the arbitrator shall determine. In any such
arbitration, if the parties are unable to agree on a single arbitrator, then
each party shall designate one arbitrator, and the two designated arbitrators
shall agree to designate a third arbitrator who will hear the dispute. All such
designated arbitrators shall each be attorneys. Judgment on the arbitration
award may be entered in any court having jurisdiction over the subject matter of
the controversy.
[signature on next page]
<PAGE>
IN WITNESS WHEREOF, Patrick E. Delaney, as Chief Financial Officer of the
Corporation, has executed this debenture to be effective as of the 29th day of
October, 1997.
Charter Communications International, Inc.,
a Nevada corporation
By: /s/ Patrick E. Delaney
---------------------------------------------
Patrick E. Delaney, Chief Financial Officer
FORM OF PURCHASE AND SALE AGREEMENT
PURCHASE AND SALE AGREEMENT, dated as of October 29, 1997, by and between
Charter Communications International, Inc. (the "Seller"), a Nevada corporation,
having an office and place of business at 2839 Paces Ferry Road, Suite 500,
Atlanta, Georgia 30339,
and Connecticut Bank of Commerce ("Buyer"), a Connecticut state banking
corporation having an office and place of business at 612 Bedford Street,
Stamford, Connecticut 06901.
WHEREAS, the Seller owns the equipment and accessories thereto (the
"Equipment"), listed and described on Schedule A attached hereto (the "Schedule
A"); and
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell
to Buyer, an undivided senior ownership interest in the Equipment on the terms
and conditions set forth herein (the "Equipment Purchase"); and
WHEREAS, the Buyer is acquiring the senior ownership interest in the
Equipment with the express intent of concurrently entering into a financial
lease transaction with the Seller as the lessee and the Buyer as the lessor with
respect to the Buyer's senior ownership interest in the Equipment as provided in
a certain Equipment Lease Agreement (the "Lease Agreement"), dated the date
hereof, by and between the Buyer and the Seller; and
WHEREAS, in order to induce the Buyer to acquire the Equipment and to enter
into the Lease Agreement with the Seller, the Seller has agreed to furnish the
Buyer with acceptable security against loss with respect to the foregoing
transactions by granting to Buyer a security interest in, and a lien on, the
Seller's residual subordinated ownership interest in the Equipment and the
unsold portion of Seller's receivables pursuant to a Security Agreement, dated
the date hereof, by and between the Seller as grantor and the Buyer as secured
party (the "Security Agreement").
NOW, THEREFORE, in consideration of the premises, the parties hereto, desiring
to be legally bound, hereby agree as follows:
1. Buyer's Purchase From Seller, and Simultaneous Lease to Seller,
--------------------------------------------------------------------
of the Senior Ownership Interest in the Equipment
- ------------------------------------------------------
1.1 Conveyance of Senior Ownership Interest in the Equipment. Subject
--------------------------------------------------------
to the terms and conditions hereof, on the Closing Date (as defined in Section
7.1 hereof), Seller shall transfer, convey, assign, set over, bargain, sell and
deliver unto Buyer, and Buyer shall purchase from Seller, all right, title and
interest in and to a senior ownership interest in the Equipment (the "Senior
Ownership Interest"), represented by a Senior Ownership Certificate. On the
Closing Date, the Seller shall deliver to Buyer, in exchange for the Buyer's
payment of the Purchase Price (as defined in Section 1.2 hereof), a bill of sale
(the "Bill of Sale") for the Senior Ownership Interest in the Equipment,
substantially in the form of Exhibit 2 hereto (appropriately completed).
8
<PAGE>
1.2 Purchase Price. On the Closing Date, the Buyer shall pay to the
---------------
Seller, by wire transfer, the full purchase price (the "Purchase Price") for the
Equipment, which shall be the amount set forth on Exhibit 1 hereto ("Exhibit
1").
1.3 Buyer's Acquisition of Equipment For Full Payout Lease to Seller.
------------------------------------------------------------------
On the Closing Date of the Equipment Purchase, Buyer shall simultaneously enter
into the Lease Agreement with the Seller. Under the Lease Agreement, commencing
on the Closing Date, the Buyer shall lease to the Seller and the Seller shall
lease from the Buyer the Buyer's undivided Senior Ownership Interest in the
Equipment on a full payout basis. The Buyer's and Seller's execution and
delivery of the Lease Agreement shall be a condition of Buyer's obligation to
close the Equipment Purchase.
1.4 Seller's Pledge of Its Residual Ownership Interest in the
-----------------------------------------------------------------
Equipment and Certain Other Assets. On the Closing Date, the Seller shall
- --------------------------------------
assign, set over and convey to the Buyer as collateral security for the Seller's
payment obligations to the Buyer under the Lease Agreement, the Seller's
Residual Ownership Interest in the Equipment and the unsold portion of Seller's
receivables as set forth more fully in the Security Agreement.
2. Representations and Warranties.
--------------------------------
2.1 Representations and Warranties of the Seller. Seller represents
--------------------------------------------
and warrants to, and covenants and agrees with, Buyer as follows:
(a) (i) On the date hereof, neither the sale nor the use of the
Equipment violates or infringes the patent, trademarks, trade name or other
rights of any person and (ii) the Equipment is insured against loss as provided
in Section 3 hereof.
(b) On the Closing Date, Seller has, and by the Bill of Sale is
conveying to Buyer, good and marketable title to the Senior Ownership Interest
in the Equipment free and clear of any and all leases, liens, claims and
encumbrances (exclusive of the Seller's Residual Ownership Interest). On the
Closing Date, the Buyer will have a first priority security interest in, and
lien on, the Seller's Residual Ownership Interest in the Equipment.
(c) Seller is duly incorporated and organized, validly existing and in
good standing under the laws of its incorporation or organization and has all
requisite power and authority to own its properties and carry on its business in
the places where such properties are located and such business is conducted.
(d) Seller has the corporate power and authority to enter into this
Agreement and to execute, deliver and receive all other instruments and
documents executed and delivered or received, or to be executed and delivered or
received, in connection with the transactions herein referred to and to carry
out the sale and transfer of the Senior Ownership Interest in the Equipment.
Seller has the corporate power and authority to execute and deliver the Bill of
Sale and any other documents and instruments required by the terms hereof or
thereof to be executed and delivered by it. (This Agreement, the Bill of Sale
and all such other instruments and documents are sometimes hereinafter referred
to collectively as the "Seller Documents"). There is no action, suit or
proceeding pending against Seller before or by any court, administrative agency
or other governmental authority which brings into question the validity of, or
in any way legally impairs, the execution, delivery or performance by Seller of
any of the Seller Documents.
(e) The execution and delivery of the Seller Documents by Seller, and
the performance by Seller of its obligations thereunder, including, without
limitation, the conveyance of the Senior Ownership Interest in the Equipment,
and the acceptance of the Purchase Price in exchange therefor, have been duly
authorized by all necessary action of Seller and do not violate or conflict with
(i) any provision of Seller's organizational documents, (ii) any law or any
order, writ, injunction, decree, rule or regulation or (iii) any material
agreement to which Seller is a party or by which Seller is bound.
(f) The Seller Documents constitute the valid and binding obligation of
Seller, enforceable against the Seller in accordance with their respective
terms, subject to bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights generally and
general equitable principles.
(g) Seller is not subject to any restriction or agreement, which, with
or without the giving of notice, the passage of time, or both, prohibits or
would be violated by, the execution, delivery and consummation of the Seller
Documents and the transactions referred to therein. All consents necessary for
such execution, delivery or consummation by Seller have been or will be
obtained.
(h) All sales, property and other taxes, licenses, tolls, inspection or
other fees, bonds, permits or certificates which were or may be required to be
paid or obtained in connection with the acquisition of the Senior Ownership
Interest in the Equipment by the Buyer have been, or when due will promptly be,
paid in full (or adequate provision for such payment has or shall have been
made) or obtained.
2.2 Representations and Warranties of the Buyer. The Buyer represents
-------------------------------------------
and warrants to, and agrees with, the Seller as follows:
(a) Buyer is duly incorporated and organized, validly existing and in
good standing under the laws of its incorporation or organization and has all
requisite power and authority to own its properties and carry on its businesses
as such business is conducted.
(b) Buyer has the power and authority to enter into this Agreement and
all other instruments and documents executed and delivered or received, or to be
executed and delivered or received, in connection with the transactions herein
referred to and to carry
and thereunder. (This Agreement and all such other instruments and documents
are sometimes hereinafter referred to collectively as the "Buyer Documents").
(c) The execution and delivery of the Buyer Documents by Buyer, and the
performance of its obligations thereunder, have been duly authorized by all
necessary action of Buyer and do not violate or conflict with (i) any provision
of Buyer's organizational document, (ii) any law, or any order, writ,
injunction, decree, rule or regulation of any court, administrative agency or
any other governmental authority, or (iii) any material agreement to which Buyer
is a party or by which Buyer is bound. There is no action, suit or proceeding
against Buyer before any court, administrative agency or other governmental
authority which brings into question the validity of, or might in any way
impair, the execution, delivery or performance by Buyer of any of the Buyer
Documents.
(d) The Buyer Documents constitute the valid and binding obligations of
Buyer enforceable against the Buyer in accordance with their respective terms,
subject to bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and general
equitable principles.
(e) Buyer is not subject to any restriction or agreement which, with or
without the giving of notice, the passage of time, or both, prohibits or would
be violated by, the execution, delivery and consummation of the Buyer Documents
and transactions therein referred to. No consents are necessary for such
execution, delivery and consummation by the Buyer.
3. Insurance.
---------
3.1 Insurance. Commencing on the Closing Date and continuing until
---------
the Equipment is delivered by the Buyer to the location or locations specified
by the Lessee in the Lease Agreement, Seller agrees to insure the Equipment
against loss in the amount not less than (i) the Purchase Price, times (ii) 115
percent. Seller shall furnish the Buyer, upon request, with evidence of such
insurance.
4. Delivery and Installation of Equipment. The Seller shall be fully
--------------------------------------
responsible for the delivery and the installation of the Equipment at the
location or locations designated by the Seller as lessee. Any and all costs and
expenses incurred by Seller in transporting and installing the Equipment shall
be the sole responsibility and duty of the Seller. Seller shall indemnify and
hold the Buyer harmless against any and all claims or liabilities arising from
the delivery and installation of the Equipment by the Seller.
5. Indemnification. Each of Seller and Buyer will indemnify the other
---------------
and its subsidiaries, stockholders, partners, directors, officers, employees and
agents (collectively with Seller or Buyer, as the case may be, "Indemnified
Parties") and protect, defend and hold any and all such Indemnified Parties
harmless from and against any and all loss, cost, damage, injury or expense,
together with interest on all amounts expended by any and all such Indemnified
Parties accruing at the rate of ten percent (10%) per annum from the date of
--- -----
disbursement, including, without limitation, reasonable attorneys' fees,
wheresoever and howsoever arising which any of the Indemnified Parties may incur
by reason of any material breach by the indemnifying Party of any of its
representations or obligations set forth in the Seller Documents or Buyer
Documents, as the case may be. In the event any claim for indemnification
hereunder arises on account of a claim or action made or instituted by a third
person against any Indemnified Party, such Indemnified Party shall notify the
Buyer or Seller, as the case may be, promptly after the receipt of notice by
such Indemnified Party that such claim was made or that such action was
commenced, and the indemnifying party shall be relieved from this
indemnification obligations hereunder to the extent it is prejudiced by any
delay in the provision of such notice. The indemnifying party shall be entitled
to assume and control the defense of any such claim or action with counsel of
its own choosing and at its own expense and if the indemnifying party so assumes
the defense of a claim, such party shall have no liability to any Indemnified
Party for legal fees or expenses of investigation, and shall have full
discretion to settle or pursue the claim so long as any settlement includes a
complete release in respect of such claim of the Indemnified Party. If the
indemnifying party does not so elect to assume the defense of such claim or
action, the same shall not be settled without its prior written consent (which
consent shall not be unreasonably withheld or delayed). The Seller also hereby
indemnifies and shall hold the Indemnified Parties harmless against any loss
sustained or reasonable expense incurred by any such Indemnified Party as the
direct result of or arising out of the imposition on the Equipment of any
Federal or other tax lien or the foreclosure thereof by virtue of the failure to
pay or under payment by the indemnifying party.
6. Benefits of Representations, Warranties, etc.. Seller hereby
-------------------------------------------------
assigns to Buyer and to Buyer's lessee (to the extent assignable), and agrees
to use commercially reasonable efforts to enforce (which shall not be
interpreted to require Seller to institute litigation) for Buyer's and the
Seller's benefit, directly or through its predecessors-in-interest (to the
extent not assignable), the benefits of all warranties, representations,
covenants and indemnities made to Seller, by or which Seller is entitled to
enforce against, any predecessor in title to the Senior Ownership Interest in
the Equipment or the manufacturer of the Equipment.
7. The Closing.
------------
7.1 Closing Date. The closing (the "Closing") for the purchase and
------------
sale of the Senior Ownership Interest in the Equipment effected pursuant to this
Agreement shall take place at the main office of the Buyer, at 12:00 noon (New
York City Time) on October 29, 1997 (the "Closing Date"), or at such other time,
date or place as the parties may mutually agree. Unless the Seller and the Buyer
shall agree otherwise in writing, all of the transactions, deliveries and
payments contemplated by Section 1 and this Section 7 shall be deemed to take
place simultaneously and no such transaction, delivery or payment shall be
deemed to have taken place or been made until all such transactions, deliveries
and payments are completed at the Closing.
7.2 Deliveries. At the Closing, the Seller shall deliver to the
----------
Buyer, in exchange for the Buyer's payment of the Purchase Price, the Bill of
Sale in the form of Exhibit 1 hereto, executed by an authorized representative
of the Seller, which Bill of Sale shall evidence the Seller's conveyance and the
Buyer's purchase of the Senior Ownership Interest in the Equipment. At the
Closing, the Seller shall also deliver to the Buyer as collateral security for
the Seller's payment obligations under the Lease Agreement the Seller's
Residual Ownership Interest and all such other documents, certificates or
instruments required in connection with the Security Agreement.
7.3. Conditions to Buyer's Obligation to Effect Closing. The Buyer's
-----------------------------------------------------
obligation to close the Equipment Purchase transaction shall be subject to each
of the following conditions, which conditions shall be satisfied on or before
the Closing Date:
(a) All of the representations and warranties of the Seller under this
Agreement shall be true and correct as of the Closing Date, and no event shall
have occurred which, with the giving of notice or the passage of time, would
constitute a default by Seller under this Agreement;
(b) Buyer shall have received the Bill of Sale, duly executed by the
Seller;
(c) Buyer shall have received the Senior Ownership Certificate
evidencing the Buyer's Senior Ownership Interest in the Equipment;
(d) Buyer shall have received a security interest in, pledge of and
lien on the Seller's Residual Ownership Certificate (evidencing the Seller's
Residual Ownership Interest in the Equipment) and certain other property of the
Seller;
(e) Buyer and Seller shall have entered into the Lease Agreement and
all other documents, agreements and certificates contemplated therein, including
the Security Agreement;
(f) Seller shall have paid the Buyer's legal fees and expenses incurred
in connection with the transactions contemplated herein; and
(g) All other terms and conditions of this Agreement shall have been
complied with.
7.4 Conditions to Seller's Obligation to Effect Closing. The Seller's
---------------------------------------------------
obligation to close the Equipment Purchase Transaction shall be subject to each
of the following conditions, which shall be satisfied on or before the Closing
Date:
(a) All of the representations and warranties of the Buyer under this
Agreement shall be true and correct as of the Closing Date, and no event shall
have occurred which would constitute a default by Buyer under this Agreement;
(b) The Buyer shall have paid the Purchase Price to the Seller; and
(c) All other terms and conditions of this Agreement shall have been
complied with.
8. Miscellaneous.
-------------
8.1 Survival. The covenants, agreements, representations, indemnities
--------
and warranties made herein shall survive the execution and delivery of this
Agreement and the consummation of the transactions described herein.
8.2 Successors and Assigns. The rights and obligations of the parties
-----------------------
hereunder shall inure to the benefit of, and be binding and enforceable upon,
the respective successors, assigns and transferee of either party.
8.3 Notices. Any notice, request or other communication to any of the
-------
parties by the other hereunder shall be given in writing and shall be deemed
given on the earlier of the date the same is (i) personally delivered with
receipt acknowledged, or (ii) mailed by certified mail, return receipt
requested, postage prepaid and addressed to the party for which it is intended
at the address set forth at the head of this Agreement. The place to which
notices or copies of notices are to be given to either party may be changed from
time to time by such party by written notice to the other party.
8.4 Captions. Captions used herein are inserted for reference purposes
--------
only and shall not affect the interpretation or construction of this Agreement.
8.5 Counterparts; Facsimile Execution. This Agreement may be
-----------------------------------
executed in one or more counterparts each of which shall be deemed an original,
but all of which together shall constitute one and the same agreement. Delivery
of an executed counterpart of this Agreement by facsimile shall be equally
effective as delivery of an original executed counterpart of this Agreement. Any
party delivering an executed counterpart of this Agreement by facsimile also
shall deliver an original executed counterpart of this Agreement, but failure to
deliver an original executed counterpart shall not affect the validity,
enforceability and binding effect of this Agreement.
8.6 Amendments. This Agreement may be amended or varied only by a
----------
document, in writing, of even or subsequent date hereto, executed by Buyer and
Seller.
8.7 Further Assurances. Each party hereto shall execute and deliver
------------------
all such further instruments and documents as may be reasonably requested by the
other party in order to fully carry out the intent and accomplish the purposes
of the Seller and Buyer Documents and the transactions referred to therein.
8.8 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the United States of America and the State of
Connecticut.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
SELLER:
CHARTER COMMUNICATIONS
INTERNATIONAL, INC.
By:___________________________
Name:_________________________
Title:__________________________
BUYER:
CONNECTICUT BANK OF COMMERCE
By:____________________________
Name:_________________________
Title:__________________________
<PAGE>
EXHIBIT INDEX
1 - PURCHASE PRICE
2 - FORM OF BILL OF SALE
A - DESCRIPTION OF EQUIPMENT
B - SENIOR OWNERSHIP CERTIFICATE EVIDENCING THE BUYER'S SENIOR OWNERSHIP
INTEREST IN THE EQUIPMENT
FORM OF EQUIPMENT LEASE AGREEMENT
This Equipment Lease Agreement (the "Agreement" or the "Lease"), dated
October 29, 1997, is made and entered into by and between Connecticut Bank of
Commerce (the "Lessor"), a Connecticut chartered commercial bank, with its
principal place of business at 612 Bedford Street, Stamford, Connecticut 06901,
and Charter Communications International, Inc. ("Lessee"), a Nevada corporation,
with its principal place of business at 2839 Paces Ferry Road, Suite 500,
Atlanta, Georgia 30339.
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth in this Agreement, and for good and valuable consideration, the
receipt of which is hereby acknowledged, the Lessor and Lessee hereby agree as
follows:
1. EQUIPMENT COVERED BY LEASE. Lessor hereby agrees to lease to
--------------------------
Lessee and Lessee agrees to lease from Lessor certain items of equipment (the
"Equipment"), upon the terms and conditions specified in this Agreement. A
description of the Equipment is set forth in Exhibit A hereto.
2. RENT. Lessee agrees to pay Lessor, by check or wire transfer, as
----
rent for the Equipment during the Lease Term (as defined in Section 3 hereof)
the monthly rent (the "Monthly Rent") set forth on Exhibit B attached hereto.
The Monthly Rent shall be due and payable by the Lessee in arrears on the first
day of each month (each a "Rent Payment Date") commencing on December 1, 1997
and on the first day of each month thereafter until October 28, 2002 when the
remaining and final Monthly Rent payment in the amount indicated on Exhibit B
shall be due and payable. The Monthly Rent shall be payable at the Lessor's
office at the address indicated at the head of this Agreement unless otherwise
directed by Lessor as provided in Section 23 hereof. If a Rent Payment Date
falls on a day other than a Business Day (as hereinafter defined), then the Rent
Payment Date shall be deemed to be the immediately following Business Day. As
used herein, the term "Business Day" shall mean any day other than Saturday or
Sunday or a day on which banks in either the State of Connecticut or the State
of Georgia are required or permitted to close. Lessee shall pay the Lessor
interest upon the amount of any Monthly Rent or other sums not paid by Lessee
within fifteen (15) days of the Rent Payment Date, calculated from the date when
due and owing hereunder until such payment is received by the Lessor computed at
the annual rate of the lesser of (i) the Wall Street Journal Prime Rate plus
ten percent, or (ii) the maximum allowable rate under applicable law (the
"Overdue Interest Rate"). Lessee may prepay all or any portion of the Monthly
Rents at any time, without penalty. In the event of a partial prepayment, the
Monthly Rent shall be adjusted for the remaining months of the Lease Term as
provided in Exhibit B hereof. As security for the Lessee's financial obligations
under this Agreement, including the obligation to pay Monthly Rent, on the Lease
Commencement Date (as defined in Section 3 hereof), the Lessee shall enter into
the Security Agreement, substantially in the form of Exhibit E hereto
(appropriately completed), in favor of the Lessor (the "Security Agreement").
12
<PAGE>
3. LEASE TERM. The term of the Lease for the Equipment leased
-----------
hereunder (the "Lease Term") shall be for a period of five (5) years and shall
commence on October 29, 1997 (the "Lease Commencement Date") and shall terminate
at 12:00 midnight (New York City Time) on October 28, 2002 (the "Lease
Termination Date"), unless earlier terminated as provided in this Agreement. The
Lease Term shall not be extended without the written permission of the Lessor.
At least ten (10) days prior to the Lease Termination Date or at least ten (10)
days prior to the date of the Lessee's purchase of the Equipment if during the
Lease Term, the Lessee shall notify the Lessor of the Lessee's election to
purchase the Equipment in accordance with Section 20 hereof. In the event that
the Lessee elects not to purchase the Equipment as provided in Section 20
hereof, the Lessee shall deliver the Equipment on or before such date to a
location designated by the Lessor. All costs or expenses associated with the
Lessor's disposition of the Equipment on the Lease Termination Date shall be
borne by the Lessee.
4. DELIVERY AND ACCEPTANCE OF EQUIPMENT. Lessor and Lessee agree
------------------------------------
that the manufacturer or vendor of the Equipment has delivered or will deliver
the Equipment to the location specified by Lessee. Lessor and Lessee agree that
the Lessee shall have full and absolute responsibility for the delivery of the
Equipment to the location designated by the Lessee and that, by the Lessee's
execution of this Agreement, the Lessee has been deemed to have acknowledged
that the Equipment conforms to the requirements of this Agreement and is subject
to the terms and conditions of this Agreement. Such acknowledgment and
acceptance of the Equipment shall not impair, and shall not in any manner be
deemed a waiver of, Lessor's or Lessee's warranty rights for the Equipment. As
long as no Event of Default (as defined in Section 18 hereof) has occurred and
is continuing hereunder, Lessor hereby appoints and authorizes the Lessee to act
as its agent, to accept for Lessor and in Lessor's name, the Equipment from the
manufacturer or vendor upon delivery. THE FAILURE OF THE MANUFACTURER OR VENDOR
TO DELIVER THE EQUIPMENT TO THE LESSEE OR TO THE LOCATION DESIGNATED BY THE
LESSEE SHALL NOT IN ANY WAY AFFECT THE LESSEE'S OBLIGATIONS UNDER THIS
AGREEMENT, INCLUDING, BUT NOT LIMITED TO, THE OBLIGATION TO THE MONTHLY RENT,
WHICH OBLIGATION IS UNCONDITIONAL AND ABSOLUTE.
5. INSTALLATION AND MAINTENANCE. (a) The Lessee agrees to pay any
----------------------------
costs incurred in transporting the Equipment to the location or locations
designated by the Lessee and to pay any installation costs. Lessee hereby agrees
to indemnify Lessor and to hold the Lessor harmless from any claims for the
payment of such costs and expenses.
(b) Lessee shall, at its expense, take all actions necessary to
maintain and repair the Equipment to keep it in good operating condition,
ordinary wear and tear excepted. Except as otherwise provided herein, Lessee
agrees to pay all costs, expenses, fees and charges incurred in connection with
the use and operation of the Equipment during the Lease Term, including repairs,
maintenance, storage and service.
6. FEES AND TAXES. (a) Lessee agrees to pay any and all taxes,
--------------
assessments, licenses, title and registration fees, including all sales, use and
personal property taxes together with any penalties, fines or interest accruing
as a result of Lessee's failure to timely comply with its obligations hereunder,
which are assessed, levied or imposed by any governmental or taxing authority
against Lessor with respect to any item of Equipment, or the purchase,
acquisition, ownership, delivery, lease, possession, use, operation, control or
return of the Equipment, which accrue during the Lease Term, excluding, however,
any taxes measured by Lessor's net income.
(b) Unless and until Lessor notifies Lessee to the contrary, the
foregoing obligations of Lessee shall include preparation and submission of all
filings to the applicable taxing authorities whether such filings would
otherwise be the obligation of the Lessor or Lessee and as long as no Event of
Default has occurred and is continuing hereunder, Lessor hereby appoints Lessee
its agent and attorney-in-fact for the purpose making such filings on behalf of
Lessor. Lessee agrees to provide copies of such filings to Lessor along with
evidence of payment. Lessor agrees to cooperate fully with Lessee by executing
any documents prepared by Lessee for filing and forwarding promptly to Lessee
any assessments, bills, invoices or other correspondence received in connection
therewith. In the event that Lessor elects to pay personal property taxes
directly to a levying authority, Lessor shall submit to Lessee a copy of any
personal property tax statements and the receipt or other document evidencing
payment and Lessee agrees to promptly reimburse Lessor for the full amount of
such taxes paid by Lessor.
(c) Lessee shall not be obligated to pay any amount under this Section
6 so long as it shall be contesting the validity or the amount thereof by
appropriate proceedings. Lessee agrees to indemnify, hold harmless and defend
Lessor against any loss, claim or expense resulting from such nonpayment or
contest. The obligations and liabilities of Lessee under this Section 6 accruing
during the Lease Term shall continue notwithstanding the termination of this
Agreement.
(d) Nothing in this Section 6 shall be deemed to obligate Lessee to
pay: (i) any taxes, fees, assessments or other charges which have been included
in the cost of the Equipment and reflected in Exhibit B hereof; (ii) any taxes,
fees or other charges imposed, based on or measured by the income of the Lessor
or any taxes, fees or charges imposed in lieu of such taxes, fees or charges; or
(iii) any business privilege, franchise or other similar taxes or fees assessed
against Lessor.
7. LESSOR'S WARRANTIES. (a) LESSOR MAKES NO EXPRESS OR IMPLIED
-------------------
WARRANTIES OR REPRESENTATION AS TO ANY MATTER WHATSOEVER INCLUDING WITHOUT
LIMITATION THE CONDITION, SELECTION, QUALITY, SUITABILITY OR OPERATION, THE
MERCHANTABILITY, OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY EQUIPMENT, AND
LESSOR SHALL NOT BE LIABLE FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES ARISING OUT
OF OR IN CONNECTION WITH THE USE OR PERFORMANCE OF THE EQUIPMENT.
(b) Lessor hereby transfers and assigns to Lessee during Lease Term all
of its right and interest in any manufacturer's warranty with respect to the
Equipment and to any and all amounts which may be collected thereunder, and
agrees to execute any documents reasonably necessary to effect such transfer and
assignment. To the extent that any rights of Lessor with respect to the
manufacturer's warranty applicable to any item of Equipment may not be assigned
to Lessee, Lessor shall use reasonable efforts to enforce such rights against
the manufacturer on behalf of Lessee.
8. LESSEE'S WARRANTIES. Lessee hereby represents and warrants that as
-------------------
of the date of this Agreement and as of the Lease Commencement Date: (a) Lessee
is a Nevada corporation validly existing and in good standing under the laws of
the State of Nevada, with full power to enter into this Agreement and to pay
rent and perform its obligations under this Agreement; (b) this Agreement has
been duly authorized, executed and delivered by Lessee, is enforceable in
accordance with its terms and Lessee's execution, delivery and performance
hereunder does not and will not contravene the provisions of any contract or
other instrument by which it is bound; (c) no approval is required of any public
regulatory body with respect to the entering into or performance of this
Agreement; (d) there are no suits or proceedings pending in any court or any
governmental agency against or affecting Lessee which if decided against Lessee
would materially impair Lessee's ability to perform any of its obligations under
this Agreement; and (e) there has been no material adverse change to Lessee's
financial condition from that reflected in the financial statements of the
Lessee furnished to the Lessor on or immediately prior to the Lease Commencement
Date (the "Lessee Financial Statements").
9. OWNERSHIP AND INSPECTION. Lessor has an undivided senior ownership
------------------------
interest in the pool of Equipment described on Exhibit A hereto (the "Senior
Ownership Intererst") represented by a Senior Ownership Certificate
substantially in the form of Exhibit A-1. Lessee has an undivided residual
junior subordinated ownership interest in the Equipment described on Exhibit A
hereto (the "Residual Ownership Interest") represented by a Residual Ownership
Certificate substantially in the form of Exhibit A-2 hereto, which has been
pledged and assigned to the Lessor as security for the Lessee's payment
obligations under this Agreement. Lessee hereby acknowledges and agrees that it
has no title to the Lessor's Senior Ownership Interest in the Equipment, and by
the execution of this Agreement it does not have or obtain, and by payment or
performance under this Agreement (except as provided in Section 20 hereof) it
does not and will not obtain title to the Senior Ownership Interest in the
Equipment, nor any property right or other interest in the Equipment except
solely as Lessee hereunder and subject to the terms of this Agreement. Lessee
agrees that upon Lessor's request it will execute and deliver to Lessor or its
assignee, if any, such Uniform Commercial Code financing statements or other
similar or substitute documents as are necessary to protect Lessor's or its
assignee's right, title and interest in and to the Equipment as represented by
the Senior Ownership Certificate and Lessor's security interest in and lien on
Lessee's Residual Ownership Interest in the Equipment as represented by the
Residual Ownership Certificate. Lessee agrees that upon reasonable prior written
notice Lessor and Lessor's agents shall have the right to inspect the Equipment.
10. QUIET ENJOYMENT. Lessor hereby represents and warrants that as of
---------------
the Lease Commencement Date: (a) Lessor has good title to the Senior Ownership
Certificate in the Equipment; (b) Lessor has the full right and authority to
enter into this Agreement on the terms stated herein; and (c) so long as no
Event of Default has occurred and is continuing hereunder, Lessee shall have the
peaceful and quiet use and enjoyment of the Equipment against any acts or
interruptions by Lessor or any person claiming by, through or under Lessor, and
Lessor agrees to cause to be discharged any lien or encumbrance impairing such
quiet enjoyment if such lien or encumbrance was created by Lessor or anyone
claiming by, through or under Lessor and not arising due to the failure of
Lessee or any sublessee to perform its obligations hereunder.
11. USE OF EQUIPMENT. (a) During the Lease Term, Lessee warrants and
----------------
agrees that the Equipment will be operated and otherwise be in compliance with
all applicable statutes, regulations and orders of any governmental body having
power to regulate the Equipment, provided, however, that Lessee may, by
appropriate proceedings, contest the application of any such rule, regulation or
order in any reasonable manner which will not adversely affect the title of
Lessor to the Equipment or subject the Equipment to forfeiture or sale. Lessor
agrees to join in any proceedings in the event that such joinder is necessary
for the proper prosecution of any such proceedings and Lessee agrees to
indemnify Lessor against all reasonable costs and expenses incurred by Lessor in
connection with Lessor's joinder in such proceedings.
(b) Lessee agrees to give prior written notice to Lessor of any change
in the location of the Equipment from that set forth on Exhibit C. Lessee agrees
to assume responsibility for any and all costs of relocation or reinstallation.
12. LIENS. During the Lease Term, Lessee agrees that it will not
-----
create, incur, or assume any mortgage, security interest, lien or encumbrance on
the Equipment except: (a) the respective rights of Lessor and its assignee, if
any, and Lessee as provided in this Agreement; (b) liens for taxes, assessments,
or state, local, federal or other governmental charges or levies not yet due or
delinquent or not yet subject to penalty for nonpayment; (c) liens which have
been bonded or are being contested by Lessee as to the existence, amount,
applicability, extent or validity thereof by appropriate proceeding which shall
operate to prevent the collection or satisfaction of the lien contested; (d)
inchoate landlord's, materialman's, mechanic's, workman's, repairman's,
employee's or other similar liens arising in the ordinary course of business and
not delinquent; and (e) liens arising out of judgments against Lessee with
respect to which an appeal or proceeding for review is being prosecuted and with
respect to which there has been secured a stay of execution pending such appeal
or proceeding for review.
13. ALTERATIONS AND MODIFICATIONS. (a) Lessee shall have the right
-----------------------------
to make or have made alterations or modifications to any item of Equipment
provided that no such alteration or modification materially reduces the value or
impairs the operation of such Equipment. Any part, attachment or accessory
constituting a physical part of the Equipment whether attached to the Equipment
or made a part thereof as a result of an alteration or modification which cannot
be detached without causing material damage to the Equipment, shall be deemed to
be an accession to the Equipment and shall thereafter be deemed Equipment for
purposes of this Agreement, with title thereto in Lessor.
(b) Lessee shall have the right at any time to connect additional
equipment to the Equipment and whether such equipment is owned by Lessee or
leased from a third party, provided that the value of the Equipment shall not be
materially reduced by such connection.
14. LOSS OR DAMAGE. (a) In the event of any loss, seizure,
----------------
condemnation or destruction of the Equipment or damage to the Equipment which
cannot be repaired by Lessee, Lessee shall immediately notify Lessor in writing.
Within thirty (30) days of such notice, during which time Lessee shall continue
to pay Monthly Rent, Lessee shall, at the option of Lessor, either: (i) replace
the Equipment with equipment of the same type and manufacture in good repair,
condition and working order, transfer title to such equipment to Lessor free and
clear of all liens, claims and encumbrances, whereupon such equipment shall be
deemed Equipment for purposes of this Agreement, or (ii) pay to Lessor an amount
equal to the present value of the aggregate of the remaining unpaid Monthly
Rents plus any other costs actually incurred by Lessor. The present value shall
be determined by discounting the aggregate of the remaining unpaid Monthly Rents
to the date of payment by Lessee at the rate of eight and one-half percent
(8.5%) per annum. Any insurance or condemnation proceeds received by Lessor
shall be credited to the obligation of Lessee under this Section 14 and the
remainder of such proceeds, if any, shall be paid to Lessee by Lessor in full
compensation for the loss of the leasehold interest in the Equipment by Lessee.
(b) Lessee acknowledges and agrees that ANY DAMAGE TO OR LOSS,
DESTRUCTION OR UNFITNESS OF, OR DEFECT IN THE EQUIPMENT, OR THE INABILITY OF
LESSEE TO USE THE EQUIPMENT FOR ANY REASON WHATSOEVER, INCLUDING, BUT NOT
LIMITED TO, THE FAILURE OF THE MANUFACTURER OR VENDOR TO DELIVER THE EQUIPMENT
OR TO DELIVER THE EQUIPMENT IN MERCHANTABLE CONDITION, SHALL NOT (i) GIVE RISE
TO ANY DEFENSE, COUNTERCLAIM OR RIGHT OF SETOFF AGAINST LESSOR, OR (ii) PERMIT
ANY ABATEMENT OR RECOUPMENT OR ANY REDUCTION OF MONTHLY RENT, OR (iii) RELIEVE
LESSEE OF THE PERFORMANCE OF ITS OBLIGATIONS UNDER THIS AGREEMENT, INCLUDING,
BUT NOT LIMITED TO, ITS OBLIGATIONS TO PAY THE FULL AMOUNT OF MONTHLY RENT,
WHICH OBLIGATIONS ARE ABSOLUTE AND UNCONDITIONAL, unless and until this
Agreement is terminated with respect to such Equipment in accordance with the
terms hereof. Any claim that Lessee may have which arise from a defect in or
deficiency of the Equipment shall be brought solely against the manufacturer or
supplier of the equipment and Lessee shall, notwithstanding any such claim,
continue to pay Lessor all amounts due and to become due under this Lease
Agreement.
15. INSURANCE. Lessee shall keep the Equipment insured against all
---------
risks of loss or damage from every cause whatsoever occurring during the Lease
Term, for an amount not less than the higher of (i) the orderly liquidation
value of the Equipment as set forth in the Equipment Appraisal attached to this
Agreement as Exhibit F or (ii) the present value (using 8.5% per annum as the
discount rate) of the unpaid Monthly Rents for the balance of the Lease Term.
Lessee shall also carry public liability insurance, both personal and property
damage, covering the Equipment, and Lessee shall be liable for any deductible
portions of all required insurance. All insurance required by this Section 15
shall name Lessor as additional insured and loss payee. Such insurance shall
also be with such insurers and be in such forms and amounts as are reasonably
satisfactory to Lessor.
16. NET LEASE. This Agreement is a net lease and Lessee agrees that
---------
its obligation to pay rent and other amounts due hereunder shall be absolute and
unconditional, and except as expressly provided herein, shall not terminate nor
be subject to or affected by any abatement, reduction, set-off, defense,
counterclaim or deduction. It is the intent of Lessor and Lessee that the
Monthly Rent and other amounts payable under this Agreement shall continue to be
payable in all events in the manner and at the time as set forth in this
Agreement.
17. INDEMNIFICATION. (a) Lessee hereby agrees to indemnify, defend
---------------
and hold harmless Lessor, its agents, employees, successors and assigns (an
"Indemnified Party") from and against any and all claims, suits, proceedings,
costs, expenses, damages and liabilities whatsoever arising out of or in
connection with the manufacture, ordering, selection, specifications,
availability, delivery, titling, registration, rejection, installation,
possession, maintenance, ownership, use, leasing, operation or return of the
Equipment, including, but not limited to, any claim or demand based upon any
STRICT OR ABSOLUTE LIABILITY IN TORT and upon any infringement or alleged
infringement of any patent, trademark, trade secret, license, copyright or
otherwise, except for any such claims arising out of the negligence, gross
negligence or willful misconduct of any Indemnified Party. All costs and
expenses incurred by an Indemnified Party in connection with any of the
foregoing, including, but not limited to, legal fees, court costs and expenses,
shall be paid to the Indemnified Party upon demand. Any claim that Lessee may
have which arise from a defect in or deficiency of the Equipment shall be
brought solely against the manufacturer or supplier of the Equipment and Lessee
shall, notwithstanding any such claim, continue to pay Lessor all amounts due or
to become due under this Agreement. The obligations and indemnities of Lessee
under this Section 17 shall survive the expiration or other termination of this
Agreement.
(b) To the extent that an Indemnified Party receives any payments from
Lessee pursuant to the provisions of this Section 17, Lessee shall be subrogated
to the Indemnified Party's rights with respect to the claim giving rise to such
indemnity.
18. DEFAULT. The occurrence of any of the following events shall
-------
constitute an event of default ("Event of Default") under this Agreement:
(a) Lessee fails to pay any Monthly Rent within 15 days of the Rent
Payment Date, whether upon demand or otherwise, and such failure continues for a
period of ten (10) consecutive days after written notice to the Lessee; or
(b) Lessee fails to pay any other sum required hereunder, and such
failure continues for a period of ten (10) days following written notice from
Lessor; or
(c) Lessee fails to maintain the insurance as required in Section 15
hereof, and such failure continues for a period of ten (10) consecutive days
following written notice from the Lessor; or
(d) Any representation or warranty made by Lessee in this Agreement or
in any other document, agreement or instrument executed or delivered pursuant
hereto or in connection herewith, including, but not limited to, the Lessee
Financial Statements, shall prove to be untrue in any material respect as of the
date on which made; or
(e) Lessee violates or fails to perform any other term, covenant or
condition of this Agreement or any other document, agreement or instrument
executed pursuant hereto or in connection herewith, which failure is not cured
within thirty (30) days after written notice from Lessor; or
(f) There shall occur under any other lease, contract or agreement
between Lessee and Lessor or between an affiliate of the Lessee and the Lessor,
including, but not limited to, an uncured default with respect to a material
financial obligation or an "event of default" (as defined in such other
agreement) by Lessee or an affiliate of Lessee; or
(g) Lessee shall: (i) file a voluntary petition in bankruptcy or file a
voluntary petition or an answer or otherwise commence any action or proceeding
seeking reorganization, arrangement or readjustment of the Lessee's debts or for
any other relief under the Federal Bankruptcy Code, as amended, or under any
other bankruptcy or insolvency act or law, state or federal, now or hereafter
existing, or consent to, approve of or acquiesce in, any such petition, action
or proceeding; (ii) apply for or acquiesce in the appointment of a receiver,
assignee, liquidator, sequestrator, custodian, trustee or similar officer for
the Lessee's property; or (iii) make an assignment for the benefit of creditors;
or
(h) An involuntary petition shall be filed or an action or proceeding
otherwise commenced seeking reorganization, arrangement or readjustment of
Lessee's debts or for any other relief under the Federal Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency act or law, state or
federal, now or hereafter existing, and such action is not dismissed within 30
days of its commencement; or
(i) A receiver, assignee, liquidator, sequestrator, custodian, trustee
or similar officer for the Lessee or for all or any material part of Lessee's
property shall be appointed involuntarily; or a warrant of attachment, execution
or similar process shall be issued against any material part of the property of
the Lessee; or
(j) There occurs any material adverse change in the Lessee's property
or financial condition; or
(k) Lessee sells all or a material portion of its assets, merges into,
or combines with, another entity where the resulting entity is not deemed
acceptable from a financial standpoint by the Lessor in its reasonable
discretion, or Lessee ceases to exist or otherwise ceases doing business as a
going concern.
No waiver by Lessor of any Event of Default shall constitute a waiver of any
other Event of Default or of the same Event of Default at any other time.
19. REMEDIES. (a) Upon the occurrence of an Event of Default and
--------
while such Event of Default is continuing, Lessor, at its sole option, upon its
declaration, and to the extent not inconsistent with applicable law, may
exercise any one or more of the following remedies:
(i) Lessor may terminate this Agreement whereupon all rights of Lessee
to the use of the Equipment shall cease.
(ii) Whether or not this Agreement is terminated, Lessor may cause
Lessee, at the sole cost and expense of Lessee, to return any or all of the
Equipment promptly to the possession of Lessor in good repair and working order,
reasonable wear and tear excepted. Lessor, at its sole option and through its
employees, agents or contractors, may peaceably enter upon the premises where
the Equipment is located and take immediate possession of and remove the
Equipment, all without liability to Lessor, its employees, agents or contractors
for such entry. LESSEE HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHTS TO NOTICE AND/OR HEARING PRIOR TO THE REPOSSESSION OR
REPLEVIN OF THE EQUIPMENT BY LESSOR, ITS EMPLOYEES, AGENTS OR CONTRACTORS.
(iii) Lessor may proceed by court action to enforce performance by
Lessee of this Agreement or pursue any other remedy Lessor may have hereunder,
at law, in equity or under any applicable statute, including, without
limitation, the rights and remedies of a secured party under the Uniform
Commercial Code of the State of Connecticut or any other applicable jurisdiction
and recover such other actual damages as may be incurred by Lessor.
(iv) Lessor may recover from Lessee damages, not as a penalty but as
liquidated damages for loss of bargain, and without limitation of any other
amounts due from Lessee under this Agreement, in an amount equal to the sum of:
(1) any unpaid Monthly Rents due and payable for periods prior to the
repossession of the Equipment by Lessor, plus any interest due thereon; (2) the
present value of all future Monthly Rents required to be paid over the remaining
Lease Term after repossession of the Equipment by Lessor determined by
discounting such future Monthly Rents to the date of payment at a rate of eight
and one-half percent (8.5%) per annum, less the then prevailing rental value of
the Equipment; and (3) all costs and expenses incurred in searching for, taking,
removing, storing, repairing, restoring, refurbishing and leasing or selling
such Equipment.
(v) With respect to Equipment returned to or repossessed by Lessor,
Lessor may sell such Equipment at a public or private sale for cash or credit or
Lessor may re-lease such Equipment free and clear of any rights of Lessee under
this Agreement (other than Lessee's Residual Ownership Interest).
(vi) Lessee shall pay all costs and expenses, including, but not
limited to, legal fees and expenses, incurred by Lessor arising out of or in
connection with any Event of Default. Lessee shall also be liable for any
amounts due and payable to Lessor under any other provision of this Agreement.
(b) No failure on the part of Lessor to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver thereof. No
single or partial exercise of any right or remedy hereunder shall preclude any
other or further exercise thereof or the exercise of any other right or remedy.
(c) Each right and remedy provided hereunder is cumulative and not
exclusive of any other right or remedy, including, without limitation, any right
or remedy available to Lessor at law, by statute or in equity.
20. PURCHASE OPTION. (a) During the Lease Term or at the Lease
----------------
Termination Date, and provided that no Event of Default has occurred and is
continuing hereunder, the Lessee may elect to purchase the Lessor's Senior
Ownership Interest in the Equipment at the purchase price (the "Purchase Price")
as defined in Section 20(b) hereof. If Lessee desires to exercise its option
under this Section 20, Lessee shall notify Lessor in writing at least ten (10)
days prior to the date of the purchase of the Lessor's Senior Ownership Interest
in the Equipment. Upon payment of the Purchase Price, and of all Monthly Rents
and other amounts then owing under this Agreement, Lessor shall deliver, assign
and sell to the Lessee, without recourse and without any representation or
warranty, other than warranty of Lessor's title, free of any and all liens
resulting from the acts of Lessor, all of the Lessor's right, title and interest
in and to its Senior Ownership Interest in the Equipment as represented by the
Senior Ownership Certificate. Lessor will also release its lien on and security
interest in the Lessee's Residual Ownership Interest in the Equipment as
represented by the Residual Ownership Certificate. In addition, Lessor shall
release its lien on and security interest in all other property of Lessee
serving as collateral for Lessee's obligations hereunder (exclusive of Lessee's
property securing or serving as collateral for other obligations of the Lessee
to the Lessor).
(b) The Purchase Price for the Senior Ownership Interest in the
Equipment shall be equal to the sum of: (i) the present value of all future
Monthly Rents required to be paid Lessor over the remaining Lease Term
(determined by discounting such future Monthly Rents to the date of payment at a
rate of eight and one-half percent (8.5%) per annum), plus (ii) $100. In
----
addition, the Lessee shall be responsible for any sales, transfer or other
similar taxes or assessments in connection with the Lessor's sale and transfer
to the Lessee of the Senior Ownership Interest in the Equipment.
21. ASSIGNMENT; SUBLEASE. (a) Lessor may sell, assign or therwise
--------------------
transfer all or any part of its right, title and interest in and to the
Equipment or in this Agreement or any related agreements, including the Security
Agreement, to a third-party assignee, subject to the terms and conditions of
this Agreement, including, but not limited to, the right to use or to purchase
the Senior Ownership Interest in the Equipment by Lessee. Such assignee shall
assume all of the rights and obligations of Lessor under this Agreement, but
Lessor shall not be released therefrom absent a release executed by the Lessee.
Thereafter, all references to Lessor herein shall mean such assignee.
Notwithstanding any sale, assignment or transfer, the obligations of Lessee
hereunder shall remain absolute and unconditional as set forth in this
Agreement.
(b) Lessor may also, to the extent of its interest therein, pledge,
mortgage or grant a security interest in the Equipment and assign as collateral,
subject to the terms and conditions hereof, including, but not limited to, the
right to the use of the Equipment by Lessee. Lessor, by reason of such pledge,
mortgage or grant of security interest or collateral assignment, shall not be
relieved of any of its obligations hereunder, which shall remain absolute and
unconditional as set forth herein. Upon the written request of Lessor, Lessee
shall acknowledge such obligations to the pledgee, mortgagee, lienholder or
assignee.
(c) LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, SUBLEASE, CONVEY OR PLEDGE
ANY OF ITS INTEREST IN THIS AGREEMENT OR ANY OF THE EQUIPMENT WITHOUT THE PRIOR
WRITTEN CONSENT OF LESSOR. ANY SUCH SALE, TRANSFER, ASSIGNMENT, SUBLEASE,
CONVEYANCE OR PLEDGE, WHETHER BY OPERATION OF LAW OR OTHERWISE, WITHOUT THE
PRIOR WRITTEN CONSENT OF LESSOR, SHALL BE VOID.
22. EQUIPMENT ACQUISITION FEE; CLOSING COSTS. On the Lease
--------------------------------------------
Commencement Date, the Lessee shall pay the Lessor an Equipment Acquisition Fee
in the amount set forth on Exhibit D hereof. In addition, the Lessee shall pay
the legal fees and reasonable expenses of Lessor's counsel in connection with
the preparation of this Agreement and the consummation of the transactions
contemplated herein.
23. NOTICES. Any notices or other communications permitted or required
-------
hereunder shall be in writing and shall be deemed conclusively to have been duly
given if personally delivered, sent by overnight courier, or mailed by certified
mail, postage prepaid, and return receipt requested, if to the Lessor or the
Lessee, addressed to the applicable party at the address set forth at the head
of this Agreement, or to such other address as a party may have designated in
writing to the other party.
24. COUNTERPARTS; FACSIMILE EXECUTION. This Agreement may be executed
---------------------------------
in several counterparts each of which shall constitute an original, but all of
which together shall constitute one instrument notwithstanding that all parties
are not signatories to the same counterparts. Delivery of an executed
counterpart of this Agreement by facsimile shall be equally effective as
delivery of an original executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by facsimile also shall
deliver an original executed counterpart of this Agreement, but failure to
deliver an original executed counterpart shall not affect the validity,
enforceability and binding effect of this Agreement.
25. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
----------------
and understanding of the parties with respect to the matters and transaction
contemplated by this Agreement and supersedes any prior agreement and
understandings with respect to these matters and transactions.
26. FINANCIAL REPORTS AND INFORMATION. Lessee agrees to provide Lessor
---------------------------------
with all financial information concerning Lessee and Lessee's business as Lessor
may reasonably request, and Lessor agrees not to divulge or disseminate
such information to any third party without Lessee's prior written consent.
27. GOVERNING LAW AND AMENDMENTS. This Agreement is to be governed by,
----------------------------
and construed in accordance with, the laws of the State of Connecticut. Neither
this Agreement nor any term hereof may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against whom enforcement of the change, waiver, discharge or termination is
sought.
28. EXHIBITS AND SCHEDULES. The Exhibits and Schedules to this
------------------------
Agreement are hereby incorporated and made a part hereof and are an integral
part of this Agreement.
29. SEVERABILITY OF PROVISIONS. If any one or more of the covenants,
--------------------------
agreements, provisions or terms of this Agreement shall be held invalid for any
reason whatsoever, then such covenants, agreements, provisions or terms shall be
deemed severable from the remaining covenants, agreements provisions or terms of
this Agreement and shall in no way affect the validity or enforceability of the
other provisions of this Agreement.
IN WITNESS WHEREOF, the Lessor and the Lessee have duly executed and
delivered this Agreement as of the date first above written.
LESSEE:
CHARTER COMMUNICATIONS
INTERNATIONAL, INC.
By:__________________________
Name:
Title:
LESSOR:
CONNECTICUT BANK OF COMMERCE
By:__________________________
Name:
Title:
EXHIBIT INDEX
A - DESCRIPTION OF EQUIPMENT
A-1 - FORM OF SENIOR OWNERSHIP CERTIFICATE EVIDENCING LESSOR'S SENIOR
OWNERSHIP INTEREST IN THE EQUIPMENT
A-2 - FORM OF RESIDUAL OWNERSHIP CERTIFICATE EVIDENCING LESSESS'S RESIDUAL
SUBORDINATED OWNERSHIP INTEREST IN THE EQUIPMENT
B - SCHEDULE OF MONTHLY RENT
C - LOCATION OF EQUIPMENT
D - EQUIPMENT ACQUISITION FEE
E - FORM OF SECURITY AGREEMENT (SEE ATTACHED)
F - APPRAISAL OF THE EQUIPMENT
FORM OF SECURITY AGREEMENT
SECURITY AGREEMENT (the "Security Agreement"), dated as of October 29,
1997, by and between Connecticut Bank of Commerce, a Connecticut bank and trust
company (the "Bank") and Charter Communications International, Inc., a Nevada
corporation(the "Grantor").
RECITALS
WHEREAS, in order to induce the Bank to enter into the Purchase and Sale
Agreement ("Purchase Agreement") and the Equipment Lease Agreement ("Lease
Agreement") with the Grantor, the Bank has required that the Grantor
concurrently enter into this Security Agreement and provide the Bank with the
first priority security interest in certain collateral as set forth hereinafter;
and
WHEREAS, the parties hereto wish to set forth the terms and conditions of
the Grantor's grant of a security interest in certain collateral to the Bank.
NOW, THEREFORE, for value received and in consideration of the mutual
representations, warranties, covenants and agreements contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
SECTION 1. SECURITY INTEREST.
1.1 Grant of Security Interest. The Grantor hereby grants to the Bank
--------------------------
a continuing security interest in, lien on, and assignment of, and right of set
off against (collectively, the "Security Interest"), all of such Grantor's
right, title and interest in, to and under the following (collectively, the
"Collateral"): (i) all currently existing and hereafter arising accounts,
contract rights and all other forms of obligations owing to Grantor arising out
of the sale or lease of goods or the rendition of services by Grantor,
irrespective of whether earned by performance, and any and all credit insurance,
guaranties or security therefor, including all documentation, invoices or other
writings evidencing any of the foregoing (collectively, "Receivables")
(excluding Receivables purchased by the Bank, from time to time hereafter, but
including the Grantor's residual interest in purchased and all other
Receivables); (ii) the machinery, machine tools, motors, equipment, furniture,
furnishings, fixtures, vehicles (including motor vehicles and trailers), tools,
parts, goods, wherever located, described on Exhibit A attached hereto and made
a part hereof (collectively, "Equipment");and (iii) the proceeds and products,
whether tangible or intangible, of any of the foregoing, including proceeds of
insurance covering any or all of the foregoing, and any and all receivables,
general intangibles, negotiable collateral, equipment, inventory, money, deposit
accounts or other tangible or intangible property resulting from the sale,
exchange, collection or other disposition of any of the foregoing, or any
portion thereof or interest therein, and the proceeds thereof.
14
<PAGE>
The Bank shall have a first priority security interest in and lien
on all of the Collateral except for Grantor's Receivables in which the Bank or
its assignee will have a first priority security interest in the Grantor's
Receivables pursuant to the terms of a Receivable Purchase Facility Agreement
and a Receivable Purchase Agreement, each by and between the Debtor as seller
and the Secured Party as buyer (collectively, the "Receivable Purchase
Agreements"). The Bank shall have all of the rights of a secured party with
respect to the Collateral under the UCC and the other laws of the States of
Connecticut, Georgia and Texas as well as under the laws of other applicable
States and jurisdictions.
1.2 The Obligations. The Security Interest in the Collateral
---------------
granted hereby is to secure the prompt, complete payment and performance of all
of the Grantor's obligations under the Lease Agreement, including, but not
limited to, its obligations to pay rent and all other amounts payable
thereunder, and any and all extensions, modifications and renewals thereof and
the performance of all terms, conditions, covenants and agreements contained in
this Security Agreement as well as any other obligations or liabilities of the
Grantor to the Secured Party under any other agreement, whether direct or
indirect, absolute or contingent, due or to become due and whether now existing
or hereafter arising and howsoever evidenced or acquired, whether joint or
several (collectively, the "Obligations").
All of the Obligations shall be secured by the Collateral. The Bank may,
in its reasonable credit decision, (i) exchange, waive, or release any of the
Collateral, (ii) apply Collateral and direct the order or manner of sale thereof
as the Bank may determine, and (iii) settle, compromise, collect or otherwise
liquidate any Collateral in any manner, all without affecting the Obligations or
the Bank's right to take any other action with respect to any other Collateral.
SECTION 2. GENERAL COVENANTS.
2.1 Perfection and Protection of Security Interest; Landlord Waivers.
------------------------------------------------------------------
The Grantor shall, at its expense, perform all reasonable steps requested by
the Bank at any time to perfect, maintain, protect, and enforce the Security
Interest. On the Closing Date, the Grantor shall execute and deliver, and cause
to be filed such financing or security statements, agreements, mortgages, deeds
of trust or other filings, in form and substance satisfactory to the Bank and
its counsel, evidencing the Bank's Security Interest in the Collateral under
applicable law. So long as this Agreement is in effect and until all
Obligations have been fully satisfied, the Security Interest shall continue in
full force and effect in all Collateral. For any of the Grantor' leased premises
in which a material portion of the Collateral is located or stored, the Grantor,
if requested by the Bank, shall obtain, as soon as practicable following the
Closing Date, landlord waivers in form and substance satisfactory to the Bank
and its counsel.
2.2 Performance by Secured Party; Right to Perform or Cure. The Bank
-------------------------------------------------------
may, in its discretion and at any time, for the Grantor' account and expense,
pay any amount or do any act required of the Grantor hereunder or reasonably
requested by the Bank to preserve, protect, maintain or enforce the Obligations,
the Collateral or the Security Interest and which the Grantors fail to pay or
do. All payments that the Bank makes under this Section 2.2 and all
out-of-pocket costs and expenses that the Bank pays or incurs in connection with
any action taken by it hereunder, together with reasonable attorneys' fees and
other costs, shall be secured by the Collateral, and upon an Event of Default
(as defined in Section 5.1 hereof) shall bear interest at a per annum interest
rate of the Wall Street Journal Prime Rate plus 10 percent. Any payment made or
other action taken by the Bank under this Section 2.2 shall be without
prejudice to any right to assert an Event of Default hereunder and to proceed
thereafter as herein provided.
2.3 Power of Attorney. The Grantor hereby appoints the Bank and the
-----------------
Bank's designees as the Grantor's attorney, with power, upon an Event of
Default: (a) to endorse the Grantor's names on any document of title relating to
any Collateral; and (b) to do all things necessary to carry out this Agreement.
The Grantor hereby ratifies and approves all acts of such attorney. Neither the
Bank nor the attorney will be liable for any acts or omissions or for any error
of judgment or mistake of fact or law. This power, being coupled with an
interest, is irrevocable until this Agreement has been terminated and the
Obligations have been fully satisfied.
2.4 Access and Examination. The Bank may at all reasonable times (and
-----------------------
at any time when an Event of Default exists) have access to examine, audit, make
extracts from and inspect the Grantor's records, files, and books of account and
the Collateral and to discuss the Grantor's affairs with the Grantor's officers
and management. The Bank may, at any time when an Event of Default exists, and
at the Grantor's expense, make copies of Grantor's financial books and records,
or require the Grantor to deliver such copies to the Bank. The Bank may,
without expense to the Bank, use such of the Grantor's personnel, supplies, and
premises as may be reasonably necessary for maintaining or enforcing the
Security Interest.
2.5 Books and Records. The Grantor shall maintain, at all times,
-------------------
correct and complete books, records and accounts in which complete, correct and
timely entries are made of its transactions in accordance with generally
accepted accounting principles ("GAAP") consistent with those applied in the
preparation of such Grantor's annual financial statements. The Grantor shall,
by means of appropriate entries, reflect in such accounts and in all financial
statements the Loans, all in accordance with GAAP. The Grantor shall maintain
at all times books and records pertaining to the Collateral in such detail, form
and scope as the Bank shall reasonably require.
2.6 Financial and Other Information. The Grantor shall promptly
----------------------------------
furnish to the Bank all such financial information as the Bank shall reasonably
request, and notify its auditors and accountants that the Bank is authorized to
obtain such information directly from them.
2.7 Notices to Bank. The Grantor shall notify the Bank in writing of
---------------
the following matters and deliver any information or notices described therein
at the following times:
(a) Immediately after becoming aware thereof, any Event of Default.
(b) Immediately after becoming aware thereof, assertion by the holder
of any debt of a Grantor in excess of $100,000 that a default exists with
respect thereto or that such Grantor is not in compliance with the terms
thereof; or the threat or commencement by such holder of any enforcement action
because of such asserted default or non-compliance.
(c) Immediately after becoming aware thereof, any material adverse
change in the Grantor's financial condition, property, business, prospects or
operations.
(d) Immediately after becoming aware thereof, any pending or threatened
action, suit, proceeding, or counterclaim by any person, or any pending or
threatened investigation by a public authority, which may materially and
adversely affect the Collateral, the Grantor's satisfaction of the Obligations,
the Bank's rights under the Lease Agreement or the Grantor's financial
condition.
(e) Immediately after becoming aware of any event, including any
violation of any law, statute, regulation, or ordinance of any public authority
applicable to the Grantor or its Properties, which may materially and adversely
affect the Collateral, the Grantor's satisfaction of the Obligations, the Bank's
rights under the Lease Agreement or the Grantor's financial condition.
(f) Any change in the Grantor's name, state, province or country of
incorporation or form of organization, at least thirty (30) days prior thereto.
Each notice given under this Section 2.7 shall describe the subject matter
thereof in reasonable detail, and shall set forth the action that such Grantor
has taken or proposes to take with respect thereto.
SECTION 3. GENERAL WARRANTIES AND REPRESENTATIONS.
The Grantor warrants and represents to the Bank:
3.1 Validity, and Enforceability of this Security Agreement and the
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Lease Agreement. The Grantor has the corporate power to execute, deliver and
- ----------------
perform this Security Agreement and the Lease Agreement and all agreement and
documents pertaining thereto, to incur the Obligations, and to grant the
Security Interest. The Grantor has taken all necessary corporate action
(including, without limitation, obtaining any necessary shareholder approval or
consent) to execute, deliver and perform this Agreement and the Lease Agreement.
No consent, approval, or authorization of, or declaration or filing with, any
public authority, and no consent of any other person, is required in connection
with the Grantor's execution, delivery, and performance of this Security
Agreement and the Lease Agreement, except for those already duly obtained. Each
of this Security Agreement and the Lease Agreement has been duly executed and
delivered by the Grantor, and constitutes the legal, valid and binding
obligation of the Grantor, enforceable against the Grantor in accordance with
its terms. The Grantor's execution, delivery, and performance of this Security
Agreement and the Lease Agreement do not and will not conflict with, or
constitute a violation or breach of, or constitute a default under, or result in
the creation or imposition of any lien upon the property of the Grantor (except
as contemplated by this Security Agreement and the Lease Agreement) by reason of
the terms of (a) any contract, mortgage, lien, lease, agreement, indenture, or
instrument to which such Grantor is a party or which is binding upon such
Grantor, (b) any judgment, law, statute, rule or governmental regulation
applicable to such Grantor or (c) the Certificate or Articles of Incorporation
or By-Laws of such Grantor.
3.2 Validity and Priority of Security Interest. The provisions of this
------------------------------------------
Security Agreement and the Lease Agreement create a legal and valid Security
Interest in the Collateral in the Bank's favor, and such Security Interest
constitutes a continuing lien on all the Collateral, having priority over all
other liens on the Collateral (other than the Grantor's Receivables), and
enforceable against the Grantor and all third parties.
3.3 Organization and Qualification. Grantor: (a) is duly incorporated
------------------------------
and organized and validly existing in good standing under the laws of its
incorporation or organization; (b) is in good standing in all jurisdictions in
which qualification is necessary in order for it to own or lease its property
and conduct its business; and (c) has all requisite power and authority to
conduct its business and to own its property.
3.4 No Default. Except as disclosed in writing to the Bank prior to the
----------
date hereof, the Grantor is not in default with respect to payment of principal,
interest or other amounts due and payable with respect to any note, indenture,
loan agreement, mortgage, lease, deed, or other agreement to which the Grantor
is a party or bound, which default could materially and adversely affect the
Collateral, the Debtor's Obligations, the Bank's rights under the Lease
Agreement, or the Grantor's financial condition. For purposes of this provision,
a loan or extension of credit of in excess of $100,000 is deemed to be material
with regard to the Grantor's financial condition.
3.5 Litigation. Except as disclosed in writing to the Bank prior to
----------
the date hereof, to the best of the Grantor's knowledge, there is no threatened
action, suit, proceeding, or counterclaim by any person, or investigation by any
public authority, or any basis for any of the foregoing, which may materially
and adversely affect the Collateral, the Grantor's satisfaction of the
Obligations, the Bank's rights under the Loan Documents, or the Grantor's
Property, business, prospects, operations, or conditions (financial or
otherwise).
3.6 Title to Collateral; Permitted Liens. The Grantor has good and
------------------------------------
marketable title to the Collateral and the same is not now and shall not become
subject to any security interest, encumbrance, lien or claim of any third person
other than: (i) liens and security interests securing the Obligations or any
other obligation of the Grantor to the Secured Party, including, but not limited
to, the Receivable Purchase Agreements; (ii) liens for taxes, assessments or
similar charges either not yet due or being contested in good faith; (iii) liens
of mechanics, materialmen, warehousemen, carriers or other like liens arising in
the ordinary course and securing obligations not yet delinquent; (iv) purchase
money liens or purchase money security interests upon or in any property
acquired or held by the Grantor in the ordinary course of business to secure
indebtedness outstanding on the date hereof or permitted to be incurred
hereunder; (v) liens and security interests which, as of the date hereof, have
been disclosed to and approved by the Bank in writing; and (vi) those liens and
security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of the Grantor's
assets (collectively, the "Permitted Liens").
SECTION 4. AFFIRMATIVE AND NEGATIVE COVENANTS.
The Grantor covenants that, so long as any of the Obligations remain
outstanding or this Security Agreement is in effect:
4.1 Compliance with Law and Agreements. Grantor shall comply with the
----------------------------------
terms and provisions of this Security Agreement. In addition, such Grantor shall
comply with the terms and conditions of each material judgment, law, statute,
rule and governmental regulation applicable to it and each material contract,
mortgage, lien, lease, indenture, order, instrument, agreement, mortgage, lien,
lease, indenture, order, instrument, agreement or document to which it is a
party or by which it is bound, including, but not limited to, the Lease
Agreement.
4.2 Transactions Affecting Collateral or Obligations; Maintenance of
-------------------------------------------------------------------
Insurance. The Grantor shall not enter into any transaction which materially
- ---------
and adversely affects the Collateral or the Grantor's ability to repay the
Obligations. The Grantor shall maintain insurance in such amounts and covering
such risks as is usually carried by companies engaged in similar businesses and
owning similar properties in the same general areas in which the Grantor
operates and maintain such other insurance and coverages as may be required by
the Bank. All such insurance shall be in form and amount and with insurance
companies satisfactory to the Bank. With respect to insurance covering
Collateral in which the Bank has a Security Interest, at the Bank's request, the
Grantor shall name the Bank as loss payee pursuant to a loss payable endorsement
satisfactory to the Bank and shall not be altered or canceled except upon ten
Business Days' prior written notice to the Bank. Upon the Bank's request, the
Grantor shall furnish the Bank with the original policy or a binder of all such
insurance.
4.3 Corporate Existence and Good Standing. The Grantor shall maintain
-------------------------------------
its corporate existence and its qualification and good standing in all states,
provinces or countries necessary to conduct its business and own its Property,
and shall obtain and maintain all licenses, permits, franchises and governmental
authorizations necessary to conduct its business and own its Property.
4.4 Maintenance of Collateral. The Grantor shall keep and maintain the
-------------------------
Collateral free and clear of all levies, liens, encumbrances and security
interests, except for Permitted Liens (as defined in Section 3.6). The Grantor
shall properly care for, house, store and maintain the Collateral in good
condition, free of misuse, abuse and deterioration, other than normal wear and
tear. The Grantor shall also maintain and preserve Collateral in good and
working order and condition in accordance with the general practice of other
businesses of similar character and size, ordinary wear and tear excepted.
4.5 Location and Maintenance of Grantor's Equipment. The Grantor's
-------------------------------------------------
Equipment shall at all times be in the Grantor's physical possession, shall not
be held for sale or lease (other than to the Bank) and shall be kept only at the
locations set forth on Schedule 1 hereof. The Grantor shall not secrete,
abandon, move or permit the removal of, the Equipment or any part thereof, from
the locations shown on Schedule 1 hereof, or permit to be removed any
accessories now or hereafter placed upon the equipment, without the express
prior written permission of the Bank. Upon the request of the Bank, the Grantor
shall immediately provide the Bank with a complete and accurate description of
the Equipment including, as applicable, the make, model, identification number
and serial number of each item of Equipment. The Grantor shall, at the Grantor's
sole cost and expense, keep and maintain the Equipment in a good state of repair
and shall not destroy, misuse, abuse, illegally use or be negligent in the care
of the Equipment or any part thereof. The Equipment is not now, and shall not at
any time hereafter, be so affixed to the real property on which it is located to
become a fixture or a part thereof. The Equipment is now and at all times
hereafter be and remain the personal property of the Grantor.
4.6 Further Assurances. The Grantor shall execute and deliver, or cause
------------------
to be executed and delivered, to the Bank such documents and agreements, and
shall take or cause to be taken such actions, as the Bank may, from time to
time, reasonably require to carry out the terms and conditions of this Agreement
and the Lease Agreement.
SECTION 5. DEFAULT; REMEDIES.
5.1 Event of Default. It shall constitute an event of default ("Event
----------------
of Default") if (i) an Event of Default occurs, as defined in the Lease
Agreement, or (ii) the Grantor breaches this Security Agreement and such breach
is not cured within thirty (30) days of written notice thereof from the Bank.
5.2 Remedies.
--------
(a) If an Event of Default exists, the Bank may, without notice to or
demand on the Grantor, do one or more of the following at any time or times and
in any order: (i) terminate the Lease Agreement; (ii) declare any or all
Obligations not payable on demand to be immediately due and payable; and (iii)
pursue its other rights and remedies under this Security Agreement or the Lease
Agreement and applicable law.
(b) If an Event of Default exists: (i) the Bank shall have, in
addition to all other rights and remedies of a secured party, all of the rights
and remedies of a secured party under the UCC and any other similar laws; (ii)
the Bank may, at any time, take possession of the Collateral and keep it on a
Grantor's premises, at no cost to the Bank or remove any part of its to such
other place or places as the Bank may desire, or such Grantor shall, upon the
Bank's demand, at such Grantor's cost, assemble the Collateral and make it
available to the Bank at a place reasonably convenient to the Bank; and (iii)
the Bank may sell and deliver any Collateral at public or private sales, for
cash, upon credit or otherwise, at such process and upon such terms as the Bank
deems advisable, in its sole discretion, and may, if the Bank deems it
reasonable, postpone or adjourn any sale of the Collateral by an announcement at
the time and place of sale or of such postponed or adjourned sale without giving
a new notice of sale. Without in any way requiring notice to be given in the
following manner, the Grantor agree that any notice by the Bank of sale,
disposition or other intended action hereunder or in connection herewith,
whether required by the UCC or otherwise, shall constitute reasonable notice to
the Grantor if such notice is mailed by registered or certified mail, return
receipt requested, postage prepaid, or is delivered personally against receipt,
at least five (5) days prior to such action to the Grantor's address specified
in or pursuant to this Agreement. If any Collateral is sold on terms other
than payment in full at the time of sale, no credit shall be given against the
Obligations until the Bank receives payment, and if the buyer defaults in
payment, the Bank may resell the Collateral without further notice to the
Grantor. In the event the Bank seeks to take possession of all or any portion
of the Collateral by judicial process, the Grantor irrevocably waives: (a) the
posting of any bond, surety or security with respect thereto which might
otherwise be required; (b) any demand for possession prior to the commencement
of any suit or action to recover the Collateral; and (c) any requirement that
the Bank retain possession and not dispose of any Collateral until after trial
or final judgment. The Grantor agrees that the Bank has no obligation to
preserve rights to the Collateral or marshal any Collateral for the benefit of
any person. The proceeds of sale shall be applied first to all expenses of
sale, including attorneys' fees, and second, in whatever order the Bank elects,
to all Obligations. The Bank will return any excess to the Grantor or such
other Person as shall be legally entitled thereto and the Grantor shall remain
jointly and severally liable for any deficiency.
(c) If an Event of Default occurs, the Grantor hereby waive all rights
to notice and hearing prior to the exercise by the Bank of the Bank's rights to
repossess the Collateral without judicial process or to re-levy, attach or levy
upon the Collateral without notice or hearing.
SECTION 6. MISCELLANEOUS.
6.1 No Waiver. Failure by the Bank to exercise any right, remedy or
----------
option under this Security Agreement or any present or future supplement
thereto, or in any other agreement between the Grantor and the Bank, or delay by
the Bank in exercising the same, will not operate as a waiver thereof. No
waiver by the Bank will be effective unless it is in writing, and then only to
the extent specifically stated. No waiver by the Bank on any occasion shall
affect or diminish the Bank's right thereafter to require strict performance by
the Grantor of any provision of this Security Agreement. The Bank's rights and
remedies under this Agreement will be cumulative and not exclusive of any other
right or remedy which the Bank may have.
6.2 Amendments and Waivers. No amendment or modification of any
------------------------
provision of this Security Agreement shall be effective without the written
agreement of the Bank and the Grantor, and no termination or waiver of any
provision of this Security Agreement, or consent to any departure by the Grantor
therefrom, shall in any event be effective without the written concurrence of
the Bank, which the Bank shall have the right to grant or withhold at its sole
discretion.
6.3 Recourse to Collateral. The rights and remedies of the Bank set
----------------------
forth in this Security Agreement are not intended to be exclusive. The Bank
shall have the right, in its sole discretion, to determine which rights and
remedies are to be exercised and in which order. The exercise of one right or
remedy shall not preclude the exercise of any others, all of which shall be
cumulative. The Bank may, without limitation, proceed directly against the
Grantor to collect the Obligations without prior recourse to the Collateral.
6.4 Severability. If any provision of this Security Agreement shall be
------------
prohibited or invalid, under applicable law, it shall be effective only to such
extent, without invalidating the remainder of this Agreement.
6.5 Governing Law; Choice of Forum; Service of Process; Jury Trial
-------------------------------------------------------------------
Waiver. (a) THIS SECURITY AGREEMENT SHALL BE INTERPRETED AND THE RIGHTS AND
- ------
LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE INTERNAL
LAWS (AS OPPOSED TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF
CONNECTICUT, EXCEPT TO THE EXTENT THAT THE PERFECTION OF THE SECURITY
INTERESTS GRANTED HEREIN, OR THE REMEDIES HEREUNDER IN
RESPECT OF ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAWS OF A
JURISDICTION OTHER THAN THE STATE OF CONNECTICUT.
(b) SUBJECT ONLY TO THE EXCEPTION IN THE NEXT SENTENCE, THE GRANTOR AND
THE BANK HEREBY AGREE TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL
COURT OF COMPETENT JURISDICTION IN THE STATE OF CONNECTICUT SITTING IN COUNTY
OF FAIRFILED AND WAIVE ANY OBJECTION BASED ON VENUE OR FORUM NON CONVENIENS
--------------------
WITH RESPECT TO ANY ACTION INSTITUTED THEREIN, AND AGREE THAT ANY DISPUTE
CONCERNING THE RELATIONSHIP BETWEEN THE BANK AND THE GRANTOR OR THE CONDUCT
OF ANY PARTY IN CONNECTION WITH THIS SECURITY AGREEMENT OR OTHERWISE SHALL BE
HEARD ONLY IN THE COURTS DESCRIBED ABOVE. NOTWITHSTANDING THE FOREGOING, THE
BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE
GRANTOR OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION THE BANK DEEMS
NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR OTHER SECURITY
FOR THE OBLIGATIONS.
(c) THE GRANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS
UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED
MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO THE GRANTOR AT ITS ADDRESS SET
FORTH IN SECTION 6.8 AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE
(5) DAYS AFTER THE SAME SHALL HAVE BEEN SO DEPOSITED IN THE MAILS.
(d) EACH OF THE GRANTOR AND THE BANK HEREBY WAIVES ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER
THIS SECURITY AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED
OR DELIVERED IN CONNECTICUT HEREWITH OR (ii) IN ANY WAY CONNECTED WITH OR
RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR EITHER OF THEM
IN RESPECT TO THIS SECURITY AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED, IN CONNECTION HEREWITH OR THE TRANSACTIONS
RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER SOUNDING IN CONTRACT OR OTHERWISE. EACH OF THE GRANTOR AND THE BANK
HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT EITHER OF THEM
MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR
RIGHT TO TRIAL BY JURY.
(e) NOTHING IN THIS SECTION 6.5 SHALL AFFECT THE RIGHTS OF THE
BANK TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE
RIGHTS OF THE BANK TO BRING ANY ACTION OR PROCEEDING AGAINST THE GRANTOR OR ITS
PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION.
6.6 Survival of Representations and Warranties. All of the Grantor's
--------------------------------------------
representations, and warranties contained in this Security Agreement shall
survive the execution, delivery, and acceptance thereof by the parties,
notwithstanding any investigation by the Bank or the Bank's agents.
6.7 Fees and Expenses. The Grantor shall pay to the Bank, on demand,
-----------------
all costs and expenses that the Bank pays or incurs in connection with the
negotiation, preparation, consummation, administration, enforcement, and
termination of this Security Agreement and the Lease Agreement.
6.8 Notices. Any notice, request, demand or other communication
-------
permitted or required to be given hereunder shall be in writing, shall be signed
by the party giving it, shall be sent to the addressee at the address or
facsimile number set forth hereinbelow (or at such address or facsimile number
as shall be designated hereunder by notice to the other parties and persons
receiving copies) and shall be deemed conclusively to have been given: (i) on
the day sent by facsimile; (ii) on the day following the day on which it is sent
by Federal Express or by any other reputable overnight courier service; (iii) on
the fifth day following the day sent by certified or registered mail, postage
prepaid and return receipt requested; or (iv) when received by the addressee, if
sent otherwise.
(a) If to the Bank:
J. Donald Weand, Jr.
Senior Vice President
Connecticut Bank of Commerce
612 Bedford Street
Stamford, Connecticut 06901
Tel. No. (203) 708-8855
Fax. No. (203) 708-8861
with a copy to:
Thomas S. Gallagher, Esq.
66 Larchmont Avenue
Larchmont, New York 10538
Tel. No. (914) 834-2867
Fax. No. (914) 833-4270
(b) If to the Grantor:
Pat Delaney
Chief Financial Officer
Charter Communications International, Inc.
2839 Paces Ferry Road, Suite 500
Atlanta, Georgia 30339
Tel. No. (770) 432-6800
Fax. No. (770) 319-2834
with a copy to:
Charles M. Cushing, Jr., Esq.
Cushing, Morris, Ambruster & Jones, LLC
2110 Peachtree Center International Tower
229 Peachtree Street, N.E.
Atlanta, Georgia 30303
Tel. No. (404) 521-2323
ax.No. (404) 522-0607
Failure or delay in delivering copies of any notice, demand, request,
consent, approval, declaration or other communication to the persons designated
above to receive copies shall not adversely affect the effectiveness of such
notice, demand, request, consent, approval, declaration or other communication.
6.9 Indemnity. The Grantor agrees to (i) reimburse the Bank for any
---------
costs and expenses (including, without limitation, reasonable attorneys' fees
and paralegals' fees and expenses) incurred by the Bank in defending any suit
brought against it by the Grantor or any other person in connection with the
transactions contemplated by this Security Agreement or the Lease Agreement
(other than any suit in which such Grantor obtains a final judgment against the
Bank), and (ii) indemnify and hold the Bank and its officers, directors,
employees, attorneys and agents (collectively, the "Indemnitees") harmless from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever incurred by the Indemnitees, whether direct, indirect or
consequential, as a result of or arising from or relating to any proceeding by
any person, whether threatened or initiated, asserting any claim for legal or
equitable remedy against any Person under any statute or regulation (including,
without limitation, any federal, state or other applicable securities or
commercial laws) or under any common law or equitable cause or otherwise, in any
way arising from or in connection with the negotiation, preparation, execution,
delivery, enforcement, performance and administration of this Agreement or any
other document executed in connection herewith, provided that the Grantor shall
have no obligation hereunder with respect to indemnified liabilities arising
from the gross negligence or willful misconduct of any Indemnitee seeking such
indemnification. To the extent that the indemnity set forth in this Section 6.9
may be unenforceable because it is violative of any law or public policy, the
Grantor shall pay the maximum portion which he is permitted to pay under
applicable law. Any Indemnitee will promptly notify the Grantor of the
commencement of any legal proceeding which may give rise to any indemnified
liability under the foregoing indemnity and shall permit the Grantor to assume
the defense of such Indemnitee in any such proceeding in accordance with the
provisions of the next paragraph of this Section 6.9. The foregoing indemnity
shall survive the payment of the Obligations and the termination of this
Security Agreement. All of the foregoing fees, costs and expenses shall be part
of the Obligations, payable upon demand, and secured by the Collateral.
In the event any action, suit or proceeding is brought by a third party
against an Indemnitee, with respect to which the Grantor may have liability
under this Section 6.9, the action, suit or proceeding shall, upon the written
agreement of the Grantor that its is obligated to pay for the defense of such
action, suit or proceeding, be defended (including all proceedings on appeal or
for review which counsel for the defendant shall deem appropriate) and, unless
otherwise provided below, controlled by the Grantor. The Indemnitee shall have
the right to employ its own counsel in any such case, but the fees and expenses
of such counsel shall be at the expense of such Indemnitee unless (i) the
employment of such counsel shall have been authorized in writing by the Grantor
in connection with the defense of such action, suit or proceeding or (ii) the
Indemnitee shall have reasonably concluded that the Grantor is failing actively
and diligently to defend such action, suit or proceeding, in either of which
events the Grantor shall not have the right to direct the defense of such
action, suit or proceeding on behalf of the Indemnitee and that portion of any
fees and expenses of counsel related to matters covered by the indemnity
agreement contained herein shall be borne by the Grantor. In addition, if (x)
the Indemnitee shall have reasonably concluded that such action, suit or
proceeding involves to a significant extent matters beyond the scope of the
indemnity agreement contained in this Section 6.9 or (y) the Indemnitee shall
have reasonably concluded that there may be one or more legal defenses available
to the Indemnitee which are different from or additional to those available to
the Grantor, the Grantor shall not have the right to direct the defense of such
action, suit or proceeding on behalf of the Indemnitee. The Indemnitee shall be
kept fully informed of such action, suit or proceeding at all stages thereof
whether or not it is so represented. The Grantor shall make available to the
Indemnitee and its attorneys and accountants all books and records of the
Grantor relating to such proceedings or litigation, and the parties hereto agree
to render to each other such assistance as they may reasonably require of each
other in order to ensure the proper and adequate defense of any such action,
suit or proceeding.
The Grantor shall not make any settlement of any claims without the written
consent of the Indemnitee, which consent shall not be unreasonably withheld. No
Indemnitee shall make any settlement of any claims without the written consent
of the Grantor, which consent shall not be unreasonably withheld.
6.10 Binding Effect; Assignment. The provisions of this Security
----------------------------
Agreement shall be binding upon and inure to the benefit of the respective
representatives, successors and assigns of the parties hereto; provided,
however, that no interest herein may be assigned by the Grantor without the
prior written consent of the Bank. The rights and benefits of the Bank
hereunder shall, if the Bank so agrees, inure to any party acquiring any
interest in the Obligations or any part thereof.
6.11 Counterparts; Facsimile Execution. This Security Agreement may be
----------------------------------
executed in any number of counterparts, each of which shall be an original, but
all of which shall together constitute one and the same agreement. Delivery of
an executed counterpart of this Security Agreement by facsimile shall be equally
as effective as delivery of any original executed counterpart of this Security
Agreement. Any party delivering an executed counterpart of this Security
Agreement by facsimile also shall deliver an original executed counterpart of
this Security Agreement, but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability and binding effect of
this Security Agreement.
6.12 Captions. The captions contained in this Security Agreement are for
--------
convenience only, are without substantive meaning and should not be construed to
modify, enlarge or restrict any provision.
IN WITNESS WHEREOF, the parties have entered into this Security Agreement
on the date first above written.
CONNECTICUT BANK OF COMMERCE
By:____________________________
Its:___________________________
CHARTER COMMUNICATIONS
INTERNATIONAL, INC.
By:____________________________
Its:___________________________
RECEIVABLE
PURCHASE FACILITY AGREEMENT
RECEIVABLE PURCHASE FACILITY AGREEMENT (the "Agreement"), dated as of
January 20, 1998, by and between Charter Communications International, Inc., a
Nevada corporation, having an office at 2839 Paces Ferry Road, Suite 500,
Atlanta, Georgia 30339 (the "Seller"), and Connecticut Bank of Commerce, having
an office at 612 Bedford Street, Stamford, Connecticut 06901 (the "Purchaser").
RECITALS
WHEREAS, the Seller has requested that the Purchaser purchase, from time
to time, certain of the Seller's Receivables (as hereinafter defined) due from
various obligors; and
WHEREAS, the Purchaser has indicated to the Seller its desire to purchase,
from time to time, with recourse, Receivables from specified obligors arising in
the normal course of Seller's business on the terms and subject to the
conditions contained herein; and
WHEREAS, the parties hereto wish to set forth the terms and conditions of
the Receivable Purchase Facility (as defined hereinafter).
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter set forth, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.1. Certain Defined Terms. As used in this Agreement, the
-----------------------
following capitalized terms shall have the meanings respectively assigned to
them below, which meanings shall be applicable equally to both the singular and
plural forms of the term defined:
"Acceptable Obligor" shall mean, at any time, all Obligors on the Seller's
Receivables being acquired, from time to time, by the Purchaser from the Seller
pursuant to this Agreement, except for Obligors which are Persons, or which are
subject to a bankruptcy proceeding, either voluntary or involuntary, or which
the Purchaser has given the Seller advance notice that the Obligor shall not be
considered an Acceptable Obligor.
"Affiliated Company" shall mean any Company controlled by, or under common
control with, the Seller, including any parent.
"Affiliated Person" shall mean any Person who owns, directly or indirectly,
a controlling interest in the Seller or any Affiliated Company.
16
<PAGE>
"Agreement" shall mean this Receivable Purchase Facility Agreement, as the
same may be supplemented, modified, amended or restated from time to time in the
manner provided herein.
"Assignment" shall mean the Assignment, substantially in the form of
Exhibit C hereto (appropriately completed), evidencing the Seller's assignment
to the Purchaser as Collateral the Seller's Residual Ownership Interest in the
Purchased Receivables and all of the Seller's rights, title and interest in and
to all other Receivables.
"Bill of Sale" shall mean the Master Bill of Sale, substantially in the
form of Exhibit A hereto (appropriately completed), evidencing the Seller's
conveyance and sale to the Purchaser, from time to time, during the Facility
Period, of one or more Receivables pursuant to this Agreement.
"Business Day" shall mean any date other than (i) a Saturday or Sunday, or
(ii) a day on which banking institutions in the State of Connecticut are
authorized or obligated by law or executive order to be closed.
"Collateral" shall have the meaning set forth in Section 4.3 hereof.
"Collections" shall mean all cash, checks, notes, instruments and other
items of payment.
"Company" shall mean any corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust, estate,
unincorporated organization or other legal entity.
"Dollars" or "$" means the lawful currency of the United States of America
and, in relation to any amount to be paid hereunder, funds having same day or
immediate value.
"Effective Date" shall mean the date of this Agreement, which shall be the
date the Receivable Purchase Facility provided hereunder is deemed effective.
"Eligible Receivable" shall mean a Receivable (i) generated from the sale
or lease of goods or the rendering of services or otherwise which is unpaid for
90 days or less from the date of the invoice evidencing the payment obligation,
(ii) which in not subject to any dispute, offset, counterclaim or defense
whatsoever, and (iii) the Obligor of which is an Acceptable Obligor and is
not an Affiliated Company.
"Facility Fee" shall mean the fee payable by the Seller to the Purchaser on
the Effective Date equal to $12,000.
"Facility Period" shall mean the period from the Effective Date until the
Termination Date.
"Guaranteed Return" shall mean the Purchaser's receipt from the Collections
on the Purchased Receivables equal to the Purchaser's Investment plus the
Investment Return thereon.
"Ineligible Receivable" shall mean any Receivable which does not qualify as
an Eligible Receivable in accordance with the criteria established in this
Agreement.
"Investment Return" shall mean a return on the Purchaser's Investment in
one or more Purchased Receivables equal to the Prime Rate plus 2 percent per
annum from time to time outstanding on the Outstanding Receivable Investment
calculated on a daily basis from the date of Purchaser's acquisition of the
Purchased Receivable up to and including the date the Purchaser's Investment in
the Purchased Receivable is reduced to zero. Each change in the Prime Rate shall
be reflected in the Investment Return on Purchaser's Investment as of the
effective date of such change. The Investment Return shall be computed on the
basis of a year of 360 days and actual days elapsed.
"Lockbox" shall mean the post office box listed on Schedule I hereto to
which the Obligors on Purchased Receivables are instructed to remit payments on
the Receivables and/or such other post office box as may be established in
connection with this Agreement.
"Lockbox Agreement" shall mean a lockbox agreement, substantially in the
form of Exhibit E.
"Maximum Facility Amount" shall mean $600,000, which represents the maximum
Outstanding Receivable Investment that the Purchaser is obligated to make with
respect to one or more pools of Purchased Receivables under this Receivable
Purchase Facility, or such higher amount as the Board of Directors of the
Purchaser, in its absolute discretion, shall approve; provided, however, that
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in no event shall the Outstanding Balance of Purchased Receivables owed by a
single Obligor when combined with other indebtedness of such Obligor to the
Purchaser exceed the Purchaser's legal lending limit with respect to said
Obligor.
"Obligor" shall mean, with respect to any Receivable, the Company or Person
obligated to make payments with respect to the Receivable.
"Other Agreements" shall have the meaning set forth in Section 2.9(b)(ix)
hereof.
"Outstanding Balance" shall mean, with respect to any Purchased Receivable
as of any date, the current unpaid balance of the Purchased Receivable as of
such date.
"Outstanding Receivable Investment" shall mean, with respect to any
Purchased Receivable, the Purchase Price less any principal reductions from
Collections with respect to the Purchased Receivable.
"Person" shall mean an individual and his or her executors,
representatives, successors or assigns.
"Prime Rate" shall mean the prime rate of interest quoted in The Wall
Street Journal, (Eastern Edition).
"Purchase Price" shall mean 60 percent of the unpaid balance of each
Eligible Receivable included in the pool of Purchased Receivables which is
unpaid for 89 days or less from the date of the invoice evidencing the payment
obligation as of the respective Settlement Date.
"Purchased Receivable" shall mean any Receivable purchased by the Purchaser
from the Seller pursuant to this Agreement.
"Purchaser's Account" shall have the meaning set forth in Section 2.8
hereof.
"Purchaser's Investment" shall mean the total amounts paid by the Purchaser
to the Seller from time to time for Purchased Receivables acquired pursuant to
this Agreement.
"Receivable" shall mean the indebtedness and payment obligations of any
Company or Person to the Seller (including, without limitation, obligations
constituting an account or general intangible or evidenced by a note,
instrument, contract, security agreement, chattel paper, other evidence of
indebtedness or security) arising from the sale of merchandise or services by
the Seller, including, without limitation, any right to payment for goods sold
or for services rendered, and including the right to payment of any interest,
sales taxes, finance charges, returned check or late charges and other
obligations of such Company or Person with respect thereto.
"Receivable Collection Account" shall mean the deposit account established
in connection with the Lockbox for the benefit of, and in the name of, the
Purchaser, to receive all collections from the Purchased Receivables as well as
from all other Receivables which have been assigned and pledged to the Purchaser
to ensure the Purchaser's receipt of the Guaranteed Return and as security for
the Seller's substitution and repurchase obligations set forth in Section 4.1
hereof.
"Receivables Documentation" shall mean all invoices and other documents
customarily attached thereto in the possession or under the control of the
Seller evidencing each Purchased Receivable.
"Receivable Purchase Facility" shall mean the contractual arrangement under
which the Purchaser has agreed to purchase from the Seller, and the Seller has
agreed to sell to the Purchaser, Receivables, from time to time during the
Facility Period, under the terms and conditions set forth in the Agreement and
subject, in each case, to the Maximum Facility Amount.
"Receivables Sale" shall mean the Seller's sale, and the Purchaser's
purchase for the Purchase Price, of one or more Receivables from time to time as
provided in this Agreement.
"Relevant UCC State" means each jurisdiction in which the filing of a UCC
financing statement is necessary or desirable to perfect the Purchaser's
interest in the Purchased Receivables.
"Renewal Effective Date" shall have mean the first day of any Renewal
Period.
"Renewal Fee" shall mean the fee payable by the Seller to the Purchaser on
the Renewal Effective Date, in accordance with Section 7.1(b) hereof, equal to
2 percent of the Maximum Facility Amount.
"Renewal Period" shall have the meaning set forth in Section 7.1(b) hereof.
"Repurchase Price" shall mean, with respect to any Purchased Receivable as
of the date of repurchase, the Outstanding Receivable Investment plus the
Purchaser's unpaid Investment Return calculated thereon up to but not including
the date of payment.
"Residual Ownership Certificate" shall mean the certificate, substantially
in the form of Exhibit B hereto (appropriately completed), evidencing the
Seller's aggregate Residual Receivable Interest in Purchased Receivables as of
any date, which interest is junior and subordinate to the Purchaser's ownership
interest in the Purchased Receivables and which interest along with all of the
Seller's other Receivables have been assigned and pledged to the Purchaser to
ensure the Purchaser's receipt of the Guaranteed Return and as security for the
Seller's substitution and repurchase obligations set forth in Section 4.1
hereof.
"Schedule of Purchased Receivables" shall mean Schedule 1 to the Bill of
Sale, as the same may be supplemented, modified or amended on each Settlement
Date, which identifies each Purchased Receivable (including the Receivables
being purchased on the particular Settlement Date) and the amount of Purchaser's
Outstanding Receivable Investment therein as of the particular Settlement Date,
and which contains such other information as the Purchaser may reasonably
require.
"Seller's Depository Account" shall have the meaning set forth in Section
2.7 hereof.
"Seller's Residual Receivable Interest" shall mean, with respect to any
Purchased Receivable as of any date, the difference between the Outstanding
Balance of the Purchased Receivable and the Purchaser's Outstanding Receivable
Investment less the Investment Return thereon, which ownership interest is
junior and subordinate to the ownership interest of the Purchaser in the
Purchased Receivable.
"Settlement Date" shall mean each Business Day during the Facility Period
on which Receivable Sales occur and all reconciliations are made of amounts due
the Seller or the Purchaser, as the case may be, under the Agreement and of all
payments received on the Purchased Receivables.
"Termination Date" shall mean the earlier of (i) the first anniversary of
the Effective Date or (ii) the date of termination of the Receivable Purchase
Facility as provided in Section 7.1 (a) hereof.
"UCC" shall mean the Uniform Commercial Code (or any successor or
comparable statute) of the State of Connecticut or of any other state
(including, but not limited to, the State of Georgia and Texas), the laws of
which are required by Section 9-103 thereof to be applied in connection with the
issue of perfection of security interests.
ARTICLE II
SALE AND PURCHASE OF RECEIVABLES
Section 2.1. Purchase of Receivables . During the Facility Period, on
-----------------------
any Settlement Date in which the Seller desires to consummate a Receivables
Sale, the Seller shall sell, and the Purchaser shall purchase, Receivables set
forth on the Schedule of Purchased Receivables prepared by such Seller, subject
to the Maximum Facility Amount, and provided that the Purchaser has received on
or before the respective Settlement Date the Receivables Documentation. Subject
to the preceding sentence and the Purchaser's payment of the Purchase Price, the
sale and purchase of the Receivables shall occur automatically and without any
further action on the part of Seller or Purchaser.
Section 2.2. Sale of Receivables. On any Settlement Date in which the
--------------------
Seller desires to consummate a Receivables Sale, the Seller agrees to sell,
transfer, setover and convey, and the Purchaser agrees to purchase, all rights,
title and interest in the Receivables set forth on the particular Purchased
Receivables List together with the Receivables Documentation. It is understood
and agreed that the Purchaser's Outstanding Receivable Investment shall not
exceed at any one time the Maximum Facility Amount. In addition, Purchaser shall
not be obligated to purchase any Receivable if, following such purchase, the
Purchaser would exceed the Maximum Facility Amount.
Section 2.3. Purchase Price. (a) On each Settlement Date in which
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the Seller desires to consummate a Receivables Sale, the Purchaser shall pay the
Purchase Price to the Seller by crediting the Depository Account in the amount
of the Purchase Price or by wire transferring the Purchase Price to an account
designated by the Seller, at the option of the Seller.
(b) In the event of any overpayment or underpayment of the Purchase
Price, the party benefitting from the error shall reimburse the other party for
any sum due the other party as a result of such error upon submission to the
benefitted party satisfactory evidence of such error.
Section 2.4. Guaranteed Return. (a) The Purchaser shall be entitled
------------------
to receive, and the Seller hereby guarantees that the Purchaser shall receive,
from the Collections on the Purchased Receivables, the Guaranteed Return. On a
monthly or, at Purchaser's option, more frequent basis, Purchaser shall issue to
the Seller, on the first Business Day of each month during the Facility Period,
a monthly invoice setting forth the Investment Return due and payable for the
preceding month with respect to the Outstanding Receivable Investment, which
shall be deducted from the amounts in the Receivable Collection Account. The
Seller's Residual Receivable Interests in the Purchased Receivables, evidenced
by the Residual Ownership Certificate, shall be subordinate to the Purchaser's
rights to receive the Guaranteed Return on the Purchased Receivables. The
Seller's Residual Ownership Interest along with certain of the Seller's other
tangible and intangible assets (including, but not limited to, Seller's unsold
Receivables) shall serve as collateral security for the Purchaser's receipt of
the Guaranteed Return and Seller's substitution and repurchase obligations as
set forth in Section 4.1 hereof. On the Effective Date, the Seller shall deliver
the Residual Ownership Certificate and the Assignment of the Seller's Residual
Ownership Interest in the Purchased Receivables and of all of the Seller's
rights, title and interest in and to the other Receivables. In addition, on the
Effective Date, the Seller shall deliver to the Purchaser a UCC-1 financing
statement, substantially in the form of Exhibit D hereto, evidencing the
Seller's security interest in and pledge of the Residual Ownership Certificate,
the Residual Ownership Interest, the other unsold Receivables and the other
Collateral (as defined in Section 4.3 hereof) to the Purchaser as collateral
security for the unpaid portion of the Guaranteed Return and the Seller's
substitution and repurchase and indemnity obligations hereunder. The Seller
shall be entitled to the return of the Residual Ownership Certificate and the
reassignment of the Seller's Residual Receivable Interest in the Purchased
Receivables and the other Receivables and the release of the Purchaser's
security interest in and lien on the other Collateral upon the later of: (i) the
Termination Date; or (ii) the date the Purchaser has received its Guaranteed
Return (or the unpaid portion thereof) and its Outstanding Receivable Investment
has been reduced to zero.
(b) Upon a Seller's material breach of its payment obligations to the
Purchaser hereunder, which breach or violation is not cured by such Seller on or
before the date ten (10) days after notice of such payment breach has been given
to the Seller, the Purchaser shall be entitled to receive its Investment Return
plus 4 percent per annum on the Outstanding Receivable Investment until the
earlier of the date such payment breach referred to above is cured.
Section 2.5. Facility and Attorneys' Fees. On the Effective Date of
----------------------------
this Agreement, the Seller shall pay the Purchaser the Facility Fee, which shall
be duly earned as of the Effective Date. In addition, on the Effective Date, the
Seller shall also pay the Purchaser's reasonable legal fees, costs and expenses
in connection with the Receivable Purchase Facility Agreement and the
transactions contemplated therein. The Facility Fee and the Purchaser's
attorneys' fees shall be paid out of the proceeds of the first Receivables Sale.
Section 2.6. Due Diligence Fees. The Seller shall reimburse the
--------------------
Purchaser for all of its out-of-pocket costs and expenses in connection with the
Purchaser's focused due diligence investigation of the Seller's Receivables,
which shall be due and payable within 30 days of the Seller's receipt of an
invoice from the Purchaser.
Section 2.7. Seller's Depository Account. On the Effective Date, the
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Seller will establish a depository account at the Stamford, Connecticut office
of the Purchaser (the "Seller's Depository Account"). The Seller's Depository
Account will be either a checking, savings or other depository account. The
Seller agrees to grant the Purchaser all rights to debit the Seller's Depository
Account for amounts due and payable to the Purchaser under this Agreement and to
otherwise setoff against all monies in the Seller's Depository Account which may
be due or payable to a Seller, including, but not limited to, the Purchase Price
for the Purchased Receivables and from the Seller's Residual Receivable Interest
and Collections on the Seller's unsold Receivables, for any obligations of the
Seller which are due and owing to the Purchaser under this Agreement.
Section 2.8 Collection of Receivables. The Seller shall at all times
-------------------------
maintain the Lockbox and the related Receivable Collection Account listed on
Schedule I hereto and shall instruct all of its account debtors (as defined in
the UCC) with regard to the Receivables to remit all Collections in respect
thereof to such Lockbox. The Seller agrees that all Receivable Collections and
other amounts received by Seller from any Obligor immediately upon receipt shall
be deposited into the Receivable Collection Account. No Lockbox Agreement,
Receivable Collection Account, or arrangement contemplated thereby shall be
modified by the Seller without the prior written consent of the Purchaser. Upon
the terms and subject to the conditions set forth in the Lockbox Agreement,
between the Seller, the Purchaser and the depository institution at which the
Receivable Collection Account is maintained, which Lockbox Agreement is
substantially in the form of the Lockbox Agreement attached hereto as Exhibit D
(appropriately completed), all amounts received in the Receivable Collection
Account in respect to Purchased Receivables shall be wired each Business Day to
the account designated by the Purchaser in accordance with the wiring
instructions supplied by the Purchaser (the "Purchaser's Account").
Section 2.9 Crediting Payments; Application of Collections. (a) The
----------------------------------------------
receipt of any Collections by the Purchaser (whether from transfers to the
Purchaser from the Receivable Collection Account or otherwise) immediately shall
be applied provisionally to reduce the Receivable Investment, but shall not be
considered a payment on account unless such Collection item is a wire transfer
of immediately available federal funds and is made to the Purchaser's Account or
unless and until such Collection item is honored when presented for payment.
Should any Collection item not be honored when presented for payment, then
Seller shall be deemed not to have made such payment, and the Investment Return
shall be recalculated accordingly. Anything to the contrary contained herein
notwithstanding, any Collection item shall be deemed received by the Purchaser
only if it is received into the Purchaser's Account on a Business Day on or
before 3:00 p.m., New York City time. If any Collection item is received into
the Purchaser's Account on a non-Business Day or after 3:00 p.m. New York City
time on a Business Day, it shall be deemed to have been received by the
Purchaser as of the opening of business on the immediately following Business
Day.
(b) The Purchaser shall immediately, without any further notice to the
Seller, have the right to direct the Obligors on the Purchased Receivables and
the Seller's pledged Receivables to make payment of amounts due and payable
thereunder directly to the Purchaser upon the happening of any one of the
following events: (i) the Seller files a voluntary petition in bankruptcy or
files a voluntary petition or an answer or otherwise commences any action or
proceeding seeking reorganization, arrangement or readjustment of its debts or
for any other relief under the Federal Bankruptcy Code, as amended, or under any
other bankruptcy or insolvency act or law, state or federal, now or hereafter
existing, or consents to, approves of or acquiesces in, any such petition,
action or proceeding; or (ii) the Seller applies for or acquiesces in the
appointment of a receiver, assignee, liquidator, sequestrator, custodian,
trustee or similar officer for it or for all or a material part of its assets;
or (iii) the Seller makes an assignment for the benefit of creditors; or (iv)
the Seller states in writing that it is unable to pay its debts as they become
due; or (v) an involuntary petition shall be filed or an action or proceeding
otherwise commenced against the Seller seeking reorganization, arrangement or
readjustment of the Seller's debts or for any other relief under the Federal
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency act or
law, state or federal, now or hereafter existing, and such petition, action or
---
proceeding shall remain undismissed or unstayed for a period of 45 days; or (vi)
the Seller shall fails to honor its substitution or repurchase obligations to
the Purchaser as provided in Section 4.1 hereof; or (vii) the Seller is in
material breach of any term, covenant or agreement contained in this Agreement
or in any document, instrument or agreement related thereto (other than Section
4.1) and any such breach is not cured by the Seller within thirty (30) days
after written notice from the Purchaser to the Seller of the existence and
character of the breach; (viii) any representation or warranty made by the
Seller to the Purchaser under or in connection with this Agreement or any
document, instrument or agreement related thereto shall prove to have been
incorrect in any material respect when made or given or when deemed to have been
made or given; or (ix) an "event of default" exists or is continuing as defined
in any loan, guarantee or other agreement with the Purchaser or any Affiliate of
the Purchaser (now or hereafter existing) (collectively, the "Other
Agreements").
Section 2.10. Purchase and Sale of Receivables. The parties to
------------------------------------
this Agreement intend that the transactions contemplated by Sections 2.1 and 2.2
hereof shall be, and shall be treated as, a purchase by the Purchaser and a sale
by the Seller of the Purchased Receivables and not a lending transaction. The
Seller's sale, assignment, transfer and conveyance of Purchased Receivables to
the Purchaser pursuant to this Agreement does not constitute and is not intended
to result in a creation or assumption by Purchaser of any obligation of the
Seller or any other Person in connection with the Receivables or any agreement
or instrument relating thereto, including any obligation to an Obligor. If this
Agreement does not constitute a valid sale, assignment, transfer and conveyance
of all right, title and interest of the Seller in, to and under the Purchased
Receivables despite the intent of the parties hereto, the Seller hereby grants a
"security interest" (as defined in the UCC as in effect in the State of
Connecticut or other Relevant UCC State or other applicable jurisdiction) in the
Purchased Receivables, the Residual Ownership Certificate, the Seller's Residual
Receivable Interest, the Seller's other unsold Receivables and the other
Collateral (as defined in Section 4.3 hereof) to the Purchaser and the parties
agree that this Agreement shall constitute a security agreement under the UCC in
effect in the State of Connecticut or other Relevant UCC State or other
applicable jurisdiction.
Section 2.11. Receivables Sold With Limited Recourse. The Seller
-----------------------------------------
acknowledges that the Purchased Receivables are being sold to the Purchaser with
limited recourse as set forth in Section 4.1 of this Agreement.
Section 2.12. Taxes; Gross Up. All payments received by the Purchaser
---------------
with respect to this Receivable Purchase Facility, including, but not limited
to, its Guaranteed Return and its Investment Return, shall be made without
setoff and deduction of taxes other than any income tax withholdings. If the
Seller is required to deduct any taxes (other than income taxes) from any amount
payable with respect to the Receivable Purchase Facility, that amount shall be
increased as much as shall be necessary so that after making all required
deductions, the Purchaser shall receive an amount equal to the sum it would have
received had no deductions been made.
Section 2.13. Early Termination Fee. In the event that the Receivable
---------------------
Purchase Facility is for any reason whatsoever terminated prior to the first
anniversary of the Effective Date (other than by mutual agreement of the Seller
and the Purchaser), the Seller shall pay the Purchaser an early termination fee
of one percent of the Maximum Facility Amount (pro-rated in order to reflect the
remaining number of days in the Facility Period). in order to compensate the
Purchaser for its reliance expenses and its loss of anticipated profits.
Section 2.14. Execution of Additional Documents; Verification of
-------------------------------------------------------
Receivable Payments. The Seller shall execute all documents that Purchaser may
--------------
reasonably require to evidence Purchaser's ownership of the Purchased
Receivables (subject to the Seller's Residual Receivable Interest) and the
Seller's assignment and pledge of the Seller's Residual Receivable Interest and
the Seller's grant of a security interest in and lien on the other Collateral as
security for the Seller's repurchase and substitution obligations hereunder and
to ensure the Purchaser's receipt of the Guaranteed Return. Seller shall take no
action following the respective Settlement Date for the particular Purchased
Receivable that would be inconsistent with the effective transfer by Seller to
the Purchaser hereunder of Seller's right, title and interest in and to the
Purchased Receivables acquired by Purchaser hereunder (exclusive of the Seller's
Residual Ownership Interest).
Section 2.15. Delivery of Receivables Documentation. As set forth in
-------------------------------------
this Agreement, the Seller shall deliver to the Purchaser no later than on each
respective Settlement Date the Receivables Documentation for Eligible
Receivables acquired by the Purchaser pursuant to this Agreement on such date.
Purchaser shall also be entitled to receive from the Seller any other
documentation pertaining to the Acceptable Obligor or the Purchased Receivable
as the Purchaser may reasonably request. The failure or omission by Purchaser to
conduct any partial or complete examination of the Receivables Documentation
shall not affect the Purchaser's rights to demand substitution or repurchase or
other relief as provided herein.
Section 2.16. Remittances to Seller. Notwithstanding any provisions
---------------------
set forth herein to the contrary, so long as no event described in Section
2.9(b)(i) through (ix) exists, and is continuing, at any time and from time to
time hereunder (including at each Settlement Date), upon demand of Seller,
Purchaser shall remit by wire transfer to Seller's designated account all
Collections then within Purchaser's control on Purchased Receivables for which
Purchaser has received its Guaranteed Return and the Outstanding Receivable
Investment for such Purchased Receivables have been reduced to zero.
ARTICLE III
COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE PARTIES
Section 3.1. Representations and Warranties of the Seller. The Seller
--------------------------------------------
hereby covenants, warrants and represents to the Purchaser as of the Effective
Date and as of each Settlement Date:
(a) Authority and Due Authorization. The Seller has the requisite
-------------------------------
power and authority to enter into, deliver and perform this Agreement and to
effect the transactions contemplated hereby. All action necessary to authorize
the execution and delivery of this Agreement has been taken contemporaneously
with the transactions contemplated by this Agreement.
(b) Binding Agreement. This Agreement constitutes a legal, valid and
-----------------
binding obligation of the Seller enforceable against the Seller in accordance
with its terms, except to the extent such enforceability may be limited or
modified by the application of bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance, liquidation and other similar laws relating
to or affecting creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding at law
or equity).
(c) Title to Assets; Absence of Liens, Encumbrances or Defenses to
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Payment. As of each Settlement Date, the Seller is the sole owner of and has
- -------
good title to each Purchased Receivable, free and clear of all security
interests, pledges, liens or other encumbrances. The documents or instruments of
transfer and sale of each Purchased Receivable, when executed and delivered to
Purchaser in accordance with the terms of this Agreement, shall vest in the
Purchaser all of the right, title and interest of the Seller in such Purchased
Receivable free and clear of any security interest, pledge, lien or other
encumbrance (exclusive of such Seller's Residual Ownership Interest in the
Purchased Receivables). There are no facts, events or occurrences known to the
Seller which would impair the validity or collectibility of the Eligible
Receivables included in the Purchased Receivables or reduce or delay payment
thereunder.
(d) Eligible Receivables. Each Eligible Receivable included in
---------------------
Purchased Receivables is a valid and legally binding obligation of the
respective Eligible Obligor and qualifies as an Eligible Receivable as defined
in this Agreement.
(e) No Prior Sale of Purchased Receivables. There has been no prior
--------------------------------------
sale, assignment or hypothecation of the Purchased Receivable to any other
person or entity by Seller except as disclosed in writing to the Purchaser.
(f) Receivables Documentation Genuine. The Receivables Documentation
---------------------------------
submitted to Purchaser by Seller pursuant to this Agreement is genuine and
accurately reflects the status of each Purchased Receivable and the indebtedness
to which such documentation relates. The information set forth in the Schedule
of Purchased Receivables is true and correct in all material respects.
(g) Compliance with Purchase Limitations. Purchaser shall not be
---------------------------------------
obligated to purchase any Receivable if to do so would exceed the Maximum
Facility Amount. Seller shall be obligated to take whatever action may be
necessary to bring the Receivable Purchase Facility into compliance with the
Maximum Facility Amount.
(h) Full Disclosure. None of the representations or warranties made by
---------------
the Seller in this Agreement contains any materially misleading statements.
Section 3.2. Representations and Warranties of the Purchaser. The
----------------------------------------------------
Purchaser covenants, warrants and represents to the Seller as of the Effective
Date and as of each Settlement Date that:
(a) Authority and Due Authorization. The Purchaser has the power and
---------------------------------
authority to enter into, deliver and perform this Agreement and to effect the
transactions contemplated hereby. All action necessary to authorize the
execution and delivery of this Agreement has been taken contemporaneously with
the transactions contemplated by this Agreement.
(b) Binding Agreement. This Agreement constitutes a legal, valid and
-----------------
binding obligation of the Purchaser enforceable against the Purchaser in
accordance with its terms, except to the extent such enforceability may be
limited or modified by the application of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, liquidation and other similar
laws relating to or affecting creditors' rights generally and by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding at law or equity).
(c) Full Disclosure. None of the representations or warranties made by
---------------
the Purchaser in this Agreement contains any materially misleading statements.
ARTICLE IV
SUBSTITUTION OR REPURCHASE OF RECEIVABLES
AND OTHER ACTIONS NECESSARY TO EFFECT
COMPLIANCE WITH VARIOUS PURCHASE LIMITATIONS
Section 4.1. Substitution or Repurchase of Receivables. (a) The Seller
-----------------------------------------
agrees to substitute an Eligible Receivable of like tenor and amount or, in lieu
thereof, to repurchase any Purchased Receivable sold to the Purchaser hereunder
at the Repurchase Price or to take whatever other action as may be necessary in
the event the Obligor refuses payment or fails to remit payment on any Eligible
Receivable included in the pool of Purchased Receivables within 90 days of the
date of Seller's invoice to the Acceptable Obligor evidencing the particular
Eligible Receivable. In addition, Seller agrees to take whatever action is
necessary to effect compliance during the Facility Period with the Maximum
Facility Amount, including but not limited to, reducing the Purchaser's
Outstanding Receivable Investment.
(b) The Purchaser shall have the right to require the Seller to repurchase
all, or any part of, its Outstanding Receivables Investment at the Repurchase
Price upon the happening of any of the events set forth in Section
2.9(b)(i)-(ix) hereof.
(c) On each Settlement Date at which the Seller has notice of a violation
of the Maximum Facility Amount or of the existence of any other ground for the
substitution of an Eligible Receivable or repurchase of one or more Purchased
Receivables as delineated in Sections 4.1(a) and 4.1(b) hereof, Seller shall
replace or repurchase the affected Purchased Receivable or Receivables at the
Repurchase Price or take whatever other action necessary and appropriate to
achieve compliance with Sections 4.1(a) and 4.1(b) hereof. The Purchaser shall
be empowered to effect the repurchase of a Purchased Receivable and to reduce
the Outstanding Receivable Investment by debiting amounts payable to the Seller
pursuant to this Agreement or by retaining amounts remitted to the Lockbox or
otherwise by Obligors on unsold Receivables.
Section 4.2. Indemnification. (a) Seller will indemnify, defend and
---------------
hold Purchaser harmless from and against any and all claims, losses, costs,
damages or suits, including reasonable attorneys' fees and expenses, arising out
of any inaccuracy in any representation or warranty or any breach of any
covenant of the Seller contained in this Agreement.
(b) Purchaser will indemnify, defend and hold Seller harmless from and
against any and all claims, losses, costs, damages or suits, including
reasonable attorneys' fees and expenses, arising out of any inaccuracy in any
representation or warranty or any breach of any covenant of the Purchaser
contained in this Agreement.
Section 4.3. Grant of Security Interest. As security for the
-----------------------------
payment and performance of the Seller's substitution and repurchase
obligations set forth in Sections 4.1(a) and 4.1(b) hereof and the Seller's
indemnity obligations set forth in Section 4.2(a) hereof, and to induce the
Purchaser to enter in this Agreement and to purchase Receivables as provided
herein in accordance with the terms and conditions hereof, the Seller hereby
pledges, assigns, transfers, hypothecates and sets over to the Purchaser, and
grants the Purchaser a security interest in, all of such Seller's right, title
and interest in, to and under the following(collectively, the "Collateral"): (i)
all currently existing and hereafter arising accounts, contract rights and all
other forms of obligations owing to Seller arising out of the sale or lease of
goods, the sale or lease of general intangibles or the rendition of services by
Seller, irrespective of whether earned by performance, and any and all credit
insurance, guaranties or security therefor (collectively, "Receivables")
(excluding Receivables purchased by the Purchaser, from time to time hereafter,
but including the Seller's residual interest in such Purchased Receivables);
(ii) the machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods
(other than consumer goods), wherever located, described on Exhibit A to the
Security Agreement , dated October 29, 1997, on Exhibit A to the Security
Agreement, dated November 7, 1997, and on Exhibit A to the Security Agreement ,
dated January 14, 1998, including the Residual Ownership Interest of the Seller
in such equipment evidenced by a Residual Ownership Certificate, dated October
29, 1997, a Residual Ownership Certificate, dated November 7, 1997, and a
Residual Ownership Certificate, dated January 14, 1998; and (iii) the proceeds
and products, whether tangible or intangible, of any of the foregoing, including
proceeds of insurance covering any or all of the foregoing, and any and all
Receivables, general intangibles, Seller's books, negotiable collateral,
equipment, inventory, money, deposit accounts or other tangible or intangible
property resulting from the sale, exchange, collection or other disposition of
any of the foregoing, or any portion thereof or interest therein, and the
proceeds thereof, as security for the Purchaser's receipt of its Guaranteed
Return and the Seller's substitution and repurchase obligations under the
Agreement. The Purchaser shall have a first priority security interest in and
lien on all of the Seller's Receivables.
ARTICLE V
SETTLEMENT
Section 5.1. The Settlement. (a) Each Receivables Sale effected
---------------
pursuant to this Agreement shall be deemed to occur at 10:00 A.M. on each
respective Settlement Date at which the Seller delivers to the Purchaser the
Schedule of Purchased Receivables, or an amendment thereof (containing a list of
all Purchased Receivables acquired by the Purchaser pursuant to this Agreement,
which are still outstanding in whole or in part, including any Purchased
Receivables being purchased by the Purchaser on the particular Settlement Date),
and the Receivables Documentation and the Purchaser pays the Seller the
Purchase Price as provided in Sections 2.1, 2.2 and 2.3 hereof (the
Settlement"). The Settlement shall be by telephone, confirmed by letter or
wire, as the parties shall agree. Unless the Seller and the Purchaser shall
agree otherwise in writing, all of the transactions, deliveries and payments
contemplated by Article II and this Article V shall be deemed to take place
simultaneously and no such transaction, delivery or payment shall be deemed to
have taken place or been made until all such transactions, deliveries and
payments are completed on such Settlement Date.
(b) On the Effective Date of this Agreement, the Seller shall execute
the Bill of Sale, in the form of Exhibit A hereto, conveying to the Purchaser
all Purchased Receivables listed or otherwise described on Schedule 1 thereto,
as Schedule 1 shall be amended or supplemented on each subsequent Settlement
Date, executed by an authorized representative of the Seller, which Bill of Sale
Shall further evidence the conveyance pursuant to this Agreement of each
Purchased Receivable being sold by the Seller to the Purchaser hereunder.
Section 5.2. Conditions to Purchaser's Obligation to Effect Settlement.
---------------------------------------------------------
The Purchaser's obligation to complete each Receivable Sale shall be subject to
each of the following conditions:
(a) All of the representations and warranties of the Seller under this
Agreement shall be true and correct as of the Settlement Date, and no event
shall have occurred which, with the giving of notice or the passage of time,
would constitute a default by Seller under this Agreement;
(b) The Purchaser shall have received the Schedule of Purchased
Receivables and the Receivables Documentation;
(c) All other terms and conditions of this Agreement shall have been
complied with by the Seller; and
(d) Seller is not in default or material breach of its obligations,
agreements or covenants under or with respect to any Other Agreement nor shall
an event of default exist under any Other Agreement.
Section 5.3. Conditions to Seller's Obligation to Effect Settlement. The
------------------------------------------------------
Seller's obligation to complete each Receivable Sale shall be subject to each of
the following conditions:
(a) All of the representations and warranties of the Purchaser under
this Agreement shall be true and correct as of the Settlement Date, and no event
shall have occurred which would constitute a default by Purchaser under this
Agreement;
(b) The Purchaser shall have delivered all documents required to be
delivered under this Agreement; and
(c) All other terms and conditions of this Agreement shall have been
complied with by the Purchaser.
Section 5.4. Conditions to Each Party's Obligation to Effect Settlement.
----------------------------------------------------------
Subject to satisfaction of the conditions set forth in Sections 5.2 and 5.3 as
applicable to each party, the Purchaser shall pay to the Seller on each
Settlement Date the Purchase Price by either crediting the Depository Account
or wiring the Purchase Price to an account designated by the Seller and the
respective Purchased Receivable or Receivables shall be delivered to the
Purchaser from the Seller free and clear of all right, title and interest of the
Seller (exclusive of the Seller's Residual Ownership Interest) or others.
ARTICLE VI
SETTLEMENT DOCUMENTATION
Section 6.1. Settlement Documentation Required of Seller. On or
-----------------------------------------------
immediately prior to the Settlement Date, the Seller shall deliver the following
documents to Purchaser:
(a) The Schedule of Purchased Receivables (Schedule 1 to the Bill of Sale)
containing all Purchased Receivables purchased by the Purchaser and sold by the
Seller to Purchaser hereunder; and
(c) The Receivables Documentation for each Purchased Receivable.
Section 6.2. Settlement Documentation Required of Purchaser. On or
--------------------------------------------------
immediately prior to the Settlement Date, the Purchaser shall have delivered to
the Seller each of the following:
(a) Payment of the Purchase Price.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Termination of the Receivable Purchase Facility. (a) The
-----------------------------------------------
Receivable Purchase Facility may be terminated prior to the first anniversary of
the Effective Date, at any time: (i) by the Purchaser upon the Seller's material
breach of a term or condition of this Agreement; (ii) by the Seller upon the
Purchaser's material breach of a term or condition of this Agreement; (iii) by
either party upon the mutual written agreement of the Seller and the Purchaser;
and (iv) by the Seller upon ten (10) Business Days' notice to the Purchaser.
Upon the effective date of the termination of the Receivable Purchase Facility,
the Purchaser shall no longer be obligated to purchase any Receivables.
Notwithstanding the termination of this Agreement, the Purchaser and the Seller
shall maintain all rights and remedies hereunder until all obligations have been
paid or performed in full, including repayment of the Purchaser's Outstanding
Receivable Investment by the Obligors pursuant to the terms of this Agreement.
(b) The Seller may renew this Receivable Purchase Facility, with the
consent of the Purchaser (which consent may be withheld by the Purchaser in its
absolute discretion), for additional one year periods (each, a "Renewal
Period"), up to a maximum of three such renewals, upon payment to the Purchaser,
on or immediately prior to the Renewal Effective Date, of the Renewal Fee, which
fee shall be paid in immediately available funds. The Seller shall provide the
Purchaser with written notice, at least 20 Business Days prior to the
Termination Date of the original term or of any Renewal Period, of its desire to
renew the Receivable Purchase Facility for an additional one-year period. The
Purchaser shall notify the Seller no later than 10 Business Days prior to such
Termination Date of its decision to approve or disapprove the renewal of this
Receivable Purchase Facility. Upon renewal of this Receivable Purchase Facility
as provided herein, all references in this Agreement to the Termination Date
shall refer to the termination date of the Renewal Period.
Section 7.2. Financial Statements. Seller agrees to assist the Purchaser
--------------------
in obtaining financial and other information with respect to Eligible Obligors.
Seller also agrees to provide the Purchaser with daily, weekly or monthly
Purchased Receivables aging reports, as may be requested by the Purchaser, and
such other financial information and reports as the Purchaser deems reasonably
necessary or appropriate in connection with this Agreement. In addition, the
Seller shall provide the Purchaser with monthly and quarterly unaudited
financial statements and its audited annual financial statements promptly when
available.
Section 7.3. Survival. The Seller and Purchaser agree that the
--------
representations, warranties and agreements made by the other party herein and in
any certificate or other instrument delivered pursuant hereto shall be deemed to
be relied upon, notwithstanding any investigation heretofore or hereafter made
by the Seller or the Purchaser as applicable or on their respective behalf, and
that the representations, warranties and agreements made herein or in any such
certificate or other instrument, shall be deemed to be repeated and reaffirmed
as of each Settlement Date and shall survive the delivery and payment for the
Purchased Receivables.
Section 7.4. Successor and Assigns: Assignment of the Agreement. This
---------------------------------------------------
Agreement shall bind and inure to the benefit of and be enforceable by the
Seller and the Purchaser and their respective successors and assigns. The
Purchaser shall have the right, without the consent of the Seller, to assign, in
whole or in part, the proceeds of its Purchased Receivables acquired hereunder,
and to designate any Company or Person to exercise any rights of the Purchaser
hereunder, and the assignee or designee shall accede to the rights and
obligations of the Purchaser hereunder with respect to the proceeds of such
Purchased Receivables, except that the obligations to accept delivery of the
Purchased Receivables, pay the Purchase Price under this Agreement, and satisfy
the conditions and such other obligations applicable to Purchaser may not be
assigned or delegated and shall remain a direct obligation of the Purchaser.
The Purchaser shall send prompt written notice to the Seller of the assignment
of any of its rights under and in accordance with this Agreement.
Section 7.5. Notices. Any notices or other communications permitted or
-------
required hereunder shall be in writing and shall be deemed conclusively to have
been duly given if personally delivered, sent by overnight courier, or mailed by
certified mail, postage prepaid, and return receipt requested, addressed to the
Purchaser or the Seller at the address set forth at the head of this Agreement
or to such other address as the Purchaser or the Seller may designate in
writing to the other.
Section 7.6. Counterparts; Facsimile Execution. This Agreement may be
----------------------------------
executed in counterparts each of which shall constitute an original, but all of
which together shall constitute one instrument notwithstanding that all parties
are not signatories to the same counterpart. Delivery of an executed counterpart
of this Agreement by facsimile shall be equally as effective as delivery of any
original executed counterpart of this Agreement. Any party delivering an
executed counterpart of this Agreement by facsimile also shall deliver an
original executed counterpart of this Agreement, but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability and
binding effect of this Agreement.
Section 7.7. Entire Agreement. This Agreement constitutes the entire
-----------------
agreement and understanding of the parties with respect to the matters and
transaction contemplated by this Agreement and supersedes any prior agreement
and understandings with respect to these matters and transactions.
Section 7.8. Governing Law and Amendments. THIS AGREEMENT SHALL BE
-------------------------------
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
CONNECTICUT, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS, AND THE
OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN
ACCORDANCE WITH SUCH LAWS, EXCEPT AS REQUIRED BY MANDATORY PROVISIONS OF LAW AND
EXCEPT TO THE EXTENT THAT THE VALIDITY OR PROTECTION OF THE PURCHASER'S
OWNERSHIP OF THE PURCHASED RECEIVABLES, OR REMEDIES HEREUNDER IN RESPECT HEREOF,
MAY BE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
CONNECTICUT. Neither this Agreement nor any term hereof may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the Seller and the Purchaser.
Section 7.9. Exhibits. The exhibits to this Agreement are hereby
--------
incorporated and made a part hereof and are an integral part of this Agreement.
Section 7.10. General Interpretive Principles. For purposes of this
---------------------------------
Agreement, except as otherwise expressly provided or unless the context
otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to
them in this Agreement and include the plural as well as the singular, and the
use of any gender herein shall be deemed to include the other gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles;
(c) references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other subdivisions without reference to a document are to
designated Articles, Sections, Subsections, Paragraphs and other subdivisions of
this Agreement;
(d) a reference to a Subsection without further reference to a Section
is a reference to such Subsection as contained in the same Section in which
the reference appears, and this rule shall also apply to Paragraphs and other
subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
provision; and
(f) the term "include" or "including" shall mean without limitation by
reason of enumeration.
19
<PAGE>
Section 7.11. Reproduction of Documents. This Agreement and all documents
-------------------------
relating thereto, including, without limitation, (a) consents, waivers and
modifications which may hereafter be executed, (b) documents received by any
party at the closing, and (c) financial statements, certificates and other
information previously or hereafter furnished, may be reproduced by any
photographic, photostatic, microfilm, micro-card, miniature photographic or
other similar process. The parties agree that any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding, whether or not the original is in existence and whether or not such
reproduction was made by a party in the regular course of business, and that any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
Section 7.12. Severability of Provisions. If any one or more of the
----------------------------
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
IN WITNESS WHEREOF, the Seller and the Purchaser have caused this
Agreement to be duly executed as of the date first above written.
Seller:
CHARTER COMMUNICATIONS
INTERNATIONAL, INC.
By:____________________________
Name:__________________________
Title:_________________________
Purchaser:
CONNECTICUT BANK OF COMMERCE
By:____________________________
Name:__________________________
Title:_________________________
EXHIBIT A
FORM OF MASTER BILL OF SALE
EXHIBIT A
MASTER BILL OF SALE
KNOW ALL MEN BY THESE PRESENTS, that Charter Communications International,
Inc., a Nevada corporation with an office at 2839 Paces Ferry Road, Suite 500,
Atlanta, Georgia 30339 (the "Seller"), for and in consideration of the Purchase
Price and other good and valuable consideration received from Connecticut Bank
of Commerce ("Purchaser"), with an office at 612 Bedford Street, Stamford,
Connecticut 06901, the receipt of which is hereby acknowledged by Seller, does
hereby bargain, sell, transfer, assign, set over and deliver unto Purchaser and
Purchaser's successors and assigns all of Seller's rights, title and interest in
the Purchased Receivables more particularly described on Schedule 1 attached
hereto (exclusive of the Seller's Residual Receivable Interest), which Schedule
shall be amended on each Settlement Date as provided in the Receivable Purchase
Facility Agreement, dated as of January 20, 1998, by and between the Seller and
the Purchaser ("Agreement").
TO HAVE AND TO HOLD the same unto Purchaser and its successors and assigns
forever.
All capitalized terms not otherwise defined in this Master Bill of Sale
shall have the meanings ascribed to them in or by reference to the Agreement.
IN WITNESS WHEREOF, Seller have executed this Master Bill of Sale as of
January 20, 1998.
CHARTER COMMUNICATIONS
INTERNATIONAL, INC.
By:___________________________
Name:_________________________
Title:________________________
ACCEPTED AND AGREED TO
ON THIS _______ day of _____________, 1998:
CONNECTICUT BANK OF COMMERCE
By:___________________________
Name:_________________________
Title:________________________
SCHEDULE 1 TO THE MASTER BILL OF SALE
DATED AS OF JANUARY 20, 1998 (the "Settlement Date")
A. Receivables being purchased on the Settlement Date:
--------------------------------------------------------
See Attached List of Purchased Receivables
B. Aggregate Purchase Price of Purchased Receivables:
--------------------------------------------------------
U.S. $_______________ (60% of Eligible Receivables included in
Purchased Receivables pool)
C. Purchased Receivables (Exclusive of Receivables Acquired on the
--------------------------------------------------------------------
Settlement Date):
- -----------------
See attached list of Purchased Receivables
4. Outstanding Receivable Investment as of the Settlement Date (exclusive of
- -- -------------------------------------------------------------------------
Purchase Price to be paid on the Settlement Date):
- ---------------------------------------------------------
U.S. $________________
IN WITNESS WHEREOF, on the Settlement Date set forth above, the Seller has
executed and delivered to the Purchaser this Schedule 1 to the Master Bill of
Sale pursuant to the Receivable Purchase Facility Agreement, dated as of January
20, 1998.
CHARTER COMMUNICATIONS
INTERNATIONAL, INC.
By:________________________________
Name:______________________________
Title:_______________________________
EXHIBIT B
FORM OF RESIDUAL OWNERSHIP CERTIFICATE
EXHIBIT B TO THE
RECEIVABLE PURCHASE
FACILITY AGREEMENT
RESIDUAL OWNERSHIP CERTIFICATE
THIS RESIDUAL OWNERSHIP CERTIFICATE (the "Certificate") is issued pursuant
to a certain Receivable Purchase Facility Agreement, dated January 20, 1998 (the
"Agreement"), between Connecticut Bank of Commerce, a Connecticut banking
corporation, with an office at 612 Bedford Street, Stamford, Connecticut 06901
(the "Purchaser") and Charter Communications International, Inc., a Nevada
corporation, having an office at 2839 Paces Ferry Road, Suite 500, Atlanta,
Georgia 30339 (the "Seller"). This Residual Ownership Certificate evidences the
Seller's Residual Receivable Interest in the Purchased Receivables (the
"Seller's Residual Receivable Interest") sold by the Seller to the Purchaser
pursuant to the Agreement. This Residual Ownership Certificate is junior and
subordinated to the ownership interest of the Purchaser in the Purchased
Receivables. As provided in the Agreement, the Purchaser or its assignee shall
be entitled to payment of the Guaranteed Return from the Receivables, which
Guaranteed Return is prior and senior to the rights of the holder of the
Residual Ownership Certificate. The Seller transferred, assigned and pledged
this Residual Ownership Certificate to the Purchaser as security for the
Purchaser's receipt of the Guaranteed Return (or the unpaid portion thereof) and
as collateral security for the Seller's, substitution, repurchase and indemnity
obligations as provided in the Agreement. The Seller is prohibited from
assigning any rights in the Residual Ownership Certificate to any other person
or entity. All capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in or by reference to the Agreement.
IN WITNESS WHEREOF, the Seller have executed and delivered this instrument
as of this 20th day of January, 1998.
CHARTER COMMUNICATIONS.
INTERNATIONAL, INC.
By:_______________________
Name:_____________________
Title:____________________
EXHIBIT C
FORM OF ASSIGNMENT OF RECEIVABLE RIGHTS
ASSIGNMENT OF RECEIVABLE RIGHTS
FOR VALUE RECEIVED, the receipt and sufficiency of which is hereby
acknowledged, the undersigned, Charter Communications International, Inc., a
Nevada corporation, having an office at 2839 Paces Ferry Road, Suite 500,
Atlanta, Georgia 30339 (the "Seller"), does hereby assign, sell and transfer
(the "Assignment") unto Connecticut Bank of Commerce, having an office and place
of business at 612 Bedford Street, Stamford, Connecticut 06901 (the
"Purchaser"), all of Seller's rights, title and interest in and to Seller's
Residual Receivable Interest in the Purchased Receivables as represented by the
Residual Ownership Certificate as well as all of the Seller's rights, title and
interest in and to all of Seller's Receivables, whether Eligible or Ineligible,
which are being assigned to the Purchaser as collateral security for the
Seller's substitution, repurchase and indemnity obligations and to ensure the
Purchaser's receipt of the Guaranteed Return (or the unpaid portion thereof) as
set forth in the Receivable Purchase Facility Agreement, dated as of January 20,
1998, by and between the Seller and the Purchaser (the "Receivable Purchase
Agreement"). All capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in or by reference to the Receivable Purchase
Agreement.
IN WITNESS WHEREOF, on this 20th day of January, 1998, the Seller has
caused this Assignment to be executed in its name by the manual signature of a
duly authorized person.
CHARTER COMMUNICATIONS.
INTERNATIONAL, INC.
By:_______________________
Name:_____________________
Title:____________________
EXHIBIT D
FORM OF UCC-1 FINANCING STATEMENT
EXHIBIT E
FORM OF LOCKBOX AGREEMENT
RIDER A TO UCC-1 FINANCING STATEMENT
DEBTOR: CHARTER COMMUNICATIONS INTERNATIONAL, INC.
SECURED PARTY: CONNECTICUT BANK OF COMMERCE
Debtor hereby grants to Secured Party a security interest in all of the Debtor's
right, title and interest in and to the following (collectively, the
"Collateral"): (i) all currently existing and hereafter arising accounts,
contract rights and all other forms of obligations owing to Debtor arising out
of the sale or lease of goods, the sale or lease of General Intangibles (as
hereinafter defined) or the rendition of services by Debtor, irrespective of
whether earned by performance, and any and all credit insurance, guaranties or
security therefor (collectively, "Accounts") (excluding Accounts purchased by
the Secured Party, from time to time hereafter, but including the Debtor's
residual interest in such purchased Accounts); (ii) the machinery, machine
tools, motors, equipment, furniture, furnishings, fixtures, vehicles (including
motor vehicles and trailers), tools, parts, goods (other than consumer goods),
wherever located, described on Exhibit A to the Security Agreement , dated
October 29, 1997, on Exhibit A to the Security Agreement, dated November 7,
1997, and on Exhibit A to the Security Agreement, dated January 14, 1998,
including the Residual Ownership Interest of the Seller in such Equipment
evidenced by a Residual Ownership Certificate, dated October 29, 1997, a
Residual Ownership Certificate, dated November 7, 1997, and a Residual Ownership
Certificate, dated January 14, 1998; and (iii) the proceeds and products,
whether tangible or intangible, of any of the foregoing, including proceeds of
insurance covering any or all of the foregoing, and any and all Receivables,
general intangibles, Seller's books, negotiable collateral, equipment,
inventory, money, deposit accounts or other tangible or intangible property
resulting from the sale, exchange, collection or other disposition of any of the
foregoing, or any portion thereof or interest therein, and the proceeds thereof,
as described in the Receivable Purchase Facility Agreement (the "Agreement"),
dated January 20, 1998, by and between the Debtor as Seller and the Secured
Party as Purchaser, as security for the Debtor's substitution, repurchase and
indemnity obligations under the Agreement.
RIDER A TO UCC-1 FINANCING STATEMENT
DEBTOR: CHARTER COMMUNICATIONS INTERNATIONAL, INC.
SECURED PARTY: CONNECTICUT BANK OF COMMERCE
Debtor has sold, and will sell in the future, to the Secured Party,
substantially all of its Accounts (as hereinafter defined), whether now owned or
existing or hereafter acquired or arising and wherever located, along with the
proceeds and products of same, whether tangible or intangible, pursuant to a
Receivable Purchase Facility Agreement, dated as of January 20, 1998, by and
among Debtor as a Seller and the Secured Party as Purchaser. "Accounts" shall
mean all currently existing and hereafter arising accounts, contract rights and
all other forms of obligations owing to Debtor arising out of the sale or lease
of goods, the sale or lease of general intangibles or the rendition of services
by Debtor, irrespective of whether earned by performance, and any and all credit
insurance, guaranties or security therefor.
FOR INFORMATION PURPOSES ONLY
REGISTRATION RIGHTS AND MINIMUM VALUE GUARANTEE AGREEMENT
January 14, 1998
Via Federal Express
- ---------------------
Mr. Dennis Pollack
President and Chief Executive Officer
612 Bedford Street
Stamford, Connecticut 06901
Dear Mr. Pollack:
This letter shall set forth our mutual understanding and agreement with
regard to the 75,000 shares of Charter Communications International, Inc.
("Charter") common stock (the "Stock") received by Connecticut Bank of Commerce
("the Bank") as additional compensation for the lease financing and receivable
purchase facility described below provided or to be provided by the Bank in the
future.
The Bank has agreed to provide (i) up to $3 million in full-payout lease
financing to Charter and (ii) a receivable purchase facility in an amount up to
$600,000. The Bank has agreed not to sell any of the Charter Stock for a period
of six months (i.e., June 30, 1998).
In consideration of the foregoing, Charter has agreed to guarantee the
market value (the "Market Value") of the Stock held by the Bank as of June 30,
1998 at $2.33 per share or an aggregate of $174,750.00 (the "Minimum Valuation
Threshold"). In addition, the Bank shall have demand registration rights
covering the Stock (as well as any additional shares of common stock to be
issued pursuant to this letter agreement). The Bank will pay all physical costs
of the registration of the Stock. Charter shall pay any unusual or out-of-the
ordinary auditing or legal costs or expenses associated with the registration of
the Stock, provided that the Bank files the registration statement during such
period as to be able to utilize Charter's 10-K and 10-Q's as of or for the year
ended December 31, 1997. For purposes of this letter agreement, the Market
Value of the Stock shall be based on the average closing sales price of the
Stock for the twenty trading days immediately preceding June 30, 1998 (inclusive
of June 30, 1998, if a trading day). In the event the Market Value of the Stock
does not equal or exceed the Minimum Valuation Threshold, then Charter, at its
option, shall pay to the Bank cash, additional shares of Charter common stock,
or a combination of both equal to the difference between the Minimum Valuation
Threshold and the Market Value of the Stock. In the event that Charter issues
additional shares of Charter common stock to the Bank, the value of the stock so
issued shall be based on the closing sales price of Charter's common stock on
the trading day immediately preceding the date of issuance and delivery of the
additional shares to the Bank. In addition, the shares shall also be covered by
an effective registration statement.
If the foregoing accurately reflects our mutual agreement with regard to
the above matters, please execute one copy of this letter in the space provided
below and return it to me at the above address.
Very truly yours,
CHARTER COMMUNICATIONS INTERNATIONAL, INC.
By: __________________________
Its: __________________________
AGREED TO AND ACCEPTED
This _______ day of _______, 1998:
CONNECTICUT BANK OF COMMERCE
By: ________________________________
Its: ________________________________
<PAGE>
January 14, 1998
Via Federal Express
- ---------------------
Mr. Ross Walpole
Managing Director
Equity Merchant Banking Corporation, L.C.
2419 East Commercial Boulevard, Suite 304
Fort Lauderdale, Florida 33308
Dear Mr. Walpole:
This letter shall set forth our mutual understanding and agreement with
regard to the 375,000 shares of Charter Communications International, Inc.
("Charter") common stock (the "Stock") received by Equity Merchant Banking
Corporation, L.C. ("EMBC") as compensation for certain investment banking
services provided in the future, to Charter. EMBC has agreed not to sell any of
the Charter Stock for a period of six months (i.e., June 30, 1998).
In consideration of the foregoing, Charter has agreed to guarantee the
market value (the "Market Value") of the Stock held by EMBC as of June 30, 1998
at $2.33 per share or an aggregate of $873,750.00 (the "Minimum Valuation
Threshold"). In addition, EMBC shall have demand registration rights covering
the Stock (as well as any additional shares of common stock to be issued
pursuant to this letter agreement). EMBC will pay all physical costs of the
registration of the Stock. Charter shall pay any unusual or out-of-the ordinary
auditing or legal costs or expenses associated with the registration of the
Stock, provided that EMBC files the registration statement during such period as
to be able to utilize Charter's 10-K and 10-Q's as of or for the year ended
December 31, 1997. For purposes of this letter agreement, the Market Value of
the Stock shall be based on the average closing sales price of the Stock for the
twenty trading days immediately preceding June 30, 1998 (inclusive of June 30,
1998, if a trading day). In the event the Market Value of the Stock does not
equal or exceed the Minimum Valuation Threshold, then Charter, at its option,
shall pay to EMBC cash, additional shares of Charter common stock, or a
combination of both equal to the difference between the Minimum Valuation
Threshold and the Market Value of the Stock. In the event that Charter issues
additional shares of Charter common stock to EMBC, the value of the stock so
issued shall be based on the closing sales price of Charter's common stock on
the trading day immediately preceding the date of issuance and delivery of the
additional shares to EMBC. In addition, the shares shall also be covered by an
effective registration statement.
If the foregoing accurately reflects our mutual agreement with regard to
the above matters, please execute one copy of this letter in the space provided
below and return it to me at the above address.
Very truly yours,
CHARTER COMMUNICATIONS INTERNATIONAL, INC.
By: __________________________
Its: __________________________
AGREED TO AND ACCEPTED
This _______ day of _______, 1998:
EQUITY MERCHANT BANKING CORPORATION, L.C.
By: ________________________________
Its: ________________________________
This MASTER LEASE AGREEMENT NO. 1 is made and entered into as of September 22,
1997 between:
LESSORS (jointly and severally): LESSEE:
First Southeastern Corporation, CHARTER COMMUNICATIONS
a Florida corporation INTERNATIONAL, INC.,
P. O. Box 148 a Nevada corporation
Boca Grande, Florida 33921 2839 Paces Ferry Road, Suite 500
Atlanta, Georgia 30339
(Overnight Delivery Address:
577 Buttonwood Bay Drive
Boca Grande, Florida 33921)
James R. Dorsey, Jr.
911 Hyacinth Drive
Delray Beach, Florida 33483
1. LEASE OF EQUIPMENT: Lessor leases to Lessee, and Lessee leases from
Lessor, all the property described in the Lease Schedules which are signed from
time to time by Lessor and Lessee. Lessor agrees that Lessee shall have an
unlimited amount of time to exercise its right to lease Equipment hereunder.
2. CERTAIN DEFINITIONS: "Lessee" means Charter Communications
------
International, Inc. and any subsidiary of Charter Communications International,
Inc. which executes a Schedule pursuant to Section 21(i) of this Master Lease
Agreement. "Schedule" means each Lease Schedule signed by Lessee and Lessor
--------
which incorporates the terms of this Master Lease Agreement, together with all
exhibits, riders, attachments and addenda thereto. "Equipment" means the
---------
property described in each Schedule, together with all attachments, additions,
accessions, parts, repairs, improvements, replacements and substitutions
thereto. "Lease", "herein", "hereunder", "hereof" and similar words mean this
----- ------ --------- ------
Master Lease Agreement and all Schedules, together with all exhibits, riders,
attachments and addenda to any of the foregoing, as the same may from time to
time be amended, modified or supplemented. "Prime Rate" means the prime rate of
----------
interest announced from time to time as the prime rate by Citibank, N.A. "Lien"
----
means any security interest, lien, mortgage, pledge, encumbrance, judgment,
execution, attachment, warrant, writ, levy or other judicial process or claim of
any nature whatsoever by or of any person. All terms defined in the Lease are
equally applicable to both the singular and plural form of such terms.
3. LEASE TERM AND RENT:
(a) The term of the lease of the Equipment described in each Schedule
("Lease Term") commences on the date stated in the Schedule, and continues for
-----------
the term stated therein unless earlier terminated by Lessee as provided in
Section 6 of this Master Lease Agreement. As rent for the Equipment described
in each Schedule, Lessee shall pay Lessor the rent payments and all other
amounts stated in such Schedule payable on the dates specified therein.
(b) In addition to the payment of rent as stated above, Charter
Communications International, Inc. ("Charter") agrees to issue to Lessor, on or
-------
prior to the first Commencement Date (as defined in the applicable Schedule), a
common stock purchase warrant, substantially in the form of the warrant attached
hereto as Exhibit "A" (the "Warrant"). The Warrant shall grant to Lessor the
------------ -------
right to purchase from Charter that number of shares of Charter common stock
which is equal to one-third of the Lessor's Total Cost set forth in Section 2 of
the first Schedule. The Warrant shall be exercisable at any time during a five
(5)-year term, commencing on the first Commencement Date, and ending on the
fifth year anniversary date of such Commencement Date, at a per share purchase
price of THREE DOLLARS ($3.00) per share.
(c) All payments due under the Lease shall be made in United States
dollars to Lessor as directed by Lessor in writing.
<PAGE>
4. ORDERING, DELIVERY, REMOVAL AND INSPECTION OF EQUIPMENT:
(a) Lessee shall identify Equipment which it wishes to lease from
Lessor and Lessor shall have the absolute right to approve or disapprove such
Equipment. Such Equipment may be owned by Lessee or subject to a purchase order
or other sale agreement in favor of Lessee, and in either such case Lessee
shall, upon Lessor's agreement, arrange to sell the Equipment or assign the
contractual rights thereto. If the Equipment is sold, then in connection with
the closing of such sale, Lessee shall execute and deliver a bill of sale in the
form attached hereto as "Exhibit B", and such other instruments and documents as
Lessor shall require. The total amount of Equipment together with associated
costs (including, without limitation, soft costs relating to installation,
customs duties and import fees) which Lessor will agree to lease under this
Lease is ONE MILLION DOLLARS ($1,000,000.00). Once Lessor has approved the
Equipment to be leased under this Lease, no substitutions or replacements may be
made by Lessee without Lessor's consent.
(b) If, at Lessee's request, Lessor has entered into purchase orders or
purchase contracts for any Equipment to be leased hereunder, Lessor is entitled,
automatically upon notice to Lessee, to assign to Lessee any such purchase
orders or purchase contracts and all obligations thereunder and Lessee shall pay
and perform all obligations thereunder. Other than the obligation to pay the
purchase price of Equipment, Lessee agrees to pay, defend, indemnify and hold
Lessor harmless from any liabilities, obligations, claims, costs and expenses
(including reasonable attorneys' fees and expenses) of whatever kind imposed on
or asserted against Lessor in any way related to any such purchase orders or
purchase contracts. Unless the Equipment is already present on the Lessee's
premises stated in the applicable Schedule, the Equipment shall be delivered
there and shall not be removed without Lessor's prior written consent. Lessor
has the right upon reasonable notice to Lessee to inspect the Equipment wherever
located. Lessor may enter upon any premises where Equipment is located and
remove it immediately, without notice or liability to Lessee, upon the
expiration or other termination of the Lease Term.
5. MAINTENANCE AND USE: Lessee agrees it will, at its sole expense: (a)
repair and maintain the Equipment in good condition and working order and supply
and install all replacement parts or other devices when required to so maintain
the Equipment or when required by applicable law or regulation, which parts or
devices shall automatically become part of the Equipment; (b) use and operate
the Equipment in a careful manner in the normal course of its business and only
for the purposes for which it was designed in accordance with the manufacturer's
warranty requirements, and comply with all laws and regulations relating to the
Equipment, and obtain all permits or licenses necessary to install, use or
operate the Equipment, and (c) make no alterations, additions, subtractions,
upgrades or improvements to the Equipment without Lessor's prior written
consent, but any such alterations, additions, upgrades or improvements shaIl
automatically become part of the Equipment. Prior to agreeing to any lease of
any Equipment Lessor shall be entitled to receive evidence satisfactory to it
that (i) any jurisdiction where the Equipment is to be located will recognize
Lessor's ownership of such Equipment and Lessor's right to retake such Equipment
upon expiration or other termination of this Lease and (ii) no filing or other
action with any governmental authority is necessary to protect Lessor's rights
under this Lease, or if such filing or other action is necessary, then Lessor
may require such filing or other action as a condition precedent to agreeing to
lease any Equipment.
6. NET LEASE; CANCELABLE LEASE: The Lease is a net lease. During the Lease
Term, Lessee's obligation to pay all rent and all other amounts payable under
the Lease is absolute and unconditional under any and all circumstances and
shall not be affected by any circumstances of any character including, without
limitation, (a) any setoff, claim, counterclaim, defense or reduction which
Lessee may have at anytime against Lessor or any other party for any reason, or
any defect in the condition, design or operation of, any lack of fitness for use
of, any damage to or loss of, or any lack of maintenance or service for any of
the Equipment. Notwithstanding anything to the contrary in the Lease, this
Lease and any or all related Schedules may be terminated by Lessee and cancelled
for any reason provided that Lessee pay Lessor the Stipulated Loss Value (as
defined in Section 9(b)) of the Equipment covered by the Schedule(s) to be
terminated prior to such termination. No partial termination of any Schedule
is permitted.
<PAGE>
7. NO WARRANTIES BY LESSOR: LESSOR LEASES THE EQUIPMENT AS-IS, WHERE-IS,
AND WITH ALL FAULTS. LESSOR MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR
IMPLIED, OF ANY KIND AS TO THE EQUIPMENT INCLUDING, WITHOUT LIMITATION: ITS
MERCHANTABILITY; ITS FITNESS FOR ANY PARTICULAR PURPOSE, ITS DESIGN, CONDITION,
QUALITY, CAPACITY, DURABILITY, CAPABILITY, SUITABILITY OR WORK-MANSHIP, ITS
NON-INTERFERENCE WITH OR NON-INFRINGEMENT OF ANY PATENT, TRADEMARK, COPYRIGHT OR
OTHER INTELLECTUAL PROPERTY RIGHT, OR ITS COMPLIANCE WITH ANY LAW, RULE,
SPECIFICATION, PURCHASE ORDER OR CONTRACT PERTAINING THERETO. LESSOR MAKES NO
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, OF ANY KIND AS TO THE
FINANCIAL CONDITION OR FINANCIAL STATEMENTS OF ANY PARTY OR AS TO THE TAX OR
ACCOUNTING TREATMENT OR CONSEQUENCES OF THE LEASE, THE EQUIPMENT OR THE RENTAL
PAYMENTS. Lessor hereby assigns to Lessee the benefit of any assignable
manufacturer's or supplier's warranties but Lessor, at Lessee's written request,
will cooperate with Lessee at Lessee's expense in pursuing any remedies Lessee
may have under such warranties. Any action taken with regard to warranty claims
against any manufacturer or supplier by Lessee will be at Lessee's sole expense.
8. INSURANCE: Lessee at its sole expense shall keep each item of Equipment
insured against normally insured risks of loss or damage from every cause
whatsoever for an amount not less than the greater of the full replacement value
or the original cost to Lessor of acquiring such item of Equipment. Lessee at
its sole expense shall carry public liability and property damage insurance in
amounts satisfactory to Lessor protecting Lessee and Lessor from liabilities for
injuries to persons and damage to property of others relating in any way to the
Equipment and, at Lessor's request, shall name Lessor as an additional insured
thereunder. All insurers shall be reasonably satisfactory to Lessor. Lessee
shall deliver to Lessor satisfactory evidence of such coverage. Proceeds of any
insurance covering damage or loss of the Equipment shall be payable to Lessor as
loss payee and shall, at Lessor's option, be applied toward (a) the replacement,
restoration or repair of the Equipment, or (b) payment of the obligations of
Lessee under the Lease. Proceeds of any public liability or property insurance
shall be payable first to Lessor as additional insured to the extent of its
liability, then to Lessee. Lessee hereby appoints Lessor as Lessee's
attorney-in-fact with full power and authority in the place of Lessee and in the
name of Lessee or Lessor to make claim for, receive payment of, and sign and
endorse all documents, checks or drafts for loss or damage under any such
policy. The insurance maintained by Lessee shall be primary without any right of
contribution from insurance which may be maintained by Lessor, and Lessee shall
have included in its insurance policies required hereunder a waiver of all
rights of subrogation against Lessor in connection with any loss or damage
thereby insured against.
9. LOSS AND DAMAGE:
(a) Lessee bears the entire risk of loss, theft, damage or destruction
of Equipment in whole or in part from any reason whatsoever ("Casualty Loss")
-------------
and no Casualty Loss to Equipment shall relieve Lessee from the obligation to
pay rent or from any other obligation under the Lease. In the event of Casualty
Loss to any Equipment, Lessee shall immediately notify Lessor of the same and
Lessee shall, if so directed by Lessor, immediately repair the same. If Lessor
determines that any item of Equipment has suffered a Casualty Loss beyond repair
("Lost Equipment"), then Lessee, at the option of Lessor, shall: (1) immediately
--------------
replace the Lost Equipment with similar equipment in good repair, condition and
working order free and clear of any Liens and deliver to Lessor a bill of sale
in the form attached hereto as "Exhibit B" covering the replacement equipment,
in which event such replacement equipment shall automatically be Equipment under
the Lease; or (2) on the next rent payment date after the date of the Casualty
Loss, pay to Lessor all amounts then due and payable by Lessee under the Lease
for the Lost Equipment plus the Stipulated Loss Value for such Lost Equipment as
of the date of the Casualty Loss. Upon payment by Lessee of all amounts due
under the above clause (2), the lease of the Lost Equipment will terminate and
Lessor shall transfer to Lessee all of Lessor's right, title and interest in
such Equipment on an "as-is, where-is" basis with all faults, without recourse
and without representation or warranty of any kind, express or implied.
(b) "Stipulated Loss Value" of any item of Equipment equals the
-----------------------
Lessor's Total Cost as reflected on the corresponding Schedule covering such
Equipment.
<PAGE>
10. GENERAL INDEMNITY:
(a) Lessee assumes all risk and liability for, and shall defend,
indemnify and keep Lessor harmless on an after-tax basis from any and all
liabilities, obligations, losses, damages, penalties, claims, actions, suits,
costs and expenses, including reasonable attorney's fees and expenses, of
whatsoever kind and nature, imposed on, incurred by or asserted against Lessor,
in any way relating to or arising out of the manufacture, purchase, acceptance,
rejection, ownership, possession, use, selection, delivery, installation,
importation, exportation, lease, operation, condition, sale, return or other
disposition of the Equipment or any part thereof (including, without limitation,
any claim for latent or other defects, whether or not discoverable by Lessee or
any other person, any claim for negligence, tort or strict liability, any claim
under any environmental protection or hazardous waste law and any claim for
patent, trademark or copyright infringement). Lessee will not be required to
indemnify Lessor under this Section for loss or liability arising from events
which occur after the Equipment has been returned to Lessor or for loss or
liability caused directly and solely by the gross negligence or willful
misconduct of Lessor. As used in this Section, "Lessor" will also include any
------
director, officer, employee, partner, member, agent, successor or assign of
Lessor. Lessee's obligations under this Section shall survive the expiration,
cancellation or termination of the Lease.
(b) Lessee shall indemnify and keep Lessor harmless from any and all
liabilities, obligations, losses, damages, penalties, claims, actions, suits,
costs and expenses, including reasonable attorney's fees and expenses, of
whatsoever kind and nature, imposed on, incurred by or asserted against Lessor,
in any way relating to or arising out
of the inability of Lessor to exercise its rights against the Equipment or any
part thereof (including, without limitation, its inability to retake, repossess
or otherwise have its rights as the owner thereof recognized and enforced).
11. PERSONAL PROPERTY: Lessee represents and agrees that the Equipment is,
and shall at all times remain, separately identifiable personal property. Upon
Lessor's request, Lessee shall furnish Lessor a landlord's and/or mortgagee's
waiver and consent to remove all Equipment. Lessor may display notice of its
interest in the Equipment by any reasonable identification. Lessee shall not
alter or deface any such indicia of Lessor's interest.
12. DEFAULT: Each of the following events shall constitute an event of
default under the Lease: (a) Lessee fails to pay any rent or other amount due
under the Lease on its due date; or (b) Lessee fails to perform or observe any
of its obligations in Sections 8 or 18 hereof; or (c) Lessee fails to perform or
observe any of its other obligations in the Lease for more than 30 days after
Lessor notifies Lessee of such failure; or (d) Lessee becomes insolvent or
bankrupt, or Lessee applies for, institutes or consents to the appointment of a
receiver, trustee or similar official for Lessee or any substantial part of its
property or any such official is appointed without Lessee's consent; or (e)
Lessee applies for, institutes or consents to any bankruptcy, insolvency,
reorganization, debt moratorium, liquidation, or similar proceeding relating to
Lessee or any substantial part of its property under the laws of any
jurisdiction or any such proceeding is instituted against Lessee without stay or
dismissal for more than 30 days; or (f) with respect to any guaranty, letter of
credit, pledge agreement, security agreement, mortgage, deed of trust, debt
subordination agreement or other credit enhancement or credit support agreement
(whether now existing or hereafter arising) signed or issued by any party in
connection with all or any part of Lessee's obligations under the Lease, the
party signing or issuing any such agreement defaults in its obligations
thereunder or any such agreement shall cease to be in full force and effect or
shall be declared to be null, void, invalid or unenforceable by the party
signing or issuing it; or (g) Lessee fails to honor its obligations under the
Warrant.
13. REMEDIES: If any event of default exists, Lessor shall give Lessee ten
(10) days' written notice of such event of default and after the expiration of
such ten (10) day period if the event of default has not been cured by Lessee or
waived by Lessor, Lessor may do one or more of the following in any order, and
Lessee shall perform its obligations imposed thereby:
(a) Lessor may require Lessee to return any or all Equipment leased
hereunder.
(b) Lessor or its agent may withhold delivery of Equipment and
repossess any or all Equipment already delivered wherever found, may enter the
premises where the Equipment is located and disconnect, render unusable and
remove it, and may use such premises without charge to store or show the
Equipment for sale.
(c) Lessor may sell any or all Equipment at public or private sale,
with or without advertisement or publication, may re-lease or otherwise dispose
of it or may use, hold or keep it.
(d) Lessor may require Lessee to pay to Lessor on a date specified by
Lessor, with respect to any or all Equipment (i) all accrued and unpaid rent,
late charges and other amounts due under the Lease on or before such date, plus
(ii) in an appropriate case the present value of the rent for the then-remaining
applicable Lease Term, plus (iii) interest at the Late Charge Rate (as defined
in Section 16) on the total of the foregoing. If an event of default under
Section 12(d) or (e) of this Master Lease Agreement exists, then Lessee will be
automatically liable to pay Lessor the foregoing amounts as of the next rent
payment date unless Lessor otherwise elects in writing.
(e) Lessee shall pay all costs, expenses and damages incurred by Lessor
because of the event of default or its actions under this Section, including,
without limitation, any collection agency and/or attorney's fees and expenses,
any costs related to the repossession, safekeeping, storage, repair,
reconditioning or disposition of the Equipment and any incidental and
consequential damages.
(f) Lessor may terminate the Lease and/or any or all Schedules, may sue
to enforce Lessee's performance of its obligations under the Lease and/or may
exercise any other right or remedy then available to Lessor at law or in equity.
(g) Lessor is not required to take any legal process or give any notice
(other than giving the ten (10) days' written notice specified above) before
exercising any of the above remedies. None of the above remedies is exclusive,
but each is cumulative and in addition to any other remedy available to Lessor.
Lessor's exercise of one or more remedies shall not preclude its exercise of any
other remedy. No action taken by Lessor shall release Lessee from any of its
obligations to Lessor. No delay or failure on the part of Lessor to exercise
any right hereunder shall operate as a waiver thereof, nor as an acquiescence in
any default, nor shall any single or partial exercise of any right preclude any
other exercise thereof or the exercise of any other right. After any default,
Lessor's acceptance of any payment by Lessee under the Lease shall not
constitute a waiver by Lessor of such default, regardless of Lessor's knowledge
or lack of knowledge at the time of such payment, and shall not constitute a
reinstatement of the Lease if the Lease has been declared in default by Lessor,
unless Lessor has agreed in writing to reinstate the Lease and to waive the
default.
(h) If Lessor actually repossesses any Equipment, then it will use
commercially reasonable efforts under the then current circumstances to attempt
to mitigate its damages; provided, that Lessor shall not be required to sell,
re-lease or otherwise dispose of any Equipment prior to Lessor enforcing any of
the remedies described above. Lessor may sell or re-lease the Equipment in any
manner it chooses, free and clear of any claims or rights of Lessee and without
any duty to account to Lessee with respect thereto except as provided below. If
Lessor actually sells or re-leases the Equipment, it will credit the net
proceeds of any sale of the Equipment, or the net present value of the rents
payable under any new lease of the Equipment (discounted at the then current
Prime Rate), against and up to (but not exceeding) any amounts Lessee owes
Lessor, or will reimburse Lessee for and up to (but not exceeding) Lessee's
payment thereof. The term "net" as used above shall mean such amount after
---
deducting the costs and expenses described in clause (e) above of this Section.
If Lessor elects in writing not to sell or re-lease any Equipment, it will
similarly credit or reimburse Lessee for Lessor's reasonable estimate of such
Equipment's Fair Market Value.
14. LESSOR'S RIGHT TO PERFORM: If Lessee fails to make any payment under
the Lease or fails to perform any of its other agreements in the Lease
(including, without limitation, its agreement to provide insurance coverage as
stated in the Lease), Lessor may itself make such payment or perform such
agreement and the amount of such payment and the amount of the expenses of
Lessor incurred in connection with such payment or performance shall be deemed
to be additional rent, payable by Lessee on demand.
<PAGE>
15. FINANCIAL REPORTS: Lessee agrees to furnish to Lessor such financial
information as Lessor may from time to time request. Lessor acknowledges that
Lessee is publicly held and that it is unlawful to misappropriate or misuse any
such financial information which has not previously been made publicly
available. Lessor agrees that it will keep confidential and not disclose any
financial information delivered to it which has not been made publicly
available; provided, however, that Lessor may disclose any financial information
(a) generally available to the public, (b) as may be required or appropriate in
any report, statement or testimony submitted to any municipal, state or federal
regulatory body having or claiming to have jurisdiction over Lessor, (c) as may
be required or appropriate in response to any summons or subpoena or in
connection with any litigation, and (d) in order to comply with any law, order,
regulation or ruling applicable to Lessor.
16. LATE CHARGES: If any rent or other amount payable under the Lease is
not paid when due, then as compensation for the administration and enforce-ment
of Lessee's obligation to make timely payments, Lessee shall pay with respect to
each overdue payment on demand interest at the Late Charge Rate on such overdue
payment for the period for which it is overdue. "Late Charge Rate" means an
interest rate per annum equal to the Prime Rate plus two hundred (200) basis
points , but not to exceed the highest rate permitted by applicable law.
17. NOTICES; POWER OF ATTORNEY: Any notice or communication required or
permitted hereunder shall be sufficiently given if sent by first class mail,
postage prepaid or via overnight carrier, signature required:
(a) if to Lessee, addressed to it at 2839 Paces Ferry Road, Suite 500,
Atlanta, Georgia 30339, attention General Counsel, with a copy thereof to Dallas
Parker, Brown, Parker & Leahy, L.L.P., 1200 Smith Street, Suite 3600, Houston,
Texas 77002;
(b) if to Lessor, addressed to it at the address set forth above, with
a copy thereof to Charles M. Cushing, Jr., Cushing, Morris, Armbruster and
Jones, L.L.P., 2110 Peachtree Center International Tower, 229 Peachtree Street,
Atlanta, Georgia, 30303;
or in either case at such other address as any party shall notify the other in
accordance with these notice provisions.
(c) With respect to any power of attorney covered by the Lease, the
powers conferred on Lessor thereby: are powers coupled with an interest; are
irrevocable; are solely to protect Lessor's interests under the Lease; and do
not impose any duty on Lessor to exercise such powers. Lessor shall be
accountable solely for amounts it actually receives as a result of its exercise
of such powers.
18. NO ASSIGNMENT, SUBLEASE OR LIEN BY LESSEE: LESSEE SHALL NOT, DIRECTLY
OR INDIRECTLY, (A) MORTGAGE, ASSIGN, SELL, TRANS-FER, OR OTHERWISE DISPOSE OF
THE LEASE OR ANY INTEREST THEREIN OR THE EQUIPMENT OR ANY PART THEREOF, OR (B)
SUBLEASE, RENT, LEND OR TRANSFER POSSESSION OR USE OF THE EQUIPMENT OR ANY PART
THEREOF TO ANY PARTY, OR (C) CREATE, INCUR, GRANT, ASSUME OR ALLOW TO EXIST ANY
LIEN ON THE LEASE, ANY SCHEDULE, THE EQUIPMENT OR ANY PART THEREOF.
19. PURCHASE OPTION AT EXPIRATION OF LEASE TERM:
(a) At least 30 days (or earlier if otherwise specified), but no more
than 60 days prior to expiration of the Lease Term of each Schedule, Lessee
shall give Lessor written notice of its electing one of the following options
for all (but not less than all) of the Equipment covered by such Schedule:
return the Equipment under clause (b) below, or purchase the Equipment under
clause (c) below. The election of an option shall be irrevocable. If Lessee
fails to give timely notice of its election, it shall be deemed to have elected
to purchase the Equipment. If Lessee elects to return the Equipment, Lessor may
reject such election and require Lessee to purchase the Equipment under clause
(c) below.
<PAGE>
(b) If Lessee gives Lessor timely notice of its election to return the
Equipment at the expiration of the Lease Term of a Schedule or if Lessee is
obligated at any time to return the Equipment, then Lessee shall, at its sole
expense and risk, deinstall, disassemble, pack, crate, insure and return the
Equipment to Lessor (all in accordance with applicable industry standards) at
any location selected by Lessor. The Equipment shall be in the same condition
as when received by Lessee, reasonable wear, tear and depreciation resulting
from normal and proper use excepted (or, if applicable, in the condition set
forth in the Lease or the Schedule), shall be in good operating order and
maintenance as required by the Lease, shall be certified as being eligible for
any available manufacturer's maintenance program, shall be free and clear of any
Liens as required by the Lease, shall comply with all applicable laws and
regulations and shall include all manuals, specifications, repair and
maintenance records and similar documents. Until Equipment is returned as
required above all terms of the Lease shall remain in full force and effect
including, without limitation, obligations to pay rent and insure the Equipment;
provided, that after the expiration of any Schedule and before Lessee has
completed its return of the Equipment or its purchase option (if elected), the
term of the lease of the Equipment covered by such Schedule shall be
month-to-month or such shorter period as may be specified by Lessor.
(c) If Lessee elects or is deemed to have elected to purchase Equipment
(or if Lessor requires Lessee to purchase the Equipment as provided in Section
19(a) above, then on the expiration date of the applicable Schedule Lessee shall
purchase all (but not less than all) of the Equipment covered by the applicable
Schedule and shall pay to Lessor the Stipulated Loss Value of the Equipment plus
all sales taxes incurred or paid by Lessor in connection with such sale plus all
accrued but unpaid amounts due with respect to the Equipment and/or the
Schedule. Upon payment in full of the above amounts, and if no default has
occurred and is continuing under the Lease, Lessor shall transfer title to such
Equipment to Lessee "as-is, where-is" with all faults and without recourse to
Lessor and without any representation or warranty of any kind whatsoever by
Lessor, express or implied.
20. GOVERNING LAW: THE INTERPRETATION, CONSTRUCTION AND VALIDITY OF THE
LEASE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF GEORGIA, WITHOUT REFERENCE
TO ITS CONFLICTS OF LAWS PRINCIPLES. WITH RESPECT TO ANY ACTION BROUGHT BY
LESSOR AGAINST LESSEE TO ENFORCE ANY TERM OF THE LEASE, LESSEE HEREBY
IRREVOCABLY CONSENTS TO THE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT
IN ATLANTA, GEORGIA.
21. MISCELLANEOUS:
(a) Subject to the limitations herein, the Lease shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
administrators, successors and assigns.
(b) This Master Lease Agreement and each Schedule may be executed in
any number of counterparts, which together shall constitute a single instrument.
Only one counterpart of each Schedule shall be marked "Lessor's Original" and
-----------------
all other counterparts shall be marked "Duplicate". A security interest in any
---------
Schedule may be created through transfer and possession only of the counterpart
marked "Lessor's Original".
------------------
(c) Section and paragraph headings in this Master Lease Agreement and
the Schedules are for convenience only and have no independent meaning.
(d) The terms of the Lease shall be severable and if any term thereof
is declared unconscionable, invalid, illegal or void, in whole or in part, the
decision so holding shall not be construed as impairing the other terms of the
Lease and the Lease shall continue in full force and effect as if such invalid,
illegal, void or unconscionable term were not originally included herein.
<PAGE>
(e) All indemnity obligations of Lessee under the Lease and all rights,
benefits and protections provided to Lessor by warranty disclaimers shall
survive the cancellation, expiration or termination of the Lease.
(f) Neither Lessor nor Lessee shall be liable for any indirect,
consequential or special damages for any reason whatsoever.
(g) Each payment made by Lessee shall be applied by Lessor in such
manner as Lessor determines in its discretion which may include, without
limitation, application as follows: first, to accrued late charges; second, to
accrued rent; and third, the balance to any other amounts then due and payable
by Lessee under the Lease.
(h) If the Lease is signed by more than one Lessee, each of such
Lessees shall be jointly and severally liable for payment and performance of all
of Lessee's obligations under the Lease.
(i) Lessor acknowledges that Lessee may desire to have one or more of
its subsidiaries lease Equipment hereunder. Lessor hereby agrees to allow a
subsidiary of Lessee to lease Equipment hereunder provided such subsidiary is
identified on the corresponding Schedule. By its execution of such Schedule,
such subsidiary will irrevocably be deemed to have signed this Master Lease
Agreement and to be bound by all of its terms and conditions. Lessee shall be
liable for all such subsidiary's obligations under such Schedule and this Master
Lease Agreement, and Lessee's obligations with such subsidiary shall be joint
and several. Each subsidiary party to any Schedule shall be jointly and
severally liable for (i) the obligations of each other subsidiary party to any
Schedule and (ii) the obligations of Lessee under this Lease.
22. JOINT AND SEVERAL LESSORS: Lessors hereby disclaim any intent to
form a partnership and have agreed to lease to Lessee their separate interests
in and to the Equipment. Consistent with the foregoing, Lessors agree and
intend, and Lessee understands, that Lessors own the Equipment jointly and
severally, that they both are leasing such Equipment to Lessee jointly and
severally and that they intend to share in the security therefore jointly and
severally.
23. ENTIRE AGREEMENT: THE LEASE REPRESENTS THE FINAL, COMPLETE AND ENTIRE
AGREEMENT BETWEEN THE PARTIES HERETO. THERE ARE NO ORAL OR UNWRITTEN AGREEMENTS
OR UNDERSTANDINGS AFFECTING THE LEASE OR THE EQUIPMENT. Lessee agrees that
Lessor is not the agent of any manufacturer or supplier, that no manufacturer or
supplier is an agent of Lessor, and that any representation, warranty or
agreement made by a manufacturer, supplier or their employees, sales
representatives or agents shall not be binding on Lessor.
FIRST SOUTHEASTERN CORPORATION CHARTER COMMUNICATIONS
- --------------------------------
Lessor INTERNATIONAL, INC.
Lessee
By:________________________________ By:___________________________________
Title:_____________________________ Title:________________________________
JAMES R. DORSEY, JR.
- -----------------------
Lessor
By:________________________________
Title:_____________________________
<PAGE>
REGARDLESS OF ANY PRIOR, PRESENT OR FUTURE ORAL AGREEMENT OR COURSE OF DEALING,
LESSEE AGREES THAT NO TERM OR CONDITION OF THE LEASE MAY BE AMENDED, MODIFIED,
WAIVED, DISCHARGED, RESCINDED OR TERMINATED EXCEPT BY A WRITTEN DOCUMENT SIGNED
BY LESSOR AND LESSEE; provided, that Lessee authorizes Lessor to complete the
blanks in each Schedule and Warrant.
CHARTER COMMUNICATIONS
INTERNATIONAL, INC.
By:_____________________________________
Title:__________________________________
<PAGE>
EXHIBIT "A"
FORM OF WARRANT
NEITHER THE SECURITIES REPRESENTED BY THIS WARRANT NOR THE SECURITIES ISSUABLE
UPON EXERCISE HEREOF HAVE BEEN REGIS-TERED UNDER THE SECURITIES ACT OF 1933 OR
THE SECURITIES LAWS OF ANY STATE; THEREFORE, THE TRANSFER OF THIS WARRANT AND
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF IS SUBJECT TO COMPLIANCE WITH THE
CONDITIONS SPECIFIED BELOW, AND NO TRANSFER OF THIS WARRANT OR SUCH SECURITIES
SHALL BE VALID UNTIL SUCH CON-DITIONS HAVE BEEN FULFILLED.
Warrant 199__-_____ ________________,199__
CHARTER COMMUNICATIONS INTERNATIONAL, INC.
NONTRANSFERABLE COMMON STOCK PURCHASE WARRANT
THIS IS TO CERTIFY THAT, for value received,
___________________________________ ("Holder"), upon due exer-cise of this
------
Warrant is enti-tled to purchase from CHARTER COMMUNICATIONS INTERNATIONAL,
INC., a Nevada cor-poration ("Company"), from and after ______________, until
-------
5:00 p.m. on _______________ (the "Expiration Date"),
----------------
__________________________________________ (______) shares of fully paid,
nonassessable common stock, $.00001 par value ("Common Stock"), of the Company
------------
at a purchase price of $3.00 per share. The per share price of the Common Stock
as set forth in the preceding sentence shall be referred to herein as the
"Purchase Price." The Purchase Price and the number of shares of Common Stock
---------------
issuable upon exercise of this Warrant are subject to possible adjustment as
provided herein.
This Warrant is hereinafter called the "Warrant," and the shares of Common
-------
Stock issued or issuable upon exercise hereof are referred to herein as,
singularly a "Share" and, collectively, the "Shares."
----- ------
ARTICLE 1. EXERCISE OF WARRANT.
Section 1.01. In case Holder shall desire to exercise the purchase
-------------
right evidenced by this Warrant, the holder shall surrender this Warrant
accompanied by written notice of Holder's election to purchase Shares pursuant
to the Warrant duly executed by the Holder to the Company at its principal
office in Atlanta, Georgia, accom-panied by payment of the Purchase Price (as
hereinafter defined).
The payment of the Purchase Price may be in immediately available funds or
cash or certified check payable to the order of the Company, or any other form
of payment which is acceptable to the Board of Direc-tors of the Company, for an
amount equal to the Purchase Price. This Warrant may only be exercised in
whole, and not in part.
Section 1.02. All of the Shares shall be validly issued, fully paid and
------------
nonassessable upon exercise in accordance with the terms and conditions hereof.
ARTICLE 2. NOTICE OF PROPOSED TRANSFER, SALE, OFFER FOR SALE, OR EXERCISE.
Section 2.01.
-------------
(a) This Warrant and the Shares issued upon exercise shall not be sold,
trans-ferred, assigned or hypothecated except upon the conditions spec-ified in
this Article 2, which conditions are intended to ensure compliance with the
provisions of the Securities Act of 1933 (the "Secu-rities Act") for the
---------------
transfer of this Warrant or of any of such Shares.
<PAGE>
(b) This Warrant and each warrant issued in exchange for or upon
transfer of this Warrant shall (unless other-wise permitted by the provisions of
this Article 2) be stamped or otherwise imprinted with a legend in substantially
the following form:
NEITHER THE SECURITIES REPRESENTED BY THIS WARRANT NOR THE SECURITIES ISSUABLE
UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
THE SECURITIES LAWS OF ANY STATE; THEREFORE, THE TRANSFER OF THIS WARRANT AND
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF IS SUBJECT TO COMPLIANCE WITH THE
CONDITIONS SPECIFIED BELOW, AND NO TRANSFER OF THIS WARRANT OR SUCH SECURITIES
SHALL BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED.
Section 2.02.
-------------
(a) Each certificate for Shares initially issued upon the exercise of
this Warrant and each certificate for Shares issued to subsequent transferees of
any such certificate (the "Restricted Certificate") shall (unless otherwise
-----------------------
permitted by this Article 2) be stamped or otherwise imprinted with a legend
(the "Restrictive Legend") in substantially the follow-ing form:
-------------------
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE. THE TRANSFER OF THE
SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO COMPLIANCE WITH THE
CON-DITIONS SPECIFIED IN A WARRANT DATED EFFECTIVE AS OF ______________, 199__,
UPON EXERCISE OF WHICH THESE SHARES WERE ISSUED, AND NO TRANSFER OF SUCH SHARES
SHALL BE VALID OR EFFEC-TIVE UNTIL SUCH CONDI-TIONS HAVE BEEN FULFILLED.
(b) The Holder of this Warrant bearing the Restrictive Legend (the
"Restricted Warrant") and as purchaser of the Shares issuable hereunder, by
-------------------
acceptance hereof agrees, prior to any transfer or attempted transfer of this
Warrant or the Shares, to give written notice to the Company of such Holder's
intention to effect such transfer. Such notice shall describe the manner and
circumstances of the proposed transfer in sufficient detail, and shall include
an opinion of counsel satis-factory to the Company specifying the nature and
circum-stances of the pro-posed transfer or offer and indicating that the same
will not be in violation of any of the provisions of the Securities Act and the
Rules and Regulations promulgated thereunder. Each War-rant issued upon the
transfer of any such Restricted Warrant shall bear the Restrictive Legend for
the Warrants set forth above, unless in the opinion of the Hold-er's counsel
satisfactory to the Company, the Restrictive Legend is not required by the
appli-cable provisions of the Securities Act.
(c) Each Restricted Certificate shall bear the Restrictive Legend for
certificates set forth above, unless in the opinion of the Holder's counsel
acceptable to the Company, the Restrictive Legend is not required by the
applicable provisions of the Securities Act.
ARTICLE 3. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES ISSUABLE ON
EXERCISE.
Section 3.01. As used in this Article 3:
-------------
(a) "Purchase Price" shall mean the price per share of Common Stock of
---------------
the Company at which this Warrant shall be exer-cisable in accordance with the
provisions hereof.
(b) "Common Stock" shall mean any series of Common Stock of the Company
------------
whether now or hereafter authorized.
<PAGE>
Section 3.02. The Company shall not be required to issue fractions of Shares
- -------------
upon exercise of this Warrant. If any fractional interest in a Share shall be
deliverable upon the exercise of this Warrant, the Company shall purchase the
fractional interest for an amount in cash equal to the current value of the
frac-tional interest computed by subtracting the Purchase Price allocable to the
fractional interest from the current market value of the Shares calculated on
the basis of the last reported sale price of the Share on any national
securities exchange on the day prior to the date of exercise or, if not listed
on any such ex-change, the average of the bid and asked prices of the Share as
reported by the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") or a comparable agency as of the day prior to the date of
------
exercise in respect of such frac-tional interest; or, if no such reports are
rendered by the NASDAQ or a comparable agency, the fair market value of a Share
as of the day prior to the date of exercise as determined in good faith by the
Board of Directors of the Company.
Section 3.03. The Purchase Price and number of Shares shall be subject to
-------------
adjustment as follows:
(a) In case the Shares issuable upon exercise of this Warrant shall be
subdivided into a greater, or combined into a lesser, number of Shares (whether
with or without par value), the Purchase Price shall be decreased or increased,
as the case may be, to an amount which shall bear the same relation to the
Purchase Price in effect immediately prior to such subdivision or combination as
the total number of Shares outstanding immediately prior to such subdivision or
combination shall bear to the total number of Shares outstanding immediately
after such sub-division or combination and the number of Shares issuable upon
exercise of the Warrant Shares be correspondingly adjusted upward or downward.
A stock dividend shall be considered a subdivision of shares for the purpose of
this paragraph.
(b) In case of any capital reorganization, or of any reclassification
of the Shares of the Company or in case of the consolidation of the Company
with, or the merger of the Company into, any other corporation, or of the sale
of the prop-erties and assets of the Company as, or substantially as, an
entirety to any other corporation, this Warrant shall after such capital
reorganization, reclassification of Shares, con-solidation, merger, or sale be
exercisable for the number of shares of stock or other securities or property of
the Company, or of the corporation resulting from such consoli-dation or
sur-viving such merger or to which such sale shall be made, as the case may be,
to which the holder of Shares issuable (at the time of such capital
reorganization, reclassifi-cation of Shares, consolidation, merger or sale) upon
exer-cise of this War-rant would have been entitled upon such capital
reorgani-zation, reclassification of Shares, consolidation, merger or sale had
this Warrant been exercised prior thereto; and in any such case, if necessary,
the provisions set forth in this Article 3 regarding the rights and interests
thereafter of the Holder shall be appropriately adjusted so as to be
appli-cable, as nearly as may reasonably be, to any shares of stock or other
securities or property thereafter deliverable on the exer-cise of this Warrant.
The subdivision or combination of Shares issuable upon exercise of this Warrant
into a greater or lesser number of Shares (whether with or without par value)
shall not be deemed to be a reclassifi-cation of the Shares of the Company for
the pur-poses of this paragraph.
(c) The Company shall take such actions as are reasonably necessary to
reduce the par value per Share such that the exercise price of such Shares will
not be less than the then existing par value of the Shares at the time of
issuance of the warrant. Notwithstanding anything in this Article 3 to the
contrary, the Company shall not be required, except as provided in this
paragraph, to make any adjustment of the Purchase Price in any case in which
such Purchase Price would be less than the par value per Share as of the
exercise date of the Warrant.
Section 3.04.
-------------
(a) Whenever the Purchase Price shall be adjusted as required by the
provisions of Section 3.03 hereof, the Compa-ny shall forthwith mail a notice
setting forth the adjusted Purchase Price and the adjusted number of Shares for
which this Warrant is exercisable to the registered Holder at his last address
as it shall appear on the registration books, but failure to mail or receive
such notice, or any defects therein, or in the mailing thereof, shall not affect
such adjust-ment in Purchase Price.
<PAGE>
(b) If any date prior to the Expiration Date shall be fixed by the
Company as the date as of which holders of Shares (1) shall be entitled to
receive any dividend or any dis-tribution upon Shares of the Company other than
a divi-dend pay-able in cash or in Common Stock, as the case may be, (2) shall
be offered any sub-scription or other rights, or (3) shall be entitled to
partic-i-pate in any capital reorganization, reclassi-fication of Shares,
consolidation, merger, or sale, des-cribed in Sec-tion 3.03(b), or in any
liquidation, dissolution or winding up of the Company, the Company shall cause
notice thereof (specify-ing such date) to be mailed to the registered Holder at
his address appearing on the registra-tion books of the Company, at least 15
days prior to the date as of which such holders of Common Stock are to be
determined.
Section 3.05. The issuance of stock certificates upon the exercise of this
------------
Warrant shall be made without charge to the exer-cising Holder; provided,
however, that the Company shall not be required to pay any tax that may be
payable on any transfer involved in the issue and delivery of stock in any name
other than that of the registered Holder. The Company shall not be required to
issue or deliver any such stock certificate unless and until the person or
persons requesting the issue thereof shall have paid to the Company the amount
of such tax or shall have established to the satisfaction of the Company that
such tax has been paid.
Section 3.06.
-------------
(a) The Company shall at all times reserve and keep available out of
its authorized but unissued Common Stock and for the purpose of effecting the
exercise of this Warrant, such num-ber of its duly authorized shares of Common
Stock as shall from time to time be sufficient to effect the exercise of this
Warrant; and if at any time the number of author-ized but unissued shares of
Common Stock shall not be suf-ficient to effect the exercise of this Warrant at
the Purchase Price then in effect, the Company will take such corporate action
as may, in the opin-ion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for this purpose.
(b) As a condition precedent to the taking of any action that would
cause an adjustment reducing the then prevailing Pur-chase Price below the then
par value, if any, per Share issuable upon exercise of this Warrant, the
Compa-ny will take such corporate action as may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue its Common
Stock at the adjusted Pur-chase Price upon conversion of this Warrant in
accordance with the provision of this Article 3.
(c) If any shares of the Company reserved or to be reserved for the
purpose of exercise of this Warrant require registration with or approval of any
governmental authority under any Federal or state law before such shares may be
validly issued upon exer-cise, then the Company covenants that it will in good
faith and as expeditiously as possible endeavor to secure such registration or
approval, as the case may be; provided, however, that this provision shall not
require the Company to endeavor to secure such registration or approval in order
to enable any person to sell or dis-tribute Common Stock received upon exercise
of this Warrant in a transaction involving a public offering within the meaning
of the Securities Act as then in effect.
(d) The Company covenants that all Shares that may be issued upon
exercise of this Warrant will upon issue be fully paid and nonassessable.
ARTICLE 4. GENERAL.
Section 4.01. This Warrant and the rights of the Holder may be assigned by
------------
the Holder subject to the terms and conditions hereof but the obligations of the
Compa-ny hereunder may not be assigned (except by operation of law) and shall be
binding upon and shall inure to the benefit of the parties hereto, and the
permitted heirs, successors and assigns of the parties.
Section 4.02. This Warrant constitutes the entire agreement and
-------------
understanding between the parties hereto and super-sedes any prior agreement and
understanding relating to the sub-ject matter of this Warrant. This Warrant may
be modified or amended only by a written instrument executed by all parties
hereto.
Section 4.03. Any notice or communication required or permitted hereunder
-------------
shall be sufficiently given if sent by first class mail, postage prepaid:
(a) if to Company, addressed to it at 2839 Paces Ferry Road, Suite 500,
Atlanta, Georgia 30339, attention General Counsel, with a copy thereof to Dallas
Parker, Brown, Parker & Leahy, L.L.P., 1200 Smith Street, Suite 3600, Houston,
Texas 77002;
(b) if to Holder, addressed to Holder at the address set forth below,
with a copy thereof to Charles M. Cushing, Jr., Cushing, Morris, Armbruster and
Jones, L.L.P., 2110 Peachtree Center International Tower, 229 Peachtree Street,
Atlanta, Georgia, 30303;
or in either case at such other address as any party shall notify the other in
accordance with these notice provisions.
Section 4.04. This Warrant shall be construed in accordance with the laws
-------------
of the State of Georgia.
IN WITNESS WHEREOF, the Company has caused this Warrant to executed by its
proper officers as set forth below, effective as of the date first above
written.
CHARTER COMMUNICATIONS
INTERNATIONAL, INC.
(CORPORATE SEAL)
ATTEST: By________________________________________
Name: _____________________________________
Title: ______________________________________
HOLDER:
__________________________________________
By:_______________________________________
Name:_____________________________________
Title:______________________________________
Address:
___________________________________________
___________________________________________
___________________________________________
<PAGE>
EXHIBIT "B"
FORM OF BILL OF SALE
BILL OF SALE
------------
STATE OF GEORGIA
COUNTY OF COBB
KNOW ALL MEN BY THESE PRESENTS:
CHARTER COMMUNICATIONS INTERNATIONAL, INC. a Nevada corporation
("Grantor"), for good and valuable consideration, consisting of
____________________________________________ ($____________________________),
paid by JAMES R. DORSEY, JR., a resident of the State of Florida, and FIRST
SOUTHEASTERN CORPORATION, a Florida corporation ("Grantee"), the receipt and
sufficient of which are hereby acknowledged, has BARGAINED, SOLD and DELIVERED
and by these presents does BARGAIN, SELL and DELIVER unto Grantee, jointly and
severally, all of the personal property described in Exhibit A which is attached
hereto and made a part hereof (the "Personalty").
Grantor hereby covenants and warrants that it is the lawful owner of the
Personalty with a good right to sell the same as aforesaid, and that, to the
best of its knowledge, its title to the Personalty is free and clear of all
mortgages, liens, pledges or charges of any nature, kind or character
whatsoever.
The Personalty is in a used condition, and Grantor is neither a
manufacturer or distributor of, nor dealer or merchant therein.
EXCEPT AS EXPRESSLY STATED HEREIN, GRANTOR MAKES NO WARRANTY OF
MERCHANTABILITY OR FITNESS FOR PURPOSE IN RESPECT OF THE PERSONALTY, AND THE
SAME IS SOLD IN AN "AS IS, WHERE IS" CONDITION, WITH ALL FAULTS. BY ACCEPTANCE
OF DELIVERY GRANTEE AFFIRMS THAT EXCEPT AS EXPRESSLY STATED HEREIN, IT HAS NOT
RELIED ON GRANTOR'S SKILL OR JUDGMENT TO SELECT OR FURNISH THE PERSONALTY FOR
ANY PARTICULAR PURPOSE, AND THAT GRANTOR MAKES NO WARRANTY THAT THE PERSONALTY
IS FIT FOR A PARTICULAR PURPOSE AND THAT THERE ARE NO REPRESENTATIONS OR
WARRANTIES, EXPRESSED, IMPLIED, OR STATUTORY, EXCEPT THAT GRANTOR REPRESENTS AND
WARRANTS THAT GRANTOR OWNS THE PERSONALTY, AND GRANTOR HAS FULL POWER, RIGHT,
AND AUTHORITY TO CONVEY TITLE THERETO.
TO HAVE AND TO HOLD the Personalty unto Grantee, its successors and assigns
forever, and Grantor shall do, execute, acknowledge and deliver or will cause to
be done, executed, acknowledged and delivered all such further acts, deeds,
assignments, transfers, conveyances, powers of attorney and assurances as may be
required to place Grantor, its successors and assigns in possession and control
of such equipment, and further, Grantor does hereby bind itself, its heirs,
legal representatives and assigns,
<PAGE>
to forever Warrant and Defend the title to the Personalty unto the said Grantee,
its successors and assigns, against any person whomsoever lawfully claiming or
to claim the same or any part thereof, subject to the matters herein set forth.
This Bill of Sale shall be construed in accordance with the laws of the State of
Georgia, without reference to Georgia's laws relating to conflicts of law.
EXECUTED as of ________________ ___, 1997.
"GRANTOR"
Charter Communications International, Inc.
By: ________________________________________
Patrick E. Delaney, its Chief Financial
Officer
"GRANTEE"
By: _______________________________________
James R. Dorsey, Jr.
First Southeastern Corporation
By: _______________________________________
Name: _____________________________________
Its: ________________________________________
<PAGE>
STATE OF ___________
COUNTY OF _____________
BEFORE ME, the undersigned authority, on this day personally appeared JAMES
R. DORSEY, JR., a resident of the State of Florida, known to me to be the person
whose name is subscribed to the foregoing instrument, and acknowledged to me
that he executed the same for the purposes and consideration therein expressed,
in the capacity therein stated and as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, on this _____ day of
___________________, 1997.
__________________________________________
Notary Public in and for the __________ County, State of ____________
STATE OF _________________
COUNTY OF ___________________
BEFORE ME, the undersigned authority, on this day personally appeared
______________, ________________ of FIRST SOUTHEASTERN CORPORATION, a Florida
corporation, known to me to be the person whose name is subscribed to the
foregoing instrument, and acknowledged to me that he executed the same for the
purposes and consideration therein expressed, in the capacity therein stated and
as the act and deed of said corporation.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, on this _____ day of
______________________, 1997.
__________________________________________
Notary Public in and for the _______
County, State of _______________
Calculation of Net Loss Per Share
<TABLE>
<CAPTION>
For the Years Ended December 31,
1997 1996
--------------- --------------------
<S> <C> <C>
Weighted Average Shares Outstanding 31,084,693 15,088,376
Net Loss $ (11,975,858) $ (7,757,848)
--------------- --------------------
Basic Net Loss Per Share $ (0.39) $ (0.51)
=============== ====================
Weighted Average Shares for Basic 31,084,693 15,088,376
Adjustments 0 0
--------------- --------------------
Total Shares for Diluted
Net Loss Per Share 31,084,693 15,088,376
--------------- --------------------
Net Loss $ (11,975,858) $ (7,757,848)
Adjustments 0 0
--------------- --------------------
Net Loss Attributable to
Diluted Net Loss Per Share $ (11,975,858) $ (7,757,848)
--------------- --------------------
Diluted Net Loss Per Share $ (0.39) $ (0.51)
=============== ====================
</TABLE>
<PAGE>
Exhibit 21.1
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- --------------------------------------------------- -----------------------------
<S> <C>
TOPS Corporation Nevada
Overlook Communications International Corporation North Carolina
WorldLink Communications, Inc. Georgia
Phoenix DataNet, Inc. Texas
Phoenix Data Systems, Inc. Texas
Telecommute Solutions, Inc. Texas
Charter Communicaciones Internacionales Grupo, S.A.
Panama Charter Communications International de
Venezuela, S.A. Venezuela
Charter Communications International de Mexico Mexico
Charter Communications Internacionales de
Nicaragua, S. A. Nicaragua
Charter Communications Internacionales de C. V Honduras
Charter Communications Internacionales de
Guatmala, S.A. Guatamala
Charter Communications International Aruba, N.V Aruba
Charter Communications Internacionales S.A de C.V Costa Rica
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Form 10-KSB of our reports dated March 31, 1998.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 155503
<SECURITIES> 0
<RECEIVABLES> 3256104
<ALLOWANCES> 650000
<INVENTORY> 252120
<CURRENT-ASSETS> 3373322
<PP&E> 8743243
<DEPRECIATION> 2113198
<TOTAL-ASSETS> 31066085
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