<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1997.
REGISTRATION NO. 333-18039
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-----------------
LONG DISTANCE DIRECT HOLDINGS, INC.
(Name of Small Business Issuer in its Charter)
Nevada
(State of Incorporation)
SIC No. 4825
(Primary Standard Industrial Classification Code No.)
33-0323376
(IRS Employer I.D. No.)
1 BLUE HILL PLAZA PEARL RIVER, NEW YORK 10965 (914)
620-0765 (Address and Telephone Number of Principal Executive Office
and Principal Place of Business)
-----------------
Steven Lampert Copy to:
President Caldwell R. Campbell, Esq.
Long Distance Direct Holdings, Inc. Day, Campbell & McGill
1 Blue Hill Plaza 3070 Bristol Street, Suite 650
Pearl River, New York 10965 Costa Mesa, California 92626
(914) 620-0765 (714) 429-2900
(Name, Address and Telephone Number
of Agent for Service)
-----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
- -----------------
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH PROPOSED PROPOSED
CLASS OF MAXIMUM MAXIMUM
SECURITIES BEING AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED BE REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock 2,796,703 $ 3.75 $10,487,637 $ 3,178
Common Stock 465,000(2) $ 4.25(3) $ 1,976,250(3) $ 600
-------- ------------ -------
Total Registration Fee $ 3,778
-------
Previously Paid $ 3,178
TOTAL DUE $ 600
-------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee under Rule 457 based upon the average of the bid and asked
prices for the Common Stock on December 13, 1996, as reported by the OTC
Bulletin Board.
(2) Additional shares of Common Stock being registered pursuant to this
Registration Statement.
(3) Estimated solely for the purpose of calculating the amount of the
registration fee under Rule 457 based upon the average of the bid and asked
prices for the Common Stock on March 24, 1997, as reported by the OTC Bulletin
Board.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
<PAGE> 3
LONG DISTANCE DIRECT HOLDINGS, INC.
CROSS REFERENCE SHEET
Between Items of Form SB-2 and Prospectus
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND PROSPECTUS CAPTION
HEADING
<C> <S> <C>
1. Forepart of the Registration Statement and Outside Front Cover Page
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Not Applicable
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Cover Page; Plan of Distribution
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Certain Beneficial Principal Stockholders
Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act Management
Liabilities
15. Organization Within Last 5 Years Not Applicable
</TABLE>
iii
<PAGE> 4
<TABLE>
<S> <C>
16. Description of Business Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis of
Plan of Operations Financial Condition and Results of
Operations
18. Description of Property Business
19. Certain Relationships and Related Certain Transactions
Transactions
20. Market Price for Common Equity and Market Price for Common Stock and
Related Stockholder Matters Related Stockholder Matters
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure Not Applicable
</TABLE>
iv
<PAGE> 5
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
PROSPECTUS
PRELIMINARY PROSPECTUS DATED
MARCH 25, 1997
SUBJECT TO COMPLETION
LONG DISTANCE DIRECT HOLDINGS, INC.
3,261,703 SHARES
OF
COMMON STOCK
($.001 PAR VALUE)
The shares of Common Stock of Long Distance Direct Holdings, Inc. (the
"Company") offered hereby (the "Shares") will be sold from time to time by the
stockholders described herein (the "Selling Stockholders") in transactions in
the national over-the-counter market or otherwise at prices prevailing at the
time of sale. The Company will not receive any of the proceeds from the sale of
the Shares. The expenses incurred in registering the Shares, estimated to be
$75,000, will be paid by the Company.
The Shares offered hereby have been or upon the exercise of outstanding options
and warrants will be acquired by the Selling Stockholders from the Company in
private transactions and are or will be "restricted securities" under the
Securities Act of 1933, as amended (the "Act"), prior to their sale hereunder.
This Prospectus has been prepared for the purpose of registering the Shares
under the Act to allow for future resales by the Selling Stockholders to the
public without restriction. To the knowledge of the Company, the Selling
Stockholders have made no arrangement with any brokerage firm for the sale of
the Shares. The Selling Stockholders may be deemed to be "underwriters" within
the meaning of the Act. Any commissions received by a broker or dealer in
connection with resales of the Shares may be deemed to be underwriting
commissions or discounts under the Act. See "Plan of Distribution."
Brokers or dealers effecting transactions in the Shares should confirm the
registration of the Shares under the securities laws of the states in which such
transactions occur or the existence of an exemption from such registration, or
should cause such registration to occur in connection with any offer or sale of
the Shares.
The Common Stock of the Company is traded in the over-the-counter market and
quoted on the National Association of Securities Dealers Electronic Bulletin
Board ("OTC Bulletin Board") under the symbol "LDDI". The bid and asked prices
for the Common Stock on March 24, 1997, as reported by the OTC Bulletin Board
were $3.50 and $5.00 per share, respectively. To date, the volume of trading in
the Common Stock has been limited and, therefore, the market prices for the
Common Stock may not accurately reflect the value of the Company.
THE COMMON STOCK OFFERED HEREBY IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is March __, 1997.
<PAGE> 6
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities and
Exchange Act of 1934 (the "1934 Act") and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company with the Commission can be inspected at the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
The Company intends to distribute to its stockholders annual reports containing
audited financial statements with a report thereon by independent certified
public accountants after the end of each fiscal year. In addition, the Company
will furnish to its stockholders quarterly reports for the first three quarters
of each fiscal year containing unaudited financial and other information after
the end of each fiscal quarter, upon written request to the secretary of the
Company.
The Company has filed with the Commission a registration statement on Form SB-2
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Act. This Prospectus does not contain all
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
No person is authorized to give any information or make any representations
other than those contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the registered shares
to which it relates or an offer to sell or a solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
2
<PAGE> 7
TABLE OF CONTENTS
PAGE
Prospectus Summary 4
The Company 4
Risk Factors 5
Market For Common Stock and Related Stockholder Matters 11
Selected Financial Data 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Business 16
Management 27
Principal Stockholders 30
Certain Transactions 31
Selling Stockholders 34
Plan of Distribution 35
Description of Capital Stock 36
Legal Matters 37
Experts 37
Further Information 37
Index to Financial Statements F-1
3
<PAGE> 8
SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Memorandum.
THE COMPANY
The Company, which was formerly known as Golden Ark, Inc., was inactive until
October 6, 1995, when it acquired all of the outstanding stock of Long Distance
Direct, Inc. ("LDDI") and LDDI became a wholly owned subsidiary of Golden Ark.
Subsequent to this transaction, Golden Ark changed its name to Long Distance
Direct Holdings, Inc. LDDI is a New York corporation which was formed in 1991
for the purpose of acting as the general partner of Long Distance Direct L.P.
("LDDLP" or the "Partnership"), a New York limited partnership formed at the
same time for the purpose of carrying on the business of a non-facilities-based
reseller of long-distance telephone service. In September 1995, LDDI acquired
all of the partnership interests of LDDLP in exchange for shares of LDDI common
stock. After its acquisition of LDDI, Golden Ark, Inc. changed its name to Long
Distance Direct Holdings, Inc. ("LDD Holdings"). In May 1996, LDD Holdings
formed Long Distance Direct Marketing, Inc., a New York corporation ("LDDM"), as
a wholly owned subsidiary for the purpose of producing and marketing a televised
infomercial designed to recruit additional independent sales representatives.
References herein to the Company, to LDDI or to LDDM shall mean LDD Holdings,
LDDI and LDDM collectively unless the context otherwise requires. The financial
statements included elsewhere herein relate to the business which was known as
LDDLP prior to the acquisition of LDDLP by LDDI and the subsequent acquisition
of LDDI by LDD Holdings.
LDDI is a non-facilities-based, or "switchless," reseller of outbound and
inbound long-distance telephone, teleconferencing, cellular long distance and
calling card services to small and medium-sized commercial customers. All of the
services sold by the Company are currently provided by AT&T Corporation ("AT&T")
or MCI Telecommunications Corporation ("MCI"). According to a 1995 FCC report,
AT&T and MCI accounted for approximately 56% and 17% respectively of total
domestic long distance revenue for calendar year 1994. The Company signs up
customers and provisions them onto the network of AT&T or MCI, which provide the
actual transmission service. The Company has agreements with AT&T and MCI to
purchase a minimum level of long distance telephone service at discounted bulk
rates which are lower than rates LDDI's customers are able to obtain for
themselves due to insufficient call volume. The Company does not own or lease
any telephone equipment or participate in the call completion process. Provision
of the service to the customer requires no equipment installation or
modification on the customer's premises; all action to provide the service takes
place within the local and inter-exchange carriers. The customer retains its
existing telephone numbers and incurs no expense in making the decision to
switch to the services of the Company.
The Company currently markets its services through three methods typically
employed by sellers and resellers of telephone services: field sales, outbound
telemarketing and direct mail. As of December 31, 1996, approximately 29% of the
Company's billings were derived from field sales using a system of self-employed
independent sales representatives, who are contractually restricted from
performing such services for competitors of LDDI, approximately 64% were derived
from outbound telemarketing using a number of outside telemarketing agencies
specializing in the sale of telephone services on a non-exclusive basis, and the
remaining 7% were derived from direct mail programs. The Company also
test-marketed a televised marketing program during the fourth quarter of 1996,
which it started to roll out in January 1997, to increase its independent sales
force. The Company intends to establish its own in-house telemarketing facility
during 1997. In November 1996, the Company signed a mutually exclusive agreement
with Kaire International, a multi-level marketing company, to supply telephone
service to that company's registered associates and through those associates to
the public at large. In January 1997, the Company signed a mutually exclusive
agreement with National Benefits Consultants, LLC ("NBC"), a company in alliance
with Deloitte & Touche LLP, under which NBC will market the Company's
telecommunications services to audit clients of Deloitte & Touche LLP and other
commercial entities. See "Business."
The Company's offices are located at One Blue Hill Plaza, Pearl River, New York
10965. The Company's telephone number is (914) 620- 0675.
4
<PAGE> 9
<TABLE>
<S> <C>
THE SELLING STOCKHOLDER OFFERING
Common Stock outstanding on March 17, 1997(1) 7,027,949
Common Stock offered by Selling Stockholders(2) 3,261,703
Risk Factors This Offering involves a high degree of risk.
See "Risk Factors."
OTC Bulletin Board Symbol LDDI
</TABLE>
- ------------------
(1) Excluding 2,075,000 shares issuable upon exercise of outstanding options and
828,088 shares issuable upon exercise of outstanding warrants. The number of
shares issuable upon exercise of outstanding options does not include an
indeterminate number of shares issuable upon exercise of options not currently
exercisable held by Guthy-Renker and National Benefits Consultants, L.L.C. See
"Description of Securities - Options."
(2) Includes 395,000 shares issuable upon the exercise of options and 828,088
shares issuable upon the exercise of warrants held by the Selling Stockholders.
SUMMARY FINANCIAL INFORMATION
The statement of operations data for the years ended December 31, 1994, 1995 and
1996, and the balance sheet data as of December 31, 1995 and 1996 has been
derived from financial statements of the Company which have been audited by
Adelman, Katz and Mond, LLP., independent auditors, and included herein. The
report of Adelman, Katz and Mond, LLP on such financial statements notes that
the Company's negative working capital and accumulated deficit raise substantial
doubt about the Company's ability to continue as a going concern and that the
financial statements were prepared on the assumption that the Company will
continue as a going concern and do not include any adjustments that might result
from the Company's inability to continue as a going concern.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1994 1995 1996
---------------------------------------
Statement of Operations Data: (IN THOUSANDS)
<S> <C> <C> <C>
Revenues, Net $9,083 $7,986 $5,310
Operating Expenses 3,877 3,219 3,321
Operating Loss (1,052) (1,096) (1,661)
Net Loss (1,221) (1,874) (2,401)
<CAPTION>
AS OF
DECEMBER 31
1995 1996
-----------------
(IN THOUSANDS)
Balance Sheet Data:
<S> <C> <C>
Working Capital (deficit) $(3,485) $ 975
Total Assets 1,627 3,715
Total Liabilities 4,890 2,298
Shareholder's Equity (deficiency) (3,262) 1,417
</TABLE>
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of risk.
Each prospective investor should carefully consider the following risk factors,
as well as other information set forth in this Prospectus, before deciding to
purchase the Shares. These risk factors are not intended to represent a complete
list of the general or specific risks that may affect the Company. It should be
recognized that other risks may be significant, presently or in the future, and
that the risks set forth below may affect the Company to a greater extent than
indicated.
5
<PAGE> 10
HISTORY OF OPERATING LOSSES AND RISK OF FUTURE LOSSES; ACCUMULATED DEFICITS;
VIABILITY AS GOING CONCERN
The Company has never made a profit since inception in November, 1991. The
Company has sustained operating losses of $1,052,236, $1,096,125 and $1,661,320
for the fiscal years ended December 31, 1994, 1995 and 1996 respectively. As of
December 31, 1996, the Company had an accumulated deficit of $7,066,787. The
Company's expected expanded sales and marketing efforts could result in
significantly higher operating losses in the future. There can be no assurances
that the Company will not continue to experience operating losses in the future.
In this respect, the report by the Company's independent certified public
accountants on the Company's financial statements for the year ended December
31, 1996 notes that the Company's negative working capital and accumulated
deficit raise substantial doubt about the Company's ability to continue as a
going concern and that the financial statements were prepared on the assumption
that the Company will continue as a going concern and do not include any
adjustments that might result from the Company's inability to continue as a
going concern. There can be no assurance that the Company will ever generate
positive operating income. See "Business" and "Financial Statements."
LIMITED OPERATING HISTORY
The Company commenced its long-distance telephone service operations in November
1991 and, accordingly, has a limited operating history. The Company's prospects
must be considered in light of the risks, expenses, and difficulties frequently
encountered by a small business in a highly competitive industry. The Company's
operating expenses are expected to increase significantly as a result of the
Company's proposed expansion of its marketing and sales efforts, and its
contractual minimum long-distance service purchase commitments to AT&T and MCI.
The Company's capital resources are, and will continue to be, extremely limited.
Since the Company has a limited operating history, there can be no assurance
that its operations will be profitable or that it will ever generate sufficient
revenues to meet its expenses and support its anticipated activities. See
"Business" and "Financial Statements."
DEPENDENCE ON TELECOMMUNICATIONS SERVICE PROVIDERS
AT&T and MCI are currently the sole providers of the long-distance
telecommunications services that the Company resells to its customers. The
future business prospects of the Company are particularly dependent on the
continuous and reliable use of AT&T and MCI's networks. Changes in tariffs,
regulations, or policies by AT&T and MCI or the Company's failure to maintain or
renew or a termination of such agreements by AT&T or MCI would in all likelihood
materially adversely affect the Company's ability to continue to offer long
distance service at commercially reasonable terms, and, in turn, would
materially adversely affect the Company's business, financial condition,
operations and prospects, and could result in the cessation of operations by the
Company. AT&T and MCI may terminate the provision of services under its contract
tariffs for limited reasons, including for non-payment by the Company, for
national defense purposes or if the provision of services to the Company were to
have a substantial adverse impact on the providers' network. There are no
specific notice requirements with respect to such termination. Although the
Company may have the right to switch end users to alternate providers subsequent
to such termination, the end users have the right to discontinue such service at
any time. See "Business." There can be no assurance that if the AT&T or MCI
agreements were terminated or not renewed, the Company would be able to obtain
other long distance communications services from alternate carriers on favorable
terms, if at all.
POTENTIAL ADVERSE EFFECTS OF RATE CHANGES
The Company bills its customers for the various long-distance telecommunications
services used by such customers. The total billing to each customer is generally
less than the telephone charges for the same long-distance service that the
customer would pay to a primary seller of such services, such as AT&T or MCI.
LDDI 's ability to undersell such primary sellers arises as a result of the
volume discount offered to the Company in accordance with the terms of its
contracts with AT&T and MCI. The Company believes its lower customer bills are
one of the most important factors in its ability to attract and retain
customers. Therefore, narrowing of the differential between the rates charged to
the Company's customers and the cost of the bulk-rate long-distance
telecommunications services purchased by the Company for resale to such
customers would have a material adverse effect on the Company. To the extent
this differential decreases, the savings the Company is able to obtain for its
customers would decrease and the Company would lose customers and face increased
difficulty in attracting new customers, and the Company's operating results
would also be materially adversely affected. The Company depends on this pricing
differential for its revenue. There can be no assurance, however, that such
pricing differential will not narrow or be eliminated entirely. The occurrence
of such narrowing or elimination of the pricing differential would likely
foreclose the
6
<PAGE> 11
prospects for any revenue for the Company whatsoever and could result in
cessation of the Company's operations See "Business."
INTENSE COMPETITION
The Company markets long-distance telecommunications services utilizing the AT&T
and MCI networks to small and medium-size commercial customers and residential
subscribers at rates which are below the rates generally available to such
customers from other carriers. Many other companies are engaged in a similar
business to that of the Company and compete directly with the Company for the
same customers. Many of the Company's competitors are established enterprises,
such as AT&T, MCI and Sprint Corporation ("Sprint"), that possess greater name
recognition, established customer bases and significantly greater resources than
the Company. There is no distinction between the services offered by the Company
and the services offered by other long-distance service providers. The same or
similar volume discount pricing schedules available to the Company from AT&T and
MCI are also available from AT&T, MCI, Sprint and other telecommunications
services providers to current and potential competitors of the Company. There
are no substantial barriers to the entry of additional competitors into the
market. The recently enacted Telecommunications Act of 1996 eliminated many of
the barriers to entry in the telecommunications market, which is likely to
result in increased competition for the Company. Given these factors, it is
highly likely that new competitors may emerge and acquire a significant portion
of the Company's market share, thereby further diminishing the Company's
prospects. In addition to direct competition from other resellers, the Company
competes with the sales organizations of large telecommunications concerns such
as Sprint, AT&T and MCI themselves, any of which at any particular time may
offer prices lower than those offered by the Company, and all of which have far
greater financial, marketing and other resources than the Company. See "Business
- -- Competition" and "Business-Regulation."
FAILURE TO MEET AT&T AND MCI MINIMUM PURCHASE REQUIREMENTS; CONTINGENT
LIABILITIES
The Company has entered into contract tariffs with AT&T and MCI for both
outbound and inbound long distance service. See "Business -- Arrangements with
AT&T" and "Business -- Arrangements with MCI." The Company recently entered into
a new four-year negotiated contract tariff with AT&T, effective March 1, 1997,
for the supply of inbound and outbound telephone service with volume discounts
which obligates the Company for a minimum quarterly purchase requirement of
$1,200,000 during the first three years increasing to $1,475,000 in the fourth
year of the contract. The contract provides that failure to achieve the minimum
will require payment of the shortfall by the Company. Under the contract tariff,
the Company is obligated to make payments equal to its minimum purchase
requirements for the outstanding term of the agreement if there is an early
termination of the plan. Under this contract with AT&T the entire cumulative
shortfall charged under the Company's prior contracts (approximately $2.3
million as of December 31, 1996, none of which has been reflected in the
Company's financial statements included herein) will be waived provided, that,
the Company discharges its past due obligations to AT&T of $140,000. In March
1996, the Company signed a four-year negotiated contract with MCI, and signed an
amendment to such agreement in September 1996, for the supply of inbound and
outbound telephone service with volume discounts in return for minimum quarterly
purchase requirements rising to $3,000,000 per quarter after the first (18)
eighteen months of service under the contract. Failure to achieve the minimum
will require shortfall payments by the Company. At the present and proposed
combined level of its commitments to AT&T and MCI, and at its current selling
margins, the Company will need to achieve annualized net sales of telephone
service, once the ramp-up period under the MCI contract has been completed in
September 1997, of approximately $25 million in order to satisfy such
commitments. There can be no assurance that the Company will be able to achieve
this level of sales. Should the Company fail to maintain or renew either of its
agreements with AT&T or MCI, such failure could have a material adverse effect
on the Company's business, financial condition, results of operation and
prospects.
CONTROL BY OFFICERS AND DIRECTORS
As of March 17, 1997, the Company's officers, directors and principal
shareholders with whom certain directors are affiliated beneficially owned or
controlled in the aggregate 5,454,103 shares of Common Stock (including
1,491,960 shares issuable upon the exercise of options held by the Company's
executive officers and directors) or approximately 64% of the outstanding shares
of the Company's Common Stock as of such date. See "Principal Shareholders." As
a result, these shareholders, if acting in concert, will be able to elect a
majority of the Company's directors and affect the outcome of most corporate
actions requiring shareholder approval including delaying or preventing any
change in control.
7
<PAGE> 12
Investors who purchase the Shares may be subject to certain risks due to the
concentrated ownership of the Common Stock of the Company. Such risks include
the fact that the shares beneficially owned or controlled by the Company's
executive officers and directors could, if they were cast together, delay, defer
or prevent a change in control or other transaction of the Company, such as an
unsolicited takeover, which change in control or other transaction might be
beneficial to the shareholders.
GOVERNMENTAL REGULATION
The Company's activities are heavily regulated by the public utility commissions
of the various states in which the Company operates. Also, decisions by the
Federal Communications Commission ("FCC") with respect to the permissible
business activities or pricing practices may have an adverse impact on the
Company's operations. The Company is required to file tariffs for interstate and
international service with the FCC, which tariffs become effective on one day's
notice. The Company is also required to file tariffs or obtain approval for
intrastate service provided in most of the states in which they are marketing
long distance services. The Company could be subject to complaints seeking
damages and other relief filed by parties claiming to be harmed by the Company's
failure to file tariffs. Moreover, any significant change in regulations by
state governmental agencies could significantly increase the Company's costs or
otherwise have a material adverse effect on the Company's activities and on its
future prospects particularly if those policies make it more difficult to obtain
service from AT&T, MCI or other long distance companies at competitive rates, or
otherwise increase the cost and regulatory burdens of providing long distance
service. The FCC has recently taken or is currently considering action on
various proposals, including proposals relating to interstate access transport
services, public filing of rates, proprietary calling cards and billed party
preference. Additionally, legislation has recently been enacted in Congress
further liberalizing the telecommunications industry, specifically by permitting
the Bell Operating Companies (BOCs) to provide service in the long-distance
market and allowing the long distance carriers such as AT&T, MCI and the Company
into the local markets. There can be no assurance that the entry of the BOCs or
other competitors into the long-distance market will not have a material adverse
effect on the Company's business. There can be no assurance that the regulatory
authorities in one or more states or the FCC will not take action having an
adverse effect on the business or financial condition or results of operations
of the Company. Regulatory action by the FCC or the states also could adversely
affect or otherwise increase the cost and regulatory burdens of providing long
distance services. As it engages in direct marketing to end users, the Company
will be subject to applicable regulatory standards for marketing activities and
the increased FCC and state attention to certain marketing practices may become
more significant to the Company. See "Business -- Regulation."
POTENTIAL INSUFFICIENCY OF WORKING CAPITAL TO SUPPORT OPERATIONS
There can be no assurance that the cash generated from operations will be
sufficient to support the Company's anticipated level of operations, or even a
diminished level of operations, for any significant period beyond the date
hereof. If the Company's plans change or its assumptions prove to be inaccurate
or it is otherwise unable to generate sufficient revenues or income, the Company
may require additional funds to maintain its operations or, if such funds are
unavailable, the Company may have to cease its operations altogether. If
additional funds are required, the Company will have to seek additional equity
or debt financing, bank loans, or other financing to sustain its planned
expansion and growth. Such financing, if obtainable at all, may be on terms
materially adverse to the Company's present shareholders and persons who
purchase the Shares, with respect to dilution of book value, dividend
preferences, liquidation preferences, or other terms. The Company currently has
no commitments for any additional financing. No assurance can be given that the
Company will be able to obtain any additional financing, if necessary, on
acceptable terms or otherwise. Failure to obtain such additional financing on
reasonable terms or otherwise would materially adversely affect the Company's
ability to fund its operations and could force the Company to restructure, file
bankruptcy, sell assets or otherwise cease operations.
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be largely dependent on the efforts of certain
key personnel of the Company, including Steven L. Lampert, its Chairman, Chief
Executive Officer and President, and Michael D. Preston, its Chief Financial
Officer and Vice President-Finance. The Company has not entered into written or
formal employment agreements with Messrs. Lampert and Preston. The loss of the
services of either of these individuals would have a material adverse effect on
the Company. The Company has key-man life insurance policies in the amount of
$1,000,000 for each of Messrs. Lampert and Preston. The success of the Company
will also depend, in part, upon its ability in the future to attract and retain
additional qualified operating, marketing and financial personnel. See
"Business" and "Management."
8
<PAGE> 13
DEPENDENCE ON PERFORMANCE OF NON-AFFILIATED COMPANIES TO INCREASE SALES
The Company's future performance depends on the success of certain
non-affiliated companies it is employing to sell its services. These companies
include Kaire International, a multi-level marketing company ("Kaire"), National
Benefits Consultants, LLC ("NBC"), a company which makes recommendations for
alternate sourcing of certain products and services so as to reduce the cost
burden on its clients, and Guthy-Renker, an infomercial producer. These
companies are in addition to the current and historical agents of the Company,
which have been unsuccessful in increasing the Company's sales. The efforts of
the Company's own agents have been insufficient to create an operating profit.
There can be no assurance that the use of Kaire, NBC or Guthy-Renker or any
other unaffiliated company will enable the Company to increase revenues, or
generate any operating profit or decrease its operating losses. See "Business" -
"Marketing and Sales," "Televised Marketing Program," "Multi-Level Marketing,"
and "National Benefits Consultants/Deloitte & Touche LLP."
CONFLICTS OF INTEREST
The Company may be subject to certain conflicts of interest arising out of its
relationship with its legal counsel, Day, Campbell & McGill, and the fact that
Rowland W. Day II of such firm sits on the Company's Board of Directors and
certain members of such firm are significant shareholders in the Company. While
not prohibited under applicable law, such a relationship may give rise to
conflicts of interest that could affect the Company's legal representation and,
therefore, could have an adverse affect on the Company's business, financial
condition or operations.
RELIANCE ON INDEPENDENT SALES AGENTS
The Company markets its services through independent sales representatives who
are paid a commission by the Company based on volume of sales generated,
independent telemarketing organizations, and by the Company's direct mail
program. The independent telemarketing organizations presently account for
approximately 64% of the Company's long-distance sales volume. Should the
services of one or more of these independent telemarketers be interrupted or
become unavailable to the Company, and in the event that the Company is unable
to promptly replace such marketing efforts, the financial results of the Company
could be adversely affected. See "Business -- Marketing and Sales."
RELIANCE ON INDEPENDENT CARRIER AND MARKETING COMPANIES; LACK OF CONTROL OVER
MARKETING ACTIVITIES
The Company markets its services primarily through independent agents and
non-affiliated companies which generally have entered into mutually exclusive
agreements with the Company. Such agents and non-affiliated companies make no
minimum use or revenue commitments to the Company under these agreements. In the
event that the Company loses access to AT&T or MCI's network or billing
services, the Company's agreements with agents and non-affiliated companies
could be adversely impacted or terminated. Certain marketing practices,
including the methods and means to convert a customer's long distance telephone
service from one carrier to another, have been subject to increased regulatory
review at both the federal and state levels. This increased regulatory review
could adversely affect the acquisition of new business by agents and
non-affiliated companies. Because agents and non-affiliated companies are
independent, the Company is unable to control their activities. The Company is
also unable to predict the extent of its agents' and non-affiliated companies'
compliance with applicable regulations or the effect of such increased
regulatory review. None of the agents or non-affiliated companies has a
substantial operating history with the Company, and therefore no assurance can
be given as to their ability to execute their agreements or to attain a level of
sales sufficient to cover related operating expenses or other future plans.
TECHNOLOGICAL CHANGE AND NEW SERVICES
The telecommunications industry has been characterized by steady technological
change, frequent new service introductions and evolving industry standards. The
impact of such changes in service and standards on the Company has been limited
due to its selling only AT&T long-distance services until April 1996. The
Company believes that its future success will depend in part on its ability to
anticipate such changes and to offer on a timely basis market responsive
services that meet these evolving industry standards, especially if at some
future time the Company should cease selling AT&T service. There can be no
assurance that the Company will have sufficient resources to introduce new
services that would satisfy an expanded range of customer needs.
9
<PAGE> 14
CUSTOMER ATTRITION
The Company experiences a high level of customer attrition that could materially
adversely affect the Company. The Company does not have a long history of
operations and accordingly, the level of customer attrition experienced to date
may not be indicative of future attrition levels. Increasing customer attrition
levels would be more detrimental to the Company. In addition, there can be no
assurance that any steps taken by the Company to counter increased customer
attrition will be successful.
AUTHORIZATION OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of 10,000,000
shares of "blank check" preferred stock with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval
(but subject to applicable government regulatory restrictions), to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders of
the Company's Common Stock. In the event of issuance, the preferred stock could
be utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of the Company favorable to the stockholders.
Although the Company has no present intention to issue any shares of its
preferred stock, there can be no assurance that the Company will not do so in
the future, and if issued the rights and privileges issued to preferred stock
holders might be detrimental to holders of the Shares. See "Description of
Securities."
SHARES ELIGIBLE FOR FUTURE SALE; IMPENDING REGISTRATION; WARRANTS
Of the 7,027,949 shares of the Company's Common Stock outstanding on March 17,
1997, approximately 1,134,049 are freely tradeable and approximately 3,855,285
shares (excluding 2,038,615 shares outstanding as of such date which are
included in the Registration Statement to which this Prospectus relates) are
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act ("Rule 144"). The "restricted securities" may be sold
only pursuant to registration under the Securities Act, or pursuant to an
exemption from the registration requirements of the Securities Act including
that arising under Rule 144. Approximately 3,200,000 of the restricted
securities will be eligible for resale under Rule 144 on April 29, 1997, and the
balance will be eligible for resale under Rule 144 during 1997 at various times
after April 29 of such year. Generally, under Rule 144, each person having held
restricted securities for the currently required period of two years may, every
three months, sell in ordinary brokerage transactions an amount of shares which
does not exceed the greater of one percent (1%) of the Company's then
outstanding shares of Common Stock, or the average weekly volume of trading of
such shares of Common Stock as reported during the preceding four calendar
weeks. A person who has not been an affiliate of the Company for at least the
three months immediately preceding the sale and who has beneficially owned
shares of the Common Stock for the currently required period of three years is
entitled to sell such shares without regard to any of the limitations described
above. Pursuant to an amendment to Rule 144, which will become effective April
29, 1997, the two year holding period will be shortened to one year and the
three year holding period will be shortened to two years. Actual sales, or the
prospect of sales by the present stockholders of the Company or by future
holders of restricted securities under Rule 144, or otherwise, may, in the
future, have a depressive effect upon the price of the Company's shares of
Common Stock in any market that may develop therefor. See "Principal
Stockholders."
LIMITED PUBLIC MARKET FOR SECURITIES OF THE COMPANY
Although the Company's Common Stock is currently traded on the National
Association of Securities Dealers ("NASD") Electronic Bulletin Board, there was
no trading activity prior to December 1995, and since such date there has been
only an extremely limited and sporadic trading market for the Common Stock.
Although the Company has filed an application for inclusion of the Company's
Common Stock in the NASDAQ Small Cap Market, there is little likelihood that
NASDAQ will admit the Company's Common Stock for trading on its Small Cap Market
given the Company's current financial condition. There can be no assurance that
an active trading market for the Company's Common Stock will develop at any time
in the future, especially as long as the Company's Common Stock continues to be
traded only on the Electronic Bulletin Board. See "Market for Common Stock and
Related Stockholder Matters."
10
<PAGE> 15
NASDAQ LISTING REQUIREMENTS; RISK OF LOW-PRICED SECURITIES
The criteria for the inclusion of securities on the NASDAQ Small Cap Market
require total assets and net worth of $4,000,000 and $2,000,000, respectively.
If the Company's application is not approved, trading, if any, will be conducted
in the over-the-counter market in the so-called "pink sheets" or the NASD
Electronic Bulletin Board. An investor would find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the Company's
securities if they are traded in the over-the-counter market.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure, relating to the market for penny stocks, in connection
with trades in any stock defined as a penny stock. Regulations of the SEC
generally define a penny stock to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions. Such exceptions
include any equity security listed on NASDAQ and any equity security issued by
an issuer that has (i) net tangible assets of at least $2,000,000, if such
issuer has been in continuous operation for three years, or (ii) net tangible
assets of $5,000,000, if such issuer has been in continuous operation for less
than three years, or (iii) average annual revenue of at least $6,000,000 for the
last three years. Unless an exception is available, the regulations require the
delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
In addition, if the Company's securities are not quoted on NASDAQ, or the
Company does not meet the exceptions described in the previous paragraph,
trading in the Common Stock would be covered by Rule 15g-9 promulgated under the
Exchange Act for non-NASDAQ and non-exchange listed securities. Under such
rule, broker/dealers who recommend such securities to persons other than
established customers and accredited investors must make a special written
suitability determination regarding the purchaser and receive the purchaser's
written agreement to a transaction prior to sale.
NO DIVIDENDS
The Company has never paid any cash or other dividends on its Common Stock. The
Company anticipates that in the foreseeable future earnings, if any, will be
retained for use in the business or for other corporate purposes, and it is not
anticipated that cash or any other dividends in respect of the Common Stock will
be paid in the foreseeable future. See "Dividend Policy."
RELATED PARTY TRANSACTIONS AND POSSIBLE CONFLICTS OF INTEREST
Until November, 1996, the Board of Directors consisted of Steven Lampert and
Michael Preston, both of whom are executive officers and principal shareholders
of the Company. Thus, there has in the past existed the potential for conflicts
of interest in transactions between the Company and such individuals or entities
in which such individuals have an interest. The Company has attempted to ensure
that any such transactions were entered into on terms that were no less
favorable than could have been obtained in transactions with unrelated third
parties. In November, 1996, three additional individuals, none of whom is an
officer or employee of the Company, were elected to the Board of Directors. One
of such individuals, however, Rowland W. Day II, is a principal with the law
firm that acts as corporate counsel to the Company. While not prohibited under
applicable law, such a relationship may give rise to conflicts of interest that
could affect the Company's legal representation and, therefore, could have an
adverse affect on the Company's business, financial condition or operations.
FORWARD LOOKING INFORMATION; CAUTIONARY STATEMENTS
Certain statements contained in this Prospectus are forward looking statements.
All of these statements involve assumptions of future events that may not prove
to be accurate and risks and uncertainties. These risks include risks associated
with competition, financing availability, government regulation and those
matters covered elsewhere in these "Risk Factors" and this Memorandum. For these
and other reasons, actual results may differ materially from those set forth
herein.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded in the over-the-counter market on the
OTC Bulletin Board under the symbol LDDI since December 13, 1995. There was no
active trading market for the Company's Common Stock for more than two years
prior to December 13, 1995. Since December 13, 1995, trading activity with
respect to the Company's Common Stock
11
<PAGE> 16
has been extremely limited and sporadic, and there is a significant number of
days or weeks when there has been no trading activity at all.
The following table reflects the high and low bid prices of the Company's Common
Stock as reported by the OTC Bulletin Board from December 13, 1995 to March 24,
1997. Such prices are inter-dealer quotations without retail mark-ups,
mark-downs or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1995
Fourth Quarter (December 13 to December 31) $3.00 $3.00
1996
First Quarter $3.00 $3.00
Second Quarter $6.00 $3.00
Third Quarter $6.00 $4.50
Fourth Quarter $5.00 $2.00
----- -----
1997
First Quarter (through March 24) $ 4.50 $ 2.00
------- --------
</TABLE>
As of March 17, 1997, there were approximately 294 shareholders of record of
the Company's Common Stock. On March 24, 1997, the closing bid price for the
Company's Common Stock was $ 3.50.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and
anticipates that, for the foreseeable future, no cash dividends will be paid on
its Common Stock. Payment of future cash dividends will be determined by the
Company's Board of Directors based upon conditions then existing, including the
Company's financial condition, capital requirements, cash flow, profitability,
business outlook and other factors. In addition, the Company's future credit
arrangements may restrict the payment of dividends.
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1994, 1995 and
1996 and the balance sheet data as of December 31, 1995 and 1996 have been
derived from financial statements of the Company which have been audited by
Adelman, Katz and Mond, LLP, independent auditors, and included herein. The
report of Adelman, Katz and Mond, LLP, on such financial statements notes that
the Company's negative working capital and accumulated deficit raise substantial
doubt about the Company's ability to continue as a going concern and that the
financial statements were prepared on the assumption that the Company will
continue as a going concern and do not include any adjustments that might result
from the Company's inability to continue as a going concern.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
1994 1995 1996
---------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, gross $ 9,528 $ 8,364 $ 5,320
Customer rebates and refunds 445 378 10
------- ------- -------
Revenues, net 9,083 7,986 5,310
</TABLE>
12
<PAGE> 17
<TABLE>
<S> <C> <C> <C>
Cost of services 6,258 5,863 3,650
Gross Profit 2,825 2,123 1,660
Operating Expenses
Sales and marketing 1,323 519 380
General and administrative 2,554 2,700 2,941
------- ------- -------
3,877 3,219 3,321
Loss from operations before interest and tax (1,052) (1,096) (1,661)
Interest expense 169 371 740
------- ------- -------
1994 IPO costs written off -- 407 --
------- ------- -------
Net Loss (1,221) (1,874) (2,401)
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31
1995 1996
------------------------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working Capital (deficit) $(3,485) $ 975
Total Assets 1,627 3,715
Total Liabilities 4,890 2,298
Shareholder's Equity (deficiency) (3,262) 1,417
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following discussion and analysis should be read in conjunction with the
Financial Statements and the notes thereto appearing herein. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in "Risk Factors" and elsewhere in this Prospectus.
GENERAL
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the two years ended December 31, 1996.
The Company has sustained losses for each of the two years due to the lack of
working capital to finance adequate levels of marketing expenditure,
insufficient revenues and other reasons. The Company effected a recapitalization
in October 1995 in order to be able to improve its liquidity and finance its
future expansion by subsequent offerings of shares of its Common Stock. After
the recapitalization and until December 31, 1996, the Company raised
approximately $6.2 million in cash (net of certain expenses) from the private
sale of its Common Stock and converted approximately $1.7 million of its debt
into equity, the proceeds of which were used primarily for working capital.
The Company has thus far used independent sales representatives, sub-contracted
telemarketers, and direct mail to solicit customers. The Company now intends to
establish its own in-house telemarketing facility later in 1997, has launched a
limited televised marketing program to increase its independent sales force, and
plans to increase its direct mail activity. The Company has also, in November
1996, signed a mutually exclusive agreement with Kaire International, a
multi-level marketing company, to supply telephone service to that company's
registered associates and through those associates to the public at large. In
January 1997, the Company signed a mutually exclusive agreement with National
Benefits Consultants,
13
<PAGE> 18
LLC ("NBC"), a company in alliance with Deloitte & Touche LLP, under which NBC
will market the Company's telecommunications services to audit clients of
Deloitte & Touche LLP and other commercial entities.
RESULTS OF OPERATIONS
THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AS COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1995
Gross revenues for the twelve months ended December 31, 1996 were $5,320,000 as
compared to $8,364,000 for the twelve months ended December 31, 1995. The
Company attributes the decrease of 36% to the Company's inability to finance
adequate levels of marketing expenditure to offset customer attrition and to the
loss, in October 1995, of its largest customer, L.C. Wegard & Company, which had
generated gross revenue of approximately $150,000 per month, as a result of such
customer's bankruptcy.
Management plans to resume the active pursuit of new customers in 1997 if
sufficient funds are available for such purpose. The Company intends to increase
expenditures on sub-contracted telemarketing and direct mail activities as well
as establish its own in-house telemarketing facility.
The Company has launched a limited televised marketing program to increase its
independent sales force. In May 1996, the Company, through its wholly owned
subsidiary, Long Distance Direct Marketing, Inc. entered into an arrangement
with Guthy-Renker Distribution, Inc., an infomercial producer and promoter, to
produce and market a thirty minute infomercial selling the right to become an
independent sales representative of the Company. Under this contract, the
Company is responsible for financing the cost of production of the infomercial
program, while Guthy-Renker is responsible for financing both the cost of media
and the costs of fulfilling the orders procured by the infomercial. The film was
completed, and test marketing commenced, in the last quarter of 1996. The
Company commenced broadcast of the infomercial in January 1997, with a view to
generating substantial numbers of additional independent sales representatives.
There can be no assurance, however, that such roll-out will be successful or
that representatives recruited by this method will generate significant levels
of telephone service for the Company.
In November 1996, the Company signed a mutually exclusive agreement with Kaire
International, a multi-level marketing company, to supply telephone service to
that company's registered associates and through those associates to the public
at large. There can be no assurance, however, that Kaire will be successful in
selling the Company's service to those associates or that the associates
themselves will be successful in selling such service to the public at large.
In January 1997, the Company signed a mutually exclusive agreement with National
Benefits Consultants, LLC ("NBC"), a company in alliance with Deloitte & Touche
LLP, under which NBC will market the Company's telecommunications services to
audit clients of Deloitte & Touche LLP and other commercial entities. There can
be no assurance, however, that NBC will be successful in selling LDDI's services
pursuant to this agreement.
In the first quarter of 1996, Congress passed legislation allowing the entry of
long-distance carriers into the local market and local carriers into the long
distance market to foster greater competition within the telephone industry.
While this may lead to increased competition for the Company in the long
distance market from local carriers, management plans to enter into the local
market in order to increase its overall market share. The Company is presently
in the process of obtaining certification to provide local service to its
customers.
The Company also entered the residential market in 1996. Previously, the Company
sold exclusively to commercial customers. The Company has signed an agreement
with MCI which allows the "LECs" (Local Exchange Carriers) to bill and collect
on behalf of the Company. It is anticipated that the majority of new business
generated from the Company's televised marketing program will be residential
where customers prefer to receive both local and long distance usage on one
monthly bill. The Company believes that commercial customers are more open to
receiving separate bills for local and long distance service.
Management believes that the Company's systems, which were further upgraded in
1995 to provide quicker response times for customer service and collection
functions, are capable of supporting the anticipated growth in the Company's
revenues. There can be no assurance, however, that the Company's systems will be
capable of handling such growth, if any.
14
<PAGE> 19
Gross profit was $1,660,000 and $2,123,000 for the twelve months ended December
31, 1996 and 1995, respectively. As a percentage of net sales, the gross profit
margins for the twelve months ended December 31, 1996 and 1995 were 31% and 27%,
respectively. The percentage increase is due to two factors: extremely favorable
pricing received by the Company under its 1996 contract with MCI; and the loss
of the Company's largest customer, L.C. Wegard and Company, in October 1995.
Since the Company had granted promotional rebates to this customer in 1995, the
result was slimmer profit margins in 1995.
For the period September 1994 through August 1995, the Company operated under an
individually negotiated contract tariff with AT&T for outbound long distance
service. This contract had a three year term and required the purchase of
$1,200,000 per quarter of SDN (Software Defined Network) and DNS (Distributed
Network Service) usage. The Company received volume discounts based on its level
of usage. The Company's previous contract with AT&T dated September 1, 1995,
encompassed both outbound and inbound service and was set at a fixed term of
four years with a one-year extension. The Company recently entered into a new
four-year contract tariff with AT&T -- which superseded all previous contracts
with AT&T -- which became effective March 1, 1997 for the supply of inbound and
outbound telephone service. The Company's minimum quarterly purchase requirement
remains constant at $1,200,000 in years one to three and increases to $1,475,000
in year four. Failure to achieve the minimum will require payment of the
shortfall by the Company. Under the contract tariff, the Company is obligated to
make payments equal to its minimum purchase requirement for the outstanding term
of the agreement if there is an early termination thereof. The Company has
received more favorable pricing from AT&T on both domestic and international
usage under the new contract. In addition, AT&T has agreed to issue a credit
waiving the entire cumulative shortfall charged under the previous contract
(approximately $2.3 million as of December 31, 1996, none of which has been
reflected in the Company's financial statements included herein) within thirty
days after the Company discharges its past due obligation to AT&T of $140,000,
which amount is scheduled to be paid by June 1, 1997.
On March 1, 1996 the Company signed an individually negotiated agreement with
MCI under which the Company is authorized to resell various MCI services,
including outbound long-distance and local long distance, inbound long-distance,
calling cards, debit cards, teleconferencing and MCI enhanced services. The
agreement, which was amended in September 1996, is subject to an eighteen month
ramp period followed by a thirty month service period and superseded a prior
agreement signed August 1995 under which MCI was unable to provide service as a
result of software problems between MCI and the LECs.
During the first eight months of the ramp period, the Company has no minimum
purchase obligations. During the ninth through twelfth months, the Company is
obligated to purchase $250,000 of usage per month; during the thirteenth through
fifteenth month, $500,000; during the sixteenth through eighteenth month,
$750,000; and during the thirty month service period, $1,000,000 per month. In
the event that the Company fails to meet its minimum purchase requirements, it
must pay MCI 15% of the difference between the amount used and the respective
minimum monthly requirement.
The MCI agreement is subject to increases and decreases in the rate of discount
offered to the Company, depending on the proportion of "new business" (currently
non-MCI business) in the Company's total usage. During the first six months of
the agreement, either the Company or MCI may terminate the agreement at will,
with no penalty. Since this six month period has expired with no notice of
termination by either party, the agreement is to run for the full forty-eight
(48) month term.
Prior to February 28, 1996, MCI had been unable to provision the Company's
customers. Subsequent to March 31, 1996, MCI commenced providing service and the
benefit of this was reflected in the Company's revenues beginning in the second
quarter. In consideration of its inability to provide service under the August
1995 contract prior to December 31, 1995, MCI agreed to compensate the Company
in the form of a service credit in an amount not to exceed $1,000,000, to be
applied against its initial usage under the March 1996 contract.
Sales and marketing expenses were $380,000 and $519,000 for the twelve months
ended December 31 1996 and 1995, respectively. As a percentage of gross sales,
sales and marketing expenses were 7% and 6% for the twelve months ended December
31, 1996 and 1995, respectively. The percentage increase is attributable
partially to lower sales in 1996 and partially to one-time adjustments made at
September 30, 1995. The Company wrote off amounts due one of its telemarketers
of $109,816 after it ceased doing business with this telemarketer. The Company
also wrote off $75,000 of commission payable to its independent sales agents who
are no longer active. Management plans to resume its acquisition of accounts
upon receipt of adequate additional funding and plans to pursue marketing
techniques more aggressively to increase its customer database and revenues. The
Company intends to establish its own in-house telemarketing facility, has
launched
15
<PAGE> 20
a televised marketing program during 1996 to increase its independent sales
force and has resumed its direct mail activity.
General and administrative expenses were $2,942,000 and $2,700,000 for the
twelve months ended December 31, 1996 and 1995 respectively. As a percentage of
gross sales, general and administrative expenses for the twelve months ended
December 31, 1996 and 1995 were 55% and 32% respectively. Total general and
administrative expenses were reduced by $108,000 at December 31, 1996, which
represented a writeoff of amounts payable to two former partners of the Company
when litigation was settled in the third quarter. The principal elements which
contributed to the increase in general and administrative expenses are mainly
related to the Company's expansion of its resources in anticipation of increased
levels of sales, and expenditures incurred in connection with the Company's plan
to significantly reduce its levels of debt by December 31, 1996. Costs incurred
in 1996, but not in 1995 include increased audit and financial printing fees due
to heavier SEC reporting requirements and increased legal fees incurred to
settle outstanding litigation.
Interest expense for the twelve months ended December 31, 1996 and 1995 was
$749,000 and $376,000 respectively. For the twelve months ending December 31,
1995, interest expense related to accrued interest on indebtedness of the
Company in connection with a note incurred in relation to the purchase of the
partnership interest of two of the original limited partners in LDDLP, and
various financing agreements entered into in 1994 to finance the Company's
working capital requirements. The note payable related to the partnership buy
out was paid off in the third quarter of 1996 when litigation was settled. In
addition, a majority of the Company's outstanding loans were converted to
equity. In the last two quarters of 1996, shares were issued to shareholders of
the Company in consideration for loans made to the Company. Non-cash interest
expense in the amount of $553,000 was recorded as a result of these
transactions. Loans payable in the amount of $500,000 were converted to equity
during the first three quarters of 1996, while another $850,000 of loans were
converted to equity in the last quarter of 1996. Interest expense for the twelve
months ended December 31, 1996 also includes interest paid to taxing authorities
as a result of a program undertaken by the Company to discharge old outstanding
tax liabilities.
The Company incurred a net loss of $2,401,000 for the twelve months ended
December 31, 1996 compared to a net loss of $1,875,000 for the twelve months
ended December 31, 1995. For the twelve months ending December 31, 1995, costs
of $407,000 were written off in connection with an initial public offering which
had been planned for the beginning of 1995 but which did not take place. These
amounts had been largely incurred during 1994 but not expensed during that year
and are non-operational in nature. For the twelve months ended December 31,
1996, non-cash interest expense in the amount of $553,000 was recorded when
shares were sold to shareholders of the Company as consideration for such
shareholders making loans to the Company. This expense is non-recurring and
non-operational in nature.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had positive working capital of $975,429
compared to negative working capital of $3,485,246 at December 31, 1995. The
Company experienced cash constraints throughout 1995 and nearly all of 1996 as a
result of the abandonment of its plans to effect an initial public offering,
insufficient revenues and other factors. Due to these cash constraints,
management was unable to undertake an active pursuit of new accounts from
outbound telemarketing firms or from direct mail, as a result of which revenues
progressively declined through customer attrition. To deal with this problem the
Company took steps to improve its liquidity by effecting a recapitalization in
October, 1995 which enabled it to undertake private placements of its common
stock in the last quarter of 1995 and throughout 1996.
In addition to selling shares of its common stock to provide required working
capital, and as part of the recapitalization, a majority of the Company's loans
which had been outstanding at December 31, 1994 were converted to equity at
December 31, 1995. All other loans were either repaid or converted into equity
prior to December, 1996. In the third quarter of 1996, litigation related to a
buy out of two former partners was settled, and, as a result, the corresponding
actual and contingent indebtedness was canceled.
BUSINESS
Long Distance Direct Holdings, Inc., which was formerly known as Golden Ark
Inc., was inactive until October 6, 1995, when it acquired all of the
outstanding stock of Long Distance Direct, Inc. ("LDDI") and LDDI became a
wholly owned subsidiary of the Company. LDDI is a New York corporation which was
formed in 1991 for the purpose of acting as the general partner of Long Distance
Direct L.P. ("LDDLP" or the "Partnership"), a New York limited partnership
formed at
16
<PAGE> 21
the same time for the purpose of carrying on the business of a
non-facilities-based reseller of long-distance telephone service.
In October 1995, LDDI acquired all of the partnership interests of LDDLP in
exchange for shares of LDDI common stock. After its acquisition of LDDI, Golden
Ark, Inc. changed its name to Long Distance Direct Holdings, Inc. ("LDD
Holdings"). In May, 1996, LDDH Holdings formed Long Distance Direct Marketing,
Inc., a New York corporation. ("LDDM") as a wholly-owned subsidiary for the
purpose of producing and marketing a televised infomercial designed to recruit
additional independent sales representatives. References herein to the Company,
to LDDI or to LDDM shall mean LDD Holdings, LDDI and LDDM collectively unless
the context otherwise requires. The financial statements included elsewhere
herein relate to the business which was known as LDDLP prior to the acquisition
of LDDLP by LDDI and the subsequent acquisition of LDDI by LDD Holdings.
The Company's offices are located at One Blue Hill Plaza, Pearl River, New York
10965. The Company's telephone number is 914-620-0765.
GENERAL
Long Distance Direct Holdings, Inc. is a non-facilities-based, or "switchless",
reseller of outbound and inbound long distance telephone, teleconferencing,
cellular long distance and calling card services to small and medium-sized
commercial customers and residential customers. All of the services sold by the
Company are currently provided either by AT&T or by MCI. Management believes
that AT&T and MCI's long-distance service remains the preferred option of the
majority of telephone users. According to a 1995 FCC report, AT&T and MCI
accounted for approximately 56% and 17% respectively of total domestic
long-distance revenue for calendar year 1994. The Company signs up customers and
connects or provisions them onto the network of AT&T or MCI, which provide the
actual transmission service. The Company has agreements with AT&T and MCI to
purchase a minimum annual level of long distance telephone service at discounted
bulk rates which are lower than rates LDDI's customers, with modest call volume,
would be able to obtain for themselves. The Company does not own or lease any
telephone equipment or participate in the call completion process. Provision of
the service to the customer requires no equipment installation or modification
on the customer's premises; all action to provide the service takes place within
the local and inter-exchange carriers. The customer retains his existing
telephone numbers and incurs no expense in making the decision to switch to the
services of the Company.
MARKETING AND SALES
The Company obtains customer orders through three separate methods typically
employed by sellers and resellers of telephone services: field sales,
telemarketing, and direct mail. Until the beginning of 1994, over 95% of the
Company's billings related to field sales, with the balance coming from
customers who had responded to the Company's direct mail programs. In January
1994, however, the Company commenced a program of outbound telemarketing, and in
June 1994 it increased the volume of its direct mail activity. Currently,
approximately 29% of the Company's billings are derived from field sales using a
system of self-employed independent sales representatives, who are contractually
restricted from performing such services for competitors of LDDI, approximately
64% are derived from telemarketing using a number of outside telemarketing
agencies specialized in the sale of telephone services on a non-exclusive basis,
and the remainder are derived from direct mail programs. The Company intends to
increase its direct mail marketing efforts and to establish its own in-house
telemarketing capability. The Company also test marketed a televised marketing
program during the fourth quarter of 1996 to attract additional participants to
its independent sales force and has started to roll out such program in January
1997. There can be no assurance, however, that such roll out will be successful
or that independent sales agents recruited thereby will significantly increase
the level of the Company's billings.
The Company's field sales force is based on a system of independent sales
representatives, all of whom are self-employed. All sales representatives are
compensated on a commission-only basis. Commissions are payable to
representatives based on actual monies collected by LDDI which can be attributed
to specific customers. LDDI's current active sales force numbers about 20
individuals. Management is considering a number of new methods of recruiting
field sales representatives including the televised marketing programs referred
to above. LDDI has prepared a comprehensive manual for use by sales
representatives as a training tool for reference on the job. LDDI also generates
sales through direct mail programs, backed up by a small in-house telemarketing
department. Until June 1994, this activity comprised exclusively the sending of
direct mail packages to small businesses, inviting them to telephone LDDI's own
800-number, and incorporating a special discount offer, with conversions of
inquiries being carried out by an inbound telemarketing team. In June 1994, the
Company commenced another direct mail approach requiring customers to complete
and send in a written sales order, with follow-up
17
<PAGE> 22
information being obtained by the Company's in-house telemarketing department.
The results of the various programs that have been carried out to date have
generated sufficient response to lead management to seek to expand the Company's
direct mail activity.
In January 1994, in order to market its services to small business users, the
Company contracted with a telemarketing company specializing in the solicitation
of orders for long-distance telephone services on behalf of resellers. The first
billings attributable to customers introduced by this company were generated in
February 1994. Since such date, the Company contracted with a number of
additional telemarketing agencies, similarly specialized in the sale of
telephone services, to market its services. The telemarketing agencies are
compensated principally by the payment of an up front fee based on successfully
provisioned orders and average per customer billing levels. Payments on account
are made on delivery of a validated order to the Company with ongoing
reconciliation and adjustment in light of results achieved. The Company now
intends to supplement the efforts of the outside agencies by establishing an
in-house outbound telemarketing department.
In November 1996, the Company signed a mutually exclusive agreement with Kaire
International, a multi-level marketing company, to sell telephone service to
that company's associates and through those associates to the public at large.
There can be no assurance, however, that Kaire will be successful in selling
LDDI's service to those associates or that the associates themselves will be
successful in selling such service to the public at large.
In January 1997, the Company signed a mutually exclusive agreement with National
Benefits Consultants, LLC ("NBC"), a company in alliance with Deloitte & Touche
LLP, under which NBC will market the Company's telecommunications services to
audit clients of Deloitte & Touche LLP and other commercial entities. There can
be no assurance, however, that NBC will be successful in selling LDDI's services
pursuant to this agreement.
TELEVISED MARKETING PROGRAM
Historically, the Company has obtained customer orders through three separate
methods typically employed by sellers and resellers of telephone services: field
sales, telemarketing and direct mail. At the outset, the Company employed the
field sales method exclusively. Although this method was successful, and
generated sales characterized by lower bad debt and customer attrition levels
than, for example, telemarketing or direct mail, it had as principal drawbacks
the facts that (i) the recruitment of independent sales representatives proved a
time-consuming and expensive procedure and (ii) the Company, in common with
other resellers of telephone services, experienced a high level of turnover
amongst its representatives.
In order to procure the advantages of sales generated by independent
representatives without the drawback of high turnover of personnel, the Company
conceived the idea of recruiting independent representatives in large numbers
through paid television programming, and to mitigate the cost of recruitment by
requiring the new representatives to pay a modest sum to purchase the right to
become independent sales representatives of the Company. The method chosen to
achieve this objective was the infomercial, a paid television program used
extensively by the direct marketing industry.
To this end, the Company, through its wholly-owned subsidiary, Long Distance
Direct Marketing Inc, entered into a contract in May 1996, with Guthy-Renker
Distribution Inc. ("Guthy-Renker"), an infomercial producer and promoter in the
United States, to produce and market a thirty minute infomercial selling the
right to become an independent sales representative of the Company. Under this
contract, the Company is responsible for financing the cost of production of the
infomercial program, while Guthy-Renker is responsible for financing both the
cost of media and the costs of fulfilling the orders procured by the
infomercial.
The net profit, if any, generated by the infomercial, comprising the revenues
from the sale of "sales packages" to members of the public, less the costs of
production, media and fulfillment, is to be split evenly between Guthy-Renker
and the Company. All billings of telephone service generated for the Company by
representatives recruited through the infomercial are to accrue to the sole
benefit of the Company, subject to the payment to Guthy-Renker of a commission
of 2% on cash collected from such billings, net of taxes. In addition, for every
$5,000,000 of gross revenue, excluding taxes, received by the Company from the
sale of telephone services by the Company's sales agents recruited through the
infomercial, Guthy- Renker shall receive, at its option, either (i) a number of
shares of the Company's Common Stock determined by dividing $100,000 by an
amount equal to 75% of the closing bid price of a share of the Company's Common
Stock on the day immediately preceding the delivery to the Company of written
notice of Guthy-Renker's election to receive such shares, or (ii) $100,000 cash.
The Company has agreed to grant "piggyback" registration rights to Guthy-Renker
with respect to any shares of the Company's Common Stock issued to Guthy-Renker
under the contract.
18
<PAGE> 23
Test marketing of the infomercial took place in late September and October 1996
and achieved a level of success such that the Company and Guthy-Renker decided
to roll out the program in the first quarter of 1997. Such roll-out commenced in
January 1997. There can be no assurance that the roll-out will also be
successful, nor can there be any assurance that representatives recruited by
this method will generate significant levels of billings of telephone service
for the Company.
MULTI-LEVEL MARKETING
In November 1996, the Company signed an agreement with Kaire International, a
multi-level marketing company, to supply telephone service to that company's
registered associates and through those associates to the public at large. Kaire
International has historically been a health and body care company and there can
be no assurance that its efforts on the Company's behalf will be successful in
the telecommunications market.
The agreement with Kaire, which is mutually exclusive and which in its initial
period runs to December 31, 1999, provides that LDDI will supply a full range of
telecommunications services on the AT&T and MCI networks which will be
co-extensive with the services offered by AT&T and MCI. In addition to providing
telephone service, LDDI will work with Kaire to develop suitable marketing
materials as well as to provide training for all Kaire associates. LDDI will
make available all training aids for Kaire at a mutually agreeable price. LDDI
retains ultimate exposure for Kaire's uncollected billings though Kaire will
mitigate bad debt through offsets against commissions due by Kaire to the
end-subscriber.
There can be no assurance that Kaire will be successful in selling LDDI's
service to its associates or that those associates themselves will be successful
in selling such service to the public at large.
NATIONAL BENEFITS CONSULTANTS/DELOITTE & TOUCHE LLP
In January 1997, the Company signed an agreement with National Benefits
Consultants, LLC ("NBC"), a company in alliance with Deloitte & Touche LLP,
under which NBC will market the Company's telecommunications services to audit
clients of Deloitte & Touche LLP and other commercial entities. NBC was
established in order to review costs and expenses incurred by clients of
Deloitte & Touche LLP, initially in the medical expenses field but subsequently
on a wider basis, and to make recommendations for alternate sourcing of certain
products and services so as to reduce the cost burden on those clients.
The agreement with NBC, which is mutually exclusive and which runs to December
31, 2001, provides that LDDI will supply a full range of telecommunications
services to companies and businesses introduced to it by NBC. In respect of
billings to such companies and businesses, NBC will be entitled to compensation
not exceeding 10% of cash receipts therefrom, net of taxes. Additionally, the
Company has granted to NBC an option to purchase up to 20% of the Company's
stock at $3.00 per share. The actual percentage that may be purchased under this
option will be determined by reference to the proportion that revenues from
customers introduced by NBC bear to LDDI's total revenues for the twenty four
months prior to exercise of the option. The option may not be exercised prior to
thirty months from the date of the agreement except in certain specified
circumstances, the principal of which is any acquisition of the Company by a
third party. In January 1997, LDDI entered into a referral agreement expiring
December 31, 2001 with NBC whereby LDDI will receive a percentage compensation
from NBC for those LDDI customers who purchase NBC services. There can be no
assurance that NBC will be successful in selling LDDI's services pursuant to the
agreement.
SERVICES PROVIDED
AT&T
The Company currently resells to its customers AT&T outbound and inbound
long-distance telephone service, including teleconferencing, cellular
long-distance and calling card services. Outbound service had, until September
1994, been provided exclusively under the Company's Software Design Network
("SDN") agreement with AT&T, but such service is now also provided on
Distributed Network Service ("DNS"). The Company's pricing to its customers for
the two services is identical, but DNS can be provisioned considerably faster
than SDN.
In February 1997, the Company signed a four-year negotiated contract tariff with
AT&T effective March 1, 1997 that supersedes the Company's prior contract with
AT&T dated September 1, 1995. Under the new contract the Company has been
granted more favorable pricing on both domestic and international usage.
19
<PAGE> 24
Customers may also request a calling card. This allows use of the telephone
system either through off network dialing using an 800-number access or through
the traditional "zero plus" access method. The calling cards have been designed
to the Company's own specifications and are issued subject to the condition that
the liability for usage thereunder remains that of the end-user unless and until
loss is reported to LDDI. In turn, LDDI has an on-line connection with AT&T's
Network Remote Access Monitoring System. Once LDDI has reported a loss or theft
to AT&T, LDDI has no further liability for usage on the lost or stolen card. The
Company is able to set and vary thresholds and usage parameters that have been
designed by AT&T to facilitate early detection of calling card theft or abuse.
MCI
Since March 1996 and pursuant to contracts signed in August 1995 and March 1996,
the Company has also commenced the resale of MCI outbound and inbound
long-distance telephone service, including teleconferencing, cellular
long-distance, calling card and debit card services. Under the calling card
arrangements, customers may access the Company's network either through an
800-number or through "zero Plus" dialing. In the case of calling cards under
the MCI contract, MCI retains full liability for fraudulent use. Provisioning of
customers onto the MCI network is done directly by the Company in conjunction
with the Local Exchange Carriers.
Whereas, under its arrangements with AT&T, the Company is permitted to sell only
to commercial customers, the MCI contract permits resale to both the commercial
and the residential markets. Furthermore, the pricing of the MCI contract makes
residential sale a realistic and financially attractive proposition. Finally,
with respect to the resale of MCI service, the Company is able to offer its
customers the alternative of billing through their Local Exchange Carrier. This
is believed to be important in relation to the residential market, which is
considered to be less willing than the commercial market to receive separate
monthly long distance bills.
SUPPLY OF SERVICE
Neither the outbound service nor the inbound service provided on the AT&T or MCI
networks requires any equipment installation or modification on the customer's
premises; all action to provide the service takes place within the local and
inter- exchange carriers. The customer retains his existing telephone numbers
and incurs no expense in making the decision to switch to the Company's service.
The Company provides its customers with services at a price which management
believes, because of the average customer's calling volume, would generally be
unavailable to such customers.
The Company's administrative and accounting systems are structured to address
the two principal areas of activity in the Company's business and their
financial and operational interface: the sales division and the customer account
base. With three separate sources of new orders, and a customer base that more
than doubled in 1994, management believes that the continued development and
structural integrity of the business depends on fundamentally sound
administrative and operating systems.
In recognition of this, the Company's management from the outset established a
computerized database under the direction of an outside computer consultant.
This database records and tracks all new sales representatives, together with
their reporting hierarchies, to enable monthly commission statements to be
derived from data supplied electronically from AT&T and MCI, and to respond to
all personnel questions. Additionally, the database records and implements all
activity from the outside telemarketing agencies, from order entry through
submission of orders to AT&T or the Local Exchange Carriers (in the case of MCI
services) to production of the data needed to effect monthly accounting
reconciliations with those agencies. The database tracks and implements order
entry and analyzes the performance of the various direct mail programs. It also
records all customers, together with their sales representative or other
introductory source attribution, and allows both direct electronic interface
with the Company's external billing agency for billing and collection purposes
and for internal interrogation for customer service purposes.
To support this function, LDDI has established computer-based operating
procedures that track each new customer through its provisioning sequence with
AT&T and the Local Exchange Carriers (where MCI service is concerned), enabling
LDDI to respond systematically and promptly to the reports generated by AT&T and
the Local Exchange Carriers on provisioning progress. In addition, LDDI operates
a customer service function as well as a dedicated credit control function.
Insofar as the Company is marketing services that are available from a wide
range of alternative suppliers, the high level of customer service that it can
offer is an area in which management believes the Company can outperform its
competitors. In this regard, as evidence of its responsive administrative
systems, the Company has a policy of calling its customers on a rotating basis
20
<PAGE> 25
to establish the level of their satisfaction with the Company's service and to
identify and attend to any additional needs that they might have.
Through March 1996, the Company's billing was performed on its behalf by
American College and University Systems ("ACUS"), a strategic business unit of
AT&T that provides resellers with a customized long-distance billing service
known as the "AT&T Bill Manager Service." The Company established its own
tariffed pricing elements and used the ACUS service to bill end-users at its
designated tariffed rates.
From monthly billing tapes and feeds supplied directly by AT&T, ACUS produced
and delivered invoices to all end-users in the Company's name, and end-users
remit payments directly to the Company through a "lock box" set up by the
Company. By using the services of ACUS, the Company was able to avoid the
labor-intensive administration of performing the billing function itself during
a period of strong account growth while retaining control over its pricing,
billing and collection policies. The Company negotiated a release without
penalty from its contract with ACUS, capable of implementation at any time after
July 1995, in order to be able to use the services of a billing company that was
both less expensive and better interfaced with the Company's computer systems.
To that effect, the Company entered into an agreement with Digital
Communications of America Inc. ("DCA") under which DCA provides billing services
to the Company in respect of both AT&T and MCI service. The first DCA bills were
generated in April 1996. The Company has also signed an agreement with MCI which
allows the Local Exchange Carrier to bill and collect on behalf of the Company.
The Company may also in the future consider employing its own billing personnel
if and when it believes that the financial benefits of so doing will outweigh
the practical difficulties involved.
The Company's overall operational strategy is based on management's belief that
the sales function is highly dependent upon the strongest possible
administrative support. The lack of such support would result in a failure to
motivate and retain sales people or respond to the needs of the outside
telemarketing agencies, customer dissatisfaction, and the loss of revenues
through inefficiencies and inattention. Management believes that the Company's
attention to this area of its operations distinguishes it from much of its
competition.
ARRANGEMENTS WITH PROVIDERS
AT&T
The Company commenced operations under Part II of AT&T's SDN tariff, a generic
tariff relating to outbound long-distance service only, and available to both
end-users and resellers satisfying AT&T's requirements both for usage commitment
and cash deposit for security purposes. Under this tariff, AT&T's customers,
which included the Company, receive a discount from published tariff rates in
return for the commitment and deposit referred to above. In December 1992, the
Company entered into a new five-year agreement with AT&T under Part VI of the
SDN tariff pursuant to which it increased its annual usage commitment in return
for the higher discounts available thereunder.
Effective September 7, 1994, the Company entered into an individually negotiated
contract tariff with AT&T for outbound long-distance service. This contract
tariff, which superseded the Company's arrangements under Part VI of the SDN
tariff, was the subject of an individual filing by AT&T with the FCC, and had a
three year term. Under this contract tariff AT&T agreed to supply the Company,
and the Company acquired the right to resell, both SDN and DNS service.
Effective September 1, 1995, the Company entered into a new
individually-negotiated contract for a fixed term of four years with a one year
extension at the Company's option. This tariff, which superseded all the
Company's other arrangements with AT&T embraced both outbound and inbound
long-distance service. Under the contract tariff, the Company had accepted a
minimum purchase requirement under which it was obligated to pay such minimum
regardless of whether its usage reached such levels. The minimum purchase
requirement was a constant amount throughout the duration of the contract
tariff. The minimum quarterly purchase requirement in respect of outbound
service, SDN and DNS combined, for each of the sixteen quarters of the contract
tariff, and for the four subsequent quarters if the Company elected to exercise
its extension option, was $1,200,000 per quarter. Also included within the
contract tariff was a requirement that a specified minimum proportion of each
quarter's usage relate to "new business", i.e. currently non AT&T business.
Until October 1992, the Company offered only outbound service to its customers:
in that month the Company started to offer its customers AT&T inbound 800-number
service through a third-party intermediary provider. However, in November 1993,
the Company ended its arrangement with the third-party provider and contracted
directly with AT&T under CSTP
21
<PAGE> 26
II, a generic tariff, to enable it to resell inbound 800-number service. In
April 1994, the Company signed a three-year individually-negotiated contract
tariff with AT&T, effective May 1, 1994, for the supply of 800-number inbound
telephone service with volume discounts in excess of those available under CSTP
II, in return for a minimum annual purchase requirement of $1,200,000. AT&T had
advised the Company that this contract tariff was the first
individually-negotiated contract tariff ever signed for inbound 800 service.
Effective September 1, 1995, this contract tariff was superseded by the new
individually-negotiated contract tariff described above in relation to the
Company's outbound service. Under this tariff, which embraced both outbound and
inbound long-distance service, the Company continued to have a minimum annual
purchase requirement of $1,200,000 for inbound usage. In February 1997, the
Company entered into a new four-year contract tariff with AT&T effective March
1, 1997 for the supply of inbound and outbound telephone service. The new
contract supersedes the Company's prior contract with AT&T dated September 1,
1995. The Company's minimum quarterly purchase requirement remains constant at
$1,200,000 in years one to three and increases to $1,475,000 in year four.
Failure to achieve the minimum will require payment of the shortfall by the
Company. Under the contract tariff, the Company is obligated to make payments
equal to its minimum purchase requirement for the outstanding term of the
agreement if there is an early termination thereof. The Company has received
more favorable pricing from AT&T on both domestic and international usage under
the new contract. In addition, AT&T has agreed to issue a credit waiving the
entire cumulative shortfall charged under the old contract (approximately $2.3
million as of December 31, 1996, none of which has been reflected in the
Company's financial statements included herein) within thirty days after the
Company discharges its past due obligation to AT&T of $140,000, which amount is
scheduled to be paid by June 1, 1997.
MCI
On August 4, 1995, the Company signed an individually-negotiated agreement with
MCI under which the Company is authorized to resell various MCI services,
including outbound long-distance and local long-distance, inbound long distance,
calling cards, debit cards, teleconferencing and MCI enhanced services. This
agreement was subject to an eight (8) month ramp period followed by a thirty-six
(36) month service period. In March 1996, the Company signed another
individually negotiated contract with MCI, and an amendment thereto in September
1996, which superseded the contract of August 1995. This new contract, which
requires higher minimum purchase levels than the prior agreements but affords
better prices, is subject to an eighteen (18) month ramp period followed by a
thirty (30) month service period.
During the first eight months of the ramp period, the Company has no minimum
purchase obligations. During the ninth through twelfth months, the Company is
obliged to purchase $250,000 of usage per month; during the thirteenth through
fifteenth month, $500,000; during the sixteenth through eighteenth month,
$750,000; and during the thirty month service period, $1,000,000 per month. In
the event that the Company fails to meet its minimum purchase requirements, it
must pay MCI 15% of the difference between the amount used and the respective
minimum monthly requirement.
The agreement is subject to increases and decreases in the rate of discount
offered to the Company, depending on the proportion of "new business" (currently
non-MCI business) in the Company's total usage. During the first six months of
the agreement either the Company or MCI may terminate the agreement at will,
with no penalty. Since this six (6) month period has expired with no notice of
termination by either party, the agreement is to run for the full forty-two (42)
month term.
In consideration of its inability to provide service under the August 1995
contract prior to December 31, 1995, MCI agreed to compensate the Company in the
form of a service credit in an amount not to exceed $1,000,000 to be applied
against its initial usage under the March 1996 contract.
RECENT DEVELOPMENTS
On September 24, 1996, AT&T introduced a single-rate calling plan for domestic
residential long-distance calls, under which it would charge a flat rate of
fifteen cents ($.15) per minute. The Company's current business involves almost
exclusively the resale of AT&T and MCI telephone service to commercial
customers. The AT&T introduction has no direct effect on the Company's current
commercial business or any expansion of its service to commercial customers, and
based on industry experience the Company does not believe that AT&T's
introduction of a new residential plan suggests an imminent introduction of a
similar commercial plan.
22
<PAGE> 27
The Company has recently entered the residential market through the resale of
MCI telephone service to residential customers. Since the Company neither
resells nor has any plans or arrangements to resell AT&T service to residential
customers, it considers the potential impact upon the Company of the AT&T
introduction to be limited to the pricing environment in which the Company
markets residential telephone service.
The AT&T single-rate calling plan is described by AT&T as designed to simplify
long distance pricing and ease consumer confusion. It is not described by AT&T
as a rate reduction and, based on its knowledge of AT&T's existing rate plans,
the Company does not consider the new AT&T plan to embody a rate reduction. The
Company believes that it is offering and will be able to continue to offer
residential telephone service at prices significantly lower than AT&T's proposed
flat rate and that the introduction of AT&T's single rate calling plan will not
have any material adverse affect on the business of the Company or on the
Company's marketing plans for residential service.
No assurances, however, can be given that either the Company will remain able to
offer residential telephone service at prices significantly lower than AT&T and
certain of the Company's other major competitors or that AT&T or such other
major competitors will not introduce new commercial telephone service plans.
CUSTOMERS
At December 31, 1996, the Company had over 10,000 active billing customers.
Customers generated by field sales activity are predominately based on the
Eastern seaboard; those generated either by telemarketing or by direct mail have
no particular geographic bias. Through December 31, 1995, the Company's customer
base was exclusively commercial and contained no residential element. It covers
almost every generic field of business activity in the United States. In the
second quarter of 1996, the Company began marketing to residential customers. No
single current customer represented more than 3% of billings for the year ended
December 31, 1996.
COMPETITION
The long-distance telecommunications market is highly competitive. The Company
does not believe it is a significant factor in the industry. The principal
competitive factors affecting the Company's market share are pricing, customer
service and value-added services such as customized billing, teleconferencing,
calling cards and prepaid calling cards. The Company's ability to compete
effectively will depend upon its continued ability to maintain high quality,
market-driven services at prices generally equal to or below those charged by
its competitors. The long-distance carriers which sell in competition with the
Company include MCI, Sprint, and AT&T itself. Resellers which sell in
competition with the Company include Long Distance Discount Services, LCI
International, Inc., U.S.Tel Inc., Excel Communications, Protel Communications
Corp., Equalnet, Midcom, Tel-Save and Pacific Coin. Of the resellers, some are
switchless and some have their own switches and leased lines: some sell services
of both AT&T and other long-distance carriers. Among the resellers, management
believes that LDDI is one of only a few to market AT&T long distance services
under a direct contractual relationship with AT&T. Management has also been
informed that the Company is one of only a limited number of resellers to be
granted a resale contract by MCI.
Price competition in the long-distance telecommunications industry has increased
in recent years due to the entry of many companies into the market. Management's
policy for gaining and retaining customers is based on four principal
components: first, marketing only premier quality long-distance services, such
as those provided by AT&T and MCI; second, offering rates for telephone usage
that are at least comparable with, and in many cases less expensive than, those
generally available to its target market; third, developing and maintaining
responsive information systems that enable customer service to be carried out on
a timely and efficient basis; and fourth, staff training programs that teach
personnel how to handle customer concerns both efficiently and courteously.
INDUSTRY BACKGROUND
On January 1, 1984, AT&T's divestiture of the Bell System went into effect. As a
result of the decree ordering such divestiture by AT&T (the "AT&T Divestiture
Decree"), AT&T was forced to divest its 22 Bell Operating Companies ("BOCs"),
which were reorganized under seven Regional Bell Operating Companies ("RBOCs"),
such as Pacific Telesis and US West, Inc. The RBOCs own and are responsible for
operations of the BOCs in each of their regions. The BOCs, as well as other
independent companies which provide local telephone service, are characterized
as local exchange carriers.
23
<PAGE> 28
The local exchange carriers are responsible for providing dial tone, local lines
and billing for local service as well as local access for long-distance traffic.
As an additional part of the AT&T Divestiture Decree, the United States was
divided into approximately 200 Local Access and Transport Areas ("LATAs"). AT&T
was given the right to compete for inter-LATA long-distance business, but was
prohibited from providing intra-LATA long-distance and local service. The BOCs
and other local exchange carriers were permitted to compete for intra-LATA
long-distance and local service, but were prohibited from entering the
inter-LATA long-distance market in which the Company competes, although
legislation has since been enacted permitting the BOCs and other local exchange
carriers to compete in the long-distance market and allowing AT&T and other
inter-exchange carriers to compete in the local markets.
The AT&T Divestiture Decree also required the local exchange carriers to provide
all inter-exchange carriers with access to local telephone exchange facilities
that are "equal in type, quality and price" to that provided to AT&T. In
addition, the local exchange carriers were required to conduct a subscription
process allowing consumers to select their long distance carrier. This
development, know as "equal access," enabled consumers to complete calls using
their selected long-distance carrier by simply dialing "1" plus the area code
and number. Prior to equal access, consumers using an inter-exchange carrier
other than AT&T had to dial a local number, then an access code, then the area
code and number of the call destination to complete a call. With equal access,
all inter-LATA traffic is carried by the local exchange carriers. The AT&T
Divestiture Decree and the implementation of equal access constitute the
fundamental regulatory developments that allow inter-exchange carriers other
than AT&T to enter and compete in the long-distance telecommunications market.
Since the AT&T Divestiture Decree, the long-distance industry has experienced
rapid technological development. One significant technological change was the
advent of digital transmission technology, which represented an improvement over
analog technology. Because the BOCs and many local exchange carriers converted
rapidly to digital switches, digital technology was necessary for inter-exchange
carriers to connect to the local exchange carriers for equal access.
Accompanying the movement toward digital switching was the rapid development and
implementation of fiber optic circuitry, which also requires digital technology.
While AT&T had once been the only source of high quality transmission
facilities, several other companies, including MCI and Sprint, entered the
business of building transmission facilities, using primarily fiber optic
circuits.
Following the AT&T Divestiture Decree, and the birth of competing long-distance
carriers, the inter-exchange carriers developed the concept of the virtual
private network ("VPN") in order to shift traffic onto the public network from
large, private networks transmitting on dedicated facilities. VPNs are aimed at
large organizations that have many locations and that spend at least $50,000 per
month on long-distance calling. The Software Defined Network ("SDN") is AT&T's
most sophisticated form of VPN, utilizing its latest fiber optic facilities and
offering significant technical and administrative benefits to major
long-distance users.
In the late 1980's resellers perceived an opportunity to package, aggregate and
market AT&T's premier service at rates lower than small businesses could expect
to obtain directly from any other carrier, with billing carried out directly by
AT&T. The Company believes that this event created the switchless reseller
industry.
Between October 1989 and March 1990 many companies entered the market of SDN
resale, recruiting field sales forces to market to small and medium-sized
businesses. Whereas AT&T is generally believed to have found itself involved
unintentionally in resale at the outset, in 1992 it introduced Distributed
Network Service ("DNS") specifically as a resale product. In 1994, MCI also
decided to make its network available to resellers such as the Company.
Following negotiations which commenced in February 1995 the Company signed an
agreement effective September 1, 1995 to resell MCI's services. That agreement
was superseded by an upgraded contract in March 1996. Provision of MCI service
by the Company commenced in March 1996.
Resellers are classified into two categories, facilities-based and
non-facilities based. A facilities-based carrier utilizes lines owned by third
parties but operates its own switching equipment and usually bills its own
customers directly. A non- facilities-based carrier does not own or lease any
telephone equipment or participate in any portion of the call completion
process. For billing purposes it receives magnetic tapes of its customers'
long-distance usage from its service provider and uses this information as a
basis for billing. Facilities-based carriers have both an investment in the
network needed to complete the call process and a geographic concentration,
whereas non-facilities-based carriers have neither such investment nor any
geographic constraint.
24
<PAGE> 29
As a result of the changes brought about by the AT&T Divestiture Decree,
secondary inter-exchange carriers, including the Company, generally provide
long-distance telephone services at a significantly lower cost than the
comparable services offered directly by AT&T, MCI and Sprint. The Company's
success will depend on its continuing ability to provide comparable services at
prices equal to or lower than its competitors in the future.
REGULATION
Although in the past the FCC had extensively regulated interstate
communications, the trend during the 1980's was toward lessened regulation.
Non-dominant inter-exchange carriers such as the Company were not required by
the FCC to maintain a certificate of public convenience and necessity or to file
tariffs with the FCC other than with respect to international calls and except
for informational tariffs, which were required to be filed with respect to
operator services. Over this period of time, the FCC had retained general
regulatory jurisdiction over the sale of interstate telecommunications services
by inter-exchange carriers, including the requirement that calls be charged on
a nondiscriminatory, just and reasonable basis.
TARIFFS. On November 13, 1992, the United States Court of Appeals for the
District of Columbia Circuit (the "Court of Appeals") ruled that the FCC lacks
authority to waive the requirement that non dominant inter-exchange carriers
file tariffs. The Court of Appeals reversed the FCC's "forbearance policy,"
which had excused inter-exchange carriers from tariff filing requirements. The
FCC had also begun a new proceeding to promulgate rules for non-dominant
inter-exchange carriers' tariff filings in a streamlined manner so as to give
substantial flexibility to the Company and similarly situated competitors. The
FCC has enacted certain rules and is expected to enact others regarding tariff
filing requirements for non dominant carriers. The FCC has issued a statement
publicly announcing its intention not to enforce the strict tariff format and
content rules against non dominant inter-exchange carriers in the interim. In
July 1993, a Federal District Court (the "District Court") granted AT&T's
request for a preliminary injunction against MCI for failure to file
customer-specific tariffs. MCI had relied upon its earlier streamlined tariff
filing, which set forth ranges of rates.
As a consequence of the Court of Appeals decision and the District Court's
ruling, the Company could be subject to complaints seeking damages, assessment
of monetary forfeitures and/or injunctive relief filed by any party claiming to
be injured by the Company's failure to file tariffs. The Court of Appeals
decision suggests that reliance upon the forbearance policy may not excuse past
failure to file tariffs, because the Court ruled that the forbearance policy
itself was unlawful. The Court of Appeals does not, however, require the FCC to
assess forfeitures or damages or take any other specific enforcement action
against those carriers who relied upon its policy, although it does direct the
FCC to give further consideration to the issue of damages in a private suit
between AT&T and MCI. In February 1993, AT&T filed lawsuits in Federal court
against MCI, Sprint and Williams Telecommunications Group, Inc. ("WilTel") for
alleged failure to file proper tariffs and seeking lost profits on a denied loss
of sales of $1 billion. WilTel responded by filing a Federal court complaint
against AT&T for illegal pricing activity, and similar complaints filed by MCI
and Sprint have been pending at the FCC for several years. Moreover, the
implications for other long-distance carriers of the District Court's
preliminary injunction against MCI may be substantial unless and until the FCC
acts. There is a possibility that the aftermath of the ultimate consequences of
the Court's ruling may affect the Company's pricing practices. AT&T has also
indicated that it may institute similar suits against other inter-exchange
carriers. MCI has filed a motion for reconsideration of the Court's preliminary
injunction and has also filed a petition for declaratory ruling with the FCC to
declare that it and other inter-exchange carriers cannot be held liable for good
faith reliance on the FCC's now reversed forbearance policy. At this time, the
Company cannot predict the likelihood of the filing of complaints against it or
potential liability, if any.
POTENTIAL INCREASED COMPETITION. In 1984, pursuant to the AT&T Divestiture
Decree, AT&T divested its 22 wholly owned BOCs. In 1987, as part of the
triennial review of the AT&T Divestiture Decree, the U.S. District Court for the
District of Columbia denied the BOCs petition to enter, among other things, the
inter-LATA long-distance telecommunications business. The District Court's
ruling was appealed to the Court of Appeals, which, in 1990, affirmed the
District Court's decision to retain the inter-LATA prohibition for the BOCs.
Recent legislation passed in Congress now permits the BOCs to provide inter-LATA
service, subject to the provisions outlined in Recent Legislation below. As
indicated below, the Company and all other providers of inter-LATA service may
now expect to face substantial additional competition. This legislation follows
the relaxing by the FCC of its regulatory requirement applicable to foreign
controlled inter-exchange carriers such that these firms and others that may
enter the market in the future will have greater flexibility to compete in
international routes.
REGULATION OF AT&T. Currently, the Company and the inter-exchange carriers with
which it competes are subject to less regulation and have greater pricing
flexibility than AT&T. However, the difference in the level of regulation
between AT&T
25
<PAGE> 30
and its competitors has recently been narrowed. The general trend of the FCC is
to treat AT&T interexchange business service as competitive and lessen FCC
reviews of the rates AT&T charges for many of its business services. In
addition, the FCC has adopted "further streamlined" regulation for many of
AT&T's domestic business services, which effectively removes various controls
under existing regulations governing AT&T's pricing flexibility. The FCC also
allows AT&T to bundle individualized packages of integrated services to
specific, high-volume customers at negotiated prices. The Court of Appeals
recently held that these so-called Tariff 12 offerings are lawful under the
Federal Communications Act. The new rules allowing the further streamlining of
AT&T's regulation are the subject of judicial appeals pending before the Court
of Appeals. The outcome of these appellate proceedings is at this time
uncertain. Management of the Company does not believe that the implementation by
the FCC of the further streamlined rules would have a material adverse effect on
its business or operations. However, should the FCC affirm further streamlined
regulation with respect to a number of AT&T's domestic business services, AT&T
can be expected to offer and price its business services more aggressively,
which in turn, may affect the Company's pricing policies and gross margins.
RECENT LEGISLATION. Under the Telecommunications Act of 1996, which became law
on February 8, 1996, many restrictions were abolished that acted as entry
barriers in telecommunications markets. Of greatest significance to the Company,
this legislation eliminates the restrictions imposed by the AT&T consent decree
on the provision by the BOCs of long distance services. However, the entry of a
BOC into the long-distance market will only be permitted if it has satisfied the
FCC and the Justice department that it has satisfactorily opened its local
exchange market to competitors such as the Company. The process of entry by the
BOCs into the long distance market will take time to complete. Although the
Company intends to take advantage of the recent legislation by seeking to resell
local telephone service, there can be no assurance that it will be successful in
so doing or that the entry of the BOCs into the long distance market will not
damage the Company's business and financial position.
STATE REGULATION. The Company's intrastate long-distance telecommunications
operations are subject to various state laws and regulations, including, in many
jurisdictions, certification requirements. Generally, the Company must obtain
and maintain certificates of public convenience and necessity from regulatory
authorities in most states in which it offers intrastate long distance services.
Some state regulatory authorities also require carriers to file tariffs which
set forth their rates and conditions of service. The Company has obtained
certificates, and filed tariffs, to provide service in a majority of the states
where it conducts business. Some states prohibit inter-exchange carriers from
providing intrastate service (calls both originating and terminating in the same
state) or restrict or condition the offering of intrastate or intra-LATA
long-distance service by the Company and other inter-exchange carriers. Those
states that do permit the offering of intrastate or intra- LATA service by
inter-exchange carriers generally require that end users desiring to access
these services dial special access codes which put the Company at a disadvantage
vis-a-vis local exchange carrier intrastate and intra-LATA toll service, which
generally requires no similar access code. The Company historically has not
experienced significant problems in its dealings with state regulatory
authorities. Changes in regulatory requirements, however, could result in
changes in the manner in which the Company conducts its operation. The Company
may also incur the expense of legal fees and related costs in order to comply
with such changes in regulatory requirements. The Company plans to obtain the
required certification in each state to provide local service.
EMPLOYEES
At January 31, 1997, the Company had 35 employees, including the directors and
executive officers, of whom 31 are full time and 4 are part-time. Of these 35
employees, 10 are responsible for order entry, customer service and operations,
18 are responsible for accounting and credit control, 3 are responsible for
marketing support, 3 are responsible for general management and administration
and 1 is responsible for maintaining the computer system. If the Company is
successful in its proposed marketing programs, management envisages that there
will be a need for a continuing increase in the number of its employees.
In addition to its employees, the Company has a total of approximately 175
self-employed independent sales representatives who are either currently active
on the Company's behalf or who have introduced customers to the Company which
are still using the Company's network.
PROPERTIES
26
<PAGE> 31
The Company operates out of a 10,700 square foot office at Blue Hill Plaza,
Pearl River, NY, a modern office facility. The space currently occupied by the
Company is leased under a lease expiring in December, 2000 with annual rent of
$192,834 rising to $214,260 commencing January 1999.
LEGAL PROCEEDINGS
The State of New York Department of Taxation and Finance has filed two separate
warrants against the Company evidencing judgment liens for uncontested tax
liabilities. One such warrant evidences an amount, including penalty and
interest, of $10,449.21. The other warrant evidences an amount, including
penalties and interest, of $5,238.61. The Company negotiated the payment of
these liabilities with the Department with monthly payments being made over a 24
month period ending July 1997, until which time the judgment liens will remain
in effect.
On September 19, 1996, the Company, Steven Lampert, Michael Preston, LDDI and
LDDLP entered into an agreement (the "Settlement Agreement") with Michael G.
Miller, Jeffrey L. Schwartz and JAMI Marketing Services, Inc. (the "Sellers"),
to settle pending litigation (the "Litigation") related to a Buy Out Agreement
among the parties dated April 6, 1993. In accordance with the terms of the
Settlement Agreement, the Company paid Sellers $500,000 in settlement of the
Litigation and as full satisfaction of all remaining obligations under the Buy
Out Agreement; the parties signed and delivered mutual general releases; and the
Litigation was dismissed with prejudice. See "Certain Transactions -- Buy Out
Agreement."
There are no other legal proceedings or claims, threatened or pending, against
the Company except as disclosed herein.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth the names, ages and titles of the persons who are the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven L. Lampert 47 President Chief Executive Officer and
Chairman of the Board
Michael D. Preston 51 Chief Financial Officer and Vice
President -- Finance, Secretary and
Director
Clair Alpert 54 Vice President -- Administration
Lori Colin 38 Controller
Andrea Grossman 33 Vice President -- Marketing
Rowland W. Day II 41 Director
Julian Levy 32 Director
Conrad J. Morris 64 Director
</TABLE>
Steven Lampert is a founder of the Company and has been the Chief Executive
Officer since January 1994. He has served as President of the Company since it
commenced operations in December 1991. Prior to founding the Company, Mr.
Lampert served as President of Comtec, Inc., a New York-based telecommunications
corporation, from November 1985 through November 1991. Prior to 1985, Mr.
Lampert served as director of telecommunications for NBC and for Corning Labs
(formerly Metpath). Mr. Lampert has served as a director of the Company since
December 1991.
Michael Preston is a founder of the Company and has been the Vice President --
Finance and Chief Financial Officer of the Company since January 1994. Prior to
this period, Mr. Preston was retained as a consultant to the Company commencing
in December 1991. Mr. Preston has served as a director of the Company since
December 1991, and served as a director of the following other companies, with
the date of such service in parentheses: Sterling Publishing Group PLC, a
publicly-held U.K. business publishing
27
<PAGE> 32
company (1977 to September 1995; and served as Deputy Chairman from 1990 to
September 1994); Broad Street Group PLC, a publicly-held U.K. public relations
and marketing services firm (June 1977 to March 1991); Frank Usher Holdings PLC,
a publicly-held U.K. clothing manufacturer (1989 to 1990); Cadiz Land
Corporation (1983 to 1987). Mr. Preston is a United Kingdom Chartered
Accountant.
Clair Alpert has been the Vice President -- Administration of the Company since
October 1993. Ms. Alpert served as Controller of the Company from April 1992 to
October 1993. Prior to joining the Company, Ms. Alpert served as the Director of
Administration and Accounting for Gross & Alpert, C.P.A., a New York-based
accounting firm, from January 1987 to March 1992.
Lori Colin has been the Controller of the Company since October 1993. Prior to
joining the Company, Ms. Colin was a Senior Accountant at Chase Manhattan
Leasing Co. from 1991 to 1993, and prior to that was an Assistant Manager --
Accounting at Concord Leasing in Connecticut from 1985 to 1990.
Andrea Grossman has been the Vice-President Marketing of the Company since May
1993. Ms. Grossman served as the Director of Marketing of the Company from
October 1992 to May 1993. Prior to joining the Company, Ms. Grossman was the
Database Marketing Director of JAMI Marketing Services, Inc., a New York-based
direct marketing firm, from October 1990 to October 1992. From June 1990 to
October 1990, Ms. Grossman was a Consultant with The Rostmark Group, a marketing
consultancy in New Jersey, and from January 1987 to June 1990, she was the
General Manager of Webvelope Corp., a New York printing company.
Rowland Day is a partner in the law firm of Day, Campbell & McGill, the
Company's corporate counsel. He was appointed a director of the Company in
November 1996.
Julian Levy is a representative of Capital Growth International, an investment
banking firm that acted as placement agent for the Company in its most recent
previous offering of securities. He is a United Kingdom Chartered Accountant and
was appointed a director of the Company in November 1996.
Conrad Morris is a United Kingdom businessman with extensive investment and
management experience in both the United Kingdom and the United States. Business
Systems Consultants Limited, an investment company registered in Liberia and
beneficially owned by Mr. Morris' two adult daughters, is a significant investor
in the Company. He was appointed a director of the Company in November 1996.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information regarding
compensation paid by the Company for services rendered during the fiscal years
ended December 31, 1994, 1995 and 1996, respectively, to the Company's Chief
Executive Officer and Chief Financial Officer during such period. No other
executive officer of the Company holding office in fiscal 1996 received total
annual salary and bonus exceeding $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
SECURITIES
NAME AND YEAR ANNUAL COMPENSATION UNDERLYING
PRINCIPAL ENDING OTHER ANNUAL OPTIONS
POSITION DECEMBER 31, SALARY BONUS COMPENSATION SARS (#)
-------- ------------ ------ ----- ------------ --------
<S> <C> <C> <C> <C> <C>
Steven Lampert, 1994 $250,000 -- $ 7,911(1) 0
President 1995 $150,000 -- $10,689(1) 250,000(2)
1996 $150,000 -- $11,745(1) 350,000(3)
Michael Preston, 1994 $100,000 -- $ 5,196(1) 0
Chief Financial 1995 $125,000 -- $ 7,122(1) 250,000(4)
Officer 1996 $125,000 -- $ 9,092(1) 350,000(5)
</TABLE>
28
<PAGE> 33
- ------------------------------
(1) Includes an allowance for automobile expenses.
(2) Options to purchase 250,000 Shares at a price of $.001 per Share were
granted to Mr. Lampert under the Company's 1995 Stock Option Plan.
(3) Options to purchase 350,000 Shares at a price of $3.30 per Share were
granted to Mr. Lampert under the Company's 1995 Stock Option Plan.
(4) Options to purchase 250,000 Shares at a price of $.001 per Share were
granted to Mr. Preston under the Company's 1995 Stock Option Plan.
(5) Options to purchase 350,000 Shares at a price of $3.30 per Share were
granted to Mr. Preston under the Company's 1995 Stock Option Plan.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1996
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS EXERCISE
NUMBER OF SECURITIES GRANTED TO OR BASE
UNDERLYING EMPLOYEES PRICE
NAME OPTIONS GRANTED IN 1996 ($/SH.) EXPIRATION DATE
---- --------------- ------- ------- ---------------
<S> <C> <C> <C> <C>
Steven Lampert 350,000 35% $ 3.30 10/11/2001
Michael Preston 350,000 35% $ 3.30 10/11/2001
</TABLE>
- ------------------
No executive officer named in the Summary Compensation Table above exercised
stock options during the fiscal year ended December 31, 1996.
The following table sets forth for each person the fiscal year-end value of
unexercised options:
AGGREGATED OPTION EXERCISES IN
FISCAL YEAR ENDED DECEMBER 31, 1996 AND OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS AT 12/31/96 OPTIONS AT 12/31/96(1)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven Lampert 0 -- 600,000 0 $1,395,000 0
Michael Preston 0 -- 600,000 0 $1,395,000 0
</TABLE>
- ------------------
(1) The value of the Company's Common Stock for purposes of the calculation was
based upon the average of the bid and asked prices for the Common Stock on March
24, 1997 as reported by the OTC Bulletin Board, minus the exercise price.
STOCK OPTION PLAN
The Company has adopted a stock option plan (the "Stock Option Plan") for its
officers, directors, employees and consultants and has reserved a total of
2,000,000 shares of Common Stock to be issued upon exercise of options granted
under the Stock Option Plan. As of March 17, 1997, options to purchase 1,000,000
shares at an exercise price of approximately $.001 per share and options to
purchase 1,000,000 shares at an exercise price of $3.30 per share had been
granted, of which 380,000 had been exercised by such date.
29
<PAGE> 34
The Stock Option Plan will be administered by the Board. Subject to the
provisions of the Stock Option Plan, the Board will have sole discretionary
authority to interpret the Stock Option Plan and to determine the type of awards
to grant, when, if and to whom awards are granted, the number of shares covered
by each award and the terms and conditions of the award.
Options granted under the Stock Option Plan may be "incentive stock options"
("ISOs"), within the meaning of Section 422 of the U.S. Internal Revenue Code,
as amended (the "Code"), or non-qualified stock options ("NQSOs"). The exercise
price of the options will be determined by the Board when the options are
granted, subject to a minimum price in the case of ISOs equal to the fair market
value (as defined in the Stock Option Plan) of the Common Shares on the date of
grant and a minimum price in the case of NQSOs of the par value of the Common
Stock. In the discretion of the Board, the option exercise price may be paid in
cash or in Common Shares or other property having a fair market value on the
date of exercise equal to the option exercise price.
DIRECTOR COMPENSATION
Directors who are officers or employees of the Company receive no additional
compensation for service as members of the Board of Directors or committees
thereof. Directors who are not officers or employees of the Company will receive
such compensation for their services as the Board of Directors may from time to
time determine. It is anticipated that non-employee directors will receive a fee
of $500 per meeting plus expenses of attending the meeting.
EMPLOYMENT CONTRACTS
The Company has not entered into any written or formal contract with any of the
above-named executive officers.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to beneficial
ownership of the Common Stock as of March 17, 1997 by (i) each person known by
the Company to be the beneficial owner of more than five percent of the Common
Stock, (ii) each director of the Company, and (iii) all executive officers and
directors of the Company as a group. See "Management."
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENTAGE OF CLASS
------------------- ------------------ -------------------
<S> <C> <C>
Steven L. Lampert............................ 1,687,065(1) 22.1%
8 Lady Godiva Way
New City, N.Y. 10956
Michael D. Preston........................... 1,754,020(2) 22.9%
8 Oak Hill Park Mews
London NW3 7LH
England
Rowland W. Day II............................ 458,220(3) 6.4%
3070 Bristol Street, Suite 650
Costa Mesa, CA 92626
Julian Levy.................................. 50,000 (4) less than 1%
Conrad Morris................................ 0 --
Business Systems Consultants, Ltd............ 1,334,798(5) 19%
P.O. Box 222
31-33 Le Pollet
St. Peter Port
Gurnsey GYI 4J6
Channel Islands
</TABLE>
30
<PAGE> 35
<TABLE>
<S> <C> <C>
All directors and officers................... 5,454,103(6) 64%
as a group (8 persons)
</TABLE>
- --------------------
(1) Includes 550,000 shares issuable upon the exercise of outstanding options.
(2) Includes 610,000 shares issuable upon the exercise of outstanding options.
(3) Includes approximately 111,960 shares issuable upon the exercise of
outstanding options. Mr. Day is also a principal in the firm of Day, Campbell &
McGill, the Company's corporate counsel.
(4) Includes 50,000 shares issuable upon the exercise of outstanding options.
(5) Business Systems Consultants, Ltd. (BSC) is an investment company registered
in Liberia. BSC is beneficially owned by two adult daughters of Conrad Morris, a
director of the Company. Mr. Morris acts as an advisor to but has no beneficial
interest in BSC.
(6) Includes 1,491,960 shares issuable upon exercise of outstanding options, and
the 1,334,798 shares owned by BSC.
CERTAIN TRANSACTIONS
PARTNERSHIP TRANSACTION
Pursuant to the recapitalization on October 5, 1995, LDDI issued shares of its
Common Stock to the limited partners of LDDLP in exchange for their respective
partnership interests in LDDLP in a transaction exempt from the registration
requirements of the Securities Act. On October 6, 1995 LDD Holdings acquired all
of the outstanding shares of Common Stock of LDDI in exchange for 3,000,000
shares of the Company's Common Stock.
BANK OF NEW YORK LOAN
Pursuant to the terms of a Bridge Loan and Security Agreement (the "Loan
Agreement") dated August 25, 1994 between Wingmead Securities Ltd. ("Wingmead")
and Michael Preston, a Director and Chief Financial Officer of the Company, as
lenders, and LDDLP, Wingmead and Preston each agreed to make one loan to the
Partnership in the original aggregate principal amount of $250,000. The Wingmead
loan (the "Wingmead Loan") was made on August 25, 1994, and the Preston loan
(the "Preston Loan") was made on October 27, 1994. The Wingmead Loan was
evidenced by a secured promissory note (the "Wingmead Note"), and bore interest
at a rate per annum equal to the Prime Rate plus 2.0% . As collateral security
for the payment of such amounts, LDDLP granted to Wingmead a first floating lien
on all of its assets. In addition, pursuant to the terms of a Guaranty dated
August 25, 1994 between Wingmead and Mr. Preston, a Director and Chief Financial
Officer of the Company, Mr. Preston personally guaranteed the payment, when due,
of all amounts owed under the terms of the Loan Agreement, and as security for
such guaranty, entered into a pledge agreement with Wingmead dated August 25,
1994 whereby he pledged 466,382 ordinary shares of Sterling Publishing Group PLC
beneficially owned by him and the proceeds of any sale thereof to secure his
obligations under his guaranty. The Preston Loan was non-interest bearing and
was repaid, together with the Wingmead Loan, out of the proceeds of a loan from
The Bank of New York.
On October 28, 1994, the Company borrowed $500,000 from The Bank of New York
("BONY") pursuant to a General Loan and Security Agreement (the "BONY Note"),
which bore interest at a rate per annum equal to the Prime Rate plus .5%.
Principal and interest on the BONY Note was due on April 12, 1995. The proceeds
from the BONY Note were used to pay in full the principal amount outstanding
under the Wingmead Note and the Preston Loan. There was no cost or other effect
to the Company for such prepayment.
As collateral security for the payment of the BONY Note, the Company granted
BONY a security interest in a $500,000 certificate of deposit issued by BONY to
Wingmead which had been hypothecated to the Company by Wingmead. In addition,
pursuant to the terms of a Guaranty dated October 28, 1994 between BONY and
Steven Lampert, the Chief Executive Officer and Director of the Company, and Mr.
Preston, the Chief Financial Officer and a Director of the Company, each of
Messrs. Lampert and Preston personally guaranteed the payments, when due, of all
amounts owing by the Company to BONY, which obligation was represented by the
BONY Note.
The repayment date of the BONY Note was extended until September 30, 1995 by an
agreement entered into in April 1995 on terms substantially identical to those
of the original agreement dated October 28, 1994 and was subsequently extended
to November 8, 1996, at which time it was paid in full. In November, 1996
Wingmead entered into an agreement with the Company under which it agreed to
subscribe for 166,667 shares of the Company's Common Stock at $3.00 per share on
July 31, 1996 or on the repayment
31
<PAGE> 36
by the Company of the BONY Note. On November 18, 1996, Wingmead purchased
166,667 shares of the Company's Common Stock for $500,000 cash.
BRIDGE LOANS
SERIES A LOANS. Pursuant to a series of loans made on September 30, 1994, the
Company borrowed an aggregate principal amount of $177,500 from a group of seven
lenders (the "Series A Loans"). Each loan bore interest at a rate per annum
equal to the Prime Rate plus 2%, was due and payable on June 30, 1995, and was
evidenced by a secured promissory note dated as of September 30, 1994. Pursuant
to a Subordination Agreement entered into by and among LDDI, each holder of the
Series A Loans and Wingmead, each of the holders of the Series A Loans agreed
that their right to payment and security interest in the property of LDDI would
be subordinate to all indebtedness owed by LDDI to Wingmead.
The Series A Loan notes provided that any loans outstanding at the time that the
Company concluded an initial public offering or similar transaction may at the
holder's option be converted into shares of the Company's Common Stock at the
offering price together with a premium of 25% over the face value of the loan.
Loans aggregating $30,000 plus accrued interest were repaid during 1995. Holders
of the balance of the Series A Notes, aggregating $147,500, elected to convert
the amounts due to them, plus premium, into shares of the Company's Common Stock
at a price of $3.00 per share prior to December 31, 1995.
SECOND WINGMEAD LOAN. Pursuant to an agreement dated December 6, 1994, the
Company borrowed from Wingmead the sum of $200,000 (the "Second Wingmead Loan")
repayable either within ten days following an initial public offering of the
Company's stock, or, if no such offering occurred within 90 days following the
date of the agreement, in six equal installments commencing on the 120th day
following the date of the agreement. The loan, which was secured by the Loan
Agreement dated August 25, 1994 between the Company, Wingmead and Michael
Preston, and was personally guaranteed by Michael Preston and Steven Lampert,
bore interest at the rate of 20% per annum, and, in consideration for making the
Loan, the Company agreed to issue to Wingmead 20,000 shares of the Company's
Common Stock, such shares to be unregistered but to have piggy-back registration
rights in the event of a public offering of the Company's Common Stock within
twenty-four months of the date after the agreement.
In August, 1996 Michael Preston paid Wingmead a total of $229,329.86,
representing $110,000 of the Second Wingmead loan together with accrued interest
and certain fees due to Wingmead, in consideration of Wingmead's granting to Mr.
Preston the benefit of Wingmead's interest in all such amounts owing by the
Company. Wingmead had previously converted the balance of the principal due into
30,000 shares of the Company's Common Stock at the price of $3.00 per share,
prior to December 31, 1995. On November 18, 1996, the Company repaid Mr. Preston
the full amount paid by him to Wingmead for the debt owed to Wingmead by the
Company.
BUSINESS SYSTEMS CONSULTANTS LOAN. On October 30, 1993, Business Systems
Consultants Limited advanced the sum of $100,000 to the Company as an
interest-free, five-year unsecured and subordinated loan, repayable at the
obligee's request after three years. Business Systems Consultants converted this
loan into shares of the Company's Common Stock at the price of $3.00 per share
prior to December 31, 1995.
SHAREHOLDER LOANS
The Company entered into an agreement with Business Systems Consultants, Ltd.
("BSC") in March, 1996, pursuant to which BSC agreed to loan $500,000 to the
Company. The agreement provided that BSC may convert all (but not less than all
) of the loan into shares of the Company's Common Stock at a price of $3.30 per
share at any time prior to the earlier of December 31, 1996 or the date on which
the Company's Common Stock is listed for trading on NASDAQ. As consideration for
the loan, the Company agreed to issue 150,000 shares of Common Stock to BSC and
to pay BSC a fee equal to 1.5% of the first $50 million of revenues and 1% of
revenues in excess of $50 million received by the Company from the customer
billings generated by sales representatives recruited via the infomercial
produced by Guthy-Renker during the first two years any revenue is received from
such infomercial. In August, 1996, BSC elected to convert the entire amount of
the loan to equity.
The Company entered into agreements with Business Systems Consultants, Ltd.
("BSC") and Michael Preston on August 1, 1996, pursuant to which BSC and Mr.
Preston agreed to loan $350,000 and $150,000, respectively, to the Company. The
loans bore interest at the rate of 12% per annum and were repayable within 60
days after receipt of the loan proceeds. The agreements provided that the loans
may be converted into shares of the Company's Common Stock at a price of $2.50
per share. As additional consideration for the loans, the Company agreed to
issue to BSC and Mr. Preston, for each seven day period during which the loans
were outstanding, 1,250 shares of Common Stock and 535 shares of Common Stock,
respectively, but not less than 5,000 shares
32
<PAGE> 37
and 2,140 shares, respectively. In addition, if the loans were not repaid prior
to September 30, 1996, BSC and Mr. Preston have the option, exercisable at any
time within 12 months after such repayment date, to purchase, at a price of
$2.50 per share, 140,000 shares and 60,000 shares, respectively. In November
1996 BSC elected to convert the full amount of its loan into shares of the
Company's Common Stock at a price of $2.50 per share. The loan from Mr. Preston
was repaid in November 1996.
BUY OUT AGREEMENT
Pursuant to the terms of an agreement (the "Buy Out Agreement") dated April 6,
1993 by and among Steven L. Lampert ("Lampert"), Michael D. Preston ("Preston"
and collectively with Lampert, the "Buyers"), Michael Miller ("Miller"), Jeffrey
Schwartz ("Schwartz" and collectively with Miller, the "Sellers"), LDDLP, LDDI
and several inactive entities (collectively with LDDLP and LDDI, the
"Entities"), the Buyers, who are officers and directors of the Company,
purchased in equal proportions all of the interests of the Sellers in the
Entities (the "Buy Out"). At the closing of the Buy Out, the Buyers paid the
Sellers an aggregate of $500,000.
In connection with the Buy Out, LDDLP obligated itself under the Buy Out
Agreement (i) to pay the Sellers an aggregate of $250,000 for their covenants
not to compete with the business of LDDLP, (ii) to pay JAMI Marketing Services,
Inc. ("JAMI"), an affiliate of the Sellers, $303,333.34, with respect to and in
cancellation of an office facilities and equipment agreement and in
consideration of services rendered, and (iii) to pay to the Sellers an aggregate
of $80,000 with respect to their capital and current accounts with LDDLP
(collectively, the "LDDLP Obligations").
In addition, the Sellers were entitled to receive Contingent Event Payments of
up to an aggregate of $750,000 upon the occurrence of (a) the sale by either of
the Buyers of all or a majority of his interests in any Entity, (b) the sale by
any Entity of all or substantially all of its assets, or (c) the distribution
(excluding compensation payments to Lampert or Preston in amounts not exceeding
$187,500 and $150,000, respectively, per year) by any Entity of cash or property
to either of the Buyers (collectively the "Contingent Events"). The Buyers were
responsible for Contingent Event Payments, except in the case of an asset sale
by an Entity, in which case the Entity was responsible to the Sellers but the
Buyers were obligated to reimburse the Entity to the extent the net proceeds of
such sale were distributed to the Buyers.
A dispute arose with respect to the Buy Out Agreement and in February, 1996,
LDDLP and the Buyers filed a lawsuit against the Sellers seeking compensatory
and punitive damages. The Sellers subsequently filed a separate lawsuit against
LDDLP and the Buyers to exercise their rights to receive payment under the Buy
Out Agreement and to exercise their remedies under the security agreement with
respect thereto.
On September 19, 1996, the Company, the Buyers, LDDI and LDDLP entered into an
agreement (the "Settlement Agreement") with the Sellers and JAMI to settle the
pending litigation (the "Litigation"). In accordance with the terms of the
Settlement Agreement, the Company paid Sellers $500,000 in settlement of the
Litigation and as full satisfaction of all remaining obligations under the Buy
Out Agreement, including the Contingent Event Payments; the parties signed and
delivered mutual general releases; and the Litigation was dismissed with
prejudice.
COMPANY COUNSEL
The Company has granted to members of the firm of Day, Campbell & McGill, the
Company's corporate counsel, options to purchase an aggregate of 460,000 shares
of Common Stock. In addition, in connection with the Company's agreement to sell
telephone services to Kaire International, the Company agreed to pay a finder's
fee to Day, Campbell & McGill in the amount of 2.5% of the monthly revenues
collected by the Company from the sale of such telephone services during the
three-year term of its agreement with Kaire International.
RELATIONSHIP WITH ALBERDALE & CO.
Michael Preston, an officer, director and principal shareholder of the Company,
owns a 33.3% interest in Alberdale & Co., a British investment firm whose
associate company, Alberdale Partners Limited, received compensation in
connection with the sale of the Company's securities in a private placement
completed in November 1996 in which Capital Growth International, LLC acted as
the Company's placement agent.
33
<PAGE> 38
ARRANGEMENTS WITH CAPITAL GROWTH INTERNATIONAL, LLC
In August 1996, the Company entered into a Placement Agreement with Capital
Growth International, LLC ("CGI") pursuant to which the Company agreed, among
other things, (i) to use its best efforts to cause the election to the Company's
Board of Directors of a person designated by CGI and reasonably acceptable to
the Company for a period of up to three years (CGI has designated Julian Levy
who has been elected to the Board); (ii) to retain CGI as a financial advisor
for two years and to compensate CGI at the rate of $2,500 per month; and (iii)
for a period of 24 months after the completion of the private placement, to
provide CGI with the first opportunity to negotiate and the right of first
refusal with respect to any debt or equity financings the Company may undertake
during such period. In March 1997, the Company issued or agreed to issue 85,000
shares of Common Stock to CGI for investment banking services.
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock by the Selling Stockholders
as of March 17, 1997, and as adjusted to reflect the sale of the Shares.
<TABLE>
<CAPTION>
Maximum Number Shares
Number of Shares of Shares to be Beneficially Owned
Beneficially Owned Sold Pursuant to After Offering(2)
NAME Prior to Offering(1) This Prospectus(1) Number Percent
- ---- -------------------- ------------------ ------ -------
<S> <C> <C> <C> <C>
A/S Caco 5,000 5,000 0 --
Christopher Adam 45,000 20,000 25,000 *
Aeron Marine 5,000 5,000 0 --
Alberdale Partners
Limited 6,060 6,060 0 --
Les Alps 60,606 60,606 0 --
Arkan Investments
Ltd. 45,000 15,000 30,000 *
AS Kapitalutvikling 5,000 5,000 0 --
Banca del Gottardo 250,000 250,000 0 --
Bocap AS 50,000 50,000 0 --
Erling Borg 5,000 5,000 0 --
Harvey Brice 10,000 10,000 0 --
Business Systems
Consolidated Ltd. 6,400 6,400 0 --
Business Systems
Consultants Ltd.(3) 1,334,798 230,000 1,104,798 16.7%
Caisse Centrale 80,000 80,000 0 --
Cameo Trust 20,000 20,000 0 --
International
Capital Growth Ltd. 333,828 333,828 0 --
Capital Management 310,000 310,000 0 --
Cook & Cie 30,000 30,000 0 --
Continental Capital 75,000 75,000 0 --
Cowen/S. Hollander 22,500 22,500 0 --
Edgeport Nominees 63,480 63,480 0 --
Effectenbank Stroeve 30,000 30,000 0 --
Gems Opportunity Fund 90,909 90,909 0 --
Helix Investments 30,000 30,000 0 --
Steven Heydt 7,888 7,888 0 --
Intergalactic Growth 30,000 30,000 0 --
Kismet 60,606 60,606 0 --
Michael Levi 10,000 10,000 0 --
Magmar Bryhn 3,125 3,125 0 --
Manhattan West 150,000 150,000 0 --
M.I. Wernstedt 5,000 5,000 0 --
</TABLE>
34
<PAGE> 39
<TABLE>
<S> <C> <C> <C> <C>
Morgan Steel 30,000 30,000 0 --
Sid Paterson 5,000 5,000 0 --
Peter Barrington Kirk 10,000 10,000 0 --
Walter Prime 5,000 5,000 0 --
Republic Natl. Bank
(France) 5,000 5,000 0 --
Republic Natl. Bank
(Luxembourg) 20,000 20,000 0 --
Rahn & Rodman 10,000 10,000 0 --
Claude Rodrigue 35,000 15,000 20,000 *
Rosebud Capital 215,818 215,818 0 --
Saracen Intl. Inc. 5,000 5,000 0 --
Thomas Scichili 39,500 39,500 0 --
Earl Shannon 30,151 30,151 0 --
Skips AS Cahopus 10,000 10,000 0 --
C.V. Spelke 5,000 5,000 0 --
Stratford Partnership 30,000 30,000 0 --
Vital Miijo AS 10,000 10,000 0 --
Wingmead Securities
Ltd. 238,667 20,000 218,667 3.3%
Winthrop Trust 273,000 273,000 0 --
Wise and Shepard 12,500 12,500 0 --
Elie Wizman 15,000 15,000 0 --
Raphael Wizman 15,000 15,000 0 --
Day Campbell &
McGill(4) 45,000 45,000 0 --
Rowland W. Day (5) 350,000 350,000 0 --
Shelby Development Ltd. 62,832 62,832 0 --
First National Fund 2,500 2,500 0 --
</TABLE>
- ------------------
* Less than 1%
(1) Includes, with respect to the following persons, the following number of
Shares which may be acquired through the exercise of options or warrants:
Alberdale Partners Limited (6,060); Les Alps (30,303); Banca del Gottardo
(30,000); Bocap AS (25,000); Business Systems Consolidated Ltd. (6,400); Cameo
Trust (10,000); International Capital Growth Ltd. (248,828); Capital Management
Ltd (130,000); Edgeport Nominees, Ltd. (15,150); Gems Opportunity Fund (30,303);
First National Fund (2,500); Intergalactic Fund (15,000); Kismet (30,303);
Michael Levi (5,000); Morgan Steel (15,000); Peter Barrington Kirk (5,000);
Republic Natl. (Lux) (10,000); Rosebud Capital (90,909); Thomas Scichili
(39,500); Shelby Development Ltd. (62,832); Stratford Partnership (15,000);
Vital Miijo AS (5,000); Day Campbell & McGill (45,000); Rowland W. Day
(350,000).
(2) Gives effect to the exercise of all of the options and warrants as to which
the underlying Shares of Common Stock are being offered hereby and the sale of
all of the Shares of Common Stock being offered by the Selling Stockholders.
(3) Conrad Morris, a director of the Company, acts as an advisor to but has no
beneficial interest in Business Systems Consultants Limited, an investment
company beneficially owned by Mr. Morris' two adult daughters.
(4) Rowland W. Day II, a director of the Company, is a member of the firm of
Day, Campbell & McGill which has provided legal services to the Company.
(5) Rowland W. Day is the father of Rowland W. Day II, a director of the
Company.
PLAN OF DISTRIBUTION
The Shares will be offered and sold by the Selling Stockholders for their own
accounts. The Company will not receive any of the proceeds from the sale of the
Shares pursuant to this Prospectus. The Company has agreed to bear the expenses
of the registration of the Shares, including legal and accounting fees and such
expenses are estimated to be $50,000.
The Selling Stockholders may offer and sell the Shares from time to time in
transactions in the over-the-counter market or in negotiated transactions, at
market prices prevailing at the time of sale or at negotiated prices. The
Selling Stockholders have advised the Company that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their Shares, nor is there an underwriter
or coordinating broker acting in connection with the proposed sale of
35
<PAGE> 40
Shares by the Selling Stockholders. Sales may be made directly or to or through
broker-dealers who may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders or the purchasers of
Shares for whom such broker-dealers may act as agent or to whom they may sell as
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions).
The Selling Stockholders and any broker-dealers acting in connection with the
sale of the Shares hereunder may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Act, and any commissions received by them and
any profit realized by them on the resale of Shares as principals may be deemed
underwriting compensation under the Act.
The Company has informed the Selling Stockholders that certain anti-manipulative
Rules contained in Regulation M under the Securities Exchange Act of 1934, as
amended, may apply to their sales in the market and has furnished each Selling
Stockholder with a copy of these Rules and has informed them of the need for
delivery of copies of this Prospectus.
Selling Stockholders may also use Rule 144 under the Act to sell the Shares if
they meet the criteria and conform to the requirements of such Rule.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Articles of Incorporation authorizes the issuance of 30,000,000
shares of Common Stock, $.001 par value, of which 7,027,949 shares were
outstanding as of March 17, 1997.
Holders of shares of Common Stock are entitled to one vote for each share on all
matters to be voted on by the shareholders. Holders of shares are not entitled
to cumulate their votes in the election of directors. Holders of shares of
Common Stock are entitled to share ratably in dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion, from
funds legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of shares of Common Stock are entitled to
share pro rata all assets remaining after payment in full of all liabilities.
Holders of Common Stock have no preemptive or other subscription rights, and
there are no conversion rights or redemption or sinking fund provisions with
respect to such shares.
PREFERRED STOCK
The Company's Articles of Incorporation authorizes the issuance of 10,000,000
shares of preferred stock, $0.001 par value. The Company's Articles of
Incorporation provide that the rights, preferences, and privileges of the
preferred stock shall be determined by the Board of Directors. The Board of
Directors has not taken any action to determine the rights, preferences or
privileges of the preferred stock nor has any preferred stock been issued. There
are no present plans to issue any shares of preferred stock.
OPTIONS
As of March 17, 1997, options to purchase 1,000,000 shares of Common Stock at an
exercise price of $.001 per share and options to purchase 1,000,000 shares at an
exercise price of $3.30 per share had been granted under the Company's 1995
Stock Option Plan, 380,000 of which have been exercised. See "Management-Stock
Option Plan." In addition, there were options outstanding to purchase 455,000
shares of Common Stock at exercise prices ranging from $2.50 to $3.30 per
share. Under an agreement entered into in January 1997, between the Company and
National Benefits Consultants, LLC ("NBC"), a company in alliance with Deloitte
& Touche LLP, NBC has an option to purchase up to 20% of the Company's Common
Stock at exercise prices ranging from $2.50 to $3.00 per share. See "Business -
National Benefits Consultants/Deloitte & Touche." In addition, for every
$5,000,000 of gross revenue, excluding taxes, received by the Company from the
sale of telephone services by the Company's sales agents recruited through the
infomercial, Guthy-Renker has the right to acquire shares of Common Stock valued
at approximately $100,000 pursuant to its agreement with the Company. See
"Business - Televised Marketing Programs".
WARRANTS
As of March 17 1997, there were warrants outstanding to purchase, at any time
prior to March 31, 1999, 25,500 shares of Common Stock at an exercise price of
$3.00 per share, warrants outstanding to purchase, at any time prior to August
31, 1999, 26,460 shares of Common Stock at an exercise price of $3.30 per share,
warrants outstanding to purchase, at a price of $4.00 per share, up to
36
<PAGE> 41
461,968 shares of Common Stock at any time prior to November 18, 1998, and
warrants outstanding to purchase, at a price of $3.30 per share, up to 314,160
shares of Common Stock at any time prior to November 18, 1998.
The Company has agreed to issue to certain holders of 890,470 shares of Common
Stock, stock purchase warrants entitling such holders to purchase 1,666 shares
of the Company's Common Stock for each 5,000 shares held by them if a
registration statement covering the resale of such securities which the Company
is required to file is not declared effective by each of certain specified dates
commencing on April 5, 1997.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent for the Company's Common Stock is American
Securities Transfer, Inc., 938 Quail Street, Suite 101, Lakewood, Colorado
80215-5513.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed upon for the Company by
Day, Campbell & McGill, 3070 Bristol Street, Suite 650, Costa Mesa, California
92626. As of the date of this Prospectus, members of the firm owned a total of
540,036 shares of the Company's Common Stock and held options to purchase an
additional 200,000 shares of the Company's Common Stock.
EXPERTS
The financial statements of the Company for the fiscal years ended December 31,
1994, 1995 and 1996 included in this Memorandum have been audited by Adelman,
Katz & Mond, LLP, independent certified public accountants, to the extent and
for the period set forth in its report included herein, and have been so
included in reliance upon the report (which notes that the Company's negative
working capital and accumulated deficit raise substantial doubt about the
Company's ability to continue as a going concern and that the financial
statements were prepared on the assumption that the Company will continue as a
going concern and do not include any adjustments that might result from the
Company's inability to continue as a going concern) of such firm given upon its
authority as experts in accounting and auditing.
FURTHER INFORMATION
The Company has filed with the Securities and Exchange Commission
("Commission"), a Registration Statement on Form SB-2 with respect to the
securities which are offered by this Prospectus. This Prospectus omits certain
information which is contained in the Registration Statement as permitted by the
Rules and Regulations of the Commission. For further information, reference is
made to the Registration Statement including the exhibits filed therewith, which
may be examined without charge at the Washington, D.C. offices of the Commission
and copies of all or any part thereof may be obtained upon payment of the
Commission's charge for copying. The statement contained in this Prospectus as
to the contents of any contract or other document identified as exhibits in this
Prospectus are not necessarily complete, and in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each statement being qualified in any and all respects by such
reference.
37
<PAGE> 42
INDEX TO FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITORS' REPORT OF ADELMAN KATZ AND MOND, LLP F-2
CONSOLIDATED FINANCIAL STATEMENTS
BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1995 F-3
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
1996,1995 AND 1994 F-4
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 F-6
NOTES TO FINANCIAL STATEMENTS F7-17
F-1
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Long Distance Direct Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Long Distance
Direct Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Long Distance Direct
Holdings, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the result
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has experienced significant
recurring losses from operations and has an accumulated deficit, both of which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 5, the Company did not meet certain minimum purchase
requirements with it's primary supplier. The supplier has agreed to waive such
commitments under certain conditions.
New York, N.Y.
March 21, 1997
F-2
<PAGE> 44
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 962,471 $ 207,666
Accounts receivable (net of allowance for doubtful accounts)
(Notes 2 and 5) 1,125,986 1,103,903
Loans receivable - officers (Note 10) 260,735 -0-
Other current assets 924,431 93,229
----------- -----------
Total Current Assets 3,273,623 1,404,798
----------- -----------
PROPERTY AND EQUIPMENT
Furniture and equipment 156,926 54,856
Computer equipment and software 257,108 196,764
Leasehold improvements 91,720 38,720
----------- -----------
505,754 290,340
Less: accumulated depreciation 193,576 129,203
----------- -----------
312,178 161,137
OTHER ASSETS 129,623 61,790
----------- -----------
$ 3,715,424 $ 1,627,725
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - current (Note 6) $-0- $ 1,165,000
Accounts payable 1,453,796 2,370,081
Accrued expenses 353,681 577,576
Sales and excise taxes payable (Note 5) 490,716 703,143
Loans payable - officers (Note 10) -0- 74,244
----------- -----------
Total Current Liabilities 2,298,193 4,890,044
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 5)
STOCKHOLDERS' EQUITY
Common stock - par value $.001 per share;
authorized 30,000,000 shares 6,598 3,798
Additional paid in capital 8,477,420 1,429,434
Accumulated deficit (7,066,787) (4,665,551)
----------- -----------
1,417,231 (3,232,319)
Less: Subscriptions receivable -0- (30,000)
----------- -----------
Total Stockholders' Equity 1,417,231 (3,262,319)
----------- -----------
$ 3,715,424 $ 1,627,725
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 45
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES $ 5,319,923 $ 8,363,949 $ 9,527,497
CUSTOMER REBATES AND REFUNDS 9,686 377,547 444,998
----------- ----------- -----------
NET REVENUES 5,310,237 7,986,402 9,082,499
COST OF SERVICES 3,650,162 5,862,665 6,257,686
----------- ----------- -----------
Gross Profit 1,660,075 2,123,737 2,824,813
----------- ----------- -----------
OPERATING EXPENSES
Sales and marketing 379,670 519,411 1,322,546
General and administrative 2,941,725 2,700,451 2,554,503
----------- ----------- -----------
Total Operating Expenses 3,321,395 3,219,862 3,877,049
----------- ----------- -----------
LOSS FROM OPERATIONS (1,661,320) (1,096,125) (1,052,236)
----------- ----------- -----------
OTHER EXPENSES (INCOME)
Interest expense 748,711 375,820 173,996
Interest income (8,795) (4,594) (5,515)
Failed IPO costs -0- 407,572 -0-
----------- ----------- -----------
Total Other Expenses (Income) 739,916 778,798 168,481
----------- ----------- -----------
NET LOSS ($2,401,236) ($1,874,923) ($1,220,717)
=========== =========== ===========
NET LOSS PER SHARE ($ .54) ($ .55) ($ .36)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 46
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Additional Paid Accumulated
Shares Amount in Capital Deficit
--------- ------ ----------- -----------
<S> <C> <C> <C> <C>
Balance - December 31, 1993 3,400,000 $3,400 $ 611,728 ($1,569,911)
Net loss - December 31, 1994 -- -- -- (1,220,717)
--------- ------ ----------- -----------
Balance - December 31, 1994 3,400,000 3,400 611,728 (2,790,628)
Accrual of expenses, payable in stock,
in connection with reverse acquisition -- -- (69,000) --
Par value assigned to shares of common
stock issued in private placement, net
of expenses of $306,397 397,835 398 886,706 --
Net loss - December 31, 1995 -- -- -- (1,874,923)
--------- ------ ----------- -----------
Balance - December 31, 1995 3,797,835 3,798 1,429,434 (4,665,551)
Par value assigned to shares of common
stock issued, net of expenses of
$1,078,050 2,799,991 2,800 7,047,986 --
Net loss - December 31, 1996 -- -- -- (2,401,236)
--------- ------ ----------- -----------
Balance - December 31, 1996 6,597,826 $6,598 $ 8,477,420 ($7,066,787)
========= ====== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 47
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ($2,401,236) ($1,874,923) ($1,220,717)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 64,372 54,580 45,905
Amortization of note discount -0- 116,000 52,000
Imputed interest on personal guarantee -0- -0- 2,000
Financing and other expenses 584,263 49,793 -0-
Provision for doubtful accounts 222,754 310,953 325,634
Forgiveness of interest on partnership buy-out (55,000) -0- -0-
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (244,837) 539,720 (1,388,937)
(Increase) decrease in other current assets (674,952) 252,718 (282,718)
(Increase) decrease in other assets (67,833) 260,827 (302,013)
Increase (decrease) in accounts payable (884,878) 223,398 1,174,456
Increase (decrease) in accrued expenses 154,893 (74,946) 304,874
Increase (decrease) in sales and excise taxes payable (212,427) (40,530) 282,030
----------- ----------- -----------
Total Adjustments to Net Loss (1,423,431) 1,692,513 213,231
----------- ----------- -----------
Net Cash Used in Operating Activities (3,824,667) (182,410) (1,007,486)
----------- ----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Acquisition of property and equipment (215,414) (38,907) (72,284)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payment) of notes payable (500,000) (155,000) 935,298
Proceeds (payment) of related party loans (319,979) (112,076) 106,602
Proceeds from private placements 6,692,915 776,209 -0-
Payment of private placement costs (1,078,050) (132,165) -0-
----------- ----------- -----------
Net Cash Provided by Financing Activities 4,794,886 376,968 1,041,900
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 754,805 155,651 (37,870)
CASH - Beginning of year 207,666 52,015 89,885
----------- ----------- -----------
CASH - End of year $ 962,471 $ 207,666 $ 52,015
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 48
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND BUSINESS
The consolidated financial statements consist of the accounts of Long
Distance Direct Holdings, Inc. ("LDDH") and its wholly owned subsidiaries,
as follows: Long Distance Direct, Inc. ("LDDI") and Long Distance Direct
Marketing, Inc. ("LDDM") referred to collectively as the "Company".
All significant intercompany balances and transactions have been eliminated
in consolidation.
LDDH, which was formerly known as Golden Ark, Inc. was inactive until
October 6, 1995, when it acquired all of the outstanding stock of LDDI in
exchange for 3,000,000 shares of LDDH and LDDI became a wholly owned
subsidiary of LDDH. LDDI is a New York corporation which was formed in 1991
for the purpose of acting as the general partner of Long Distance Direct
L.P. ("LDDLP"), a New York limited partnership formed at the same time for
the purpose of carrying on the business of a non-facilities based re-seller
of long-distance telephone services. On October 5, 1995, LDDI acquired all
of the partnership interests of LDDLP in exchange for 3,218,821 shares of
common stock of LDDI. This transaction was accounted for as a change in form
of organization. Prior to its acquisition of LDDI, Golden Ark, Inc. effected
a 1 for 1.4700477 forward split of its common stock. After its acquisition
of LDDI, Golden Ark, Inc. changed its name to Long Distance Direct Holdings,
Inc.
For accounting purposes, the acquisition of the common stock of LDDI has
been treated as a recapitalization of LDDI with LDDI as the acquirer
(reverse acquisition). Stockholders' equity and loss per share data has
been restated to give retroactive recognition to the recapitalization.
The consolidated financial statements include the combined activities of
LDDI and LDDLP for the year ended December 31, 1994 and for the period from
January 1, 1995 through October 5, 1995. Therefore no pro-forma data has
been presented.
The Company is a non-facilities based reseller of outbound and inbound
long-distance telephone, teleconferencing, cellular long-distance and
calling card services to commercial customers. All of the services sold by
the Company through December 31, 1995 were provided by AT&T. The Company
commenced operations with MCI during 1996. The Company signs up customers
and provisions them onto the networks of AT&T and MCI, which provide the
actual transmission of service. The Company does not own or lease any
telephone equipment or participate in the call completion process.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Allowance for Doubtful Accounts
Accounts receivable are net of allowance for doubtful accounts of $318,976
and $163,149 as of December 31, 1996 and 1995, respectively. The Company
estimates an allowance based upon various factors, including credit risk and
industry standards.
F-7
<PAGE> 49
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenues, Collections and Cost Recognition
Revenues are recognized as service is provided to the Company's customers.
Through December 31, 1995, the Company operated under a billing service
agreement with an affiliate of AT&T. Under the agreement, AT&T's affiliate
provided billing services on behalf of the Company. Subsequent to December
31, 1995, the Company contracted with another billing company to provide
billing services. The Company's customers make payments directly to the
Company through a lock-box account. Costs are recognized based on monthly
network usage billings received from AT&T and MCI.
Accounting Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets,
liabilities, income and expenses and disclosures of contingencies.
Future events could alter such estimates in the near term.
Property and Equipment
Property and equipment are stated at cost. Depreciation of furniture and
computer equipment is provided using the straight-line method for financial
reporting purposes based on their estimated useful lives. Depreciation of
leasehold improvements is provided using the straight-line method for
financial reporting purposes based on their estimated useful lives or the
life of the lease, whichever is shorter. Depreciation and amortization
expense was $64,372, $54,580 and $45,905 for the years ended December 31,
1996, 1995, and 1994, respectively.
Initial Public Offering Costs
The Company incurred costs of approximately $407,000 in connection with an
initial public offering which was not successfully completed in 1995. As a
result, all such costs were charged to expense for the year ended December
31, 1995.
Private Placement Costs
Costs incurred in connection with private placements of common stock are
recorded as a reduction in additional paid in capital.
MCI Usage Credit
During 1996, the Company received service credits from MCI, in amounts not
to exceed $1,000,000, due to MCI's inability to provide service under the
original contract with MCI (Note 5). Such credit is applicable to the
Company's current usage. Credits in the amount of $208,000 are recorded as
a reduction in actual network charges incurred during 1996.
F-8
<PAGE> 50
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Weighted Average of Common Shares
Earnings per share are based on the weighted average number of shares
outstanding (4,467,972 in 1996, 3,416,577 in 1995 and 3,400,000 in 1994).
The assumed exercise of stock options and warrants are anti-dilutive and
therefore is not considered a common stock equivalent.
Direct-Response Advertising
The costs of direct-response advertising are capitalized and amortized over
the period during which future benefits are expected to be received.
Concentrations of Risk
AT&T and MCI are currently the sole providers of the long distance
telecommunications services that the Company resells to it's customers. The
future business of the Company is currently entirely dependent upon the use
of the AT&T and MCI networks. Changes in tariffs, regulations, or policies
by AT&T and MCI, or the Company's failure to maintain or renew, or a
termination of, such agreements would materially adversely affect the
Company's financial condition and could result in a cessation of operations
by the Company.
The Company's customers are commercial businesses and are not concentrated
in any particular geographic area of the United States.
Preferred Stock
The Company's Articles of Incorporation authorizes the issuance of
10,000,000 shares of preferred stock, $0.001 par value and provide that the
rights, preferences and privileges, of the preferred stock shall be
determined by the Board of Directors. The Board of Directors has not taken
any action to determine the rights, preferences or privileges of the
preferred stock nor has any preferred stock been issued. There are no
present plans to issue any shares of preferred stock.
3. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. The Company has sustained losses since
inception and as a result has experienced deficiencies in cash flows from
operations and has an accumulated deficit of $7,066,787 at December 31,
1996.
F-9
<PAGE> 51
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
3. BASIS OF PRESENTATION (continued)
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Management is taking the following steps to revise its operating results and
financial position, which it believes will be sufficient to provide the
Company with the ability to continue in existence:
- Increased sales volume through sub-contracted telemarketing and direct
mail activities and establishment of an in-house telemarketing facility.
- Private placement in early 1997.
- Televised marketing program to recruit additional independent sales
representatives.
- Strategic alliances for multi-level and other concentrated marketing
programs.
4. PRIVATE PLACEMENTS
The Company sold approximately 1,899,000 shares of common stock through
private placements during November and December of 1995 and throughout the
year ended December 31, 1996, at prices ranging from $2.50 per share to
$3.30 per share.
5. COMMITMENTS AND CONTINGENT LIABILITIES
Contract Tariffs with AT&T - Minimum Commitments
Effective September 1, 1995, the Company entered into an individually
negotiated contract for a fixed term of four years with a one year extension
at the Company's option. The agreement called for minimum purchase
commitments of $2,400,000 on a semi-annual basis and $4,800,000 on an annual
basis. The agreement also required minimum purchases with respect to new
business usage of $240,000 on a semi-annual basis and $480,000 on an annual
basis.
In February 1997, the Company signed a four-year agreement with AT&T,
effective March 1, 1997, that superseded the contract dated September 1,
1995. The Company's minimum quarterly purchase commitment is $1,200,000 in
years one to three and increases to $1,475,000 in the fourth year. Failure
to achieve the minimum will require payment of the amount of the shortfall.
The agreement is not renewable.
Contingent Liability to AT&T - Failure to Meet Minimum Purchase Obligations
As discussed above, the previous agreement with AT&T called for certain
minimum usage by the Company. The Company did not meet such minimum usage
requirements. The shortfall (the difference between actual usage and the
minimum requirement) asserted by AT&T was
F-10
<PAGE> 52
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
5. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Contingent Liability to AT&T - Failure to Meet Minimum Purchase Obligations
(continued)
approximately $2,300,000, of which approximately $965,000 was billed as of
December 31, 1996, with the balance to be billed. On February 6, 1997, the
Company entered into a release and settlement agreement with AT&T whereby
the Company will be released from the entire $2,300,000 obligation subject
to certain conditions, which include payment by the Company of a total of
$320,000 (the amount of the Company's obligations as of November 1, 1996,
excluding the shortfall) over a six (6) month period starting January 1,
1997. The Company has made payments of $180,000 toward this balance Also,
the Company is required to be current on all of its future invoices for
ongoing service. Upon full payment of this amount, AT&T will credit the
Company's account for the full amount of the shortfall. The Company's
obligations under the release agreement are secured by a lien on it's
accounts and accounts receivable. The Company's failure to make any and
all payments on a timely basis would constitute a default under the
settlement agreement and could result in termination of service by AT&T.
These financial statements do not include a provision for the shortfall
amount.
Billing Disputes
For December 1996, the Company was billed approximately $570,000 by AT&T for
certain usage by an unauthorized user of a phone card issued by the Company.
The Company has taken the position that its documentary material with
AT&T relating to credit card fraud demonstrates that its liability for
fraudulent use is limited to $500.00. AT&T has notified the Company that
it is their position that the Company is responsible for the full amount of
the charges. The outcome of this issue is uncertain and the effect of this
dispute, if any, on the Company's current obligations as set forth in the
aforementioned settlement agreement, has not been determined. Accordingly,
these financial statements do not contain a provision for this liability.
Carrier Agreement with MCI - Minimum Commitments
On March 1, 1996, the Company entered into an agreement with MCI under which
the Company is authorized to resell various MCI services. This agreement
superseded a prior agreement dated August 1, 1995 under which MCI was unable
to provide service.
In September of 1996, the Company signed an amendment to its contract with
MCI which extends the initial ramp period and consequently, the term of the
original contract. The amended contract affords the Company an eighteen (18)
month ramp period followed by a thirty (30) month service period. During the
first eight months of the ramp period, the Company has no minimum purchase
obligations. During the ninth through twelfth months, the Company is obliged
to purchase $250,000 of services per month; during the thirteenth through
fifteenth month $500,000; during the sixteenth through eighteenth month,
$750,000; and during
F-11
<PAGE> 53
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
5. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Carrier Agreement with MCI - Minimum Commitments (continued)
the thirty month service period, $1,000,000 per month. In the event that the
Company fails to meet its minimum purchase requirements, it must pay MCI
fifteen (15) percent of the difference between the amount used and the
respective minimum monthly requirement.
In consideration of its inability to provide service under the August 1995
contract prior to December 31, 1995, MCI agreed to compensate the Company in
the form of a service credit in an amount not to exceed $1,000,000, to be
applied against its initial usage under the 1996 contract.
Joint Venture Agreement
The Company has entered into a joint venture agreement with a leading
television production company to launch a marketing program based on
broadcast media. The Company expended approximately $500,000 during 1996 for
production and origination costs, with all media expenditures being borne by
its joint venture partner. All such costs have been capitalized and will be
amortized over the estimated useful life, starting in 1997.
Installment Obligation - New York State Taxes
The State of New York Department of Taxation & Finance has filed two
separate warrants against the Company evidencing judgment liens for
uncontested tax liabilities. The Company has negotiated a payment plan with
the State of New York. The Company is making the required payments under the
plan and the warrants will be released when all required payments have been
made.
Installment Obligation - Federal Excise Taxes
During 1993, 1994 and the first quarter of 1995, the Company did not remit
payments for Federal excise taxes which were due to the Internal Revenue
Service. The Company entered into an installment agreement with the Internal
Revenue Service for the payment of such taxes. The agreement required
monthly payments of $34,000 until the total liability, including taxes and
interest had been satisfied. Penalties were waived by the Internal Revenue
Service. The Internal Revenue Service has filed a tax lien in connection
with this obligation, which will be released upon the satisfaction of all
amounts due under the agreement. As of September 1996, the Company had made
all of its payments under the payment plan. As of December 31, 1996, the
Company was awaiting a final determination from the Internal Revenue
Service as to the satisfaction of its liability under this agreement.
F-12
<PAGE> 54
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
5. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Leases
The Company conducts its operations in leased facilities under a
noncancellable operating lease expiring in 2000. The Company also leases
automobiles and equipment under noncancellable operating leases expiring in
2001. The minimum rental commitments under operating leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1997 $285,924
1998 270,177
1999 215,060
2000 198,224
2001 3,416
--------
Total Minimum Payments Required $972,801
========
</TABLE>
Rent expense charged to operations was $91,688, $100,975 and $98,868 for the
years ended December 31, 1996, 1995 and 1994, respectively.
6. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Note payable to Bank of New York (a) $ 500,000
Notes payable to two former partners, issued in
connection with Partnership buy-out (b) 555,000
Note payable, bearing interest at 20%, payable
in six (6) equal monthly installments (c) 110,000
----------
1,165,000
Less: current portion 1,165,000
----------
$ -0-
==========
</TABLE>
F-13
<PAGE> 55
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
6. NOTES PAYABLE (continued)
(a) Note Payable - Bank
On October 28, 1994, the Company borrowed $500,000 from the Bank of New
York, pursuant to a General Loan Security Agreement, with interest
payable monthly at a rate equal to the prime rate plus one-half (1/2)
percent. The loan was secured by a $500,000 certificate of deposit
which was issued by the bank to a shareholder of the Company. The
shareholder entered into an agreement with the Company under which it
agreed to subscribe to 166,667 shares of the Company's common stock at
$3.00 per share. On November 18, 1996, the stockholder purchased
166,667 shares for $500,000 and, on the same date, the bank loan was
repaid in full.
(b) Notes Payable - Partnership Buy-Out Agreement
On April 6, 1993, certain officers and LDDI entered into a buy-out
agreement to purchase the interests of two (2) partners in LDDLP.
A dispute arose with respect to the agreement, and on September 20,
1996 the parties entered into an agreement to settle pending
litigation. In accordance with the terms of the settlement, the Company
paid the sellers $500,000 in settlement of the litigation and as full
satisfaction of all remaining obligations under the buy-out agreement.
As a result of the settlement, the Company recorded cancellation of
indebtedness income of approximately $108,000.
(c) Note Payable - Other
Pursuant to a loan made on December 6, 1994, the Company borrowed an
aggregate principal amount of $200,000 from one lender. The note was
evidenced by a promissory note, was payable in six (6) equal monthly
installments starting April 6, 1995, and bore interest at a rate of 20%
per annum. The notes were personally guaranteed by certain officers of
the Company. Prior to December 31, 1995 the lender converted $90,000 of
principal into shares of the Company's common stock at a price of $3.00
per share. In August 1996, an officer and shareholder of the Company
paid the lender $229,330, representing the unpaid principal of
$110,000, and accrued interest and fees of $119,330, in consideration
of the lender granting the shareholder the benefit of the lender's
interest in all such amounts owed by the Company.
F-14
<PAGE> 56
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
7. STOCK OPTION PLAN
During 1995, the Company adopted the 1995 Stock Option Plan (the "Stock
Option Plan"), pursuant to which key employees of the Company who have been
selected as participants are eligible to receive awards of options to
purchase common shares.
Options granted under the Stock Option Plan may be Incentive Stock Options
("ISOs"), within the meaning of Section 422 of the U.S. Internal Revenue
Code, as amended (the "Code"), or non-qualified stock options ("NQSOs"). The
exercise price of the options will be determined by the Committee when the
options are granted, subject to a minimum price in the case of ISOs of the
fair market value (as defined in the Stock Option Plan) of the common shares
on the date of grant and a minimum price in the case of NQSOs of the par
value of the common shares. In the discretion of the Committee, the option
exercise price may be paid in cash or in common shares or other property
having fair market value on the date of exercise equal to the option
exercise price, or by delivering to the Company an amount of sale or loan
proceeds sufficient to pay the exercise price.
A summary of stock option activity for the years ended December 31, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
Number of Option Price
Options Per Share
--------- ------------
<S> <C> <C>
Granted 1,000,000 $ .001
Exercised -0-
Cancelled -0-
Outstanding, December 31, 1995 1,000,000 $
Granted 1,000,000 $3.30
Exercised 10,000 .001
Cancelled -0-
Outstanding, December 31, 1996 1,990,000
</TABLE>
Subsequent to December 31, 1996, options to purchase 270,000 shares of
common stock were exercised at $.001 per share. In addition to the options
issued under the Stock Option Plan, the Company granted an additional
105,000 options to purchase shares to certain parties.
8. INCOME TAXES
For the period from January 1, 1993 through October 5, 1995, LDDLP operated
as a limited partnership for Federal and State income tax purposes.
Accordingly, all of the partners were required to report their share of the
Company's loss on their respective Federal and State income tax returns.
At December 31, 1996, the Company had net operating loss carryforwards for
financial and U.S. Federal income tax purposes of approximately $7,000,000,
which are available to offset
F-15
<PAGE> 57
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
8. INCOME TAXES (continued)
future taxable income and begin to expire in the year 2007. The utilization
of such losses against future profits may be limited, dependent on ownership
changes in the Company.
Deferred taxes have not been recorded as the temporary differences,
consisting primarily of differences related to the method of recognizing
bad debts and depreciation, are not considered material by management.
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Cash paid during the year for interest $ 119,588 $ 55,151 $3,719
Private placement costs accrued -0- 174,232 -0-
Conversions of debt to equity 1,350,000 337,500 -0-
Financing and other expenses paid in stock 584,263 -0- -0-
Liabilities paid in stock 100,407 -0- -0-
Assets acquired for stock 156,250 -0- -0-
</TABLE>
10. RELATED PARTY TRANSACTIONS
Officers Loans
Loans receivable from officers includes amounts paid to officers who are
principal owners of the Company. Such amounts are non-interest bearing and
have no specific terms regarding repayment. Officers loans are shown net
of accrued compensation of $180,000 to such officers.
As of December 31, 1995, loans payable to officers are non-interest bearing
and have no specific terms regarding repayment.
Shareholder Loans
In March 1996, the Company entered into an agreement with a shareholder of
the Company, pursuant to which the shareholder agreed to loan $500,000 to
the Company. The agreement provided that the shareholder may convert all
(but not less than all) of the loan into shares of the Company's common
stock at a price of $3.30 per share at any time prior to the earlier of
December 31, 1996 or the date on which the Company's common stock is listed
for trading on NASDAQ. As consideration for the loan, the Company agreed to
issue 150,000 shares of
F-16
<PAGE> 58
LONG DISTANCE DIRECT HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1996 AND 1995
10. RELATED PARTY TRANSACTIONS (continued)
Shareholder Loans (continued)
common stock to the shareholder, which is recorded as interest expense in
the amount of $495,000 in 1996, and to pay the shareholder a fee equal to
1.5% of the first $50 million of revenues and 1% of revenues in excess of
$50 million received by the Company from the customer billings generated by
sales representatives recruited via the 1997 infomercial during the first
two (2) years any revenue is received from such infomercial. In September
1996, the shareholder converted the entire amount of the loan into 151,515
shares of common stock.
The Company entered into agreements with two (2) shareholders on August 1,
1996, pursuant to which the shareholders agreed to loan $350,000 and
$150,000, respectively, to the Company. The loans bear interest at the rate
of 12% per annum and are repayable within 60 days after receipt of the loan
proceeds. The agreements provided that the loans were convertible into
shares of the Company's common stock at a price of $2.50 per share. As
additional consideration for the loans, the Company issued 23,205 shares of
common stock, which is recorded as interest expense in the amount of $58,000
in 1996. The loan in the amount of $350,000 was converted into 140,000
shares of common stock. The loan in the amount of $150,000 was repaid prior
to December 31, 1996.
11. OUTSTANDING WARRANTS
At December 31, 1996, the Company had outstanding warrants to purchase
828,088 shares of the Company's common stock at prices ranging from $3.00
to $4.00 per share. The warrants become exercisable at various dates through
1999.
12. 401(k) PLAN
The Company maintains a 401(k) plan that covers all eligible employees.
The Company matches a percentage of employee contributions, up to a set
percentage of compensation, as stated in the plan.
F-17
<PAGE> 59
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
22. Indemnification of Directors and Officers
Section 78.751 of the Nevada General Corporation Law provides for
indemnification of directors and officers against certain liabilities. Officers
and directors of the Company may be indemnified generally against expenses
actually and reasonably incurred in connection with actions, suits or
proceedings, whether civil or criminal, provided that it is determined that
they acted in good faith, and, in any criminal matter, had reasonable cause to
believe that their conduct was not unlawful.
23. Other Expenses of Issuance and Distribution
<TABLE>
<S> <C>
Registration fee $ 3,778
Legal fees and expenses 50,000
Accounting fees and 5,000
expenses
Blue sky fees and expenses 1,000
Printing 10,000
Miscellaneous 5,222
Total $75,000(1)
</TABLE>
(1) All of the above expenses except the SEC registration fee are estimates.
All of the above expenses will be paid by the Company.
24. Recent Sales of Unregistered Securities
The Company has sold the following securities within the last three years:
In October, 1995, the Company issued 3,000,000 shares of Common Stock to the
stockholders of Long Distance Direct, Inc. (LDDI) in exchange for all of the
shares of LDDI stock pursuant to the terms and conditions of an Agreement and
Plan of Reorganization among the Company, LDDI and the stockholders of LDDI.
The issuance of such securities was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder.
In November, 1995, the Company granted options under the Company's 1995 Option
Plan to purchase 1,000,000 shares of Common Stock to officers, employees and
consultants. The grant of such options was exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder.
Between November, 1995 and January, 1996, the Company sold 440,833 shares of
Common Stock at a price of $3.00 per share to a total of approximately 18
accredited investors, none of whom were U.S. persons. The shares were issued
pursuant to Regulation S promulgated under the Securities Act of 1933.
In February, 1996, the Company issued 23,000 shares of Common Stock to an
aggregate of five individuals for consulting services. The issuance of such
shares was exempt under Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.
Between April and July 1996, the Company sold 204,000 shares of Common Stock at
a price of $3.30 per share to a total of approximately 5 accredited investors,
none of whom were U.S. persons. The shares were issued pursuant to Regulation S
promulgated under the Securities Act of 1933.
II-1
<PAGE> 60
Between April and July, 1996, the Company sold 303,151 shares of Common Stock
at a price of $3.30 per share to two accredited investors. The sale of such
securities was exempt from registration under the Securities Act of 1933
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.
In May, 1996, the Company issued 7,988 shares of Common Stock to two
individuals in consideration of their having made bridge loans to the Company.
The issuance of such shares was exempt under Section 4(2) of the Securities Act
of 1933 and Regulation D promulgated thereunder.
In May, 1996, the Company issued 150,000 shares of Common Stock to Business
Systems Consultants Limited, an accredited investor, in consideration of its
having provided a convertible loan to the Company. The issuance of such shares
was exempt under Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder.
In May, 1996, the Company granted Guthy-Renker the right to receive shares of
the Company's Common Stock valued at approximately $100,000 for every
$5,000,000 of gross revenue, excluding taxes, received by the Company from the
sale of telephone services by the Company's sales agents recruited through an
infomercial produced by Guthy-Renker. The grant of such right was exempt under
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder.
In July, 1996, the Company issued 150,000 shares to Manhattan West, Inc. for
consulting services. The issuance of such shares was exempt under Section 4(2)
of the Securities Act of 1933 and Regulation D promulgated thereunder.
In June, 1996, the Company issued 12,500 shares of Common Stock to Wise and
Shepard as partial consideration for the cancellation of the Company's debt to
Wise and Shepard for legal services rendered. The shares were issued pursuant
to Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder.
In August, 1996, the Company issued warrants to purchase 25,500 shares of
Common Stock at a price of $3.00 per share and warrants to purchase 14,000
shares of Common Stock at a price of $3.30 per share, to Thomas Scichili, a
non-U.S. person. The warrants were issued pursuant to Regulation S promulgated
under the Securities Act of 1933.
In August, 1996, the Company granted an option to Michael Preston to purchase,
at an exercise price of $2.50 per share, 60,000 shares of the Company's Common
Stock. The grant of such option was exempt under Section 4(2) of the Securities
Act of 1933 and Regulation D promulgated thereunder.
In September, 1996, the Company sold 60,606 shares of Common Stock at a price
of $3.30 per share and issued warrants to purchase an aggregate of 60,606
shares of Common Stock at $4.00 per share to two accredited investors, neither
of whom was a U.S. person. The shares were issued pursuant to Regulation S
promulgated under the Securities Act of 1933.
In September, 1996, the Company sold 151,515 shares of Common Stock at a price
of $3.30 per share to Business Systems Consultants Ltd., an accredited
investor. The shares were issued pursuant to Section 4(2) of the Securities Act
of 1933 and Regulation D promulgated thereunder.
In an offering that terminated on November 18, 1996, the Company sold 812,970
shares of Common Stock at a price of $3.30 per share and issued warrants to
purchase an aggregate of 401,362 shares of Common Stock at a price of $4.00 per
share. The offering was made on behalf of the Company by Capital Growth
International LLC as placement agent. The securities were issued to a limited
number of investors, none of whom were U.S. persons. The securities were issued
pursuant to Regulation S promulgated under the Securities Act of 1933. The
Company also issued to the placement agent, as a portion of its compensation,
warrants to purchase, at a price of $3.30 per share, up to 283,454 shares of
Common Stock. The placement agents' warrants were issued pursuant to Section
4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder.
In an offering that terminated on November 18, 1996, the Company sold 77,500
shares of Common Stock at a price of $3.30 per share. The offering was made on
behalf of the Company by Capital Growth International LLC as placement agent.
The shares were issued to a limited number of accredited investors. The
issuance of such shares was exempt from registration under the Securities Act
of 1933 pursuant to Section 4(2) thereof and Regulation D promulgated
thereunder. The Company also issued to the placement agent, as a portion of its
compensation, warrants to purchase, at a price of $3.30 per share, up to 30,706
shares of Common Stock. The placement agents' warrants were issued pursuant to
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder.
II-2
<PAGE> 61
On November 4, 1996, the Company sold 140,000 shares of Common Stock at a price
of $2.50 per share to Business Systems Consultants Ltd., an accredited
investor. The shares were issued pursuant to Section 4(2) of the Securities Act
of 1933 and Regulation D promulgated thereunder.
On November 22, 1996, the Company granted options to purchase 1,045,000 shares
of Common Stock to officers, employees and consultants. Options to purchase
1,000,000 of the shares were granted under the Company's 1995 Option Plan. The
grant of such options was exempt under Section 4(2) of the Securities Act of
1933 and Regulation D promulgated thereunder.
On November 25, 1996, the Company sold 400,000 shares of Common Stock at a
price of $2.50 per share to Business Systems Consultants Ltd., an accredited
investor. The shares were issued pursuant to Section 4(2) of the Securities Act
of 1933 and Regulation D promulgated thereunder.
In November, 1996, the Company issued 166,667 shares to Wingmead Securities,
Ltd. a non-U.S. person, at a price of $3.00 per share. The shares were issued
pursuant to Regulation S promulgated under the Securities Act of 1933.
In November, 1996, the Company issued warrants to purchase, at a price of $3.30
per share, 6,400 shares and 6,060 shares to Business Systems Consolidated Ltd.
and Alberdale Partners Limited, respectively, both non-U.S. persons. The
warrants were issued pursuant to Regulation S promulgated under the Securities
Act of 1933.
In November, 1996, the Company issued 16,250 and 6,955 shares of Common Stock
respectively to Business Systems Consultants Ltd. and Michael Preston in
consideration of their having made bridge loans to the Company. The shares were
issued pursuant to Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder.
In January, 1997, the Company granted an option to National Benefits
Consultants, LLC to purchase up to 20% of the Company's Common Stock at $3.00
per share. The option was granted pursuant to Section 4(2) of the Securities
Act of 1933 and Regulation D promulgated thereunder.
In January, 1997, the Company granted an option to Rowland W. Day to purchase,
at an exercise price of $3.00 per share, 350,000 shares of Common Stock. The
option was granted pursuant to Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.
In March, 1997, the Company issued 85,000 shares of Common Stock to Capital
Growth International, L.L.C. or nominee for investment banking services. The
shares were issued pursuant to Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder.
25. Exhibits
2.1 Agreement and Plan of Reorganization dated October 6,
1995 between Golden Ark, Inc. (now known as Long
Distance Direct Holdings, Inc.) Long Distance Direct,
Inc. and the stockholders of Long Distance Direct, Inc.*
3.1 Amended and Restated Articles of Incorporation of Long
Distance Direct Holdings, Inc. (formerly known as
Golden Ark, Inc.).*
3.2 Certificate of Amendment of Articles of Incorporation of
Long Distance Direct Holdings, Inc.*
3.3 Bylaws, as amended, of Long Distance Direct Holdings,
Inc.*
5.1 Opinion of Day, Campbell & McGill.
II-3
<PAGE> 62
10.1 Buy-out Agreement between Long Distance Direct, Inc.,
and Steven Lampert, Michael Preston, Jeffrey Schwartz,
Michael Miller and JAMI Marketing Services, Inc.*
10.2 Amended Lease Agreement for Suite 1430, 1 Blue Hill
Plaza, Pearl River, New York 10965, dated December,
1996.
10.3 Agreement with AT&T dated July, 1995 for supply of long
distance telephone service for resale.*
10.4 Agreement with MCI dated March, 1996 for supply of long
distance telephone service for resale.*
10.5 1995 Stock Option Plan.*
10.6 Agreement with Guthy-Renker-Engler dated May 15, 1996
regarding the marketing and distribution of an
infomercial.**
10.7 Agreement with Schulberg MediaWorks, Inc. dated June 10,
1996 regarding the production of an infomercial.**
10.8 Agreement with Kaire International, Inc. dated November,
1996 and extension thereof dated December, 1996
regarding supply of telecommunications services.
10.9 Agreement with National Benefits Consultants, LLC dated
January, 1997 regarding supply of telecommunications
services.
10.10 Agreement with AT&T dated February, 1997 for supply of
long distance telephone service for resale.
10.11 Amendment to MCI Agreement dated September 23, 1996.
21 List of Subsidiaries.**
23.1 Consent of Adelman, Katz & Mond, LLP
23.2 Consent of Day, Campbell & McGill, included in Exhibit
5.1.
27 Financial Data Schedule.
- ----------------
* Incorporated by reference to the Company's Form 10-K/A dated November 7, 1996
filed with the Commission on November 7, 1996.
** Previously filed.
26. Undertakings
A. Supplementary and Periodic Information, Documents and Reports
II-4
<PAGE> 63
Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, the Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority in that Section.
B. Item 512 Undertaking with Respect to Rule 415 Under the
Securities Act of 1933
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(a) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(b) To reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement; and
(c) To include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
C. Indemnification
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 ("Securities Act") may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
D. Item 512 Undertaking with Respect to Rule 430A
The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the
Securities Act of 1933, the registrant will treat the information omitted from
the form of prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of
this registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the
Securities Act of 1933, the registrant will treat each post-effective amendment
that contains a form of prospectus as a new registration statement for the
securities offered in the registration statement, and the offering of such
securities at that time as the initial bona fide offering thereof.
II-5
<PAGE> 64
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Pearl River, State of New York on March __, 1997.
LONG DISTANCE DIRECT HOLDINGS, INC.
By: /s/ Steven Lampert
--------------------------------
Steven Lampert, President
Each person whose signature to this Registration Statement appears below hereby
appoints Steven Lampert and Michael Preston, and each of them, as his
attorney-in-fact to sign on his behalf individually and in the capacity stated
below and to file all amendments and post-effective amendments to this
Registration Statement as such attorney-in-fact may deem necessary or
appropriate.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Steven Lampert March __, 1997
- --------------------------
Steven Lampert, President
and Director
Michael Preston March __, 1997
- --------------------------
Michael Preston
Chief Financial Officer
and Director
Lori Colin March __, 1997
- --------------------------
Lori Colin
Controller
Rowland W. Day II March __, 1997
- --------------------------
Rowland W. Day II
Director
II-6
<PAGE> 65
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Reorganization dated October 6,
1995 between Golden Ark, Inc. (now known as Long
Distance Direct Holdings, Inc.) Long Distance Direct,
Inc. and the stockholders of Long Distance Direct, Inc.*
3.1 Amended and Restated Articles of Incorporation of Long
Distance Direct Holdings, Inc. (formerly known as
Golden Ark, Inc.).*
3.2 Certificate of Amendment of Articles of Incorporation of
Long Distance Direct Holdings, Inc.*
3.3 Bylaws, as amended, of Long Distance Direct Holdings,
Inc.*
5.1 Opinion of Day, Campbell & McGill.
10.1 Buy-out Agreement between Long Distance Direct, Inc.,
and Steven Lampert, Michael Preston, Jeffrey Schwartz,
Michael Miller and JAMI Marketing Services, Inc.*
10.2 Amended Lease Agreement for Suite 1430, 1 Blue Hill
Plaza, Pearl River, New York 10965, dated December,
1996.
10.3 Agreement with AT&T dated July, 1995 for supply of long
distance telephone service for resale.*
10.4 Agreement with MCI dated March, 1996 for supply of long
distance telephone service for resale.*
10.5 1995 Stock Option Plan.*
10.6 Agreement with Guthy-Renker-Engler dated May 15, 1996
regarding the marketing and distribution of an
infomercial.**
10.7 Agreement with Schulberg MediaWorks, Inc. dated June 10,
1996 regarding the production of an infomercial.**
10.8 Agreement with Kaire International, Inc. dated November,
1996 and extension thereof dated December, 1996
regarding supply of telecommunications services.
10.9 Agreement with National Benefits Consultants, LLC dated
January, 1997 regarding supply of telecommunications
services.
10.10 Agreement with AT&T dated February, 1997 for supply of
long distance telephone service for resale.
10.11 Amendment to MCI Agreement dated September 22, 1996.
21 List of Subsidiaries.**
23.1 Consent of Adelman, Katz & Mond, LLP
23.2 Consent of Day, Campbell & McGill, included in Exhibit
5.1.
27 Financial Data Schedule.
- ----------------
* Incorporated by reference to the Company's Form 10-K/A dated November 7, 1996
filed with the Commission on November 7, 1996.
** Previously filed.
<PAGE> 1
[DAY CAMPBELL & McGILL LETTERHEAD]
March 25, 1997
Long Distance Direct Holdings, Inc.
1 Blue Hill Plaza
Pearl River, New York 10965
Re: Registration Statement on Form SB-2
(SEC Registration No. 333-18039)
--------------------------------
Gentlemen:
You have requested our opinion as counsel for Long Distance Direct
Holdings, Inc., a Nevada corporation (the "Company"), as to the matters set
forth below in connection with the registration under the Securities Act of
1933 on Form SB-2 (SEC Registration No. 333-18039) of 3,261,703 shares of the
Company's Common Stock, $.001 par value (the "Shares"), including 1,223,088
Shares (the "Option and Warrant Shares") issuable upon exercise of outstanding
options and warrants (the "Options and Warrants").
We have examined the Company's Registration Statement on Form SB-2
(Registration No. 333-18039) filed with the Securities and Exchange Commission
("Commission") on December 17, 1996 (the "Registration Statement"), and
Amendment Number 1 thereto filed with the Commission on March 25, 1997. We
have also examined the Articles of Incorporation of the Company, as amended,
the Bylaws and the minute books of the Company, and such other documents as we
deemed pertinent as a basis for the opinion hereinafter expressed.
Based on the foregoing, it is our opinion that:
The Shares have been duly authorized and are, or in the case of the
Option and Warrant Shares, upon exercise of the respective Options and Warrants
and upon payment therefor, will be, legally and validly issued, fully paid and
non-assessable.
LONG DISTANCE DIRECT HOLDINGS, INC.
FORM SB-2
EXHIBIT 5.1
Long Distance Direct Holdings, Inc.
March 25, 1997
Page 2
We consent to the inclusion of our name in the Registration Statement
under the caption "Legal Matters" and the filing of this opinion as an exhibit
to the Registration Statement.
This opinion is limited solely to the matter set forth herein and is
delivered to you only with regard to, and is intended for use solely in
connection with, the Registration Statement.
Very truly yours,
DAY CAMPBELL & McGILL
CRC:lec
<PAGE> 1
EXHIBIT 10.2
BLUE HILL PLAZA
LEASE
LEASE, dated December 20th, 1996, between GLORIOUS SUN ROBERT MARTIN,
L.L.C., a New York limited liability company, having its principal place of
business at 100 Clearbrook Road, Elmsford, New York 10523, ("LANDLORD"), and
LONG DISTANCE DIRECT, INC. a corporation organized and existing under the laws
of the State of New York having its principal place of business at One Blue Hill
Plaza, Pearl River, New York ("TENANT").
WHEREAS, Landlord is the Landlord of the building commonly known as One
Blue Hill Plaza, Pearl River, New York 10965, in the Town of Orangetown, County
of Rockland, and State of New York (the "BUILDING"); and
WHEREAS, Landlord and Tenant desire that a lease be made by Landlord to
Tenant of certain space in the Building for the term, for the rent and upon and
subject to the covenants, agreements, terms, conditions, limitations, exceptions
and reservations herein contained;
NOW, THEREFORE, Landlord and Tenant hereby covenant and agree
as follows
ARTICLE 1
Demise-Premises-Term
1.01. Demise.
Landlord hereby demises and leases to Tenant, and Tenant hereby takes
and hires from Landlord, the premises hereinafter mentioned for the term
hereinafter stated, for the rent hereinafter reserved and upon and subject to
the covenants, agreements, terms, conditions, limitations, exceptions and
reservations of this lease.
1.02. Demised Premises.
The premises hereby demised and leased to Tenant are a portion of the
14th floor of the Building, as shown on the floor and location plans annexed
hereto and marked as Exhibit A. The terms "Demised Premises" or "Premises" at
any given time shall mean the premises described in this Section, subject to the
provisions of this lease.
1.03. Term.
The term of this lease and the estate hereby granted (hereinafter
collectively called the "term of this lease") shall commence on the Commencement
Date (as defined in Section 8.01) and shall expire on December 31, 2000 (such
expiration date being hereinafter called the "Expiration Date"), or on such
earlier date upon which said term may expire or be terminated pursuant to any of
the provisions of this lease or pursuant to law. Promptly following the
determination of the Commencement Date, the parties hereto shall enter into a
recordable supplementary agreement setting forth the Commencement Date and
Expiration Date.
-1-
<PAGE> 2
ARTICLE 2
Definitions
2.01. Definitions.
For all purposes of this lease, and all agreements supplemental hereto,
the terms defined in this Section shall have the meanings specified in this
Section unless the context otherwise requires:
(a) The Land shall mean all of the land and improvements
thereon owned or ground leased by Landlord and comprising the Blue Hill project.
The foregoing shall include, in addition, any other parcels of land or
improvements or any facility serving the project and made available by easement,
agreement or otherwise. Landlord reserves the right to add or sever the
Landlordship or right of use to any portion of the Land at any time, whereupon
the portion so added or severed shall be included or excluded, as the case may
be, from the Land for purposes of this lease.
(b) The Buildings shall mean the Building, the other office
building and the additional improvements erected or to be erected by Landlord on
the Land, of which Building and the Demised Premises are a part, and all
replacements of such Buildings.
(c) Real Property shall mean the Land and Buildings (or in the
event same shall be submitted to the provisions of Article 9-B of the Real
Property Law, the unit (as defined in Section 339-e of the Real Property Law) of
which the Premises is a part).
(d) The Rentable Area of the Premises, shall be conclusively
deemed to be 10,713 square feet and that of the Buildings shall be conclusively
deemed to be 1,100,000 square feet.
(e) The term mortgage shall include an indenture of mortgage,
a deed of trust to a trustee, a pledge or any other instrument creating a lien
on or other security interest in the Real Property, and the term mortgagee shall
include any such mortgagee, trustee and any other holder of rights under a
mortgage.
(f) The terms include and including shall each be construed as
if followed by the phrase "without being limited to".
(g) Landlord shall mean only the Landlord, or the mortgagee in
possession, for the time being of the Building or the condominium unit (or the
Landlord of a lease or sublease of the Building or the condominium unit) of
which the Premises form a part, so that in the event of any conveyance, sale or
sales of said Building or condominium unit or an assignment, termination or
surrender of said lease or sublease or in the event of a lease or sublease of
said Building or of the condominium unit, the said Landlord shall be and hereby
is entirely freed and relieved of all covenants and obligations of Landlord
hereunder, and it shall be deemed and construed without further agreement
between the parties or their successors in interest, or between the parties and
the purchaser, at any such sale or other transaction described above, or the
said lessee or transferee of the Building or of the condominium unit, that the
purchaser or the lessee or transferee of the Building or the condominium unit
has assumed and agreed to carry out any and all covenants and obligations of
Landlord thereafter accruing hereunder.
-2-
<PAGE> 3
(h) Tenant shall mean and include, at any given time, Tenant herein
named and each successor to or assignee of any interest of Tenant herein named
under this lease pursuant to the terms of this lease.
(i) The obligations of this lease, and words of like import, shall mean
the covenants to pay rent and additional rent under this lease and all of the
other covenants, agreements, terms, conditions and limitations contained in this
lease.
(j) Tenant's obligations hereunder and Landlord's obligations
hereunder, and words of like import, shall mean the obligations of this lease
which are to be performed, observed, or kept by Tenant, or by Landlord, as the
case may be. Reference to performance of either party's obligations under this
lease shall be construed as "performance, observance and keeping".
(k) The term related corporation shall mean a corporation, individual,
partnership, or other business entity, which directly or indirectly, controls,
is controlled by, or is under common control with, another corporation,
individual, partnership, or other business entity.
(l) The term successor corporation shall mean a corporation or other
business entity into or with which another corporation or other business entity
shall be merged or consolidated or to which all or substantially all of the
assets of such other corporation or other business entity shall be transferred.
(m) The term laws and requirements of public authorities, and words of
like import, shall mean laws and ordinances of any or all of the federal, state,
city, and county governments and rules, regulations, orders and directives of
any or all departments, subdivisions, bureaus, agencies or offices thereof, or
of any other governmental, public or quasi-public authorities, having
jurisdiction of the Land or Building, and the directions of any public officer
pursuant to law.
(n) The term requirements of insurance bodies, and words of like
import, shall mean rules, regulations, orders and other requirements of the New
York Board of Fire Underwriters or the New York Fire Insurance Rating
Organization or any other similar body performing the same or similar functions
and having jurisdiction or cognizance of the Land, Building or Demised Premises.
(o) The words repair and repairs shall be deemed to include
restoration, replacement and rebuilding.
(p) All references in this lease to numbered Articles and Sections and
lettered Exhibits, are references to Articles and Sections of this lease, and
Exhibits annexed to (and thereby made part of) this lease, as the case may be,
unless expressly otherwise designated in the context.
(q) The term unavoidable delays shall mean delays due to strike,
lockout or other labor or industrial disturbance (whether or not on the part of
employees of either party hereto), civil disturbance, order of any government,
court or regulatory body claiming jurisdiction, act of the public enemy, or
riot, sabotage, blockage, embargo, failure or inability to secure materials or
labor by reason of priority or similar regulation or order of any government or
regulatory body, lightning, earthquake, fire, storm, hurricane, flood, washout,
explosion, act of God, or any cause whatsoever beyond the reasonable control of
either party hereto whether or not similar to any of the causes hereinabove
stated, excluding however, the inability of either party to obtain any financing
which may be necessary to carry out its obligations.
-3-
<PAGE> 4
(r) Regular business hours, business days and words of like import
shall mean 8:00 A.M. to 6:00 P.M. on all days other than Saturdays, Sundays, and
all days observed as holidays by the United States, State of New York or labor
unions representing individuals servicing the Building in behalf of Landlord; if
there be no such labor unions, such definition shall include holidays designated
by Landlord for the benefit of such individuals.
(s) The word invitee, relating to either Landlord or Tenant, shall mean
any employees, agents, visitors, customers, contractors, licensees, or other
parties claiming under, or in the Building by permission or sufferance of,
Landlord or Tenant, as the case may be.
(t) Tenant's Property shall mean all movable partitions, lighting
fixtures, special cabinet work, business and trade fixtures, machinery and
equipment, vaults and all other property, whether or not attached to or built
into the Premises and which is installed in the Premises by or for the account
of Tenant at its expense and can be removed without damage to the Building, and
all furniture, furnishings and other articles of personal property owned by
Tenant and located in the Premises.
(u) A lease year shall mean the 12 month period commencing with the
Commencement Date (as defined in Section 8.01), and ending the day preceding the
first anniversary of the Commencement Date (except that if the Commencement Date
shall occur on a day other than the first day of a calendar month, such period
shall commence with the Commencement Date and end with the last day of the 12th
full calendar month thereafter) and each 12 month period thereafter, all or
parts of which fall within the term of this lease.
2.02. Headings.
The Article and Section headings in this lease and the Index annexed to
this lease are inserted only as a matter of convenience, and are not to be given
any effect whatsoever in construing this lease.
ARTICLE 3
Rent
3.01. Rent.
The rent reserved under this lease (hereinafter called the "rent"), for
the term hereof, shall be and shall consist of:
(a) $192,834.00 per annum for the period commencing on the Commencement
Date through and including December 31, 1998 and $214,260.00 per annum for the
period commencing on January 1, 1999 through and including December 31, 2000
(which sum is hereinafter referred to as "fixed rent") which fixed rent shall be
payable without notice, in equal monthly installments in advance on the first
day of each and every calendar month of the term of this lease (except that if
the first day of the term of this lease is other than the first day of a
calendar month, the first monthly installment, prorated to the end of said
calendar month, shall be payable on such first day), plus
(b) such other sums of money as shall become due and payable hereunder
(which other sums are collectively hereinafter referred to as "additional
rent"), which additional rent shall be
-4-
<PAGE> 5
payable as hereinafter provided, all to be paid to Landlord or its designated
agent, at its principal place of business as specified on the first page of this
lease, or such other place as Landlord may designate, in lawful money of the
United States of America, without abatement, deduction or set-off. All rent
shall be paid by currently dated, unendorsed check of Tenant, drawn on a bank or
trust company which is a member of the New York Clearing House.
3.02. Payments Due.
Tenant covenants and agrees to pay the rent and other charges herein
reserved promptly, as and when the same shall become due and payable, without
notice or demand therefor. If no date shall be set forth herein for the payment
of additional rent, then such sum shall be due and payable within ten business
days after the date upon which Landlord demands such payment. Landlord
acknowledges receipt of the payment of fixed rent for the first full calendar
month of the term, by check, subject to collection.
3.03. Rent Control.
If at any time during the term of this lease the rent, or any part
thereof, shall not be fully collectible by reason of any law and requirement of
public authority, Tenant shall enter into such agreement or agreements and take
such other action or actions (without additional expense to Tenant) as Landlord
may request and as may be legally permissible, to permit Landlord to collect the
maximum rents which may from time to time during the continuance of such legal
rent restriction be legally permissible (but not in excess of the amounts
reserved therefor under this lease). Upon the termination of such legal rent
restriction prior to the expiration of the term of this lease (a) the rents
shall become and thereafter be payable hereunder in accordance with the amounts
reserved in this lease for the period of the term following such termination and
(b) Tenant shall pay Landlord, if legally permissible, an amount equal to (i)
the rents which would have been paid pursuant to this lease but for such legal
rent restriction less (ii) the rents actually paid by Tenant to Landlord during
the period such rent restriction was in effect. Tenant hereby appoints Landlord
its attorney-in-fact to execute any and all necessary agreements and documents
pursuant to this Section.
3.04. Late Charge.
If any monies owing by Tenant to Landlord are not paid when due and
payable pursuant to the provisions of this lease, Tenant shall pay to Landlord,
in compensation for the additional administrative, bookkeeping and collection
expenses incurred by Landlord by reason of such late payment, a sum calculated
by multiplying the amount of money not paid timely by the greater of (a) 13%, or
(b) three percentage points in excess of the prime rate then established by
Chemical Bank, N.A. (or its successor), dividing the product by 365 and
multiplying the quotient by the number of days between the date such monies were
payable and the date such monies are in fact paid. Nothing herein shall be
intended to violate any applicable law, code or regulation, and in all instances
all such charges shall be automatically reduced to any maximum applicable legal
rate or charge. Such compensation shall be without prejudice to any of
Landlord's rights and remedies hereunder.
ARTICLE 4
-5-
<PAGE> 6
Adjustment of Rent for Changes in Real Estate Taxes
and Operating Expenses
4.01. Definitions of Taxes and Operating Expenses.
As used herein:
(a) "Taxes" shall mean the total amount of real estate taxes and
assessments now or hereafter levied, imposed, confirmed or assessed against the
Real Property, including, city, county, school and transit taxes, water fees and
sewer and refuse disposal charges, or taxes, assessments or charges levied,
imposed, confirmed or assessed against, or a lien on, the Real Property by any
taxing authority whether general or specific, ordinary or extraordinary,
foreseen or unforeseen and whether for public betterments or improvements or
otherwise. If, due to any change in the method of taxation, any franchise,
capital stock, capital, income, profit, sales, rental, use and occupancy tax or
charge shall be levied, assessed, confirmed or imposed upon any Landlord of the
Real Property in lieu of, or in addition to any real estate taxes or assessments
upon or with respect to the Real Property, such tax shall be included in the
term Taxes. Penalties and interest on Taxes (except to the extent imposed upon
timely payments of assessments that may be, and are in fact, paid in
installments) and income, franchise, transfer, inheritance and capital stock
taxes shall be deemed excluded from Taxes except to the extent provided in the
immediately preceding sentence.
(b) "Base Tax" shall mean a sum determined by applying the tax rates
set forth on tax bills rendered by the taxing authorities for the tax year of
each such taxing authority during which this lease is executed to the assessed
valuations (after any reduction in said assessment as a result of any tax
abatement or other tax relief of any nature whatsoever) of the Real Property for
the tax year during which the Commencement Date shall occur. "Tax Year" shall
mean the fiscal period for each Tax affecting the property (whether or not a
calendar year) as established by each taxing authority. Any and all tax
abatements shall be for the benefit of Landlord.
(c) "Operating Expenses" or "Expenses" shall mean such costs or
expenses (and taxes thereon), as shall be paid or incurred by or in behalf of
Landlord in providing services to tenants, and in the operation, cleaning,
repair (whether structural or non-structural and whether or not capitalized
under generally accepted accounting principles), management, security and
maintenance of any and all parts of the Land and Buildings (collectively called
"Building Operation") including (i) salaries, wages and bonuses paid to, and the
cost of any hospitalization, medical, surgical, union and general welfare
benefits (including group life insurance), pension, retirement or life insurance
plans and other benefit or similar expenses of, Landlord's employees engaged in
Building Operation, (ii) social security, unemployment and other payroll taxes
and the cost of providing disability and workers' compensation coverage with
respect to said employees, (iii) costs and expenses for fuel or energy purchased
or used for the operation of the Buildings' heating, ventilating and air cooling
system and equipment, and for light and power (excluding any allocable share
thereof paid for by tenants for overtime charges), (iv) the cost of casualty,
rent, boiler, machinery, sprinkler, apparatus, liability, fidelity, plate glass
and any other insurance, (v) cost of painting, (vi) cost or rental of all
cleaning supplies, tools, materials and equipment, (vii) cost of uniforms, work
clothes and dry cleaning, (viii) cost of window cleaning, concierge, guard,
watchperson or other security personnel, service or system, if any, (ix)
management fees or, if
-6-
<PAGE> 7
no managing agent is employed by Landlord, a sum in lieu thereof which is not in
excess of then prevailing rates for management fees payable for comparable
properties in comparable locations, (x) charges of independent contractors
performing work included within this definition, (xi) stationery, (xii) legal
(except those for the preparation of this and other leases), accounting and
other professional fees and disbursements incurred in connection with Building
Operation, (xiii) water, (xiv) service contracts for the performance of
Landlord's obligations, including elevator, electric, heating, air-conditioning
and plumbing systems, (xv) maintenance and repair of grounds, including interior
and exterior lawns, gardens, shrubbery, trees, planters, containers, statuary,
exhibits, displays, walks and other ways and areas and common areas, (xvi)
maintenance and repairs to the heating, ventilating and air-conditioning
systems, underground pipes, lines, equipment and systems, roof, and all parts of
the Real Property, (xvii) removal of snow, ice, trash, garbage and other refuse,
(xviii) telephone charges incurred at the Buildings' office, if any, (xix)
extermination, (xx) fire protection, (xxi) repairs or replacements incurred by
reason of fire or other casualty or condemnation to the extent Landlord is not
compensated by insurance or the condemning authority, (xxii) cost of repairs and
the cost of replacements made in connection with repairs of cables, fans, pumps,
boilers, cooling equipment, wiring and electrical fixtures and metering, control
and distribution equipment, component parts of the HVAC, electrical, plumbing,
elevator and any life or property protection system (including sprinkler
systems), window washing equipment and snow removal equipment, (xxiii) costs for
alterations or improvements resulting in or intended to result in a reduction in
fuel consumption or Operating Expenses or made by reason of laws and
requirements of public authorities, insurance bodies or Landlord's insurers,
provided however, that to the extent such costs are capitalized under generally
accepted accounting principles, such costs (together with an interest factor
equal to the greater of 13% or three percentage points in excess of the prime
rate established by Chemical Bank, N.A. (or its successor) at the time of
expenditure) shall be amortized over a period of five years, (xxiv) for each
Expense Comparison Year (as defined in Section 4.06(a) subsequent to the first
Expense Comparison Year, an amount equal to the increase, if any, in the
interest payable as a result of any refinancing of the initial first mortgage
(encumbering the property of which the Premises are a part) during (or with
respect to) such Expense Comparison Year over the interest payable under any
such initial first mortgage during (or with respect to) the first Expense
Comparison Year; provided however, that if the principal balance of such
refinanced mortgage exceeds the principal balance thereof immediately prior to
such refinancing, then for purposes of determining the amount of interest
payable on such refinanced mortgage, the principal amount of such refinanced
mortgage shall be deemed to be equal to the lesser of the principal balance of
such refinanced mortgage or the original principal balance of the initial first
mortgage, and (xxv) costs and expenses (and taxes thereon) paid or incurred in
connection with the operation, cleaning, repair (whether structural or
non-structural and whether or not capitalized under generally accepted
accounting principles), management, security and maintenance of the limited
common elements or common elements of the condominium (if any) of which the
Premises is a part. An item of expense properly included in more than one of the
aforesaid categories shall not be included more than once in the calculation of
Operating Expenses.
(d) "Base Operating Expenses" shall mean Operating Expenses for the
calendar year during which the lease is executed ("Base Expense Year"). If the
Buildings are not fully operational or fully occupied by tenants during such
year, then the Operating Expenses for such year shall be calculated by Landlord
by projecting actual expenses to such increased amount as would have been
incurred if the Buildings had been fully operational and 95%
-7-
<PAGE> 8
occupied.
(e) "Tenant's Proportionate Share" shall mean .97%, provided that if
the Premises shall be a portion of a condominium unit the rentable area of which
shall be less than 100% of the rentable square feet in the Buildings, then
"Tenant's Proportionate Share" shall be a percentage by dividing 10,713 square
feet by the total number of square feet of rentable square feet in the unit of
which the Premises is a part.
4.02. Tax Payments.
(a) If Taxes for any Tax Year during the term ("Tax Comparison Year")
shall exceed the Base Tax, Tenant shall pay Landlord, as additional rent for
each such Tax Comparison Year, Tenant's Proportionate Share of such excess ("Tax
Payment"). At Tenant's request, Landlord shall furnish Tenant with a true copy
of all relevant tax bills.
(b) Subsequent to Landlord's receipt of the tax bills for each Tax
Comparison Year, Landlord shall submit to Tenant a statement showing (i) the Tax
Payments due for such Tax Comparison Year, and (ii) the basis of calculations
("Landlord's Tax Statement"). Tenant shall (y) pay Landlord the unpaid portion
(if any) of the Tax Payment within 30 days after receipt of Landlord's Tax
Statement, and (z) on account of the immediately following Tax Comparison Year,
pay Landlord commencing as of the first day of the month during which Landlord's
Tax Statement is rendered, and on the first day of each month thereafter until a
new Landlord's Tax Statement is rendered, 1/12th of the total payment for the
current Tax Comparison Year. The monthly payments based on the total payment for
the current Tax Comparison Year shall be adjusted from time to time to reflect
Landlord's reasonable estimate of increases in Taxes for the immediately
following Tax Comparison Year.
4.03. Reduction of Comparison Year Taxes.
If Taxes for any Tax Comparison Year, or an installment thereof, shall
be reduced before such Taxes or such installment shall be paid, the amount of
Landlord's costs and expenses of obtaining such reduction (including appraisers'
and consultants' fees) shall be added to and deemed part of Taxes for such Tax
Comparison Year. In the event Landlord obtains a refund of Taxes for any Tax
Comparison Year for which a Tax Payment has been made by Tenant, Landlord shall
credit against Tenant's next succeeding Tax Payment, Tenant's Proportionate
Share of the refund (but not more than the Tax Payment that was the subject of
the refund) after deducting from such refund the costs and expenses incurred by
Landlord in obtaining the refund, including appraisers' and consultants' fees.
In the event no Tax Payment shall thereafter be due, Landlord shall pay such
refund to Tenant.
4.04. Reduction of Base Tax.
If Landlord obtains a reduction in the Base Tax after Tenant shall have
made Tax Payments for one or more Tax Comparison Years, the Base Tax shall be
reduced (such reduction to include the expenses incurred by Landlord in
obtaining such reduction, including appraisers' and consultants' fees), prior
Tax Payments shall be recalculated and Tenant shall pay Landlord, for each of
such Tax Comparison Years, Tenant's Proportionate Share of the increased amount
of Tax Payment for each such Tax Comparison Year. Tenant's payment under this
Section 4.04 shall be made within 30 days after Landlord's billing therefor.
-8-
<PAGE> 9
4.05. Tax Payment Pending Protest.
While proceedings for the reduction in assessed valuations are pending,
the computation and payment of Tax Payments shall be based upon the original
assessments for the year(s) in question.
4.06. Adjustment of Operating Expense Payments.
(a) If Operating Expenses for any calendar year during the term and
following the Base Expense Year (each such year being called an "Expense
Comparison Year") shall exceed Base Operating Expenses, Tenant shall pay
Landlord for each such Expense Comparison Year, Tenant's Proportionate Share of
such excess ("Expense Payment"). (If the Buildings are not fully operational or
fully occupied by tenants throughout any Expense Comparison Year, then the
Operating Expenses for each such year shall be calculated by projecting actual
expenses to such increased amount as would have been incurred if the Buildings
had been fully operational and occupied).
(b) Subsequent to the end of each Expense Comparison Year, Landlord
shall submit to Tenant a statement showing (i) the Expense Payments due Landlord
for such Expense Comparison Year, and (ii) the basis for such calculation
("Landlord's Statement"). Tenant shall (x) make payment of any unpaid portion of
the Expense Payment within 30 days after receipt of Landlord's Statement, and
(y) pay to Landlord on account of the then current Expense Comparison Year,
within 30 days after receipt of Landlord's Statement an amount equal to the
product obtained by multiplying the total payment required for the preceding
Expense Comparison Year by a fraction, the denominator of which shall be 12 and
the numerator of which shall be the number of months of the current Expense
Comparison Year which shall have elapsed prior to the first day of the month
immediately following the rendition of Landlord's Statement, and (z) pay
Landlord on account of the then current Expense Comparison Year, commencing as
of the first day of the month immediately following the rendition of Landlord's
Statement and on the first day of each month thereafter until a new Landlord's
Statement is rendered, 1/12th of the total payment for the preceding Expense
Comparison Year. The monthly payments based on the total payment for the
preceding Expense Comparison Year shall be adjusted, from time to time, to
reflect Landlord's reasonable estimate of increases in rates and expenses for
the current Expense Comparison Year. The payments required to be made under
clauses (y) and (z) above shall be subject to adjustment as and when Landlord's
Statement for such current Expense Comparison Year is rendered by Landlord.
Tenant shall make payments on account of Expense Payments for the first Expense
Comparison Year on the basis of estimates prepared by Landlord, payments to be
made monthly on the first day of each month during such first Expense Comparison
Year. The payments based on such estimates shall be adjusted following the
expiration of the first Expense Comparison Year, upon rendition of Landlord's
Statement for that year.
4.07. No Credit.
If in a Tax Comparison Year the Taxes are less than the Base Tax,
and/or if in an Expense Comparison Year, the Operating Expenses are less than
the Base Operating Expenses, the Tenant shall not be entitled to receive a
credit, by way of a reduction in fixed rent, a refund of all or a portion of
prior (or a credit against future) Tax Payments or Expense Payments, or
otherwise.
-9-
<PAGE> 10
4.08. Assessment With Other Properties.
If, at any time, the Real Property is assessed for tax purposes with
other property owned by Landlord, the tax ascribable to the Real Property shall
be the allocable portion of the Taxes on the entire properties, based upon an
informal apportionment by such assessors of the total assessment to such Real
Property or if such apportionment is not available, as shall be determined by
Landlord.
4.09. Billing.
Landlord's failure during the term to prepare and/or deliver any
statement or bill required to be delivered to Tenant, or Landlord's failure to
make demand for payment of fixed rent or additional rent shall not be deemed a
waiver of, or cause Landlord to forfeit or surrender its rights to collect, any
rent due. Tenant's liability for all such payments shall continue unabated
during the term and shall survive the expiration or sooner termination of the
term, notwithstanding Landlord's failure to demand payment for same, failure to
bill same, or improper billing thereof.
4.10. Partial Comparison Year.
If the Expiration Date or earlier date upon which the term of this
lease may expire or terminate shall be on a date other than the last day of a
Tax or Expense Comparison Year, Tenant's Tax Payment and Expense Payment for
such partial Tax or Expense Comparison Year (as the case may be) shall be
appropriately prorated.
4.11. Tax Protests.
Tenant shall have no right to institute or participate in any tax
certiorari proceedings or other proceedings of a similar nature, it being
understood that the commencement, maintenance, settlement, or conduct thereof
shall be in the sole discretion of Landlord.
ARTICLE 5
Charges for Services During Non-Regular Business Hours
5.01. Services During Non-Regular Business Hours.
In the event Tenant conducts business in any portion of the Demised
Premises during other than regular business hours, Landlord shall, upon
reasonable advance notice, provide those building services as shall enable
Tenant to utilize the Premises during such period, provided that Tenant shall
pay Landlord's charges therefor, and subject to Landlord's regulations in effect
from time to time.
5.02. Cooling Tower.
In the event Tenant conducts business in any portion of the Demised
Premises during hours other than regular business hours, Landlord shall, upon
reasonable advance notice, operate the Building's cooling tower and such other
equipment and machinery as
-10-
<PAGE> 11
shall enable Tenant to cool the Premises. Tenant shall reimburse Landlord for
Landlord's cost of such service upon rendition of a bill therefor, at a rate
equal to Landlord's actual cost therefor, plus 15%.
ARTICLE 6
Construction of the Building
6.01. Changes to Building.
Landlord may, at any time, without the same constituting an eviction of
Tenant or entitling Tenant to any abatement of rent, and without otherwise
incurring liability to Tenant, and without any effect on any of Tenant's
obligations under this lease, change the arrangement and/or location of
(including the closing off of) public entrances, passageways, doors, doorways,
corridors, elevators, stairs, toilets or other parts of the Building, provided
that in so doing, Landlord does not deny Tenant reasonable means of access to
the Demised Premises for the conduct of Tenant's business.
6.02. Multi-Tenant Floors.
Landlord may, without the same constituting an eviction of Tenant or
entitling Tenant to any abatement of rent, and without otherwise incurring
liability to Tenant, and without any effect on any of Tenant's obligations under
this lease, rearrange the space unit divisions and the public corridors on the
floor upon which the Demised Premises is located in any manner Landlord may
determine, provided only that the Demised Premises shall not (i) be changed in
any respect and (ii) have diminished access by public corridor(s) to the
elevator(s), fire stair(s) and public toilet(s) serving said floor.
ARTICLE 7
Completion of the Demised Premises
Mechanics' Liens
7.01. Completion of Premises.
Landlord will substantially perform all the quantity of building
standard work in the Demised Premises as set forth in the Work Letter attached
hereto and made part hereof, upon the terms and conditions specified in such
Work Letter.
7.02. Tenant's Work.
(a) If Tenant shall employ or use any contractor or subcontractor other
than Landlord in the performance of any work in connection with Tenant's initial
occupancy, which work Tenant shall not commence until after the Commencement
Date, all of Tenant's duties and obligations set forth in Article 17 (relating
to Tenant's duties and obligations in making Tenant's Changes) shall be
applicable to and binding upon Tenant with respect to any such work.
(b) If Tenant shall employ or use any contractor other than Landlord in
the performance of any work in connection with
-11-
<PAGE> 12
Tenant's initial occupancy, such work shall be conducted in accordance with all
laws and requirements of public authorities and requirements of insurance
bodies, in a good and workmanlike manner, and in such manner as not to interfere
with or delay the work of Landlord's contractors and subcontractors in the
Building, or to impose any additional expense upon Landlord in the construction
within, or operation of, the Buildings, and so as to maintain harmonious labor
relations in the performance of work in the Buildings. Without limiting the
generality of the foregoing, Tenant shall advise Landlord of the names of
Tenant's contractors and subcontractors and adopt a work schedule in conformity
with the schedule of Landlord's contractors and subcontractors. Tenant agrees
that its contractors and subcontractors shall employ people and means to ensure
the progress of the work in the Buildings without interruption on account of
strikes, work stoppage or other similar cause for delay. At any and all times
while Landlord's and Tenant's installations are being performed by Tenant's
designated contractor, Landlord shall be entitled to have a representative(s) on
the site for the purpose of inspecting same, and for such purpose such
representative(s) shall have free and unrestricted access to all parts of the
Demised Premises.
7.03. Tenant's Construction Related Obligations.
Tenant, at its expense, and with diligence and dispatch, shall procure
the cancellation or discharge of all notices of violation arising from or
otherwise connected with work performed, or alleged to have been performed, by
its contractor(s) and which shall be issued by any public authority having or
asserting jurisdiction. Tenant shall defend, indemnify and save harmless
Landlord against any and all mechanic's and other liens and financing
statements, conditional bills of sale, chattel mortgages or other financing or
title retention devices, filed in connection therewith and against all costs,
expenses and liabilities (including reasonable attorney's fees) incurred in
connection with any such lien, financing statement, conditional bill of sale,
chattel mortgage or other financing or title retention devices, or any action or
proceeding brought thereon. In connection therewith, Tenant, at its expense,
shall procure the satisfaction or discharge of all such liens, financing
statements, conditional bills of sale, chattel mortgages and other financing or
title retention devices within 15 days after the filing or recording of same.
Nothing herein contained, however, shall prevent Tenant from contesting, in good
faith and at its own expense, any such notice of violation, lien, financing
statement, conditional bill of sale, chattel mortgage, or other financing or
title retention devices provided that (i) in case of a notice of violation,
Tenant shall comply with the provisions of Section 14.02, and (ii) in case of a
lien, financing statement, conditional bill of sale, chattel mortgage, or other
financing or title retention device Tenant shall have accomplished the discharge
thereof by bonding or otherwise within 15 days after the filing or recording of
the same.
7.04. Non-Liability of Landlord.
Neither Tenant nor any of its agents, employees, representatives,
contractors or subcontractors shall have any power or authority to do any act or
thing or to make any contract or agreement which will bind Landlord or which may
create or be the foundation for any mechanic's lien or other lien or claim upon
or against Landlord or Landlord's interest in the Real Property; and, further,
Landlord shall have no responsibility to Tenant or to any architect, engineer,
contractor, subcontractor, supplier, material provider, worker or other person,
firm or corporation who shall engage, or participate, in the performance of
additional
-12-
<PAGE> 13
work or any installation, alteration or improvement to be performed or made by
Tenant under any of the terms of this lease, or otherwise, unless Landlord shall
expressly undertake such obligation by an agreement in writing, signed by
Landlord, and made between Tenant and Landlord or such other party.
ARTICLE 8
Commencement Date-Earlier Possession
8.01. Commencement Date.
As used herein, the term "Commencement Date" shall mean the earlier of
(i) the date Tenant shall commence the conduct of business in and from the
Demised Premises, or (ii) the date when the Demised Premises are ready for
occupancy. The Demised Premises shall be deemed "ready for occupancy" on the
earliest date on which all of the following conditions shall have been met:
(a) A certificate of occupancy (temporary or final) has been
issued by the Department of Building of The Town of Orangetown, not
inconsistent with the uses permitted by Section 9.01.
(b) The work required to be performed by Landlord in the
Demised Premises has been substantially completed; and it shall be
deemed so completed notwithstanding the fact that minor or
insubstantial details of construction, mechanical adjustment, or
decoration remain to be performed, the noncompletion of which does not
materially interfere with Tenant's normal use and occupancy of the
Demised Premises.
(c) Means of access to the Demised Premises have been
provided, and the use, without material interference, of the facilities
necessary to Tenant's occupancy of the Demised Premises, including
corridors, elevators and stairways and toilet, air-conditioning, water,
plumbing, lighting and electric power facilities, are available to
Tenant substantially in accordance with Landlord's obligations
hereunder.
(d) All facilities and systems serving the Building and
passing through the Demised Premises or any part thereof have been
completed to the extent required to provide adequate services to the
Demised Premises, and the remaining work to be done in the Building is
of such nature as will not materially interfere with Tenant's use and
occupancy of the Demised Premises or access thereto.
If the occurrence of any of the above-mentioned conditions shall be delayed due
to any act or omission of Tenant or its invitees (including but not limited to
(x) Tenant's failure to furnish plans and specifications or subsequent changes
thereto; (y) Tenant's request for materials, finishes or installations other
than Landlord's standard; and (z) the performance or incompletion of work by a
party employed or retained by Tenant) the Demised Premises shall be deemed ready
for occupancy on the date when they would have been so ready but for such delay.
Any installation by Tenant prior to the Commencement Date shall be at the sole
risk of Tenant, provided that no such installation shall interfere with or delay
the work of Landlord's contractors or subcontractors in the Building or impose
any additional expense upon Landlord in the construction or operation of the
Building.
8.02. Consequences of Tenant's Possession of Premises or
-13-
<PAGE> 14
Commencement Date.
On the Commencement Date or upon such earlier date as Tenant shall take
possession of any part or parts of the Demised Premises, Tenant shall be
conclusively deemed to have agreed that Landlord, up to the time of such
possession or the Commencement Date, as the case may be, has performed all of
its obligations hereunder with respect to preparation of such part or parts for
Tenant's possession, except for such failures or omissions by Landlord in
performing such obligations as Tenant may specify by notice to Landlord not more
than 10 days following the taking of such possession by Tenant or the
Commencement Date, as the case may be. Tenant shall not be entitled to any rent
abatement on account of any such incomplete work.
8.03. Waiver of Right to Rescind.
The parties agree that this Article covers Tenant's rights with respect
to the time possession of the Premises is to be delivered to it and constitutes
an express provision to the contrary under, and Tenant hereby waives any rights
to rescind this lease and/or recover damages which Tenant might otherwise have
pursuant to, Section 223(a) of the Real Property Law of the State of New York.
8.04. Early Commencement of Business.
If Tenant shall commence the conduct of its business in one or more
portions of the Demised Premises prior to the Commencement Date, the rents
allocable to such portion or portions shall be payable from the date or dates of
such commencement or commencements, and the obligations assumed by Tenant and to
be performed during the term of this lease shall commence as of the date or
dates of such commencement or commencements, provided that no such partial
commencement of business shall be permitted if, in Landlord's judgment, such
action would interfere with the completion of its construction and installation
obligations. In the event of any such occupancy by Tenant prior to the
Commencement Date, Tenant shall not interfere with or delay the work of
Landlord's contractors and subcontractors in the Buildings and Landlord shall
have no liability to Tenant in the event it, its contractors and subcontractors
shall, in the performance of Landlord's construction and installation
obligations, interfere with, or interrupt the conduct of, Tenant's business.
ARTICLE 9
Use
9.01. Permitted Uses.
Tenant may occupy and use the Demised Premises only for executive,
administrative, accounting, and general office purposes, and for no other
purpose.
9.02. Prohibited Uses.
(a) Tenant agrees that neither Tenant nor any subtenant, assignee or
occupant of the Demised Premises shall at any time during the term of this lease
occupy or use the Demised Premises or permit the same to be used or occupied in
any manner except as provided in Section 9.01. The following non-exclusive list
of
-14-
<PAGE> 15
uses shall not be deemed to be "executive, administrative, accounting and
general office purposes", and Tenant shall not use, or permit the use of, the
Demised Premises or any part thereof, for:
(i) the conduct of a public auction of any kind, or of any
gaming or gambling activities, or for any political or club activities,
whether public or private;
(ii) the conduct of a school of any kind or as an employment
agency;
(iii) the sale, at retail or wholesale, of any products or
materials kept in the Demised Premises, by vending machine or
otherwise;
(iv) manufacturing purposes;
(v) the rendition to the public of medical, dental or other
diagnostic or therapeutic services;
(vi) a restaurant, bar, or the sale of confectionery, tobacco,
newspapers, magazines, soda, beverages, sandwiches, ice cream, baked
goods or similar items, or the preparation, dispensing or consumption
of food and beverages;
(vii) the conduct of any business, occupation or activity
which, in Landlord's reasonable judgment may (x) impair the reputation
of the Buildings, (y) interfere with or disturb the occupancy of other
tenants or occupants of the Buildings, or (z) create or foster an
unusual risk to the security of the Buildings or of any of their
tenants or occupants;
(viii) the conduct of any business not engaged in by Tenant at
the date of this lease, if the use of the Demised Premises for such
business shall conflict with any negative covenants as to use contained
in any other lease of space in the Buildings entered into subsequent to
the date of this lease but prior to the use of the Demised Premises for
such other business, provided that Landlord shall have notified Tenant
of the existence of such negative covenants; or
(ix) printing and reproduction of materials for sale or for
the purpose of rendering services to others.
(b) Tenant shall not suffer or permit the Demised Premises or any part
thereof to be used in any manner, or anything to be done therein, or suffer or
permit anything to be brought into or kept in the Demised Premises, which would
in any way (i) violate any laws or requirements of public authorities (subject
to the right to contest such laws or requirements as provided in, and subject to
the provisions of, Section 14.02), (ii) cause injury to the Buildings or any
part thereof, (iii) constitute a public or private nuisance, (iv) impair the
appearance of the exterior of the Buildings, (v) impair the use for normal
purposes of any other area of the Buildings by (or occasion physical discomfort
to, or interfere with services required to be furnished by Landlord to Tenant or
to) any of the other tenants and occupants of the Buildings, or (vi) violate any
of Tenant's other obligations under this lease.
(c) Tenant shall not cause (or allow any of its contractors, agents or
other persons or entities over whom or which it exercises a degree of control to
cause) to occur within the Demised Premises, or the Buildings, any discharge,
spillage, uncontrolled loss, seepage or filtration of hazardous waste or oil or
petroleum liquids or solids, asbestos, pcb, radioactive substances, methane,
volatile hydrocarbons, industrial solvents,
-15-
<PAGE> 16
or any other materials or substances which have in the past caused or
constituted, or are in the future found to cause or constitute, a health, safety
or environmental hazard.
9.03. Physical Protection of Premises.
(a) Tenant shall not place (nor require the placement of) a load upon
any floor of the Demised Premises exceeding 75 lbs. per square foot (live and
dead), nor shall Tenant place (or require the placement of) a load upon any
ceiling in the Demised Premises exceeding 5 lbs. per square foot. All data
processing and other business machines and equipment and all other mechanical
equipment installed and used by Tenant in the Demised Premises shall be so
equipped, installed and maintained by Tenant, at its expense, as to prevent
noise, vibration or electrical or other interference from being transmitted from
the Demised Premises to any other area of the Buildings. Tenant shall not move
any safe, heavy machinery or heavy equipment into or out of the Buildings
without employing persons properly licensed, if required by laws and
requirements of public authorities.
(b) Tenant shall not discharge or permit to be discharged any materials
into waste lines, vents, or flues of the Buildings which might cause damage
thereto. The water and wash closets and other plumbing fixtures in or serving
the Demised Premises shall not be used for any purposes other than those for
which they shall have been designed or constructed, and no sweepings, rubbish or
rags shall be deposited therein.
ARTICLE 10
Building Name-Signs-Directory
10.01. Building Name.
Landlord shall have the right, from time to time, to change the name
and/or address of the Buildings.
10.02. Tenant Signs.
Landlord agrees that Tenant may, at its own expense, install and
maintain any signs which Tenant may deem appropriate inside the Demised
Premises, except that any such signs which are visible from the outside of the
Buildings or Demised Premises shall be subject to Landlord's approval. Tenant
agrees that it will maintain all such signs at its sole cost and expense and
will comply with all laws and requirements of public authorities with respect
thereto. Upon the termination or expiration of the term of this lease, Tenant
shall, at its sole cost and expense, remove all such signs and repair any damage
caused by such removal.
10.03. Directory.
Landlord shall, upon Tenant's request and upon payment of Landlord's
charge therefor, list on the Building's directory ("Directory") the names of the
Tenant, any other party occupying any part of the Demised Premises in accordance
with the terms hereof, and their officers or employees, provided the number of
names so listed does not exceed Tenant's Proportionate Share of the Directory's
capacity. The listing of any party's name other than that of Tenant shall
neither grant such party any right or interest in this lease and/or the Demised
Premises nor constitute
-16-
<PAGE> 17
Landlord's consent to any assignment or sublease to, or occupancy by, such
party. Such listing may be terminated by Landlord at any time, without prior
notice.
ARTICLE 11
Subordination
11.01. Subordination.
(a) This lease is subject and subordinate to all ground or
underlying leases and to all mortgages which may now or hereafter affect such
leases or the Real Property, and to all renewals, modifications, consolidations,
replacements and extensions of any such underlying instruments. This clause
shall be self-operative and no further instrument of subordination shall be
needed by any ground or underlying lessee or mortgagee affecting any lease or
the Real Property. In confirmation of such subordination, Tenant shall promptly
execute any certificate that Landlord (or the lessor under any such lease or the
holder of any such mortgage or any of their respective successors in interest)
may request. If Tenant fails to execute, acknowledge or deliver any such
instrument within ten days after request therefor, Tenant hereby irrevocably
constitutes and appoints Landlord as Tenant's attorney-in-fact, coupled with an
interest, to execute and deliver any such instrument for and in behalf of
Tenant.
(b) Notwithstanding the provisions of Section 11.01(a),
subject to the provisions herein set forth, and at the election of the holder of
any current or future mortgage encumbering all or a portion of the premises of
which the Demised Premises are a part, such mortgage shall be subordinate to
this lease with the same force and effect as if this lease had been executed,
delivered and recorded prior to the execution, delivery and recording of the
said mortgage, except however that the said subordination of the mortgage to the
lease shall not affect nor be applicable to and does expressly exclude:
(i) the prior right, claim or lien of the said mortgage in, to
and upon any award or other compensation heretofore or hereafter to be
made for any taking by eminent domain of any part of the mortgaged
premises, and to the right of disposition thereof in accordance with
the provisions of the said mortgage;
(ii) the prior right, claim and lien of the said mortgage in,
to and upon any proceeds payable under all policies of fire and rent
insurance upon the said mortgaged premises and as to the right of
disposition thereof in accordance with the terms of the said mortgage;
and
(iii) any lien, right, power or interest, if any, which may
have arisen or intervened in the period between the recording of the
said mortgage and the execution of this lease, or any lien or judgment
which may arise at any time under the terms of this lease.
Although this clause shall be self-operative upon the election of any
such mortgagee, in confirmation hereof, Tenant shall execute promptly any
certificate that Landlord or such mortgagee may request, and the last sentence
of Section 11.01(a) shall apply to this Section 11.01(b) (with appropriate
changes in points of detail).
-17-
<PAGE> 18
11.02. Attornment.
In the event any proceedings are brought for the foreclosure of, or in
the event of an exercise of the power of sale under, any mortgage made by
Landlord covering the premises of which the Demised Premises are a part, Tenant
shall attorn to and acknowledge the purchaser or purchasers upon any foreclosure
or sale and recognize such purchaser or purchasers as the Landlord under this
lease.
11.03. Waiver of Termination Right.
Tenant waives the benefit of the provisions of any statue or rule of
law now or hereafter in effect which may give or purport to give Tenant any
right of election to terminate this lease or to surrender possession of the
Demised Premises in the event a superior lease or superior mortgage is
terminated or foreclosed, as the case may be.
ARTICLE 12
Quiet Enjoyment
12.01. Quiet Enjoyment.
Landlord covenants and agrees that so long as Tenant pays the fixed
rent and additional rent due hereunder and performs all of Tenant's other
obligations hereunder, Tenant shall peaceably and quietly have, hold and enjoy
the Demised Premises without hindrance or molestation by Landlord, subject,
nevertheless, to the terms, covenants and conditions of this lease. The covenant
herein set forth shall bind and be enforceable against Landlord or any successor
to Landlord's interest, subject to the terms hereof, only so long as Landlord or
any successor to Landlord's interest is in possession and is collecting rent
from Tenant.
ARTICLE 13
Assignment-Mortgaging-Subletting
13.01. Prohibition Against Assignment, Etc.
(a) Tenant covenants and agrees that neither this lease, nor
the term and estate hereby granted, nor any part hereof or thereof shall be
assigned, mortgaged, pledged, or otherwise transferred (whether voluntarily or
involuntarily, by operation of law or otherwise) to, and that neither the
Demised Premises, nor any part thereof, shall be sublet to, or offered or
advertised for subletting to, or be used or occupied by or permitted to be used
or occupied by, anyone other than Tenant.
(b) Unless Tenant is an entity the securities of which are
registered under appropriate statutory authority and listed and traded on a
national securities exchange, the transfer of any portion of the capital stock
of Tenant or the issuance of additional capital stock of Tenant the result of
which, in either event, shall be the transfer of control of Tenant to any person
or entity not controlling Tenant on the date of this lease shall be deemed an
assignment of this lease within the meaning of this Section , and shall not be
valid and binding upon Landlord.
(c) If Tenant is controlled (directly or indirectly) by a
corporation or other business entity, ("Parent"), the securities of which are
not registered under appropriate statutory authority and not listed and traded
on a national securities
-18-
<PAGE> 19
exchange, the transfer of any portion of the capital stock of such Parent or the
issuance of additional capital stock of such Parent the result of which, in
either event, shall be the transfer of control of such Parent to any person or
entity not controlling such Parent on the date of this lease shall be deemed an
assignment of this lease within the meaning of this Section, and shall not be
valid and binding upon Landlord.
(d) Any transfer by operation of law or otherwise, of Tenant's
interest in this lease, shall be deemed an assignment of this lease within the
meaning of this Section and shall not be valid and binding upon Landlord.
(e) If this lease shall be assigned, whether or not in
violation of the provisions of this lease, Landlord may (but need not) collect
rent from the assignee. If the Demised Premises or any part thereof be sublet or
occupied by anyone other than Tenant, Landlord may (but need not), after default
by Tenant and expiration of Tenant's time to cure such default, collect rent
from the subtenant or occupant. In either event, Landlord may apply the net
amount collected to the rents herein reserved, but no such assignment,
subletting, occupancy or collection shall be deemed a waiver of this covenant,
or the acceptance of the assignee, subtenant or occupant as Tenant hereunder, or
a release of Tenant from the further performance by Tenant of Tenant's
obligations under this Lease.
ARTICLE 14
Compliance with Laws
14.01. Notice and Compliance With Laws.
Tenant shall give prompt notice to Landlord of any written notice it
receives of the violation of any law or requirement of public authority
affecting the Demised Premises or the Buildings, and (subject to Section 14.02)
at its expense shall comply with all laws and requirements of public authorities
which shall, with respect to the Demised Premises or the use or occupancy
thereof, or the abatement of any nuisance, impose any violation, order or duty
on Landlord or Tenant, arising from (i) Tenant's use of Demised Premises, (ii)
breach of any of Tenant's obligations hereunder, (iii) the manner of conduct of
any business of Tenant or operation of its installations, equipment or other
property in the Demised Premises, or (iv) any cause or condition created by or
at the instance of Tenant or its invitees.
14.02. Contest.
Tenant may, at its expense (and if necessary, in the name of but
without expense to Landlord), contest, by appropriate proceedings prosecuted
diligently and in good faith, the validity or applicability to the Demised
Premises, of any law or requirement of public authority, and Landlord shall
cooperate with Tenant in such proceedings, provided that:
(a) Tenant shall defend, indemnify and hold harmless Landlord
against all liability, loss or damage which Landlord shall suffer by
reason of such contest (and any non-compliance in connection
therewith), including reasonable attorneys' fees and other expenses
incurred by Landlord, and shall furnish such bond or other security as
may be required pursuant to the requirements of any mortgage affecting
the Real Property or Demised Premises; and
-19-
<PAGE> 20
(b) Tenant shall keep Landlord advised as to the status of
such proceedings.
Tenant need not comply with any law or requirement of public authority so long
as Tenant shall be so contesting the validity or applicability thereof to the
Demised Premises in accordance with this Section, provided that (v)
noncompliance shall not constitute a crime or an offense on the part of Landlord
or any shareholder, member, partner, agent or officer of Landlord punishable by
fine or imprisonment, (w) neither Landlord nor any shareholder, member, partner,
agent or officer of Landlord shall be subjected to civil complaint, (x) no part
of the Buildings shall be in danger of being condemned or vacated by reason of
noncompliance or otherwise by reason of such contest, (y) such noncompliance
shall not cause either a violation of the Certificate(s) of Occupancy for the
Buildings or of any licenses or permits issued for the Buildings or a violation
to be noted or issued against the Buildings, and (z) title to the Demised
Premises, the Real Property and/or the Buildings is not adversely affected by
reason of such contest.
ARTICLE 15
Insurance
15.01. Tenant's Requirements.
Tenant covenants to provide prior to entry upon the Demised Premises
and to keep in full force and effect during the period prior to the commencement
of the term during which Tenant shall enter upon and occupy any portion of the
Demised Premises for any purpose, and throughout the term of this lease, at its
own cost, and with responsible insurance companies of recognized standing,
authorized to do business in the State of New York and approved by Landlord, (i)
public liability and property damage insurance, written on an occurrence basis,
to afford protection in an amount not less than $2,500,000 combined single limit
for personal injury, death and property damage arising out of any one
occurrence, protecting Landlord and Tenant against any and all claims for
personal injury, death or property damage occurring in, upon or adjacent to the
Demised Premises and any part thereof, or arising from, related to, or in any
way connected with the conduct and operation of Tenant's use, or occupancy, of
the Demised Premises, which insurance shall name Landlord (and, at Landlord's
request, Landlord's mortgagees) as additional insureds, (ii) workers'
compensation insurance covering all persons employed by Tenant or its
contractors in connection with any work performed by or for Tenant, and (iii)
plate glass insurance covering exterior plate glass in the Demised Premises, if
any. All of Tenant's insurance shall be in form satisfactory to Landlord and
shall provide that it shall not be subject to cancellation, termination or
change except after at least 30 days' prior written notice to Landlord. All such
policies or duly executed certificates for the same (in both instances with
satisfactory evidence of the payment of the premium therefor) shall be deposited
with Landlord not less than 30 days prior to the day such insurance is required
to be in force and upon renewals of said policies not less than 30 days prior to
the expiration of the term of such coverage. Landlord shall have the right at
any time and from time to time during the term hereof on not less than 30 days
notice to Tenant to require that Tenant increase the amount and/or types of
coverage required to be maintained under this Article to the amounts and/or
types of coverage then generally required of tenants in first class office
buildings the New York City metropolitan area. The minimum limits of liability
insurance required pursuant to clause (i) of this Section shall in no way limit
or diminish Tenant's liability under Section 28.02 hereof.
-20-
<PAGE> 21
15.02. Blanket Policies.
The insurance required to be provided by Tenant hereunder may be
effected by "umbrella" policies. Any such policy or policies shall, as to the
Premises, otherwise comply as to endorsements and coverage, with the provisions
of this Article.
15.03. Tenant's Compliance.
Tenant shall not commit or permit any violation of the casualty and
rent insurance policies carried by Landlord, or do or permit anything to be
done, or keep or permit anything to be kept, in the Demised Premises, which, in
case of any of the foregoing (i) could result in termination of any of such
policies, (ii) could adversely affect Landlord's right of recovery under any
such policies, or (iii) would result in reputable and independent insurance
companies refusing to insure the Building or property of Landlord therein in
amounts reasonably satisfactory to Landlord and its mortgagees, in compliance
with the requirements of insurance bodies. If any such action by Tenant, or any
failure by Tenant either to comply with the requirements of insurance bodies
with respect to the Demised Premises or to perform any of Tenant's obligations
hereunder, or any use of the Demised Premises by Tenant (whether or not
permitted under Article 9) shall result in the cancellation of any such
insurance or an increase in the rate of premiums payable with respect to such
policies carried by Landlord, Tenant shall indemnify and hold Landlord harmless
against any loss which would have been covered by such insurance and reimburse
Landlord for the resulting additional premiums which shall thereafter be paid by
Landlord. Tenant shall make such reimbursement within 30 days after the receipt
of notice from Landlord that such additional premiums have been paid by
Landlord, without limiting Landlord's rights under Articles 32, 33 and 34.
15.04. Waiver of Subrogation.
Tenant shall procure an appropriate clause in, or endorsement on, each
of its policies for fire or extended coverage insurance covering the Demised
Premises or the Building or personal property, fixtures or equipment located
thereon or therein, pursuant to which the insurance company waives subrogation
or consents to a waiver of right of recovery against Landlord, and Tenant hereby
agrees that it will not make any claim against or seek to recover from Landlord
for any loss or damage to its property or the property of others covered by such
fire or extended coverage insurance. To the extent that Tenant shall be a
self-insurer with respect to Tenant's Property, Tenant shall and hereby does
waive its right of recovery, if any, against Landlord, its agents and employees,
for loss, damage or destruction of Tenant's Property.
ARTICLE 16
Parking
16.01. Parking.
(a) Throughout the term, so long as Tenant shall have performed all of
the agreements on Tenant's part to be performed, Landlord shall make available
to Tenant the following number of parking spaces, on a reserved basis:
-21-
<PAGE> 22
four (4) spaces for executive cars, which shall be reasonably close to
the front entrance to the Building.
If Tenant or its invitees use more than the specified number of spaces
set forth above, then after five days notice from Landlord, Tenant shall, at the
option of Landlord, either (i) pay Landlord's then current charge per month for
each additional space used for each month during which such excess use takes
place (even if for less than the full month) (as of the date of this lease,
Landlord's current monthly charge is $40.00 per space), or (ii) cease and desist
immediately from using said additional spaces. If Landlord selects the first of
such options, Landlord may revoke such choice on 30 days notice.
(b) As necessary, Landlord shall (between 7:00 a.m. and 10:00 p.m. on
business days), light, clean, remove snow from and otherwise maintain, the
parking area. Tenant shall be responsible for repairing damage to the parking
areas caused by Tenant or its invitees. Landlord shall not be obligated to
remove snow unless the accumulation exceeds three inches. In no event shall
Landlord be obligated to remove snow from areas obstructed by parked vehicles at
the time Landlord's equipment is servicing such areas.
(c) Tenant shall require its invitees to park only in areas designated
by Landlord, and not to obstruct the parking areas of other tenants. Tenant
shall, upon request, furnish to Landlord the license numbers of the automobiles
operated by Tenant, its executives and other employees. Landlord may use any
lawful means to enforce the parking regulations established pursuant to Article
38, including, but not limited to, the towing away of improperly parked or
unauthorized cars and pasting of warning notices on car windows and windshields.
(d) Landlord may temporarily close any parking area in order to make
repairs or changes, to prevent the acquisition of public rights, or to
discourage unauthorized parking. Landlord may do such other acts in and to such
areas as, in its judgment, may be desirable to improve same.
(e) The parking areas for trucks and delivery vehicles in front of
loading areas (if any) adjacent to the Buildings are not to be used by Tenant or
its invitees, as parking spaces, unless otherwise directed by Landlord. Such
loading areas are provided solely for the loading and unloading of Tenant's
goods and no vehicles may be parked in such areas longer than necessary, in
Landlord's reasonable judgment, for the efficient discharge of such purposes. In
no event shall access to any loading area be blocked for more than 15 minutes.
(f) Neither Tenant nor its invitees shall park automobiles, trucks or
other motor vehicles overnight within the parking areas.
ARTICLE 17
Tenant's Changes
17.01. Permitted Changes.
After completion of the initial preparation of the Demised Premises as
provided for in Article 7, Tenant may, at any time and from time to time during
the term of this lease, at its expense, make or have made such other
alterations, additions, installations, substitutions, improvements and
decorations (hereinafter collectively called "changes" and, as applied to
changes provided for in this Article, "Tenant's Changes") in and to the Demised
Premises, but not structural alterations, additions
-22-
<PAGE> 23
or changes, as Tenant may reasonably consider necessary for the conduct of its
business in the Demised Premises, provided that:
(a) the outside appearance of the Building, or the strength of
the Building or of any of its exterior walls, supporting beams,
columns, floor slabs, foundations or elevator systems is not adversely
affected;
(b) no Tenant's Changes shall operate to reduce the Rentable
Area of the Demised Premises or the value of the Buildings;
(c) no Tenant's Changes shall adversely affect (or increase
the cost of) any service required to be furnished by Landlord to the
Demised Premises or to any other portion of the Buildings;
(d) in performing the work involved in making such changes,
Tenant shall be bound by and observe all applicable conditions and
provisions contained in Sections 7.02(b), 7.03 and 7.04 as if such
changes were included in the initial preparation of the Demised
Premises;
(e) in the case of any Tenant's Changes, other than
decorations, Tenant shall give notice to Landlord, including general
plans and specifications (if any) for such Tenant's Changes, at least
20 days before the work of making such Tenant's Changes shall commence;
(f) if the reasonably anticipated cost of any Tenant's Change
or series or group of proposed Tenant's Changes intended to be made at
or about the same time shall be $50,000 or more ("Substantial Change"),
or if any Tenant's Change shall include a change which under the
provisions of the applicable governmental Building Code then in effect
requires an alteration permit, Tenant, prior to commencement of such
change, shall obtain consent thereto from Landlord; Landlord agrees
that its consent shall not be unreasonably withheld, but Tenant agrees
that any such consent may be upon condition that upon the expiration or
earlier termination of this lease, Tenant shall restore the Demised
Premises to the condition in which it would be if the change in respect
of which the consent is required had not been made; it is agreed that
Landlord shall be deemed to be acting reasonably in refusing to give
any such consent if the making of such change would constitute a
default under a mortgage encumbering the Land or Building;
(g) if because of the nature of any Tenant's Change,
compliance with any provisions of a mortgage encumbering the Land or
Building is required, Tenant at its own expense, shall comply
therewith; and
(h) in connection with any Tenant's Changes, Tenant shall, at
its own cost and expense, obtain such permits and certificates as
shall be required under the applicable governmental Building Code then
in effect, and all other permits and certificates of any other
governmental authority having jurisdiction over the Building; and
(i) at Landlord's option, Tenant shall employ Landlord or an
affiliate of Landlord to perform Tenant's Changes, provided Landlord or
its affiliates price for such Tenant's Changes is competitive with
other licensed (and union if applicable) contractors for similar work
in similar buildings in Rockland County.
-23-
<PAGE> 24
17.02. Substantial Changes.
Each Substantial Change shall be made under the supervision of an
architect or engineer selected (and paid) by Tenant and approved by Landlord,
which approval shall not be unreasonably withheld. Each Substantial Change shall
be made in accordance with detailed plans and specifications prepared by an
architect or engineer designated (and paid) by Tenant and approved by Landlord,
such approval not to be unreasonably withheld. Copies of all such plans and
specifications shall be delivered by Tenant to Landlord, and shall be subject to
the advance approval of Landlord, which approval shall not be unreasonably
withheld. If any plans and/or specifications are prepared in connection with any
Tenant's Change, Tenant shall furnish copies thereof to Landlord.
17.03. Substantial Changes in Excess of $100,000.
If the estimated cost of any proposed Tenant's Change shall be $100,000
or more or if the estimated aggregate cost of any series or group of proposed
Tenant's Changes intended to be made at or about the same time shall be $100,000
or more, Tenant shall, at its sole cost and expense and before commencing same,
furnish to Landlord (and the holder of any mortgage affecting the Land or
Building, if therein required) (i) a surety company bond, issued by a surety
company approved by Landlord, which approval shall not be unreasonably withheld
(and the holder of any such mortgage where required), in an amount at least
equal to the estimated cost of such change, or the estimated collective cost of
such group of permitted changes, as the case may be, or (ii) other security
satisfactory to Landlord (and the holder of any such mortgage where required),
in each case guaranteeing to Landlord (and the holder of any such mortgage where
required) the fully paid completion of the proposed change, or proposed
permitted changes, as the case may be, within a reasonable time, free and clear
of all liens, encumbrances, chattel mortgages, conditional bills of sale and
other claims and charges, and in accordance with any plans and specifications
therefor approved by Landlord (and the holder of any such mortgage where
required).
17.04. Restricted Changes.
Except as provided in this Article, Tenant shall not have any right to
make any changes in the Demised Premises without the prior consent of Landlord.
ARTICLE 18
Tenant's Property
18.01. Tenant's Property.
Tenant's Property shall be and shall remain the property of Tenant, may
be removed by it at any time during the term of this lease so long as Tenant
shall not be in default hereunder and shall be in possession of the Demised
Premises. Tenant shall repair or pay the cost of repairing any damage to the
Demised Premises or to the Buildings resulting from such removal.
18.02. Abandonment of Tenant's Property.
Any of Tenant's Property which shall remain in the Demised
-24-
<PAGE> 25
Premises following the expiration or earlier termination of the term of this
lease and the removal of Tenant from the Demised Premises, may, at the option of
Landlord, be deemed to have been abandoned and either may be retained by
Landlord as its property or be disposed of by Landlord at Tenant's expense,
without accountability to Tenant, in such manner as Landlord may see fit,
subject to the reimbursement provisions of Section 18.05. Tenant's failure to
remove any of Tenant's Property from the Demised Premises after the expiration
or earlier termination of the term of this lease shall not be construed to
create a holding over by Tenant.
18.03. Leasehold Improvements.
All leasehold improvements at any time constructed or installed in the
Demised Premises, except as hereinafter otherwise provided, shall remain in the
Demised Premises upon the expiration or sooner termination of the term of this
lease. All leasehold improvements which Tenant is required to remove under the
following sentence, shall be removed by Tenant without damage to the Demised
Premises and Buildings and in the event any damage is caused by such removal,
the damage shall be repaired by Tenant at Tenant's expense. If any alteration
which shall require the Landlord's consent or approval is an item which is not a
customary leasehold improvement, such as (for illustrative purposes only) a
raised computer floor, supplemental HVAC system, private elevator, vault,
internal stairway or private lavatory, then unless Landlord shall give written
notice to Tenant to the contrary at the time it grants consent or approval for
the alteration, Landlord will require removal of said alteration by Tenant at
the expiration or sooner termination of the term of this lease.
18.04. End of Term.
Upon the expiration or sooner termination of the term of this lease,
Tenant shall quit and surrender possession of the Premises, broom clean and dry,
in good order and condition, ordinary wear and tear excepted, and Tenant shall
remove Tenant's Property from the Premises and repair any damage caused by such
removal. All leasehold improvements which Tenant is required to remove shall be
removed by Tenant, and any damage caused by such removal shall be repaired by
Tenant at Tenant's expense.
18.05. Removal by Landlord.
In the event Tenant fails to (i) remove any item of Tenant's Property
or any leasehold improvement or alteration it is required to remove, or (ii)
repair damage caused by such removal, then Landlord may effect such removal and
repair, and Tenant shall pay Landlord's costs for such removal and repair, such
obligation to survive the expiration or sooner termination of the term of this
lease.
ARTICLE 19
Tenant's Repairs
19.01. Tenant's Required Repairs.
Tenant shall, at its own expense, take good care of the Demised
Premises, and shall be responsible for replacement of all fluorescent tubes,
starters and light bulbs installed in the
-25-
<PAGE> 26
Demised Premises. Tenant, at its expense shall make all repairs, including
structural repairs, in the Demised Premises and the Buildings as shall be
required by reason of the negligence or other improper conduct of Tenant or its
invitees. In addition to the foregoing, Tenant shall, at Tenant's expense, keep
in good order and condition all installations, alterations and additions in the
Demised Premises comprising Tenant's Property (including Tenant's pneumatic
tubes, conveyors, mail chutes and air-conditioning equipment installed by or at
the expense of Tenant) and make all repairs thereto, ordinary or extraordinary,
structural or otherwise, foreseen or unforeseen, as from time to time may be
necessary, whether or not such repairs are or shall be made necessary by reason
of fault or neglect on the part of Tenant.
19.02. Windows.
Tenant shall not clean the exterior side of any window in the Demised
Premises or require, permit or allow it to be cleaned, from the outside, in
violation of any law or requirement of public authority.
19.03. Damage to Building.
All damage to the Buildings caused by Tenant in moving property into or
out of the Building or in installing or removing furniture, equipment or
fixtures shall promptly be repaired by Tenant at its expense. If Tenant permits
consumption of food in the Demised Premises, Tenant, at its expense, shall
employ the regular services of an exterminator to keep the Demised Premises and
Buildings free of vermin occasioned by such consumption.
ARTICLE 20
Landlord's Repairs, Maintenance, Cleaning
20.01. Landlord's Obligations.
Landlord, at its expense, shall keep and maintain the Building and its
fixtures, appurtenances, systems and facilities, in working order, condition and
repair and shall make all repairs, structural and otherwise, interior and
exterior, as and when needed in or about the Demised Premises, except for items
installed by or for Tenant at Tenant's expense and except for those repairs for
which Tenant is expressly responsible pursuant to any other provisions of this
lease.
20.02. Cleaning.
(a) Provided that Tenant shall keep the Demised Premises in good order,
Landlord shall cause the Demised Premises to be cleaned in accordance with the
provisions of the Cleaning Specifications annexed hereto and made part hereof.
Tenant shall provide Landlord with unrestricted access to the interior of all
windows within the Demised Premises, as a condition precedent to Landlord's
obligation to clean same.
(b) Tenant shall pay to Landlord, within 30 days after demand, the
costs and expenses incurred by Landlord as a result of (i) cleaning performed by
or for the account of Landlord in the Demised Premises, the Buildings or on the
Land, necessitated by
-26-
<PAGE> 27
(v) misuse or neglect on the part of Tenant or its invitees, (w) use of any
portion of the Demised Premises for preparation, serving or consumption of food
or beverages, reproducing operations, private lavatories or other special
purposes requiring greater or more difficult cleaning work than that normally
associated with office areas, (x) interior glass surfaces, (y) non-building
standard materials or finishes installed by Tenant or at its request, or (z)
increases in frequency or scope of any of the items set forth in the Cleaning
Specifications as shall have been requested by Tenant and provided by Landlord,
and (ii) removal from the Demised Premises, the Buildings or Land of (y) so much
of any refuse and rubbish of Tenant as shall exceed that normally accumulated
daily in the routine or ordinary business office occupancy, or (z) all of the
refuse and rubbish of Tenant's machines and eating facilities requiring special
handling. Tenant shall provide Landlord, its contractors and their employees
with free access to the Demised Premises during hours other than regular
business hours, together with the use of Tenant's lights, electricity and water,
all as may be required for the purpose of cleaning the Demised Premises.
20.03. Extraordinary Refuse.
Extraordinary waste (such as crates, cartons, boxes and used furniture
and equipment) shall be removed from the Buildings by Landlord, at Tenant's cost
and expense. At no time shall Tenant place any waste of any kind in any public
area. Anything placed in a public area by Tenant shall be deemed abandoned and
of no value to Tenant, and Landlord may have same removed and disposed of, and
the cost thereof shall be paid by Tenant to Landlord, within 30 days after
submission of a statement therefor, without limiting Landlord's rights under
Articles 32, 33 and 34.
20.04. Quality of Repairs.
All repairs to be made by Tenant pursuant to this lease shall be of
first-class quality and workmanship. If Tenant shall fail to commence any
required repairs within a reasonable time, or in any event within ten days after
service of a notice by Landlord requesting such repairs, or after commencing
such repairs shall fail to complete them with reasonable diligence, Landlord may
(but shall not be obliged to) make or complete such repairs at the expense of
Tenant.
20.05. Required Changes.
If at any time during the term of this lease there is imposed upon
Landlord by any governmental authority having jurisdiction, any obligation or
requirement to perform any structural or non-structural alteration, change or
improvement (collectively, "changes") to the Buildings which changes are not
required to be performed by Tenant pursuant to any provision of this lease,
Tenant shall pay to Landlord, as additional rent, Tenant's Proportionate Share
of all costs and expenses incurred by Landlord in performing such changes. Such
payment by Tenant shall be due to Landlord within 30 days after rendition of a
bill therefor, accompanied by a statement setting forth the changes performed by
Landlord.
ARTICLE 21
Electricity
-27-
<PAGE> 28
21.01. General.
(a) Electricity shall be supplied to the Demised Premises during the
term in accordance with the provisions of paragraph 21.02 of this Article.
However, at any time and from time to time during the term hereof, provided it
is then permissible under the provisions of laws and requirements of public
authorities, Landlord shall have the option to have electricity supplied to the
Demised Premises in accordance with either paragraph 21.03 or 21.04 of this
Article.
(b) For the purposes of this Article:
(i) The term "Electric Rate" shall mean the greater of either:
(a) the Service Classification pursuant to which Landlord
purchases electricity from the utility company servicing the Building,
or
(b) the Service Classification pursuant to which Tenant would
purchase electricity directly from the utility company servicing the Building,
provided, however, at no time shall the amount payable by Tenant for electricity
be less than Landlord's Cost per Kilowatt and Cost per Kilowatt Hour (as such
terms are hereinafter defined), and provided further that in any event, the
Electric Rate shall include all applicable surcharges, and demand, energy, fuel
adjustment and time of day charges (if any), taxes and other sums payable in
respect thereof.
(ii) The term "Cost per Kilowatt Hour" shall mean the total cost for
electricity incurred by Landlord to service the Building during a particular
time period (including all applicable surcharges, and energy, fuel adjustment
and time of day charges (if any), taxes and other sums payable in respect
thereof) divided by the total kilowatt hours purchased by Landlord during such
period.
(iii) The term "Cost per Kilowatt" shall mean the total cost for demand
incurred by Landlord to service the Building during a particular time period
(including all applicable surcharges, demand, and time of day charges (if any),
taxes and other sums payable in respect to thereof) divided by the total
kilowatts purchased by Landlord during such period.
21.02. Rent Inclusion.
(i) Landlord shall redistribute or furnish electricity to the Demised
Premises on a "rent inclusion" basis in such reasonable quantities as may be
required by Tenant to service Tenant's ordinary office equipment installed in
the Demised Premises as of the Commencement Date. Tenant shall pay to Landlord,
on account, the annual sum of $1.50 per square foot of Rentable Area, which sum
is included in the fixed rent as set forth in Article 3.01(a) ("Electric Rent").
At any time during the term, Landlord, at Tenant's sole cost and expense, may
cause an independent electrical engineer or electrical consulting firm selected
by Landlord (hereinafter referred to as the "Engineer") to make a survey of
Tenant's electrical equipment located in the Demised Premises, and the use
thereof, to determine if the full value of electricity furnished to the Demised
Premises exceeds the Electric Rent. If the value of such electricity (applying
the Electric Rate to Tenant's usage) exceeds the Electric Rent, Landlord shall
furnish a copy of said survey to Tenant and Landlord shall adjust the Electric
Rent and fixed rent in
-28-
<PAGE> 29
accordance with the survey and the Electric Rate, or Cost per Kilowatt and Cost
per Kilowatt Hour in effect on the date hereof, as adjusted in accordance with
Section 21.02 (iii) below.
(ii) If, on the Commencement Date or at any time during the term,
Tenant desires to install in the Demised Premises equipment which would not be
considered ordinary office equipment, including, but not limited to, items such
as copier machines, computer installations or supplemental air-conditioning
systems, or other heat or cooling intensive electrically operated equipment,
Tenant shall submit to Landlord a list indicating the specific type of
additional equipment, and the number, type and model of each item of equipment
to be installed, as well as the manufacturer's electrical rating associated with
same. If Landlord consents to the installation of such additional equipment,
Landlord, at Tenant's cost and expense, subsequent to or simultaneously with the
installation thereof, may either (a) cause the Engineer to make a survey of such
additional equipment in accordance with the provisions of Section 21.02(i)
hereof, or (b) at Tenant's cost, install a submeter to record Tenant's
consumption of and demand for electricity within the Demised Premises and in
that event the provisions of Section 21.03 below shall apply.
(iii) If, at any time or times after the execution of this lease, the
electric rate as published by the electric utility company servicing the Demised
Premises ("Electric Schedule") shall be increased or decreased, then commencing
with the Commencement Date and from time to time thereafter, the fixed rent and
the Electric Rent shall be increased or decreased, as the case may be, by the
percentage increase or decrease in the Electric Schedule. Notwithstanding
anything herein to the contrary, under no circumstances shall the Electric Rent
be less than the amount set forth in Section 21.02(i) hereof.
21.03. Submetering.
(i) Landlord may supply electricity to service the Demised Premises on
a submetered basis, and Tenant in such event shall pay to Landlord, as
additional rent, the sum of (y) an amount determined by applying the Electric
Rate or, at Landlord's election, the Cost per Kilowatt Hour and Cost per
Kilowatt, to Tenant's consumption of and demand for electricity within the
Demised Premises as recorded on the submeter or submeters servicing the Demised
Premises, and (z) Landlord's administrative charge of 12% of the amount referred
to in clause (y) above, if and to the extent same is permitted by laws and
requirements of public authorities (such combined sum being hereinafter called
"Submeter Electric Rent"). Except as set forth in the foregoing clause (z),
Landlord will not charge Tenant more than the Electric Rate or, at Landlord's
election, the Cost per Kilowatt and Cost per Kilowatt Hour for the electricity
provided pursuant to this paragraph. If, pursuant to paragraph (a) hereof,
Landlord shall have elected to supply electricity to the Demised Premises in
accordance with this paragraph, the fixed rent shall be decreased by the
Electric Rent. At Landlord's request, Tenant agrees to execute a supplementary
agreement modifying this lease to reflect the changes in the fixed rent
resulting from such election.
(ii) Where more than one submeter measures the electric service to
Tenant, the electric service rendered through each submeter shall be computed
and billed separately in accordance with the provisions hereinabove set forth.
(iii) Tenant shall pay to Landlord, on account of the Submeter Electric
Rent payable pursuant to this Section 21.03, the annual sum of $1.50 per square
foot of Rentable Area ("Estimated
-29-
<PAGE> 30
Submeter Electric Rent"), subject to the adjustments on the first day of each
and every calendar month of the term (except that if the first day of the term
is other than the first day of a calendar month, the first monthly installment,
prorated to the end of said calendar month, shall be payable on the first day of
the first full calendar month).
(iv) From time to time during the term, the Estimated Submeter Electric
Rent may be adjusted by Landlord on the basis of either Landlord's reasonable
estimate of Tenant's electric consumption and demand (if at any time the
submeter(s) servicing the Demised Premises are inoperative) or Tenant's actual
consumption of and demand for electricity as recorded on the submeter(s)
servicing the Demised Premises, and, in either event, the Electric Rate or Cost
per Kilowatt and Cost per Kilowatt Hour then in effect.
(v) Subsequent to the end of each calendar year during the term of this
lease, or more frequently if Landlord shall elect, Landlord shall submit to
Tenant a statement of the Electric Submeter Rent for such year or shorter period
together with the components thereof, as set forth in clause (i) of this Section
21.03 ("Submetered Electric Statement"). To the extent that the Estimated
Submeter Electric Rent paid by Tenant for the period covered by the Submetered
Electric Statement shall be less than the Submeter Electric Rent as set forth on
such Submeter Electric Statement, Tenant shall pay Landlord the difference
within 30 days after receipt of the Submeter Electric Statement. If the
Estimated Submeter Electric Rent paid by Tenant for the period covered by the
Submeter Electric Statement shall be greater than the Submeter Electric Rent as
set forth on the Submeter Electric Statement, such difference shall be credited
against the next required payment(s) of Estimated Submeter Electric Rent. If no
Estimated Submeter Electric Rent payment(s) shall thereafter be due, Landlord
shall pay such difference to Tenant.
(vi) For any period during which the submeter(s) servicing the premises
are inoperative, the Submeter Electric Rent shall be determined by Landlord,
based upon its reasonable estimate of Tenant's actual consumption of and demand
for electricity, and the Electric Rate or Cost per Kilowatt and Cost per
Kilowatt Hour then in effect.
21.04. Direct Meter.
If Landlord discontinues furnishing electricity to the Demised Premises
pursuant to Sections 21.02 or 21.03, Tenant shall make its own arrangements to
obtain electricity directly from the utility company furnishing electricity to
the Building. The cost of such service shall be paid by Tenant directly to such
utility company. Landlord shall permit its electric feeders, risers and wiring
serving the Demised Premises to be used by Tenant, to the extent available, safe
and capable of being used for such purpose. All meters and all additional panel
boards, feeders, risers, wiring and other conductors and equipment which may be
required to enable Tenant to obtain electricity of substantially the same
quality and character, shall be installed by Landlord at Tenant's cost and
expense.
21.05. Landlord's Statements and Bills.
(a) Bills for electricity supplied pursuant to Sections 21.02 and 21.03
shall be rendered to Tenant at such times as Landlord may elect. Tenant's
payments for electricity supplied in accordance with Sections 21.02 and 21.03
shall be due and payable within 30 days after delivery of a statement therefor,
by Landlord
-30-
<PAGE> 31
to Tenant. If such bills are not paid within 30 days after the same are
rendered, Landlord may, without further notice, discontinue the service of
electricity to the Demised Premises without releasing Tenant from any liability
under this lease and without Landlord or Landlord's agents incurring any
liability for any damage or loss sustained by Tenant as the result of such
discontinuance. If any tax is imposed upon Landlord's receipts from the sale of
electricity to Tenant by laws and requirements of public authorities, Tenant
agrees that, unless prohibited by such laws and requirements of public
authorities, Tenant's Proportionate Share of such taxes shall be included in the
bills of, and paid by Tenant to Landlord, as additional rent.
(b) Landlord's failure during the term to prepare and deliver any
statements or bills under this Article, or Landlord's failure to make a demand
under this Article, shall not in any way be deemed to be a waiver of, or cause
Landlord to forfeit or surrender, its rights to collect any amount of additional
rent which may become due pursuant to this Article. Tenant's liability for any
amounts due under this Article shall survive the expiration or sooner
termination of the term.
(c) Tenant's failure or refusal, for any reason, to utilize the
electrical energy provided by Landlord, shall not entitle Tenant to any
abatement or diminution of fixed rent or additional rent, or otherwise relieve
Tenant from any of its obligations under this lease.
21.06. Change of Service.
If either the quantity or character of the electrical service is
changed by the utility company supplying electrical service to the Building or
is no longer available or suitable for Tenant's requirements, or if there shall
be a change, interruption or termination of electrical service due to a failure
or defect on the part of the utility company, no such change, unavailability,
unsuitability, failure or defect shall constitute an actual or constructive
eviction, in whole or in part, or entitle Tenant to any payment from Landlord
for any loss, damage or expense, or to abatement or diminution of fixed rent or
additional rent, or otherwise relieve Tenant from any of its obligations under
this lease, or impose any obligation upon Landlord or its agents. Landlord will
use reasonable efforts to insure that there is no interruption in electrical
service to Tenant, but in no event shall Landlord be responsible for any
failures of the utility providing such service or the negligence or other acts
of third parties causing any such interruption.
21.07. Additional Installations.
(a) Tenant shall not make any electrical installations, alterations,
additions or changes to the electrical equipment or appliances in the Demised
Premises without prior written consent of Landlord in each such instance. Tenant
shall comply with the rules and regulations applicable to the service,
equipment, wiring and requirements of Landlord and of the utility company
supplying electricity to the Building. Tenant agrees that its use of electricity
in the Demised Premises will not exceed the capacity of existing feeders to the
Building or the risers or wiring installations therein and Tenant shall not use
any electrical equipment which, in Landlord's judgment, will overload such
installations or interfere with the use thereof by other tenants in the
Building. If, in Landlord's judgment, Tenant's electrical requirements
necessitate installation of an additional riser, risers or other proper and
necessary equipment or services, including additional ventilating or
air-conditioning, the same
-31-
<PAGE> 32
shall be provided or installed by Landlord at Tenant's expense, which shall be
chargeable and collectible as additional rent and paid within 30 days after the
rendition to Tenant of a bill therefor.
(b) If, after Landlord's initial installation work, (i) Tenant shall
request the installation of additional risers, feeders or other equipment or
service to supply its electrical requirements and Landlord shall determine that
the same are necessary and will not cause damage or injury to the Building or
the Demised Premises or cause or create a dangerous or hazardous condition or
entail excessive or unreasonable alterations, repairs or expense or interfere
with or disturb other tenants or occupants of the Building, or (ii) Landlord
shall determine that the installation of additional risers, feeders or other
equipment or service to supply Tenant's electrical requirements is necessary,
then and in either of such events Landlord shall cause such installations to be
made, at Tenant's sole cost and expense and Tenant shall pay Landlord for such
installations, as additional rent, within 30 days after submission of a
statement therefor.
ARTICLE 22
Heat, Ventilation and Air-Conditioning
22.01. Access and Repair.
Landlord shall have free and unrestricted access to any and all
heating, air-conditioning and ventilating equipment in the Demised Premises. The
cost of maintaining said systems shall, except to the extent set forth in this
Section and in Section 22.02, be deemed an Operating Expense. Any damage caused
to the heating, air-conditioning and ventilating equipment, appliances or
appurtenances as a result of the negligence of, or careless operation of the
same by Tenant or its invitees, shall be repaired by Landlord and the cost and
expense thereof shall be paid by Tenant, as additional rent, within 30 days
after submission of a statement therefor, without limiting Landlord's rights
under Articles 32, 33 and 34. Landlord shall have no maintenance or repair
obligation as to heating, ventilating or air conditioning equipment installed
by, or at the expense or direction of, Tenant.
22.02. Tenant's Requirements.
Landlord will not be responsible for the failure of the
air-conditioning system to meet its maximum performance specifications prior to
the proper balancing of the systems, or, if such failure results from the
occupancy of the Demised Premises by more than an average of 1 person for each
150 square feet of Tenant's Rentable Area or if Tenant installs and operates
machines and appliances the installed electrical load of which when combined
with the load of all lighting fixtures exceeds 4 watts per square foot of
Tenant's Rentable Area in any one room or other area. If the use of the Demised
Premises in a manner exceeding the aforementioned occupancy and electrical load
criteria, or the rearrangement, or partitioning after the initial preparation,
of the Demised Premises, results in the interference with the normal operation
of the air-conditioning in the Demised Premises, and as a result thereof changes
in the air-condition system servicing the Demised Premises are needed, such
changes shall be made by Landlord, at Tenant's request and at Tenant's expense,
and shall be paid within 30 days after submission of a statement therefor.
-32-
<PAGE> 33
22.03. Additional Tenant Requirements.
Tenant shall keep all windows closed and lower and close window
coverings when necessary because of the sun's position. Tenant agrees to
cooperate fully with Landlord and to comply with all regulations and
requirements Landlord may establish for the proper functioning and protection of
the heating, air-conditioning and ventilating Systems.
ARTICLE 23
Landlord's Other Services
23.01. Elevators.
Landlord shall provide Tenant, in common with other tenants in the
Building, passenger elevator service. If Landlord shall be obliged to repair,
maintain or replace such elevators by reason of the negligence or other improper
conduct of Tenant or its invitees, such work shall be performed at Tenant's
expense; Tenant shall pay for such work, within 30 days after submission of a
statement therefor, without limiting Landlord's rights under Articles 32, 33 and
34.
23.02. Interruption of Services.
Landlord reserves the right, without any liability to Tenant, to
interrupt, curtail, suspend or stop any of Landlord's services to Tenant or the
Demised Premises (including heat, ventilation, elevators, and water and such
other services as may hereafter be undertaken by Landlord for Tenant) at such
times as may be necessary, and for so long as may be reasonably required, by
reason of the making of repairs or changes which Landlord is required by this
lease to make or in good faith deems necessary. In each such case Landlord shall
exercise reasonable diligence to effect restoration of service and shall give
Tenant reasonable notice, when practicable, of the commencement and anticipated
duration of such interruption, curtailment, suspension or stoppage of any of
Landlord's services. Before commencing any work required in connection with the
foregoing, or any other work or repairs in the Demised Premises which would
interfere with Tenant's use thereof, Landlord shall endeavor to notify Tenant of
the need for and nature of the work and repairs and the manner in which and the
length of time for which such work or the making of such repairs will affect the
Demised Premises. Such notice with respect to the making of emergency repairs
shall, if time permits, be given by telephone or in person to such
representative of Tenant at the Demised Premises as Tenant may have designated
to receive such notice. Except in the event of an emergency, Tenant may require
Landlord to perform such work or make such repairs after Tenant's business hours
if they would otherwise create a material interference with Tenant's use of the
Demised Premises and can properly be accomplished at such time provided however,
however, that if Landlord shall thereby incur any additional expense by reason
of overtime work, Tenant shall reimburse Landlord for the amount thereof within
30 days after submission of a statement therefor.
ARTICLE 24
Tenant's Access
-33-
<PAGE> 34
24.01. Tenant's Access to Demised Premises.
During the term of this lease Tenant may conduct its business in the
Demised Premises on such days and hours as it may determine, and Tenant and its
invitees at all times shall have access to the Demised Premises by means of
doorways, passageways, corridors, stairways, elevators, entrances and service
entrances in the Building selected by Landlord and affording access to the
Demised Premises. Notwithstanding the foregoing, Landlord may, during times
other than regular business hours and regular business days, limit or restrict
access to the Building and Demised Premises to all persons other than Tenant and
employees and invitees specifically designated to Landlord by Tenant. Rules and
procedures to be followed in order to gain access to the Building and Demised
Premises may, from time to time, be established and amended by Landlord, and
shall be complied with by Tenant, its employees and invitees. Except in the case
of an emergency, Tenant shall have 24 hours per day, seven days per week access
to the Demised Premises.*
ARTICLE 25
Landlord's Access
25.01. Lines Through Demised Premises.
Tenant shall permit Landlord to install, use and maintain additional
utility and other pipes, ducts, lines, flues and conduit in the Demised
Premises, provided:
(a) such installations shall be so located as to cause the
least possible interference with the Tenant's use of the Demised
Premises and the conduct of its operations therein, shall not
unreasonably damage the appearance or materially reduce the floor area
of the Demised Premises or affect Tenant's layout, in each case
consistent with requirements of any laws and requirements of public
authorities and insurance bodies if such installation is required by
the aforesaid public authorities or insurance bodies;
(b) the installation shall be performed at such times and in
such manner as to create the least practicable interference with
Tenant's use of the Demised Premises and the conduct of its operations
therein; and
(c) Landlord shall repair and restore all damage caused by
such installations.
Where access doors are required for mechanical equipment in or adjacent to the
Demised Premises, Landlord shall furnish and install such access doors and
confine their location, wherever practicable, to closets, coat rooms, toilet
rooms, corridors and kitchen or pantry rooms. Landlord and Tenant will cooperate
with each other in the location of Landlord's and Tenant's facilities requiring
such access doors.
25.02. Access to Demised Premises.
Landlord and/or Landlord's agents shall have the right, upon request
made to Tenant, or to a designated representative of Tenant at the Demised
Premises, to enter and pass through the Demised Premises or any part or parts
thereof during business hours (i) to examine the Demised Premises and to show
them to the lessors of underlying or ground leases or mortgagees and to
prospective purchasers, mortgagees or lessees of the Real
-34-
<PAGE> 35
Property, and (ii) for the purpose of performing such maintenance and making
such repairs or changes in or to the Demised Premises or in or to the Building
or its facilities as may be provided for or permitted by this lease or deemed
necessary by Landlord for the benefit of the Demised Premises or other portions
of the Building or as may be mutually agreed upon by the parties or as Landlord
may be required to make by laws and requirements of public authorities. Landlord
shall be allowed to take all materials into and upon the Demised Premises that
may be required for such repairs, changes or maintenance, without being deemed
thereby to evict Tenant from the whole or any part of the Demised Premises.
Landlord's rights under this Section shall be exercised in such manner (not
involving any overtime expenses, unless Tenant shall agree to reimburse Landlord
for such expenses as additional rent) as to create the least practicable
interference with Tenant's normal conduct of its business in the Demised
Premises.
25.03. Access Upon Emergency.
Landlord shall also have the right to enter on and pass through the
Demised Premises, or any part thereof, at such times as such entry shall be
required by emergency circumstances affecting the Demised Premises or the
Building. In such event, if practicable, Landlord or its agents shall be
accompanied by a designated representative of Tenant or a member of the police,
fire, water or other municipal department concerned or of a recognized
protection company or of a public utility which is concerned.
25.04. Access During Twelve Months.
During the period of 12 months prior to the Expiration Date, Landlord
may exhibit the Demised Premises to prospective tenants, during regular business
hours, upon prior notification to Tenant.
ARTICLE 26
Shoring
26.01. Access for Protection.
If an excavation or other substructure work shall be undertaken or
authorized upon land adjacent to the Building or beneath the Building, Tenant,
without liability on the part of Landlord, shall afford to the person causing or
authorized to cause such excavation or other substructure work license to enter
upon the Demised Premises for the purpose of doing such work as such person
shall deem to be reasonably necessary to protect or preserve any of the walls or
structures of the Building or surrounding lands from injury or damage and to
support the same by proper foundations, pinning and/or underpinning, provided
that such entry (except in the event of an emergency) shall be accomplished in
the presence of a representative of Tenant, who shall be designated by Tenant
promptly upon Landlord's request. The said license to enter the Demised Premises
shall be granted by Tenant without any claim for damages or indemnity against
Landlord, and Tenant shall not be entitled to any diminution of rent on account
therefor.
ARTICLE 27
Notice of Accidents, Fire, Damage and Defects
-35-
<PAGE> 36
27.01. Notice to Landlord.
Tenant shall give prompt notice to Landlord of any of the following of
which Tenant shall have knowledge: (i) any accident in or about the Demised
Premises or the Building for which Landlord might be liable, (ii) all fires in
the Demised Premises, and (iii) all damage to, or defects in, the Demised
Premises (including the fixtures, equipment and appurtenances constituting part
thereof), or in any parts or appurtenances of the Building's sanitary,
electrical, heating, ventilating, air-conditioning, elevator and other systems
located in or passing through the Demised Premises or any part thereof.
ARTICLE 28
Landlord Not Liable, Indemnity and Exculpation
28.01. No Liability of Landlord.
Except for the negligence of Landlord, its agents or employees,
Landlord and its agents shall not be liable for any damage to property of Tenant
or others entrusted to employees of the Buildings, nor for the loss of or damage
to any property of Tenant by theft or otherwise. Except for the negligence of
Landlord, its agents or employees, Landlord and its agents shall not be liable
for any injury or damage to persons or property resulting from fire, explosion,
falling plaster, Steam, gas, electricity, water, rain or snow which may leak
from any part of the Buildings or from the pipes, appliances or plumbing works
of the same, or from any other place, or from dampness or any other cause of
whatsoever nature; nor shall Landlord or its agents be liable for any such
damage caused by other tenants or persons in, upon or about said Buildings, or
caused by operations in construction of any public or quasi-public work; nor
shall Landlord be liable for any latent defect in the Buildings or Premises. If
at any time any windows of the Demised Premises are temporarily or permanently
closed, or bricked up for any reason whatsoever, Landlord shall not be liable
for any damage Tenant may sustain thereby and Tenant shall not be entitled to
any compensation therefor nor abatement of rent nor shall the same release
Tenant from its obligations hereunder nor constitute an eviction.
28.02. Tenant's Indemnification.
Tenant shall defend, indemnify and save harmless Landlord and its
agents and employees against and from all liabilities, obligations, damages,
penalties, claims, costs, charges and expenses, including reasonable attorneys'
fees, which may be imposed upon or incurred by or asserted against Landlord
and/or its agents or employees by reason of any of the following occurring
during the term, or during any period of time prior to the Commencement Date
that Tenant may have acquired or been given access to or possession of all or
any part of the Demised Premises: (i) any work or thing done in, on or about the
Demised Premises or any part thereof by or at the instance of Tenant, or any of
its invitees, (ii) any negligent or otherwise wrongful act or omission on the
part of Tenant or any of its invitees, (iii) any accident, injury or damage to
any person or property occurring in, on or about the Demised Premises or any
part thereof, or vault, passageway or space adjacent thereto caused by the
negligence of Tenant or any of its invitees, and (iv) any failure on the part of
Tenant to perform or comply with any of the
-36-
<PAGE> 37
covenants, agreements, terms, provisions, conditions or limitations contained in
this lease on its part to be performed or complied with. In case any action or
proceeding is brought against Landlord by reason of any such claim, Tenant upon
notice from Landlord shall, at Tenant's expense, resist or defend such action or
proceeding by counsel approved by Landlord, which approval Landlord shall not
unreasonably withhold. Counsel selected by Tenant's insurance companies shall be
deemed approved by Landlord.
28.03. Exculpation.
Tenant shall look solely to the estate and interest of Landlord, its
successors and assigns, in the Building for the collection of any judgment (or
other judicial process) recovered against Landlord based upon the breach by
Landlord of any of the terms, conditions or covenants of this lease on the part
of Landlord to be performed, and no other property or assets of Landlord shall
be subject to levy, execution or other enforcement procedures for the
satisfaction of Tenant's remedies under or with respect to either this lease,
the relationship of landlord and tenant hereunder, or Tenant's use and occupancy
of the Demised Premises.
ARTICLE 29
Destruction or Damage
29.01. Notice and Repair Obligation.
Tenant shall give prompt notice to Landlord in case of fire or other
casualty in or about the Demised Premises. If the Demised Premises and/or access
thereto shall be partially or totally damaged or destroyed by fire or other
casualty, then, Landlord shall, subject to its rights as set forth in Section
29.03, repair the damage and restore and rebuild the Demised Premises and/or
access thereto as nearly as may be reasonably practical to its condition and
character immediately prior to such damage or destruction, with reasonable
diligence after notice to it of the damage or destruction, which repair and
restoration shall be limited to the extent of insurance proceeds received,
subject to unavoidable delays and delays in the adjustment of insurance claims.
In no event shall Landlord be required to repair or replace Tenant's
furnishings, decorations and other moveable items in the Premises, or personal
property of any type belonging to Tenant. Unless Landlord shall terminate this
lease in accordance with Section 29.03, Tenant shall cooperate with Landlord's
restoration by removing from the Premises as promptly as possible, all of
Tenant's salvageable inventory and movable equipment, furniture and other
property.
29.02. Abatement of Rent.
If the Demised Premises and/or access thereto shall be partially or
totally damaged or destroyed by fire or other casualty not attributable to the
fault, negligence or misuse of the Demised Premises or the Buildings by the
Tenant or its invitees, the rents payable hereunder shall be abated to the
extent that the Demised Premises shall have been rendered untenantable, from the
date of such damage or destruction to the date the damage shall be substantially
repaired. Should Tenant reoccupy a portion of the Demised Premises during the
period that the repair is in progress and prior to the date that the same are
made completely tenantable, rents allocable to such portion shall
-37-
<PAGE> 38
be payable by Tenant from the date of such occupancy to the date the Demised
Premises are made tenantable.
29.03. Termination Rights.
In case the Demised Premises shall be rendered wholly unusable by
reason of fire or other casualty or if the Building shall be so damaged by fire
or other casualty that substantial renovation, reconstruction or demolition of
the Building shall, in Landlord's opinion, be required (whether or not the
Demised Premises shall have been damaged by such fire or other casualty), or in
the event Landlord's mortgagee(s) shall make claim to the proceeds of the
casualty insurance maintained by Landlord, then Landlord may, at its option,
terminate this lease and the term and estate hereby granted, by notifying Tenant
of such termination, within 120 days after the date of such damage; such
termination date shall be not more than 60 days after the giving of such notice.
If at any time prior to Landlord giving Tenant the aforesaid notice of
termination or commencing the repair and restoration pursuant to Section 29.01,
the holder of a mortgage or the lessor of a superior lease or any person
claiming under or through the holder of such mortgage or the lessor of such
lease takes possession of the Building through foreclosure or otherwise, such
holder or lessor shall have a further period of 60 days from the date of taking
possession to terminate this lease by appropriate notice to Tenant. Nothing
contained in this Section shall relieve Tenant from any liability to Landlord in
connection with any damage to the Demised Premises or the Buildings by fire or
other casualty if Tenant shall be legally liable in such respect.
29.04. Termination Upon Casualty.
In the event of the termination of this lease pursuant to the
provisions of this Article, this lease shall expire as fully and completely on
the date fixed in such notice of termination as if that were the date definitely
fixed for the expiration of this lease, and Tenant shall forthwith quit,
surrender and vacate the Premises without prejudice, however, to Landlord's
rights and remedies against Tenant under the lease provisions in effect prior to
such termination. Any rent owing shall be paid up to such date, and any payments
of rent made by Tenant which were on account of any period subsequent to such
date shall be returned to Tenant.
29.05. Non-Liability of Landlord.
No damages, compensation or claim shall be payable by Landlord for
inconvenience, loss of business or annoyance arising from any repair or
restoration of any portion of the Demised Premises or of the Buildings pursuant
to this Article. Landlord shall use its best efforts to effect such repair or
restoration promptly and in such manner as not to interfere unreasonably with
Tenant's use and occupancy.
29.06. Insurance on Tenant's Property.
Landlord will not carry insurance of any kind on Tenant's Property or
on any work in excess of building standard work and shall not be obligated to
repair any damage thereto or replace the same. For purposes of this Article the
term casualty damage, to the extent Landlord is responsible under this Article,
shall not be deemed to include damage caused by vandalism, unknown cause or
other act not normally covered under fire and extended coverage
-38-
<PAGE> 39
insurance policies applicable to office buildings in the New York City
metropolitan area.
29.07. Waiver of Statutory Protection.
The provisions of this Article shall be considered an express agreement
governing any case of damage or destruction of the Demised Premises by fire or
other casualty, and Section 227 of the Real Property Law, providing for such a
contingency in the absence of an express agreement, and any other law of like
import, now or hereafter in force, shall have no application in such case.
29.08. Uncollectibility of Insurance.
Notwithstanding any of the foregoing provisions of this Article, if
Landlord or the lessor of any underlying lease or the holder of any mortgage
shall be unable to collect all of the insurance proceeds (including rent
insurance proceeds) applicable to damage or destruction of the Demised Premises
or the Buildings by fire or other cause, by reason of some action or inaction on
the part of Tenant, or any of its invitees, then without prejudice to any other
remedies which may be available against Tenant, the abatement of Tenant's rent
provided for in Section 29.02 shall not be effective to the extent of the
uncollected insurance proceeds.
ARTICLE 30
Condemnation
30.01. Landlord's Rights to Award.
In the event that the Real Property or any part thereof, shall be taken
in condemnation proceedings or by the exercise or any right of eminent domain or
by agreement between any superior lessors and lessees and/or Landlord on the one
hand and any governmental authority authorized to exercise such right on the
other hand (collectively a "taking"), Landlord shall be entitled to collect from
the condemnor the entire award or awards that may be made in any such proceeding
without deduction therefrom for any estate hereby vested in or owned by Tenant.
Tenant hereby expressly assigns to Landlord all of its right, title and interest
in or to every such award and also agrees to execute any and all further
documents that may be required in order to facilitate the collection thereof by
Landlord.
30.02. Full Taking.
If title to the whole or substantially all of the Real Property shall
be subject to a taking, this lease shall terminate and expire on the date of
such taking and the fixed rent and additional rent provided to be paid by Tenant
shall be apportioned and paid to the date of such taking.
30.03. Partial Taking.
If substantially all of the Real Property is not so taken and if only a
part of the Demised Premises shall be so taken, this lease nevertheless shall
continue in full force and effect, except that either party may elect to
terminate this lease, if that portion of the Demised Premises then occupied by
Tenant shall be reduced by more than 25%, by notice of such election to the
other
-39-
<PAGE> 40
party given not later than 30 days after (i) notice of such taking is given by
the condemning authority, or (ii) the date of such taking, whichever occurs
later. Upon the giving of such notice this lease shall terminate on the date of
service of such notice and the fixed rent and additional rent due and to become
due, shall be prorated and adjusted as of the date of the taking. If both
parties fail to give such notice upon such partial taking, and this lease
continues in force as to any part of the Demised Premises not taken, (x) the
rents apportioned to the part taken shall be prorated and adjusted as of the
date of taking and from such date the fixed rent and additional rent shall be
reduced to the amount apportioned to the remainder of the Demised Premises, (y)
the number of parking spaces allocated to Tenant pursuant to Section 16.01 shall
be proportionately reduced and (z) the Tenant's Proportionate Share shall be
recomputed to reflect the number of square feet of Tenant's Rentable Area
remaining in the Demised Premises in relation to the Rentable Area remaining in
the Real Property.
30.04. Tenant's Rights to Award.
Tenant shall not be entitled to appear, claim, prove or receive any
award in the proceedings relating to any taking mentioned in this Article.
30.05. Reconstruction.
In the event of any taking which does not result in a termination of
this lease, Landlord, at its expense, shall proceed with reasonable diligence to
repair the remaining part of the Building and the Demised Premises to
substantially the same condition as it was in immediately prior to such taking
to the extent that the same may be feasible, so as to constitute a tenantable
Building and Demised Premises, provided that Landlord's liability under this
Section shall be limited to the amount received by Landlord as an award arising
out of such taking, and Landlord shall have no liability or responsibility to
repair Tenant's Property.
ARTICLE 31
Surrender and Holdover
31.01. Surrender.
On the Expiration Date, or upon any earlier termination of the term of
this lease, Tenant shall quit and surrender the Demised Premises to Landlord in
good order, condition and repair, except for ordinary wear and tear, damage or
destruction by fire or other casualty or the elements, and Tenant shall remove
all of Tenant's Property therefrom except as otherwise expressly provided in
this lease.
31.02. Holdover.
Tenant acknowledges that possession of the Demised Premises must be
surrendered to Landlord at the expiration or sooner termination of the term of
this lease. Tenant agrees it shall indemnify and save Landlord harmless against
all liabilities, obligations, damages, penalties, claims, costs, charges and
expenses, including reasonable attorneys' fees, resulting from delay by Tenant
in so surrendering the Demised Premises, including
-40-
<PAGE> 41
any claims made by any succeeding tenant founded on such delay. The parties
recognize and agree that the damage to Landlord resulting from any failure by
Tenant to surrender possession of the Demised Premises on a timely basis as
aforesaid will be extremely substantial, will exceed the amount of fixed rent
and additional rent theretofore payable hereunder and will be impossible of
accurate measurement. Tenant, therefore, agrees that if possession of the
Demised Premises is not surrendered to Landlord on the date of expiration or
sooner termination of the term of this lease, then Tenant agrees to pay to
Landlord as liquidated damages for each month and for any portion of a month
during which Tenant holds over in the Demised Premises after expiration or
termination of the term of this lease, a sum equal to 200% of the average fixed
rent and additional rent which was payable per month under this lease during the
last three months of the term hereof. Such liquidated damages shall not limit
Tenant's indemnification obligation with respect to claims made by any
succeeding tenant founded upon Tenant's failure or refusal to surrender the
Premises to Landlord at the expiration or sooner termination of the term of this
lease. Nothing contained herein shall be deemed to authorize Tenant to remain in
occupancy of the Demised Premises after the expiration or termination of the
term of this lease.
ARTICLE 32
Conditions of Limitation
32.01. Prior to Term.
If at or before the commencement of the term of this lease:
(a) Tenant (or any guarantor of Tenant's obligations under
this lease) shall file a petition commencing a voluntary case under the
Bankruptcy Code (Title 11 of the United States Code), as now or
hereafter in effect, or under similar law, or file a petition in
bankruptcy or for reorganization or for an arrangement pursuant to any
state insolvency law or any similar state law;
(b) An involuntary case against Tenant (or any guarantor of
Tenant's obligations under this lease) as debtor is commenced by a
petition under the Bankruptcy Code (Title 11 of the United States
Code), as now or hereafter in effect, or under similar law, or a
petition or answer proposing the adjudication of Tenant (or any
guarantor of Tenant's obligations under this lease) as a bankrupt or
its reorganization pursuant to any state insolvency law or any similar
state law shall be filed in any court and shall not be dismissed,
discharged or denied within 60 days after the filing thereof, or if
Tenant (or any guarantor of Tenant's obligations under this lease)
shall consent or acquiesce in the filing thereof;
(c) A custodian, receiver, United States Trustee, trustee or
liquidator of Tenant or of all or substantially all of Tenant's
property (or any guarantor of Tenant's obligations under this lease) or
of the Demised Premises shall be appointed in any proceedings brought
by Tenant; or if any such custodian, receiver, United States Trustee,
trustee or liquidator shall be appointed in any proceedings brought
against Tenant and shall not be discharged within 60 days after such
appointment or if Tenant shall consent to or acquiesce in such
appointment; or
(d) If Tenant shall generally not pay Tenant's debts
-41-
<PAGE> 42
(or the guarantor of Tenant's obligations under this lease shall
generally not pay its debts) as such debts become due, or shall make an
assignment for the benefit of creditors, or shall admit in writing its
inability to pay its debts generally as they become due;
this agreement shall be deemed cancelled and terminated, in which event neither
Tenant nor any person claiming through or under Tenant or by virtue of any
statute or of an order of any court shall be entitled to possession of the
Demised Premises, but Tenant shall remain liable for damages as provided in
Article 34.
32.02. During Term.
(a) If any of the events set forth in Section 32.01 occurs during the
term of this lease, such term, at the option of Landlord, exercised within a
reasonable time after notice of the happening of any one or more of such events,
shall terminate on such date as Landlord shall specify by notice to Tenant, with
the same effect as if the date of termination were the Expiration Date, but
Tenant shall remain liable for damages as provided in Article 34.
(b) The term of this lease is subject to the further
limitation that:
(i) Whenever Tenant shall default in the payment of any
installment of rent or any other charge payable by Tenant to Landlord,
on any day upon which the same is due, and such default shall continue
for five days after Landlord shall have given to Tenant a notice
specifying such default;
(ii) Whenever Tenant shall do, or permit to be done, whether
by action or inaction, anything contrary to any of Tenant's obligations
hereunder, and if such situation shall continue and shall not be
remedied by Tenant within 30 days after Landlord shall have given to
Tenant a notice specifying the same, or, in the case of a situation
which cannot with due diligence be cured within a period of 30 days, if
Tenant shall not (y) within said 30-day period advise Landlord of
Tenant's intention duly to institute all steps necessary to remedy such
situation, and (z) duly institute within said 30- day period, and
thereafter diligently prosecute to completion, all steps necessary to
remedy the same;
(iii) Whenever Tenant shall desert and abandon the Demised
Premises (whether the keys be surrendered or not and whether the rent
be paid or not);
(iv) Whenever Tenant shall default in the timely payment of
rent for two consecutive months or for a total of four months in any
period of 12 months, notwithstanding the possibility that each of such
defaults shall have been cured within the time period set forth in
subparagraph (i); or
(v) Whenever Tenant shall default in the performance of any
non-rental obligation imposed upon it hereunder more than two times in
any period of six months or more than three times in any period of 12
months, notwithstanding the possibility that each of such defaults
shall have been cured within the time period set forth in subparagraph
(ii);
then in any of said cases set forth in the foregoing subparagraphs (i) through
(v), Landlord may give to Tenant a notice of intention to end the term of this
lease at the expiration of five days from the date of service of such notice of
intention, and upon the expiration of said five days the term and estate hereby
granted,
-42-
<PAGE> 43
whether or not the term shall theretofore have commenced, shall expire and
terminate with the same effects as if the date of termination were the
Expiration Date, but Tenant shall remain liable for damages as provided in
Article 34.
32.03. Adequate Assurances.
Without limiting any of the provisions of Articles 32, 33 or 34, if
pursuant to the Bankruptcy Code of 1978, as the same may be amended, Tenant is
permitted to assign this lease in disregard of the obligations contained in
Article 13 hereof, Tenant agrees that adequate assurance of future performance
by the assignee permitted under the Code shall mean the deposit of cash security
with Landlord in an amount equal to the sum of one year's fixed rent then
reserved hereunder plus an amount equal to all additional rent payable under
this lease for the calendar year preceding the year in which such assignment is
intended to become effective, which deposit shall be held by Landlord, for the
balance of the term of this lease as security for the full and faithful
performance of all of the obligations under this lease on the part of Tenant yet
to be performed. If Tenant receives or is to receive any valuable consideration
for such an assignment of this lease, such consideration after deducting
therefrom (i) the brokerage commissions, if any, and other expenses reasonably
incurred by Tenant for such assignment and (ii) any portion of such
consideration reasonably designated by the assigned as paid for the purchase of
Tenant's property in the Demised Premises, shall be the sole and exclusive
property of Landlord and shall be paid over to Landlord directly by such
assignee.
ARTICLE 33
Re-Entry by Landlord
33.01. Re-Entry; Summary Proceedings.
If Tenant shall default in the payment of any installment of rent or
any other charge payable by Tenant to Landlord, and if such default shall
continue for five days, or if the term of this lease shall be terminated as in
Article 32 provided, Landlord or Landlord's agents and employees may immediately
or at any time thereafter re-enter the Demised Premises, or any part thereof,
either by summary dispossess proceedings or by any suitable action or proceeding
at law, or by force or otherwise, without being liable to indictment,
prosecution or damages therefor, and may repossess the same, and may remove any
persons therefrom, to the end that Landlord may have, hold and enjoy the Demised
Premises. The word "re-enter", as herein used, is not restricted to its
technical legal meaning. In the event of any termination of this lease under the
provisions of Article 32 or if Landlord shall re-enter the Demised Premises
under the provisions of this Article or in the event of the termination of this
lease, or of re-entry, by or under any summary dispossess or other proceeding or
action under any provision of law by reason of default hereunder on the part of
Tenant, Tenant shall thereupon pay to Landlord the rent and any other charge
payable by Tenant to Landlord up to the time of such termination or re-entry, as
the case may be, and shall also pay to Landlord damages as provided in Article
34.
33.02. Remedies Cumulative.
The special remedies to which Landlord may resort hereunder are
cumulative and are not intended to be exclusive of any other remedies or means
of redress to which Landlord may lawfully be
-43-
<PAGE> 44
entitled at any time, and Landlord may invoke any remedy allowed at law or in
equity as if specific remedies were not provided for herein.
33.03. Retention of Funds.
If the term of this lease shall be terminated under the provisions of
Article 32, or if Landlord shall re-enter the Demised Premises under the
provisions of this Article, or in the event of the termination of this lease, or
of re-entry, by or under any summary dispossess or other proceeding or action or
any provision of law by reason of default hereunder on the part of Tenant,
Landlord shall be entitled to retain all moneys, if any, paid by Tenant to
Landlord, whether as advance rent, security or otherwise, but such moneys shall
be credited by Landlord against any rent or other charge due from Tenant at the
time of such termination or re-entry or, at Landlord's option, against any
damages payable by 'Tenant under Article 34 or pursuant to law.
ARTICLE 34
Damages
34.01. Damages.
Tenant covenants and agrees that if the term of this lease shall be
terminated under the provisions of Article 32, or if Landlord shall re-enter the
Demised Premises under the provisions of Article 33, or in the event of the
termination of the term of this lease, or of re-entry, by or under any summary
dispossess or other proceeding or action or any provision of law by reason of
default hereunder on the part of Tenant, Tenant shall pay to Landlord as
damages, at the election of Landlord, either:
(a) a sum which at the time of such termination or at the time
of such re-entry by Landlord, as the case may be, represents the then
value of the excess, if any, of: (i) the aggregate of the rent payable
hereunder which would have been payable by Tenant (conclusively
presuming the additional rent to be the same as was payable for the
year immediately preceding such termination or re-entry) for the period
commencing with the date of such termination or re-entry, as the case
may be, and ending with the Expiration Date had the term of this lease
not been so terminated or had Landlord not so re-entered the Demised
Premises, over (ii) the aggregate rental value of the Demised Premises
for the same period; both discounted to the date of such termination or
re-entry, as the case may be, at the rate of 10% per annum compounded
quarterly; or
(b) sums equal to the rent payable hereunder which would have
been payable by Tenant had the term of this lease not been terminated,
or had Landlord not re-entered the Demised Premises, payable upon the
due dates therefor specified herein following such termination or such
re-entry and until the Expiration Date; Landlord may re-let the Demised
Premises or any part or parts thereof, either in the name of Landlord
or otherwise, for a term or terms, which may at Landlord's option be
less than or exceed the period which would otherwise have constituted
the balance of the term of this lease; Landlord may grant concessions
of free rent and Landlord, at its option, may make such alterations and
decorations in the Demised Premises as Landlord considers advisable and
necessary for the purpose of re-letting the Demised Premises, and the
granting of such concessions and/or
-44-
<PAGE> 45
making of such alterations and decorations shall not operate or be
construed to release Tenant from liability hereunder as aforesaid
PROVIDED HOWEVER, that if Landlord shall re-let the Demised Premises
during said period, Landlord shall credit Tenant with the net rents
received by Landlord from such re-letting, such net rents to be
determined by first deducting from the gross rents as and when received
by Landlord from such re-letting, the expenses incurred or paid by
Landlord in terminating the term of this lease and in re-entering the
Demised Premises and in securing possession thereof, as well as the
expenses of re-letting, including altering and preparing the Demised
Premises for new tenants, brokers' Commissions, attorneys' fees and all
other expenses properly chargeable against the Demised Premises and the
rental therefrom it being understood that any such re-letting may be
for a period shorter or longer than the remaining term of this lease.
In no event shall Tenant be entitled to receive any excess of such net
rents over the sums payable by Tenant to Landlord hereunder, or shall
Tenant be entitled in any suit for the collection of damages pursuant
to this Article to a credit in respect of any net rents from a re-
letting, except to the extent that such net rents are actually received
by Landlord. If the Demised Premises or any part thereof should be
re-let in combination with other space, then proper apportionment on a
square foot basis shall be made of the rent received from such
re-letting and of the expenses of re-letting.
In the event of a default by Tenant in its obligations under this
lease, beyond applicable grace periods, if any, in addition to
Landlord's other rights and remedies, there shall be immediately
payable by Tenant to Landlord, as additional rent, the amount of all of
the following which are incurred, granted or assumed by Landlord in
connection with the lease: all rent concessions, free rent, rent
credits, contributions or payments by Landlord with respect to work or
improvements performed in the Demised Premises, and/or obligations
expenses and liabilities of Tenant assumed or paid for by Landlord in
consideration of Tenant's entering into this lease.
If the Demised Premises or any part thereof be relet by Landlord for
the unexpired portion of the Term, or any part thereof, before presentation of
proof of such damages to any court, commission or tribunal, the amount of rent
reserved upon such reletting shall, prima facie, be the fair and reasonable
rental value for Demised Premises, or part thereof, so relet during the term of
the reletting. Landlord shall not be liable in any way whatsoever for its
failure or refusal to relet the Demised Premises or any part thereof, or if the
Demised Premises or any part thereof are relet, for its failure to collect the
rent under such reletting, and no such refusal or failure to relet or failure to
collect rent shall release or affect Tenant's liability for damages or otherwise
under this lease.
34.02. Recovery of Damages.
Suit or suits for the recovery of such damages, or any installments
thereof, may be brought by Landlord from time to time at its election, and
nothing contained herein shall be deemed to require Landlord to postpone suit
until the date when the term of this lease would have expired if it had not been
terminated under the provisions of Article 32, or under any provision of law, or
had Landlord not re-entered the Demised Premises.
-45-
<PAGE> 46
34.03. Additional Damages.
Nothing herein contained shall be construed as limiting or precluding
the recovery by Landlord against Tenant of any sums or damages, in addition to
the damages particularly provided above, to which Landlord may lawfully be
entitled by reason of any default hereunder on the part of Tenant.
ARTICLE 35
Waivers
35.01. Waiver of Redemption Rights.
Tenant, for Tenant, and on behalf of any and all persons claiming
through or under Tenant, including creditors of all kinds, does hereby waive and
surrender all right and privilege which they or any of them might have under or
by reason of any present or future law, to redeem the Demised Premises or to
have a continuance of this lease for the term hereby demised after being
dispossessed or ejected therefrom by process of law or under the terms of this
lease or after the termination of the term of this lease as herein provided.
Tenant also waives the provisions of any law now or hereafter in effect relating
to notice and delay in levy of execution in case of an eviction or dispossess of
a tenant for non-payment of rent.
35.02. No Designation of Payments.
Tenant waives Tenant's right, if any, to designate the items against
which any payments made by Tenant are to be credited, and Tenant agrees that
Landlord may apply any payments made by Tenant to any items it sees fit,
irrespective of and notwithstanding any designation or request by Tenant as to
the items against which any such payments shall be credited.
35.03. Waiver of Jury Trial.
Landlord and Tenant waive trial by jury in any action, proceeding or
counterclaim brought by either against the other on any matter whatsoever
arising out of or in any way connected with this lease, the relationship of
landlord and tenant, Tenant's use or occupancy of the Demised Premises, any
claim of injury or damage, or any emergency statutory or any other statutory
remedy.
35.04. Counterclaims.
Tenant shall not interpose any counterclaim of any kind in any summary
proceeding commenced by Landlord for nonpayment of rent.
ARTICLE 36
Unperformed Covenants
36.01. Performance of Tenant's Obligations.
If Tenant shall default in the performance of any of Tenant's
obligations hereunder, Landlord, without thereby waiving such default, may at
Landlord's option, after reasonable notice to
-46-
<PAGE> 47
Tenant, perform the same for the account of Tenant. If Landlord makes any
expenditures or incurs any obligations for the payment of money, including
attorneys' fees in instituting, prosecuting or defending any action or
proceeding by reason of any default of Tenant hereunder, such sums paid or
obligations incurred, with interest at the maximum legal rate thereon, shall be
deemed to be additional rent hereunder and shall be paid by Tenant to Landlord
upon rendition of any bill or statement to Tenant therefore.
ARTICLE 37
Consents and Approvals
37.01. Consents and Approvals.
Whenever in this lease it is provided that Landlord shall not
unreasonably withhold or delay consent or approval or shall exercise its
judgment reasonably (such consent or approval and such exercise of judgment
being collectively referred to as "consent"), if Landlord shall delay or refuse
such consent, Tenant in no event shall be entitled to make, nor shall Tenant
make, any claim, and Tenant hereby waives any claim, for money damages (nor
shall Tenant claim any money damage by way of setoff, counterclaim or defense)
based upon any claim or assertion by Tenant that Landlord unreasonably withheld
or unreasonably delayed its consent. Tenant's sole remedy shall be an action or
proceeding for specific performance, injunction or declaratory judgment to
enforce any such provision, but any such equitable remedy which can be cured by
the expenditure of money may be enforced personally against Landlord only to the
extent of its interest in the Building. Failure on the part of Tenant to seek
such relief within 30 days after the date upon which Landlord has withheld its
consent shall preclude any right to dispute the reasonableness of such
withholding of consent.
37.02. Expenses.
If Tenant shall request the consent or approval of Landlord to the
making of any alterations or to any other thing, and Landlord shall seek and pay
a separate fee for the expert opinion of Landlord's counsel, architect, engineer
or other representative or agent as to the form or substance thereof, Tenant
shall pay to Landlord, as additional rent, within 30 days after demand, all
costs and expenses of Landlord incurred in connection therewith, including, in
case of any alteration, costs and expenses of Landlord in reviewing plans and
specifications.
ARTICLE 38
Rules and Regulations
38.01. Rules and Regulations.
Tenant and Tenant's invitees shall observe and comply with the Rules
and Regulations attached hereto and made part hereof, and such other and further
Rules and Regulations as Landlord or Landlord's agents may from time to time
adopt. Notice of any additional Rules and Regulations shall be given to Tenant.
Nothing in this lease shall be construed to impose upon Landlord any duty or
obligation to enforce the Rules and Regulations or the terms, covenants or
conditions in any other lease, against any other tenant or occupant of the
Buildings, and Landlord shall not
-47-
<PAGE> 48
be liable to Tenant for violation of the same by any other tenant or such other
tenant's licensees. In the event of a conflict between the Rules and Regulations
and the provisions of this lease, the provisions of this lease shall prevail.
ARTICLE 39
Amendments for Financing
39.01. Amendments for Financing.
If, in connection with obtaining financing for the Real Property, a
banking, insurance or other recognized institutional lender shall request
modifications in this lease as a condition to such financing, Tenant will not
withhold, delay or defer its consent thereto, provided that such modifications
do not increase the monetary obligations of Tenant hereunder.
ARTICLE 40
Notice to Mortgagees and Underlying Lessors
40.01. Notice to Mortgagees and Lessors.
Upon the occurrence of any act or omission on the part of Landlord
which would give Tenant the right, either immediately or after the lapse of a
period of time, to terminate this lease or the term hereof or to claim a partial
or total eviction, Tenant shall not exercise such right until (i) it has given
notice of the occurrence of such act or omission to holders of any mortgages
which at the time shall be liens on the leasehold estate under any ground lease
or the Real Property, and the lessors under all underlying leases, if the names
and addresses of such holders and lessors shall previously have been furnished
to Tenant, and (ii) a period of time has elapsed after such notice as shall
equal the greater of (y) twice the length of time to which Landlord would be
entitled under this lease or otherwise, after similar notice, to remedy such act
or omission, or (z) the same time to which Landlord would be so entitled, plus
the time reasonably required to enable the holder of such mortgage or lease to
become legally entitled (through receivership or otherwise) to remedy such act
or omission.
ARTICLE 41
Parties Bound; Partnership Tenant
41.01. Successors and Assigns.
The covenants, agreements, terms, provisions and conditions of this
lease shall bind and benefit the successors and assigns of the parties hereto
with the same effect as if mentioned in each instance where a party hereto is
named or referred to, except that no violation of the provisions of Article 13
shall operate to vest any rights under this lease in any successor or assignee
of Tenant. Notwithstanding the foregoing, it is understood and agreed that (i)
the covenants and obligations on the part of Landlord under this lease shall not
be binding upon Landlord herein named with respect to any period subsequent to
the transfer of its interest in the Real Property as Landlord or lessee thereof,
(ii) in the event of such transfer said covenants and obligations shall
thereafter be binding upon each transferee
-48-
<PAGE> 49
of the interest of Landlord herein named as such Landlord or lessee of the Real
Property, but only with respect to the period ending with a subsequent transfer
of such interest, (iii) a lease of the entire interest of Landlord hereunder
shall be deemed a transfer within the meaning of this Article, and (iv) the
provisions of this Article shall not be construed as modifying the conditions of
limitation contained in Article 32.
41.02. Partnership Tenant.
If Tenant's interest in this lease shall at any time be held by a
partnership, or by two or more persons or entities individually (any such
partnership and such persons and entities are referred to in this Section as
"Partnership Tenant"), the following provisions shall apply to such Partnership
Tenant:
(a) the liability of each of the parties comprising
Partnership Tenant shall be joint and several;
(b) each of the parties comprising Partnership Tenant consents
in advance to, and agrees to be bound by, any (i) written instrument
which may thereafter be executed, changing, modifying or discharging
this lease, in whole or in part, or surrendering all or any part of the
Demised Premises to Landlord, and (ii) notices, demands, requests or
other communications which may thereafter be given, by Partnership
Tenant or any of the parties comprising Partnership Tenant;
(c) any bills, statements, notices, demands, requests or other
communications given or rendered to Partnership Tenant, or to any of
the parties comprising Partnership Tenant, shall be deemed given or
rendered to Partnership Tenant and to all such parties and shall be
binding upon Partnership Tenant and all such parties;
(d) if Partnership Tenant shall admit new partners, all of
such new partners shall by their admission to Partnership Tenant, be
deemed to have assumed performance of all of the terms, covenants and
conditions of this lease on Tenant's part to be observed and performed;
and
(e) Partnership Tenant shall give prompt notice to Landlord of
the admission of each new partner, and upon demand of Landlord, shall
cause each new partner to execute and deliver to Landlord an agreement
in form satisfactory to Landlord, wherein each new partner shall assume
performance of all of the terms, covenants and conditions of this lease
on Tenant's part to be observed and performed (but neither Landlord's
failure to request any such agreement nor the failure of any such
partner to execute or deliver any such agreement to Landlord shall
vitiate the provisions of this subparagraph).
Landlord shall release from liability hereunder, as to obligations
thereafter accruing, retiring partners and the estates of deceased partners,
provided that the aggregate assets of the remaining partners of a Partnership
Tenant shall be sufficient in Landlord's sole judgment to meet Tenant's
obligations hereunder.
The provisions of this Section shall not be deemed to constitute a
consent, by Landlord, to the assignment of any interest in this lease by Tenant.
ARTICLE 42
No Other Waivers or Modifications
-49-
<PAGE> 50
42.01. Waivers.
The failure of Landlord to insist in any one or more instances upon the
strict performance or observance of any one or more of the obligations of this
lease, or to exercise any election herein contained, shall not be construed as a
waiver or relinquishment for the future of the performance of such one or more
obligations of this lease or of the right to exercise such election, but the
same shall continue and remain in full force and effect with respect to any
subsequent breach, act or omission. No executory agreement hereafter made
between Landlord and Tenant shall be effective to change, modify, waive,
release, discharge, terminate or effect an abandonment of this lease or the
Premises, in whole or in part, unless such executory agreement is in writing and
is signed by the party against whom enforcement of the change, modification,
waiver, release, discharge or termination or effectuation of the abandonment is
sought.
42.02. Surrender; Payments.
Without limiting the generality of the foregoing provisions of this
Article:
(a) No agreement to accept a surrender of all or any part of
the Demised Premises shall be valid unless in writing, signed by
Landlord. The delivery of keys to the Demised Premises to an employee
of Landlord or of its agent shall not operate as a termination of the
term of this lease or a surrender of the Demised Premises.
(b) The receipt by Landlord, or the payment by Tenant, of rent
or any other payment by Tenant with knowledge of breach of any
obligation of this lease shall not be deemed a waiver of such breach.
(c) No payment by Tenant or receipt by Landlord of a lesser
amount than the correct amount of any rent or other charge due
hereunder shall be deemed to be other than a payment on account; nor
shall any endorsement or statement on any check or any letter
accompanying any check or payment be deemed an accord and satisfaction,
and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance or pursue any other remedy in
this lease or at law provided.
ARTICLE 43
Notices
43.01. Notices.
Except for rent bills, any notice, approval, consent, bill, statement
or other communication required or permitted to be given, rendered or made by
either party to the other, pursuant to this lease or pursuant to any applicable
law or requirement of public authority, shall be in writing (shall be sent in
duplicate to Landlord) and shall be delivered by registered or certified mail or
nationally recognized overnight carrier (e.g., Federal Express), addressed to
the other party at the address hereinabove set forth (in the case of notice to
Landlord, a second copy is to be delivered, in the same manner, to Robert Martin
Company, 100 Clearbrook Road, Elmsford, New York 10523, Attn: Senior Vice
President and General Counsel, and a third copy is to be delivered
-50-
<PAGE> 51
in the same manner to Glorious Sun Robert Martin, L.L.C., 501 Seventh Avenue,
New York, New York 10018, Attn: Mr. Paul Chan) and shall be deemed to have been
given, rendered, made or (in the case of any communication required by the
provisions of this lease to have been received before any period prescribed
herein for the taking of any action or the creation of any rights shall
commence) received, on the second business day following the day so mailed if
mailed in Westchester County and the third business day following the day so
mailed if mailed outside of Westchester County. Any notices, approvals,
consents, bills, statements or other communication given pursuant to this
Article by either party may be given by such party, their agents or attorneys.
Either party may, by notice as aforesaid, designate a different address or
addresses for notices, bills, statements or other communications intended for
it.
ARTICLE 44
Estoppel Certificate-Recording
44.01. Tenant's Estoppel.
Tenant agrees, at any time and from time to time, upon ten days prior
notice from Landlord, to execute, acknowledge and deliver to Landlord and any
other person designated by Landlord, a statement in writing stating (i) that
this lease is unmodified and in full force and effect (or if there have been
modifications, that the lease is in full force and effect as modified and
stating the modifications), (ii) the dates to which the fixed rent, additional
rent and other charges, if any have been paid by Tenant, (iii) whether or not
Landlord is in default in the performance of any covenant, agreement or
condition contained in this lease and, if so, specifying in detail each such
default, (iv) whether or not there are then existing any set-offs or defenses
against the enforcement of any of the agreements, terms, covenants or conditions
hereof upon the part of Tenant to be performed or complied with and, if so,
specifying the same, and (v) the address to which notices to Tenant should be
sent. If requested by Landlord, the form of statement shall be, at Landlord's
election, as set forth on Exhibit B, annexed hereto and made part hereof. Any
such statement delivered pursuant hereto may be relied upon by the holder of any
interest in the Real Property, any prospective purchaser of the Real Property,
any mortgagee or prospective mortgagee of the Real Property or of Landlord's
interest, or any prospective assignee of any such mortgage.
44.02. Recording.
This lease shall not be recorded. At the request of Landlord, Tenant
shall promptly execute, acknowledge and deliver to Landlord a memorandum in form
satisfactory to Landlord with respect to this lease, and any amendment of or
other agreement supplementary to this lease, sufficient for recording.
ARTICLE 45
Brokerage
45.01. Brokerage.
Tenant covenants, warrants and represents that, in the
-51-
<PAGE> 52
negotiation of this lease, it dealt with no broker or any other person who could
legally claim to be entitled to receive a brokerage commission or finder's or
consultant's fee with respect to this transaction, except RM Management, LLC,
which commission Landlord shall pay per a separate agreement. Tenant shall
indemnify and hold Landlord harmless from and against any and all losses, costs,
damages, expenses, claims and liabilities (including court costs and attorneys'
fees and disbursements) arising out of any inaccuracy or alleged inaccuracy of
the above representation.
ARTICLE 46
SECURITY
46.01. Security.
(a) Tenant has deposited with Landlord a sum of money (by check,
subject to collection) equal to $66,940.00, as security for the full and
faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease. If Tenant defaults in respect of any of the terms,
provisions and conditions of this lease, including but not limited to, the
payment of rent and additional rent, Landlord may use, apply or retain the whole
or any part of the security so deposited to the extent required for the payment
of any rent and additional rent, or any other sum as to which Tenant is in
default, or for any sum which Landlord may expend or may be required to expend
by reason of Tenant's default in respect of any of the terms, covenants and
conditions of this lease, including but not limited to, any damages or
deficiency in the reletting of the Premises, whether such damages or deficiency
accrued before or after summary proceedings or other re-entry by Landlord. In
the event that Tenant shall fully and faithfully comply with all of the terms,
provisions, covenants and conditions of this lease, the security shall be
returned to Tenant after the date fixed as the Expiration Date and after
delivery of possession of the entire Premises to Landlord. If Landlord applies
or retains any part of the security so deposited, Tenant, upon demand, shall
deposit with Landlord the amount so applied or retained, so that Landlord shall
have the full deposit on hand at all times during the term of this lease. In the
event of a sale of the Land and Building or condominium unit of which the
Premises may be a part or leasing, conveyance or transfer of the Building or
condominium unit of which the Premises form a part, Landlord shall have the
right to transfer the security to the vendee, lessee or transferee and Landlord
shall thereupon be released by Tenant from all liability for the return of such
security; and Tenant agrees to look to the new Landlord solely for the return of
said security; and it is agreed that the provisions hereof shall apply to every
transfer or assignment made of the security to a new Landlord. Tenant further
covenants that it will not assign or encumber or attempt to assign or encumber
the monies deposited herein as security and that neither Landlord nor its
successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
(b) If this lease is in full force and effect one year after the
Commencement Date, Tenant has not paid any fixed rent or additional rent beyond
the applicable grace period more than twice during the first lease year and
Tenant is not in default hereunder, Landlord shall return to Tenant the sum of
$31,230.00 in accordance with the provisions hereof.*
ARTICLE 47
-52-
<PAGE> 53
Miscellaneous
47.01. Entire Agreement.
This lease contains the entire agreement between Landlord and Tenant
relating to the leasing of the Premises. Tenant expressly acknowledges and
agrees that Landlord has not made and is not making, and, in executing and
delivering this lease Tenant is not relying upon, any warranties,
representations, promises or statements, except to the extent that the same may
be expressly set forth in this lease.
47.02. Partial Invalidity.
If any term or provision of this lease, or the application thereof to
any person or circumstance, shall, to any extent, be invalid or unenforceable,
the remainder of this lease, or the application of such term or provision to
persons or circumstances other than those as to whom or which it is held invalid
or unenforceable, shall not be affected thereby, and each term and provision of
this lease shall be valid and enforceable to the fullest extent permitted by
law.
47.03. Applicable Law.
This lease shall be deemed to have been made in Rockland County, and
shall be construed according to, and governed by, the laws of the State of New
York.
47.04. Lease Submission.
This lease is submitted to Tenant for signature, with the understanding
that it shall not bind Landlord unless and until it has been executed by
Landlord and delivered to Tenant or Tenant's attorney or agent.
47.05. Asterisks.
The asterisks set forth at various locations in this lease are set
forth for Landlord's internal administrative purposes, and are not intended to
refer to any other language or to be used for interpretive purposes.
47.06. Confidentiality.
Tenant agrees not to disclose the terms, covenants, conditions or other
facts with respect to this lease, to any person, business entity, association,
newspaper, periodical or other entity. This non-disclosure and confidentiality
agreement shall be binding upon Tenant without limitation as to time, and a
breach of this Section shall constitute a material breach of
-53-
<PAGE> 54
Tenant's obligations under this lease.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this lease
as of the day and year first above written.
GLORIOUS SUN ROBERT MARTIN, L.L.C.
By: RM Blue Hill, LLC, Member
By: /s/
-------------------------
Member/Manager
LONG DISTANCE DIRECT, INC.
By: /s/
-------------------------------
Vice-President
-54-
<PAGE> 55
WORK LETTER (SECTION 7.01)
WORK SCHEDULE OF LANDLORD'S RESPONSIBILITY
Landlord agrees at its sole expense and without charge to Tenant, to do the
following Building Standard Work in the demised premises:
A. General Construction:
1. Partitions
Landlord shall supply and install ceiling-high metal
stud drywall partitions with 5/8" sheet rock on both
sides. All partitions to be finished with 4" cove
base. Corridor and between tenant partitions shall be
of sound attenuating construction, extending to the
underside of the floor above.
2. Doors
Landlord shall supply and install necessary doors.
All interior tenant doors to be solid core veneer 3'
x 7' and shall be furnished complete with bucks,
1-1/2 pair butts, door stops and latch sets.
3. Ceilings
Landlord shall supply and install a 2' x 4' textured
acoustical ceiling tile laid in a tee system
throughout all tenant areas.
4. Electrical
Landlord shall supply and install:
a. Lighting
Recessed building standard 2' x 4' prismatic
light fixtures with T12 lamps. Initial
lamping by Landlord; all subsequent
replacements by Tenant.
b. Outlets
Duplex convenience wall outlets as shown on
the floor plan attached hereto and made a
part hereof.
c. Switches
Wall switches in each private office and one
switch at entrance to open areas.
5. Telephone
Tenant shall make arrangements with any telephone
company or computer vendor for installation of
telephone and computer service. Landlord will not
provide or initiate such service.
Plenum rated cables are to be suspended from slab
above and all damages as a result of Tenant's
telephone or computer cabling shall be Tenant's
responsibility.
6. Window Covering
-55-
<PAGE> 56
Building Standard 1" slat blinds will be provided at
all exterior windows in a uniform color throughout
the building. No substitution from Building Standard
will be permitted.
7. Painting
All partitions will be painted with two coats of flat
finish latex paint. Exposed metal surfaces, e.g.
convector enclosures, bucks will be painted two coats
semi-gloss enamel. Doors shall be furnished with
paint. Charge will be made for more than one color in
any one room. Selection will be from premixed
Building Standard Color Chart. Should Tenant desire
colors darker or different than the Building Standard
Color Chart, same colors shall be at Tenant's sole
expense.
8. Flooring
Landlord shall install Landlord's standard grade
carpet to be selected by Tenant from Landlord's
standard selection chart as to type and color.
9. Exterior and Public Areas
To the extent that the exterior of the Building, the
public areas thereof, viz lobby, elevator, corridors,
grounds, parking areas and walkways have not been
finished, Landlord will complete same at its costs
and expense in accordance with Building Standard.
10. Substitutions
Tenant may substitute like items for Building
Standard items, but no credits for Building Standard
items will be given against the cost of items so
substituted. No credit will be given for Building
Standard items not utilized by Tenant.
B. Heating, Ventilating and Air Conditioning:
The Landlord shall furnish and install a complete heating,
ventilating and year-round air conditioning system. The
equipment shall be capable of maintaining an indoor
temperature of 80 (degrees) F.D.B. at 50% R.H. during summer
(June through September) based on the local 2 1/2% outdoor
design condition as specified in the latest edition of the
"Ashrae Handbook of Fundamentals" and 68 (degrees) F.D.B. in
the winter based on local 97 1/2% design as specified in the
latest edition of the "Ashrae Handbook of Fundamentals".
The air conditioning system will provide fresh air in a
quantity of not less than .75 to 1.0 cubic feet per minute per
square foot of rentable floor area.
Real Estate Taxes assessed against any item of construction which is a part of
Landlord's standard work letter or customary installation are included as part
of the Lease terms set forth herein. If any additional specifications, extras or
non-standard items of improvement give rise to the assessment of additional real
estate taxes, such taxes shall be for the account of Tenant.
All selections or designations to be made by Tenant are to be made within five
(5) business days after request by Landlord. If
-56-
<PAGE> 57
Tenant has not made such designations or selections within said period, the
Landlord shall be authorized to do so on behalf of the Tenant.
-57-
<PAGE> 58
CLEANING SPECIFICATIONS (SECTION 20.02)
1. General
(a) All flooring to be swept and/or dust mopped on each business
day.
(b) All carpeting areas and rugs vacuumed twice weekly.
(c) All stairways to be swept each business day.
(d) Empty and wipe wastepaper baskets and ashtrays each business
day.
(e) Cigarette urns to be cleaned each business day and sand
replaced when necessary.
(f) Floors, walls and interior surfaces of lobby, elevators and
public corridors to be maintained as required.
(g) Dust furniture and window sills as required.
(h) Water coolers to be wiped each business day.
(i) Entrance lobby glass to be washed or wiped each business day.
2. Lavatories Daily (Business Days)
(a) All flooring to be swept and washed using disinfectant in
water.
(b) All basins, bowls, urinals and toilet seats to be washed.
(c) All mirrors to be washed.
(d) Paper towel and sanitary disposal receptacles to be emptied
and cleaned.
(e) Toilet tissue holders and soap and paper towel dispensers to
be filled.
3. Windows
(a) Three times per year clean all exterior windows on the inside
only, provided that window sills are free of articles and
access to the windows is not obstructed.
(b) Two times per year clean all exterior windows on the outside.
4. Venetian Blinds
Venetian blinds to be dusted annually.
5. Ledges and moldings
Ledges and moldings to be high dusted semi-annually as required.
6. Lighting Fixtures
Interior and exterior of lighting fixtures to be dusted annually as
required.
-58-
<PAGE> 59
Rules and Regulations (Section 38.01)
1. Any moving of furniture or equipment into or out of the Demised
Premises must be done by Tenant at its own cost and expense, on business days
after 6:00 P.M., or on Saturday subject, however, to the prior written consent
of Landlord. If such move requires use of an elevator, such move shall not be in
excess of such elevator's carrying load capacity.
2. The sidewalks, entrances, passages, lobby, elevators, vestibules,
stairways, corridors or halls shall not be obstructed or encumbered by Tenant or
used for any purpose other than ingress and egress to and from the Demised
Premises and Tenant shall not permit any of its invitees to congregate in any of
said areas. No door mat shall be placed or left in any public hall or outside
any entry door of the Demised Premises.
3. No awnings or other projections shall be attached to the outside
walls of the Building. No curtains, blinds, shades, or screens shall be attached
to or hung in, or used in connection with, any window or door of the Demised
Premises, without the prior consent of Landlord. Such curtains, blinds, shades
or screens must be of a quality, type, design and color, and attached in the
manner, approved by Landlord.
4. No sign, insignia, advertisements, object, notice or other lettering
shall be exhibited, inscribed, painted or affixed by any tenant on any part of
the outside or inside of the Demised Premises or the Buildings without the prior
written consent of Landlord. In the event of the violation of the foregoing by
Tenant, Landlord may remove the same without any liability, and may charge the
expense incurred in such removal to Tenant. Interior signs and lettering on
doors and directory tablets shall, if and when approved by Landlord, be
inscribed, painted or affixed by Landlord at the expense of Tenant, and shall be
of a size, color and style acceptable to Landlord.
5. The sashes, sash doors, skylights, windows and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Buildings shall not be covered or obstructed by Tenant, nor shall any bottles,
parcels, or other articles be placed on window sills.
6. No showcases or other articles shall be put in front of or affixed
to any part of the exterior of the Buildings, nor placed in the halls, corridors
or vestibules by Tenant.
7. Tenant shall not discharge or permit to be discharged any materials
which may cause damage into waste lines, vents or flues of the Buildings. The
water and wash closets and other plumbing fixtures shall not be used for any
purposes other than those for which they were designed or constructed, and no
sweepings, rubbish, rags, corrosives, acids or other substances shall be thrown
or deposited therein. All damages resulting from any misuse of the fixtures
shall be borne by the tenant who, or whose invitees, shall have caused the same.
8. Tenant shall not mark, paint, drill into, or in any way deface any
part of the Demised Premises or the Buildings. No boring, cutting or stringing
of wires shall be permitted, except with the prior consent of Landlord, and as
Landlord may direct. Tenant shall not lay linoleum, or other similar floor
covering, so that the same shall come in direct contact with the floor of the
Demised Premises, and, if linoleum or other similar floor covering is desired to
be used, an interlining of builder's deadening felt shall be first affixed to
the floor, by a paste or other material, soluble in water, the use of cement and
other similar adhesive material being expressly prohibited.
-59-
<PAGE> 60
9. No bicycles, vehicles, animals, fish or birds of any kind shall be
brought into or kept in or about the Demised Premises.
10. No noise, including, but not limited to, music or the playing of
musical instruments, recordings, radio or television which, in Landlord's
judgment, might disturb other tenants in the Buildings, shall be made or
permitted by Tenant. Nothing shall be done or permitted in the Demised Premises
by Tenant which would impair or interfere with the use or enjoyment by any other
tenant of any other space in the Buildings. Tenant shall not throw anything out
of the doors, windows of skylights or down the passageways.
11. Neither Tenant nor its invitees shall bring or keep upon the
Demised Premises any explosive fluid, chemical or substance, nor any inflammable
or combustible objects or materials.
12. Additional locks or bolts of any kind which shall not be operable
by the grand master key(s) for the Buildings shall not be placed upon any of the
doors or windows by Tenant, nor shall any changes be made in locks or the
mechanism thereof which shall make such locks inoperable by said grand master
key(s). Tenant shall, upon the termination of its tenancy, turn over to Landlord
all keys of stores, offices and toilet rooms, either furnished to, or otherwise
procured by, Tenant and in the event of the loss of any keys furnished by
Landlord, Tenant shall pay to Landlord the cost thereof.
13. All removals from the Demised Premises or the Buildings, or the
moving or carrying in or out of any safes, freight, furniture, packages, boxes,
crates or any other object or matter of any description must take place during
such hours and in such elevators as Landlord or its agent may determine from
time to time. All deliveries of any nature whatsoever to the Buildings or the
Demised Premises must be made only through Building entrances specified for such
deliveries by Landlord. Landlord reserves the right to inspect all objects and
matter to be brought into the Buildings and to exclude from the Buildings all
objects and matter which violate any of these Rules and Regulations or the
Lease. Landlord may require any person leaving the Buildings with any package or
other object or matter, to submit a pass, listing such package or object or
matter, from the tenant from whose premises the package or other object or
matter is being removed, but the establishment and enforcement of such
requirement shall not impose any responsibility on Landlord for the protection
of any tenant against the removal of property from the premises of such tenant.
Landlord shall, in no way, be liable to Tenant for damages or loss arising from
the admission, exclusion or ejection of any person to or from the Demised
Premises or the Buildings under the provisions of this Rule 13 or Rule 17
hereof.
14. Tenant shall not occupy or permit any portion of the Demised
Premises to be occupied as an office for a public stenographer or public typist,
or for the possession, storage, manufacture, or sale of beer, wine or liquor,
narcotics, drugs, tobacco in any form, or as a barber, beauty or manicure shop,
or as an employment bureau. Tenant shall not engage or pay any employees on the
Demised Premises, except those actually working for Tenant on the Demised
Premises, nor advertise for laborers giving an address at the Demised Premises.
Tenant shall not use the Demised Premises or any part thereof, or permit the
Demised Premises or any part thereof to be used, for manufacturing, or for sale
at auction of merchandise, goods or property of any kind.
15. Tenant shall not obtain, purchase or accept for use in the Demised
Premises ice, drinking water, food, beverage, towel, barbering, boot blacking,
cleaning, floor polishing or other similar services from any persons not
authorized by Landlord in
-60-
<PAGE> 61
writing to furnish such services, provided always that the charges for such
services by persons authorized by Landlord shall not be excessive. Such services
shall be furnished only at such hours, in such places within the Demised
Premises, and under such regulations as may be fixed by Landlord. Tenant shall
not purchase or contract for waxing, rug shampooing, venetian blind washing,
furniture polishing, lamp servicing, cleaning of electric fixtures, removal of
garbage or towel service in the Demised Premises except from contractors,
companies or persons so approved by the Landlord.
16. Landlord shall have the right to prohibit any advertising or
identifying sign by Tenant which in Landlord's judgment tends to impair the
reputation of the Buildings or their desirability as buildings for offices, and
upon notice from Landlord, Tenant shall refrain from or discontinue such
advertising or identifying sign.
17. Landlord reserves the right (although it is specifically understood
that Landlord shall not be obligated under any circumstances) to exclude from
the Building during hours other than regular business hours and days all persons
who do not present a pass to the Building signed by Landlord. All persons
entering and/or leaving the Building during hours other than regular business
hours and days may be required to sign a register. Landlord will furnish passes
to persons for whom any tenant requests same in writing. Tenant shall be
responsible for all persons for whom Tenant requests such pass and shall be
liable to Landlord for all acts or omissions of such persons. Landlord's
providing of services during other than regular business hours and days shall
not be interpreted to mean that the Buildings are in operation during such
after-hours; and, in lieu of possible darkness, lack of activity and lack of
such services during such after-hours, Tenant may wish to take measures
regarding security of its invitees using the Demised Premises during other than
regular business hours and days.
18. Tenant, before closing and leaving the Demised Premises at any
time, shall see that the lights are turned off. All entrance doors in the
Demised Premises shall be left locked by Tenant when the Demised Premises are
not in use. Entrance doors shall not be left open at any time.
19. Unless Landlord shall furnish electrical energy hereunder as a
service included in the rent, Tenant shall, at Tenant's expense, provide
artificial light and electrical energy for the employees of Landlord and/or
Landlord's contractors while doing janitorial service or other cleaning in the
Demised Premises and while making repairs or alterations in the Demised
Premises.
20. The Demised Premises shall not be used for lodging or sleeping or
for any immoral or illegal purpose.
21. The requirements of Tenant will be attended to only upon
application at the office of the Buildings. Employees of Landlord shall not
perform any work or do anything outside of their regular duties, unless under
special instructions from Landlord.
22. Canvassing, soliciting and peddling in the Buildings are prohibited
and Tenant shall cooperate to prevent the same.
23. There shall not be used in any space, or in any lobbies, corridors,
public halls or other public areas of the Buildings, in the moving or delivery
or receipt of safes, freights, furniture, packages, boxes, crates, paper, office
material, or any other object or thing, any hand trucks except those equipped
with rubber tires, side guards, and such other safeguards as Landlord shall
require. No move or delivery of any object or thing of whatever nature, other
than light-weight objects hand-carried by not more than one person, shall be
made without at least 24 hours prior
-61-
<PAGE> 62
notice by Tenant to Landlord and without Tenant, prior to any such move or
delivery, laying (without affixation or attachment to any part of the floor or
floor covering) adequate masonite or plywood sheets covering all lobby,
corridor, public hall and other public area floors of the Buildings (whether
carpeted or terrazzo) over which such move or delivery shall take place.
24. Tenant shall not cause or permit any odors of cooking or other
processes or any unusual or objectionable odors to emanate from the Demised
Premises which would annoy other tenants or create a public or private nuisance.
No cooking shall be done in the Demised Premises except as is expressly
permitted in the lease.
25. Tenant shall cooperate with Landlord in obtaining maximum
effectiveness of the cooling system by lowering and closing venetian blinds
and/or drapes and curtains when the sun's rays fall directly on the windows of
the Demised Premises.
26. Landlord reserves the right to rescind, alter or waive any rule or
regulation at any time prescribed for the Buildings, when, in its judgment, it
deems it necessary or desirable for the reputation, safety, care or appearance
of the Buildings, or the preservation of good order therein, or the operation or
maintenance of the Buildings or the equipment thereof, or the comfort of tenants
or others in the Buildings. No recision, alteration or waiver of any rule or
regulation in favor of one tenant shall operate as a recision, alteration or
waiver in favor of any other tenant.
27. Tenant, its employees, agents, licensees, contractors and
subtenants shall not litter any public areas of the Real Property (including the
walkways and parking areas located thereon).
28. Landlord shall not unreasonably withhold its consent to the
installation, maintenance and operation by Tenant in the Demised Premises of
data processing machines, office duplicating machines, teletype machines and
other business machines and machinery customarily used in offices in the
ordinary course of business, provided however, that Tenant shall comply with all
other obligations of this lease that may be applicable to or result from such
installation, maintenance or operation.
29. Landlord shall not unreasonably withhold or delay from Tenant any
approval provided for in the Rules and Regulations.
-62-
<PAGE> 63
EXHIBIT "B"
STATEMENT OF TENANT IN RE:
Date:
Re: Address:
Your Appl. #
Gentlemen:
It is our understanding that you have committed to place a mortgage
upon the subject premises and as a condition precedent thereof have required
this certification by the undersigned.
The undersigned, as Lessee, under that certain lease dated __________,
made with _______________________ as Lessor, hereby ratifies the said lease and
certifies that:
1. the undersigned has entered into occupancy of the premises
described in said lease on __________________;
2. the undersigned is presently open and conducting business with
the public in the premises;
3. the minimum rental in the annual amount of $________________
was payable from the date of occupancy ;
4. that said lease is in full force and effect and has not been
assigned, modified, supplemented or amended in any way (except
by agreement(s) dated __________), and neither party thereto
is in default thereunder;
5. that the same represents the entire agreement between the
parties as to this leasing;
6. that the term of said lease expires on ____________________;
7. that all conditions under said lease to be performed by the
Lessor have been satisfied, including but without limitation,
all co-tenancy requirements thereunder;
8. all required contributions by Lessor to Lessee on account of
Lessor's improvements have been received;
9. on this date there are no existing defenses or offsets which
the undersigned has against the enforcement of said lease by
the Lessor;
10. that no rental has been paid in advance and no security (or in
the amount of $_______________) has been deposited with
Lessor;
11. that rental for _____________, 19__, has been paid.
Very truly yours,
______________________ (Tenant)
By:_________________________
(Title)
-63-
<PAGE> 1
EXHIBIT 10.8
[LONG DISTANCE
DIRECT INC. LOGO]
November 27, 1996
Kaire International
380 Lashley
Longmont, CO 80501
Re: Telephone Services Agreement
Gentlemen:
This letter, when countersigned by Kaire International
("Kaire"), will confirm our agreement to provide long distance telephone and
other telecommunications services upon the following terms and conditions.
1 . Long Distance Direct Holdings, Inc. ("LDDI") commits to
establish a full service telecommunications product range for sale by Kaire's
existing and future sales force. The product range will be co-extensive with the
services offered by AT&T and MCI to their own customers.
2. LDDI confirms that (a) it is considered an Inter-Exchange
Carrier (IXC) with its own CIC code and appropriate service licenses from the
FCC, PSCs and PUCs, (b) it has its own operator services and (c) no access code
or special dialing is required for use of LDDI's service.
3. LDDI's service will be based on its own direct contracts
with AT&T and MCI, with each of which companies it has an excellent working
relationship.
4. The product range may be sold under either LDDI's name or
Kaire's name, or under a combination of the two. LDDI also has the right to
utilize the AT&T and MCI names in describing its underlying carrier, and this
benefit may be transferred into the Kaire product range.
5. Billing will be customized to reflect the Kaire pricing
policies and all bills sent out to the end-subscribers can--if required--include
the name of the network on which their traffic is being carried, i.e., AT&T or
MCI.
6. All interstate traffic will be sold to Kaire at flat rates:
MCI at 10 cents per minute, AT&T at 11.5 cents per minute. These rates will
remain fixed for the term of this Agreement. Intrastate and international rates
will be on a state-by-state basis according to tariffs agreed upon with Kaire in
respect of each of the underlying carriers and will be subject to changes in
intrastate and international tariffs.
1 Blue Hill Plaza . Pearl River, New York 10965. Phone: (914) 620-0765 .
Fax: (914) 620-0709
<PAGE> 2
7. Provisioning to the networks will be accomplished within twenty-four
hours after receipt of a properly completed telephone service order for MCI, and
within five days after receipt of a properly completed telephone service order
for AT&T.
8. LDDI will retain ultimate exposure for uncollected billings ("bad
debt"), but Kaire will undertake to use its best efforts to mitigate bad debt,
including the offset of bad debt for telephone service against commissions or
other amounts due by Kaire to the end-subscriber.
9. LDDI will work with Kaire to develop suitable marketing materials as
well as to provide training for all Kaire salesmen. LDDI will make available all
training aids for Kaire at a mutually agreeable price.
10. With respect to each end-subscriber to be brought onto the LDDI
service, Kaire will be responsible for supplying LDDI with a telephone service
purchase order in an electronic LDDI format, and to indicate the pricing plan
for that subscriber. Thereafter, LDDI will be responsible for all aspects of
that customer's service, including provisioning, billing and collection,
together with the generation of monthly statements for Kaire itself in a format
to be agreed upon.
11. This Agreement shall become effective on December 1, 1996 and shall
continue in full force and effect until December 31, 1997, unless sooner
terminated in accordance with paragraph 12 of this Agreement.
12. This Agreement may be terminated:
(a) By mutual written agreement of the parties.
(b) By either party if the other party commits a material breach of
the terms of this Agreement and fails to substantially remedy such material
breach within thirty (30) days after written notice thereof.
13. During the term of this Agreement, LDDI agrees that it will not
provide any telephone services to any company whose products and/or services are
sold through a multi-level or network marketing organization.
14. During the term of this Agreement, Kaire agrees that it will not
purchase any telephone services for resale from any company other than LDDI.
15. During the term of this Agreement, Kaire agrees to adhere to the
LDDI and FCC guidelines with regard to the unauthorized acquisition of accounts
("slamming").
2
<PAGE> 3
16. The parties agree that at any time and from time to time after the
execution of this Agreement, either party will, upon the request of the other
party, cooperate in good faith with the requesting party to negotiate and
prepare such amendments or supplements to this Agreement as may be necessary in
order to accomplish the purpose and terms hereof.
17. Neither party shall be liable for any failure to comply with the
terms of this Agreement due to acts of God; acts, regulations or laws of any
government; riot, strike, or labor disturbances; destruction of product
facilities and materials by fire, earthquake or storm; failure of public
utilities or common carriers; or any other causes beyond the reasonable control
of the affected party. Any party claiming force majeure as an excuse for
nonperformance shall give prompt notice to the other party and shall promptly
resume its performance as soon as possible.
18. No waiver or breach of any term or condition of this Agreement
shall operate as a waiver of any other breach of such term or condition, or of
any other term or condition, nor shall any failure to enforce any provisions
hereunder operate as a waiver of such provision or any other provision
hereunder.
19. The rights and obligations of each party under this Agreement shall
not be assignable or otherwise transferable without the prior written consent of
the other.
20. All notices hereunder shall be in writing and shall be deemed to
have been duly given if delivered personally, one day after delivery to a
nationally recognized overnight delivery service, charges prepaid, three days
after sent by registered or certified mail, postage prepaid, or when receipt is
confirmed if by telex, facsimile or other telegraphic means:
If to LDDI, to:
Long Distance Direct, Inc.
1 Blue Hill Plaza
Pearl River, New York 10965
If to Kaire, to:
Kaire International
380 Lashley
Longmont, Colorado 80501
or to such other address as any party shall have specified by notice to the
other in accordance with this paragraph.
21. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall be deemed one
and the same instrument.
3
<PAGE> 4
22. Kaire acknowledges that LDDI has been represented by Day Campbell &
McGill in connection with this Agreement; that Day Campbell & McGill has not
been retained by Kaire nor has Day Campbell & McGill undertaken to represent
Kaire's interests in connection with this Agreement; that Kaire has been advised
to retain independent counsel to represent its interests in connection with this
Agreement; and that Kaire has had a reasonable opportunity to seek the advice of
independent counsel of its choice in connection with this Agreement.
If the foregoing is in accordance with your understanding of our
agreement, please so acknowledge by signing the enclosed copy of this letter and
returning it to the undersigned, whereupon this letter shall constitute a
binding agreement between us.
Very truly yours,
LONG DISTANCE DIRECT HOLDINGS, INC.
By: /s/ Steven Lampert
-----------------------------------
Steven Lampert, President
Agreed and accepted
as of the date first hereinabove written
KAIRE INTERNATIONAL
By:
--------------------------
Its:
--------------------------
4
<PAGE> 5
[LONG DISTANCE DIRECT INC. LETTERHEAD]
December 17, 1996
Kaire International, Inc.
380 Lashley
Longmont, Colorado 80501
Re: Telephone Service Agreement
---------------------------
Gentlemen:
This letter, when countersigned by Kaire International, Inc. ("Kaire"),
will confirm our agreement to amend our prior agreement dated November 27, 1996
(the "Telephone Services Agreement") as follows:
1. All terms defined in the Telephone Services Agreement and used herein
shall have the meaning given them in the Telephone Services Agreement.
2. Paragraph 11 of the Telephone Services Agreement is hereby amended to
read in full as follows:
"11. This Agreement shall become effective on December 1, 1996 and
shall continue in full force and effect until December 31, 1999,
unless sooner terminated in accordance with paragraph 12 of this
Agreement."
3. Except as expressly set forth herein, the Telephone Services Agreement
shall remain in full force and effect.
4. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall be deemed one
and the same instrument.
<PAGE> 6
Kaire International, Inc.
December 17, 1996
Page 2
If the foregoing is in accordance with your understanding of our
agreement, please so acknowledge by signing the enclosed copy of this letter
and returning it to the undersigned, whereupon this letter shall constitute a
binding agreement between us.
Very truly yours,
LONG DISTANCE DIRECT HOLDINGS, INC.
By: /s/ Steven Lampert
----------------------------------
Steven Lampert, President
Agreed and accepted
as of the date first hereinabove written
KAIRE INTERNATIONAL, INC.
By: /s/ Robert L. Richard
------------------------------------
Its: CEO
------------------------------------
<PAGE> 1
EXHIBIT 10.9
NBC - LDDI ALLIANCE AGREEMENT
This agreement is made and entered into as of the 15 day of January,
1997, by and between National Benefits Consultants, L.L.C., a Delaware limited
liability company, and Long Distance Direct Holdings, Inc., a Nevada corporation
("LDDI").
RECITALS
A. NBC develops and maintains a customer base ("NBC Customers") for the
purposes of supplying a variety of disbursement recovery services,
health claims products and services, and a variety of employee benefit
services. NBC has entered into an Alliance Agreement with Deloitte &
Touche - ICRS (D&T) under which NBC will provide certain services
including accounts payable ("A/P") audit services.
B. LDDI's principal business is the provision of telephone services which
are, in general, co-extensive with the services offered by AT&T and MCI
to their own customers (the "LDDI Services").
C. NBC and LDDl wish to enter into a mutually beneficial relationship
involving, but not limited to, (a) the mutual referral of customers,
and (b) the performance of services for each other's customers, all on
the terms and subject to the conditions set forth herein.
PROVISIONS
Now, THEREFORE, in consideration of the RECITALS, premises and the
mutual covenants, conditions and obligations contained herein, NBC and LDDI
mutually agree as follows:
ARTICLE 1.
TERM
1.1. GENERAL. This Agreement shall be effective as of the date first written
above and shall continue in effect until December 31, 2001, unless terminated
earlier as provided hereafter in Article 6.
ARTICLE 2.
SCOPE OF THE ALLIANCE
2.1. LDDI SERVICES, LDDI agrees to perform LDDI Services for Registered NBC
Customers (as defined in Section 2.2 below) referred to LDDI by NBC.
2.2. REGISTRATION OF NBC CUSTOMERS. When NBC intends to refer a customer to
LDDI, NBC shall deliver a notice ("NBC Referral Notice") to LDDI identifying the
customer ("NBC Referral Customer"). If the NBC Referral Customer is already a
customer of LDDI, or if LDDI wishes to decline the performance of its services
for such NBC Referral Customer for specific reasons to be communicated, in
writing, to NBC, LDDI shall deliver a notice ("LDDI Customer Notice") to NBC
within ten (10) business days ("the "LDDI Notice Period") after receipt of the
NBC Referral Notice. If LDDI fails to deliver an LDDI Customer Notice within the
LDDI Notice Period with respect to an NBC Referral Customer, the NBC Referral
Customer shall become a "Registered NBC Customer" upon the expiration of the
LDDI Notice Period. If LDDI delivers an LDDI Customer Notice within the LDDI
Notice Period, with reference to an NBC Referral Customer, such notice shall
state the specific category of products or services provided by LDDI to the
customer under the existing LDDI contract or the reasons that LDDI
<PAGE> 2
declines to perform the services for the Customer. Unless the LDDI Customer
notice states that LDDI is declining to perform services to the Customer, the
NBC Referral Customer shall become a Registered NBC Customer as to all other
categories of products and services not listed in the LDDI Customer Notice;
provided, however, if LDDI declines to perform services for an NBC Referral
Customer, NBC shall have the right to obtain those services from others. All
Deloitte & Touche audit clients are automatically NBC Registered Customers as of
the date of this Agreement, unless they are already a client of LDDI. If a
Registered NBC Customer does not become a customer of LDDI within 180 days of
first becoming a Registered NBC Customer, the registration shall lapse and such
customer shall no longer be an NBC Registered Customer for purposes of this
Agreement.
2.3. COMPENSATION TO NBC. NBC and LDDI agree that as compensation to NBC for its
referral of Registered NBC Customers to LDDI for LDDI Services, NBC shall
receive from LDDI fees ("NBC Referral Fees") in the amount of ten percent (10%)
of LDDI's receipts from billings, net of taxes ("Receipts"), to such Registered
NBC Customers, unless both NBC and LDDI otherwise agree, in writing. The payment
to NBC shall be made within 30 days after the end of the month in which the
Receipts are received by LDDI.
2.4. NBC BONUS COMPENSATION - STOCK. NBC shall have an option ("Option") to buy
shares of LDDI common stock ("Shares") constituting up to 20% of the Total
Shares (as defined in Section 2.4(a) hereof) upon the following terms and
conditions:
(a) "Total Shares" shall be calculated on a fully diluted basis
and shall mean the sum of (i) the total number of outstanding
Shares, (ii) the Shares then issuable upon the exercise of the
Option or the Second Option (as defined in Section 2.4(d)
hereof), and (iii) any Shares issuable upon conversion of
outstanding convertible debt instruments or convertible stock
or upon exercise of outstanding options or warrants, except
for shares issuable under such instruments where the
conversion or exercise price is above the market price of
LDDI's stock at the date of the exercise of the Option.
(b) "Referral Percentage" shall mean the percentage calculated for
the period ("Calculation Period") beginning with the first day
of the seventh full calendar month following the date of this
Agreement and ending with the Option Exercise Date (as defined
in Section 2.4(d) hereof) which percentage shall be determined
by dividing (i) the sum of (x) the amount of LDDI's Receipts
(as defined in Section 2.3 hereof) from NBC Registered
Customers during the Calculation Period, and (y) the amount of
any LDDI Referral Fees received by LDDI pursuant to Section
2.6 hereof during the Calculation Period by (ii) the amount of
LDDI's total receipts from all of LDDI's customers during the
Calculation Period. The Calculation Period shall be the
twenty-four (24) months ending immediately prior to the Option
Exercise Date and commencing not earlier than the first day of
the seventh full calendar month following the date of this
Agreement, except where an Acceleration Event occurs prior to
the elapse of twenty-four (24) months from the first day of
the seventh full calendar month following the date of this
Agreement.
(c) Upon the exercise of the option by NBC, it shall be entitled
to purchase a number of Total Shares equal to the "Referral
Percentage", not to exceed twenty percent (20%) of the Total
Shares.
2
<PAGE> 3
(d) (1) NBC may exercise its Option by delivering to LDDI written
notice thereof (the "Option Notice") together with full
payment by NBC check of the Option exercise price which shall
be an amount equal to $3.00 per share of common stock
("Exercise Price"). The "Option Exercise Date" shall be the
date the Option Notice is deemed given under Section 7.11
hereof. Upon full payment of the Exercise Price, NBC shall
have all rights of a shareholder of LDDI effective as of the
Option Exercise Date. Subject to the rights to exercise the
Option in the case of an Acceleration Event as set forth in
Section 2.4(e)(2) below, the Option may be exercised at any
time following thirty (30) full months after the date of this
Agreement. If the Option is exercised prior to the termination
of this Agreement, NBC shall have a second option ("Second
Option") to purchase additional Shares ("Additional Shares")
as follows: (i)the Calculation Period for the Second Option
shall be the 24-month period prior to the Exercise Date of the
Second Option, (ii) the Second Option may be exercised at any
time after the Exercise Date of the first Option and prior to
the termination of this Agreement and (iii) the Additional
Shares, if any, issuable upon exercise of the Second Option
shall be the percentage of Total Shares equal to the amount by
which the Referral Percentage for the exercise of the Second
Option exceeds the Referral Percentage for the exercise of the
first Option. Under no circumstances shall NBC be entitled to
acquire, upon exercise of the Option and the Second Option, an
aggregate amount of Shares in excess of twenty percent (20%)
of the Total Shares. Any Additional Shares issuable hereunder
shall be issued and delivered to NBC within thirty (30) days
following the Exercise Date of the Second Option.
(e) (1) At least 30 days prior notice ("Acceleration Notice") of
any of the following transactions ("Acceleration Event") shall
be given by LDDI to NBC: (i) the dissolution or liquidation of
LDDI; (ii) a reorganization, merger or consolidation as a
result of which LDDI IS not the surviving corporation or as a
result of which the outstanding Shares are changed into or
exchanged for cash, property or securities not of LDDI's
issue, except for a merger or consolidation with a
wholly-owned subsidiary of LDDI or a transaction effected
primarily to change the state of LDDI's incorporation; or
(iii) the sale or other transfer of all or substantially all
of the assets of LDDI.
(2) If an Acceleration Event occurs, the Option shall
terminate upon the closing of the Acceleration Event;
provided, however, during the period from the Acceleration
Notice to the closing of the Acceleration Event, NBC, at its
election, may either (i) exercise the Option and purchase
Shares equal to the Referral Percentage as set forth above or
(ii) exercise the Option and purchase Shares equal to an
"Adjusted Referral Percentage" determined by computing the
Referral Percentage based upon an "Adjusted Calculation
Period" defined as the six full months immediately preceding
the Acceleration Event.
(3) An Acceleration Event shall also allow NBC, in its sole
discretion, to terminate this Agreement by giving notice
thereof to LDDI.
3
<PAGE> 4
(f) If the number of outstanding Shares is increased or decreased
by a stock dividend payable in shares of stock or a
subdivision, split, combination or reverse split of
outstanding shares of stock, or if the outstanding Shares are
changed into or exchanged for a different number or kind of
securities of LDDI through a reorganization or
reclassification, an appropriate and proportionate adjustment
shall be made to the number and kind of securities which may
be purchased upon exercise of the Option and the Option
exercise price.
(g) NBC shall have the registration rights as set forth in Exhibit
A.
2.5. COMPENSATION REPORTS TO NBC. LDDI will provide NBC with a statement of all
billings to and collections received from Registered NBC Customers and the
compensation due NBC based upon the LDDI Services rendered by LDDI hereunder on
a monthly basis no later than thirty (30) days following the end of each month.
In the event NBC disputes any such statement by giving LDDI written notice
thereof ("Dispute Notice"), after receiving the Dispute Notice and any other
communications from NBC relevant to the information contained in such report,
LDDI will cause its independent auditors within thirty (30) days after the
receipt of the Dispute Notice to supply NBC with a statement of reconciliation
which sets forth whether the amount of compensation paid to NBC was accurate. If
an inaccuracy is demonstrated, the payment made to NBC will be adjusted in
accordance with the report made by the independent auditors. If the report made
by the independent auditors discloses that the payment of compensation to NBC
was accurate, then NBC shall either reimburse LDDI for the cost of the report
made by the independent auditors or submit the matter for arbitration pursuant
to Section 7.9 hereof.
2.6. LDDI REFERRALS.
(a) Registration. When LDDI intends to refer an LDDI customer to
NBC, LDDI shall deliver a notice ("LDDI Referral Notice") to
NBC identifying the customer ("LDDI Referral Customer"). If
the LDDI Referral Customer is already a customer of NBC, NBC
shall deliver a notice ("NBC Customer Notice") to LDDI within
five (5) business days (the "NBC Notice Period") after receipt
of the LDDI Referral Notice. If NBC fails to deliver a NBC
Customer Notice within the NBC Notice Period with respect to
an LDDI Referral Customer, the LDDI Referral Customer shall
become a "Registered LDDI Customer" upon the expiration of the
NBC Notice Period. If NBC delivers a NBC Customer Notice
within the NBC Notice Period, such notice shall state the
specific category of products or services provided by NBC to
the customer under the existing NBC contract. As to all other
categories of products and services, the LDDI Referral
Customer shall become a Registered LDDI Customer. All Deloitte
& Touche audit clients are automatically NBC Registered
Customers under Section 2.2 hereof and none of them shall be
LDDI Registered Customers other than with respect to the
categories of products and services in which LDDI is
performing services for such customers at the date of this
Agreement. If a Registered LDDI Customer does not become a
customer of NBC within 180 days of first becoming a Registered
LDDI Customer, the registration shall lapse and such customer
shall no longer be a Registered LDDI Customer for purposes of
this Agreement.
(b) Compensation to LDDI. NBC agrees to pay fees ("LDDI Referral
Fees") to LDDI in accordance with the PCA Agreement attached
hereto as Exhibit B to be entered into between LDDI and NBC
concurrently herewith.
4
<PAGE> 5
ARTICLE 3.
EXCLUSIVENESS
3.1. EXCLUSIVENESS OF THIS AGREEMENT. LDDI and NBC agree that during the term of
this Agreement NBC will not enter into a customer referral relationship
involving a potential equity position with any other entity that provides
services similar to LDDI's to a marketplace similar to LDDI's marketplace.
Specifically, NBC maintains the right to have a relationship with an entity
providing telecommunication services to large corporations. LDDI agrees not to
provide data to or contract with any firm that competes with NBC for the
services described in Recital A of the Recitals section of this Agreement.
ARTICLE 4.
COMPLIANCE
4.1. COMPLIANCE WITH RULES AND REGULATIONS. LDDI shall comply with the laws,
rules, and regulations of any governmental agency having jurisdiction with
respect to LDDI's performance of its obligations hereunder. LDDI will be solely
responsible for maintaining any and all licenses which may be required for the
provision of the LDDI Services and the performance of its obligations hereunder.
4.2. PAYMENT OF FINES AND PENALTIES. LDDI shall indemnify and hold NBC harmless
from any fines, penalties, and related expenses incurred by NBC as a result of
LDDI's failure to comply with the laws, rules, and regulations of any
governmental agency having jurisdiction over the performance of its obligations
hereunder.
ARTICLE 5.
INDEMNIFICATION
5.1. GENERAL PROVISION. LDDI agrees to indemnify and hold harmless NBC, its
members, directors, officers, employees, agents and representatives against any
and all claims, liabilities, losses or damages which arise from LDDI's
intentional or negligent acts during the performance of its duties under this
Agreement. NBC agrees to indemnify and hold harmless LDDI, its directors,
officers, employees, agents and representatives against all claims, liabilities,
losses or damages which arise from NBC's intentional or negligent acts during
the performance of its duties under this Agreement.
ARTICLE 6.
TERMINATION
6.1. EXPIRATION OF TERM. The Agreement will continue in effect until December
31, 2001, unless it is mutually extended by the parties or is earlier terminated
pursuant to this Section.
6.2. BANKRUPTCY OR INSOLVENCY. This Agreement shall automatically terminate if
either party shall be adjudicated insolvent or have an order for relief entered
against it or generally not pay its debts as they become due (within the meaning
of the United States Bankruptcy Code as at any time amended or any successor
statute thereto), or make an assignment for the benefit of creditors; or shall
apply for or consent to the appointment of a custodian, receiver, trustee or
similar officer for it for all or any substantial part of its property, or such
custodian, receiver, trustee or similar officer shall be appointed without its
application or consent and such appointment shall remain undismissed for a
period of sixty (60) days; or shall institute (by petition, application, answer,
consent or otherwise) or take any action indicating its consent to, approval of
or acquiescence in any bankruptcy, insolvency, reorganization,
5
<PAGE> 6
moratorium, arrangement, readjustment of debt, dissolution, liquidation or
similar proceeding relating to it under the laws of any jurisdiction; or any
such proceeding shall be instituted (by petition, application or otherwise)
against either of them and shall remain undismissed for a period of sixty (60)
days; or any judgment, writ, warrant of attachment or execution or similar
process shall be issued or levied against a substantial part of any of their
property and such judgment, writ or similar process shall not be released,
vacated or fully bonded within sixty (60) days after its issue or levy.
6.3 TERMINATION FOR CAUSE. This Agreement may be terminated by either party for
cause; provided, however, neither party may terminate this Agreement for cause
prior to delivering a written notice to the other party specifying the cause and
the required remedies for a cure, and giving the other party a thirty (30) day
period in which to cure the specified cause.
(a) NBC shall have the right to terminate for cause in the event of:
(i) the failure by LDDI to perform its duties hereunder in any
material respect.
(ii) the failure by LDDI to comply in any material respect with
the provisions of any applicable statute, rule or regulation
of any governmental entity exercising jurisdiction over the
services provided, as determined by a court or government
agency having relevant jurisdiction and such failure has a
material adverse effect on NBC;
(iii) the commission by LDDI of any fraudulent act with respect to
its services provided hereunder;
(iv) an Acceleration Event pursuant to Section 2.5(e)(3) hereof.
(b) LDDI shall have the right to terminate for cause in the event of:
(i) the failure by NBC to perform its duties hereunder in any
material respect;
(ii) the failure by NBC to comply in any material respect with the
provisions of any applicable statute, rule or regulation of
any governmental entity exercising jurisdiction over the
services provided, as determined by a court or government
agency having relevant jurisdiction and such failure has a
material adverse effect on LDDI;
(iii) the commission by NBC of any fraudulent act with respect to
its services provided hereunder.
6.4 POST-TERMINATION OBLIGATIONS.
(a) Following the expiration of the term of the Agreement without
renewal, LDDI will continue, for a period of the greater of
six months or the life of the LDDI contract with each
Registered NBC Customer, to pay NBC Referral Fees to NBC, but
only for referrals made prior to such expiration. In
addition, the Option shall expire on the date of termination
of the Agreement and shall not be exercisable thereafter.
6
<PAGE> 7
(b) Following a termination of this Agreement by LDDI or NBC
under Section 6.3 hereof, LDDI shall continue, for a period
of the greater of six months or the life of the LDDI contract
with each registered NBC Customer, to pay NBC Referral Fees
to NBC, but only for referrals made prior to such
termination. In addition, if the Agreement is terminated by
NBC pursuant to Section 6.3 hereof, the Option shall expire
on the date of such termination, but it will become
exercisable immediately prior to such termination in the same
manner as if there was an Acceleration Event on the date of
such termination. If the Agreement is terminated by either
NBC or LDDI pursuant to Section 6.3 hereof, the Option shall
be exercisable for a period of six months after the
termination of the Agreement.
(c) Following a termination of this Agreement by LDDI or NBC
under Section 6.3 hereof, NBC shall continue, for a period of
the greater of six months or the life of the NBC contract
with the Registered LDDI Customer, to pay LDDI Referral Fees
to LDDI but only for referrals made prior to such
termination.
(d) Following a termination of this Agreement by LDDI or NBC,
both LDDI and NBC agree that they will not solicit the
other's customers, including those referred to each other
pursuant to and during the existence of this Agreement, for
the purpose of providing the telecommunications services
referred to in this Agreement.
ARTICLE 7.
MISCELLANEOUS PROVISIONS
7.1. INDEPENDENT ENTITIES; NO GRANT OF AUTHORITY. NBC and LDDI are independent
entities and are not the agent, employee or partner of each other. This
Agreement does not grant authority to NBC or LDDI to bind each other or any of
their principals or members. NBC and LDDI shall each act in accordance with
their own expertise, experience, manner and methods and through their own duly
authorized employees, agents and subcontractors.
7.2 EXPENSES. Each party shall be responsible for its own expenses incurred as
the result of performing its duties pursuant to this Agreement unless otherwise
set forth in this Agreement or mutually agreed to in writing.
7.3 MODIFICATION OR AMENDMENT. This Agreement and any Exhibit or Schedule hereto
may not be modified or amended unless such modification or amendment is
contained in a writing signed by the parties.
7.4 GOVERNING LAWS. Except to the extent provided in Section 7.9 herein, this
Agreement and any Exhibit or Schedule hereto shall be subject to and construed
pursuant to the laws of the State of California without giving effect to the
choice of law principles thereof.
7.5 WAIVER AND ESTOPPEL. No waiver by either party or any act or omission to act
in violation of this Agreement on the part of either party shall stop or bar the
other from reasserting a similar act or omission to act as a breach or other
violation of the Agreement at a subsequent date.
7.6 HEADINGS. The paragraph headings in this Agreement and any Exhibit or
Schedule hereto are included solely as a matter of convenience for reference and
are not intended to be a part of this Agreement.
7
<PAGE> 8
7.7 SEVERABILITY. If any term or condition of the Agreement or Exhibit or
Schedule hereto is held by any government agency, court of competent
jurisdiction or arbitrator appointed pursuant to Section 7.9 herein to be
invalid or unenforceable, the balance of this Agreement shall remain in effect.
This Agreement shall be deemed to consist of a series of separate covenants.
Should any government agency, court of competent jurisdiction or arbitrator
determine that any covenant is not enforceable in light of the circumstances as
they then exist, then it is the intention of the parties that this Agreement be
construed by the government agency, court or arbitrator in such a manner as to
impose only those restrictions on the conduct of a party which are enforceable
in light of the circumstance as they then exist and as necessary to assure the
other party the intended benefit of this Agreement. If in an agency, judicial or
arbitration proceeding such agency, court or arbitrator shall refuse to enforce
a series of separate covenants because, cumulatively, they are more extensive
than necessary to assure a party the intended benefit of the Agreement, it is
expressly agreed by the parties that those covenants which, if eliminated, would
permit the remaining separate covenants to be enforced in such proceeding, shall
for the purpose of such proceeding, be deemed eliminated from this Agreement.
7.8 COUNTERPARTS. This Agreement and any Exhibit or Schedule hereto may be
executed in one or more counterparts and when executed by all parties hereto,
such counterpart shall be deemed to be the original.
7.9 ARBITRATION. The parties hereby stipulate and agree that any and all
disputes between them arising out of or otherwise relating to this Agreement
shall be governed exclusively by the Federal Arbitration Act, as amended, and
shall be submitted for resolution to mandatory, exclusive and binding
arbitration in Orange County, California before a single arbitrator in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The party initiating arbitration shall first provide the responding
party written notice (the "Notice") of the initiating party's intention to
arbitrate, a brief statement of the nature of the dispute and a list of proposed
arbitrators. The Notice shall be sent and deemed given in accordance with
Section 7.11. The parties shall then mutually select an arbitrator. If the
parties fail to agree to an arbitrator within thirty (30) days following the
delivery of the Notice in accordance with Section 7.11, an arbitrator shall be
selected in the manner provided by the American Arbitration Association. The
parties agree to be bound by any final decision rendered by the arbitrator,
which final decision may be enforced in any court of competent jurisdiction. The
parties hereby consent to the exercise of personal jurisdiction over them by
such courts and the propriety of venue of such courts for the purpose of
carrying out this provision and they waive any objection that they would
otherwise have to the same. The parties agree that the arbitrator shall have no
power or authority to make awards of punitive or exemplary damages. The parties
further agree that the arbitrator shall have the power to dispense equitable
relief.
Either party may, without inconsistency with this Agreement, seek from a court
any interim or provisional relief that is necessary to protect the right or
property of that party, until the arbitration award is rendered or the
controversy is otherwise resolved. The arbitrator shall render a single written
decision setting forth an award, to the extent applicable, and state with
reasonable specificity the reasons for the decision reached. The parties hereby
further stipulate that each party (as determined by the arbitrator) shall pay
the fees and expenses of the Arbitrator. The Arbitrator shall award fees to the
prevailing party, or, in the event no party is clearly prevailing, in a manner
deemed equitable by the Arbitrator. This Section shall survive the termination
of this Agreement. Unless prohibited by applicable law, any arbitration under
this Agreement must be commenced within one (1) year of the conduct or event
giving rise to the dispute. An arbitration shall be deemed commenced upon
effective delivery of the Notice. The parties acknowledge, understand and agree
that in the event of a dispute under this Agreement
8
<PAGE> 9
between the parties, both parties have waived any right to a jury trial and a
judicial resolution of the dispute.
7.10. ENTIRE AGREEMENT. This Agreement and the Exhibits and Schedules hereto are
entire in content and constitute the sole and complete understanding of the
parties.
7.11. NOTICES. All notices required by this Agreement shall be in writing and
shall be given (i) by either party personally delivering notice to the other
party or any officer thereof, or (ii) by certified or registered U.S. Mail,
return receipt requested postage and charges prepaid; or (iii) by facsimile; or
(iv) by reputable overnight courier service (e.g., Federal Express) which
provide written proof of delivery. Notices shall be sent to the address shown
below or to any other address a party may furnish the other pursuant to this
Section. Notice shall be sent to:
NBC LDDI
Erik R. Watts Steven Lampert
National Benefits Consultants, LLC President
695 Town Center Drive Long Distance Direct, Inc.
Suite 450 1 Blue Hill Plaza
Costa Mesa, California 92626 Pearl River, New York 10965
Telephone: (714) 429-5770 Telephone: (914) 620-0765
Telefax: (714)429-5599 Telefax: (914) 620-1889
Notice shall be deemed given and received (i) at the time actually received, if
personally delivered; or (ii) per the date of receipts or refusal indicated on
the return receipt, if sent by registered or certified mail, return receipt
requested, postage and charges prepaid and properly addressed; or (iii) upon
confirmation of receipt if sent by facsimile; or (iv) upon the date of delivery
as set forth in the courier's delivery receipt if sent by overnight courier
service.
7.12. SIGNATURES. Where required, signature from the parties are deemed
acceptable from the facsimile transmission.
7.13. THIRD PARTY BENEFICIARY. None of the obligations hereunder of either party
shall run to or be enforceable by any party other than a party to this Agreement
or by one deriving rights hereunder as a result of an assignment permitted
pursuant to the terms hereof. The parties acknowledge and agree that either
party is not a party beneficiary of any agreement between the other party and
any third party.
7.14. DEFINED TERMS. Unless the context otherwise requires, defined terms may be
used in the singular or plural, depending on the reference.
7.15. SURVIVAL OF PROVISIONS. Any of the provisions in this Agreement relating
to compensation, general indemnification, confidentiality, nondisclosure and
nonsolicitation shall survive the termination of this Agreement.
7.16. ASSIGNMENTS. This agreement will inure to the benefit of and be binding
upon the parties and their respective successors and permitted assigns. No party
may assign its obligations or rights under this Agreement, except for its rights
to receive cash payments, without the written consent of the other party, and
except that NBC shall have the right to assign all or any portion of the Option
or Shares issuable upon exercise of the Option in a transaction registered under
or exempt from the registration requirements of the Securities Act of 1933 as
amended.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties have signed this Agreement and declared
it effective on the date first written above.
NATIONAL BENEFITS CONSULTANTS, LLC LONG DISTANCE DIRECT HOLDINGS, INC.
By: /s/ Erik R. Watts By: /s/ Steven Lampert
-------------------------------- ---------------------------------
Erik R. Watts Steven Lampert
Title: Managing Member Title: President
10
<PAGE> 11
LONG DISTANCE DIRECT HOLDINGS, INC.
REGISTRATION RIGHTS CERTIFICATE
1. DEFINITIONS.
(a) The term "Company" shall mean Long Distance Direct
Holdings, Inc., a Nevada corporation.
(b) The term "Exchange Act" shall mean the Securities Exchange
Act of 1934, as amended, or any similar federal statute then in effect, and a
reference to a particular section thereof or rule thereunder shall be deemed to
include a reference to the comparable section or rule, if any, of any such
similar federal statute.
(c) The term "Holder" shall mean National Benefits
Consultants, LLC, a Delaware limited liability company.
(d) The term "person" shall mean an individual, partnership,
corporation, trust, unincorporated organization or other entity.
(e) The term "Registrable Securities" shall mean shares of
Common Stock of the Company issued upon exercise of the option granted by the
Company to the Holder pursuant to the terms of the NBC-LDDI Alliance Agreement
dated as of January 15, 1997 between the Company and the Holder (the "NBC-LDDI
Agreement"). As to any particular Registrable Securities, once issued, such
shares shall cease to be Registrable Securities when (i) such shares shall have
been registered under the Securities Act, the registration statement with
respect to the sale of such shares shall have become effective under the
Securities Act and such shares shall have been disposed of pursuant to such
effective registration statement, (ii) such shares shall have been distributed
pursuant to Rule 144 (or any similar provision relating to the disposition of
securities then in force) under the Securities Act, (iii) such shares shall have
been otherwise transferred, new certificates or other evidences of ownership for
them not bearing a legend restricting further transfer and not subject to any
stop-transfer order or other restrictions on transfer shall have been delivered
by the Company and subsequent disposition of such shares shall nor require
registration or qualification of such shares under the Securities Act or any
state securities laws then in force or (iv) such shares shall cease to be
outstanding.
(f) The term "Registration Expenses" shall mean all expenses
incident to the Company's performance of or compliance with this Certificate,
including, without limitation, all SEC and stock exchange or National
Association of Securities Dealers, Inc. registration and filing fees and
expenses, fees and expenses of compliance with securities or blue sky laws
(including, without limitation, reasonable fees and disbursements of counsel for
the underwriters in connection with blue sky qualification of the Registrable
Securities), rating agency fees, printing expenses,
Exhibit A
<PAGE> 12
messenger and delivery expenses, the fees and expenses incurred in connection
with the listing of the shares to be registered on each securities exchange on
which similar securities issued by the Company are then listed, fees and
disbursements of counsel for the Company and all independent certified public
accountants (including the expenses of any annual audit, special audit or "cold
comfort" letters required by or incident to such performance and compliance),
securities acts liability insurance (if the Company so desires or if the
underwriters so desire), the fees and disbursements of underwriters customarily
paid by issuers or sellers of securities, the reasonable fees and expenses of
any special experts retained by the Company in connection with such
registration, and fees and expenses of other persons retained by the Company
(but not including any underwriting discounts or commissions attributable to the
sale of Registrable Securities by the Holder).
(g) The term "SEC" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act or the Exchange Act.
(h) The term "Securities Act" shall mean the Securities Act of
1933, as amended, or any similar federal statute then in effect, and a reference
to a particular section thereof or rule thereunder shall be deemed to include a
reference to the comparable section or rule, if any, of any such similar federal
statute.
(i) The term "Shares" shall mean shares of Common Stock of the
Company issued upon exercise of the option granted by the Company to the Holder
pursuant to the terms of the NBC-LDDI Agreement.
2. SALE OR TRANSFER OF SHARES; LEGEND.
(a) The Shares and the Registrable Securities shall not be
sold or transferred unless either (i) they first shall have been registered
under the Securities Act, or (ii) the Company first shall have been furnished
with an opinion of legal counsel, reasonably satisfactory to the Company, to the
effect that such sale or transfer is exempt from the registration requirements
of the Securities Act.
(b) Notwithstanding the foregoing, no registration or opinion
shall be required for a transfer made in accordance with Rule 144 under the
Securities Act.
(c) Each certificate representing the Shares and the
Registrable Securities shall bear a legend substantially in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED UNLESS AND UNTIL SUCH SHARES ARE
REGISTERED UNDER SUCH ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY
2
<PAGE> 13
IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS
NOT REQUIRED.
3. DEMAND REGISTRATION.
(a) At any time after the Company becomes eligible to file
a registration statement on Form S-3 (or any successor form relating to
secondary offerings), the Holder or Holders holding in the aggregate at least
50% of the Registrable Securities may request the Company, in writing, to effect
the registration on Form S-3 (or such successor form) of the Registrable
Securities owned by such Holder or Holders. Upon receipt of any such request,
the Company shall promptly give written notice of such proposed registration to
all Holders. Such Holders shall have the right, by giving written notice to the
Company within twenty (20) days after the Company provides its notice, to elect
to have included in such registration such of their Registrable Securities as
such Holders request in such notice of election. Thereupon, the Company shall,
as expeditiously as possible, use its best efforts to effect the registration on
Form S-3, or such successor form, of all Registrable Securities which the
Company has been requested to register. The Company will pay all Registration
Expenses in connection with each registration of Registrable Securities
requested pursuant to Section 3 of this Certificate.
(b) The Company shall not be required to effect more than
two registrations pursuant to paragraph (a) of this Section 3.
(c) If at the time of any request to register Registrable
Shares pursuant to this Section 3, the Company is engaged in any activity which,
in the good faith determination of the Company's Board of Directors, would be
adversely affected by the requested registration to the material detriment of
the Company, then the Company may at its option direct that such request be
delayed for a period not in excess of six months from the effective date of
commencement of such material activity, such right to delay a request to be
exercised by the Company not more than once in any two year period.
4. INCIDENTAL REGISTRATION.
(a) If the Company proposes to register any of its
securities under the Securities Act (other than a registration on Form S-4 or
Form S-8, or any successor or similar forms), whether or not for sale for its
own account, in a manner which would permit registration of the Registrable
Securities for sale to the public under the Securities Act, the Company will
give prompt written notice to the Holder of its intention to do so and of such
Holder's rights under this Certificate at least twenty (20) days prior to the
anticipated filing date of the registration statement relating to such
registration. Such notice shall offer the Holder the opportunity to include in
such registration statement such number of Registrable Securities as Holder may
request. Upon the written request of Holder made within ten (10) days after the
receipt of the Company's notice (which request shall specify the number of
Registrable Securities intended to be disposed of by Holder and the intended
method of disposition thereof), the Company will use its best efforts to effect
the registration under
3
<PAGE> 14
the Securities Act of all Registrable Securities which the Company has been so
requested to register by Holder, to the extent requisite to permit the
disposition (in accordance with such intended methods thereof) of the
Registrable Securities so to be registered; provided, that if such registration
involves an underwritten offering, Holder must sell the Registrable Securities
to the underwriters selected by the Company on the same terms and conditions as
apply to the Company. If a registration requested pursuant to this Certificate
involves an underwritten public offering, Holder may elect, in writing prior to
the effective date of the registration statement filed in connection with such
registration, not to register such securities in connection with such
registration. The Company will pay all Registration Expenses in connection with
each registration of Registrable Securities requested pursuant to Section 4 of
this Certificate.
(b) If a registration pursuant to this Certificate involves
an underwritten offering and the managing underwriter advises the Company in
writing that, in its opinion, the number of securities which the Company, the
Holder and any other persons intend to include in such registration exceeds the
number which would have an adverse effect on such offering, including the price
at which such securities can be sold, the Company will include in such
registration (i) first, all the securities the Company proposes to sell for its
own account and (ii) second, a number of such securities equal to the number, in
the opinion of such underwriters, which can be sold without having the adverse
effect referred to above, such amount to be allocated pro rata among Holder and
other persons on the basis of the relative number of securities Holder and each
other person has requested to be included in such registration.
(c) Notwithstanding the provisions of this Section 4, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 4 (irrespective of whether a written request for
inclusion of any Registrable Securities shall have been made) to elect not to
file any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof. The Company shall not be
obligated to maintain effectiveness of any registration statement in which
Registrable Securities are included pursuant to this Section 4 for any period of
time.
5. REGISTRATION PROCEDURES. In the case of each registration
pursuant to this Certificate, the Company shall:
(a) Furnish to Holder a copy of the prospectus included in
such registration statement in conformity with the requirements of the
Securities Act and such other documents as Holder may reasonably request in
order to facilitate the disposition of the Registrable Securities owned by
Holder.
(b) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by Holder,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify as a foreign corporation or as a dealer in
securities or
4
<PAGE> 15
to file a general consent to service of process in any such states or
jurisdictions in which it has not already done so and except as may be required
by the Securities Act.
(c) Notify Holder at any time when a prospectus is required
to be delivered under the Securities Act of the happening of any event as a
result of which the prospectus, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing.
6. INFORMATION BY HOLDER. Holder shall furnish in writing to
the Company such information regarding Holder and the distribution of the
Registrable Securities proposed by Holder as the Company may request in writing
and as shall be required in connection with any registration referred to in this
Certificate. The Company's obligations under this Certificate are conditioned
upon compliance by Holder with the provisions of this Certificate.
7. INDEMNIFICATION.
(a) To the extent permitted by law, the Company will
indemnify each Holder, each of its officers, directors and constituent partners,
legal counsel for the Holders, and each person controlling such Holder, with
respect to which registration of Registrable Securities has been effected
pursuant to this Certificate, and each underwriter, if any, and each person who
controls any underwriter, against all claims, losses, damages or liabilities (or
actions in respect thereof) to the extent such claims, losses, damages or
liabilities arise out of or are based upon any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus or other
document (including any related registration statement) incident to any such
registration, or are based on any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of any rule
or regulation promulgated under the Securities Act applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration; and the Company will reimburse each such Holder, each such
underwriter and each person who controls any such Holder or underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action;
provided, however, that the indemnity contained in this Section 7 shall not
apply to amounts paid in settlement of any such claim, loss, damage, liability
or action if settlement is effected without the consent of the Company (which
consent shall not unreasonably be withheld); and provided, further, that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based upon any untrue
statement or omission based upon written information furnished to the Company by
such Holder, underwriter, or controlling person and stated to be for use in such
prospectus or other documents.
(b) To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which registration is being effected pursuant to this Certificate, indemnify the
Company, each of its directors and officers, each legal
5
<PAGE> 16
counsel and independent accountant of the Company, each underwriter, if any, of
the Company's securities covered by such registration statement, each person who
controls the Company or such underwriter within the meaning of the Securities
Act, and each other such Holder, each of its officers, directors and constituent
partners and each person controlling such other Holder, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of
or based upon any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus or other document,
or any omission (or alleged Omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or any violation by such Holder of any rule or regulation promulgated under the
Securities Act applicable to such Holder and relating to action or inaction
required of such Holder in connection with any such registration; and will
reimburse the Company, such Holders, such directors, officers, partners,
persons; law and accounting firms, underwriters or control persons for any legal
and any other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, or other document in reliance upon and in conformity with
written information furnished to the Company by such Holder and stated to be
specifically for use in such registration statement, prospectus or other
document; and provided that in no event shall any indemnity under this Section
7(b) exceed the gross proceeds from the offering received by the Holder.
(c) Each party entitled to indemnification under this
Section 7 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not be
unreasonably withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein within a reasonable amount
of time, if such failure is prejudicial to the Indemnifying Party of its
obligations under this Certificate, shall relieve the Indemnifying Party of any
liability to the Indemnified Party under this Section 7, but not of any
obligation rising apart from this Certificate. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. If any such Indemnified Party shall have
reasonably concluded that there may be one or more legal defenses available to
such Indemnified Party which are different from or additional to those available
to the Indemnifying Party, or that such claim or litigation involves or could
have an effect upon matters beyond the scope of the indemnity agreement provided
in this Certificate, the Indemnifying Party shall not have the right to assume
the defense of such action on behalf of such Indemnified Party and such
Indemnifying Party shall reimburse such Indemnified Party and any person
controlling such
6
<PAGE> 17
Indemnified Party for that portion of the fees and expenses of any counsel
retained by the Indemnified Party which are reasonably related to the matters
covered by the indemnity agreement provided in this Section 7.
8. TRANSFER OF REGISTRATION RIGHTS. The rights to cause the
Company to register securities granted by the Company under this Certificate to
the Holders may be assigned by any Holder to a transferee or assignee of any
Registrable Securities; provided, however, that the Company must be given
written notice prior to the time of said transfer, stating the name and address
of said transferee or assignee and identifying the securities with respect to
which such registration rights are being assigned.
9. ADJUSTMENTS AFFECTING SECURITIES. The Company will not take
any action or permit any change to occur, with respect to the Shares or the
Registrable Securities that would affect adversely the ability of the Holders to
include the Registrable Securities in a registration undertaken pursuant to this
Certificate or the marketability of the Shares or the Registrable Securities in
any registration. If, and as often as, there is any change in the Common Stock
of the Company by way of a stock split, stock dividend, combination or
reclassification; or through a merger, consolidation or reorganization, or by
any other means, appropriate adjustment shall be made in the provisions hereof
so that the rights and privileges granted hereby shall continue with respect to
the Shares and the Registrable Securities.
10. MISCELLANEOUS.
(a) This Certificate shall be governed in all respects by
the laws of the State of California as applied to agreements among California
residents entered into and to be performed entirely within California.
(b) Except as otherwise expressly provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
(c) All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, sent by facsimile or delivered personally by
hand or nationally recognized courier addressed (a) if to the Holder at 695 Town
Center Drive, Suite 450, Costa Mesa, California 92626, or at such other address
as such Holder or permitted assignee shall have furnished to the Company in
writing, or (b) if to the Company, at such address or facsimile number as the
Company shall have furnished to the Holder in writing. All such notices and
other written communications shall be effective on the date of mailing,
facsimile transfer or delivery.
(d) The titles of the sections and subsections of this
Certificate are for convenience of reference only and are not to be considered
in construing or interpreting this Certificate.
7
<PAGE> 18
The Company has caused this Registration Rights Certificate to
be duly executed as of January 15, 1997.
COMPANY:
LONG DISTANCE DIRECT HOLDINGS, INC.
By: /s/ Steven Lampert
------------------------------
Its: President
-------------------------
8
<PAGE> 19
PARTICIPATING CONSULTANT AGREEMENT
THIS PARTICIPATING CONSULTANT AGREEMENT (the "Agreement") is entered into on
this fifteenth day of January, 1997 by and between MARKETER, (the "Consultant"),
whose business is located at ADDRESS; and NATIONAL BENEFITS CONSULTANTS, LLC, a
Nevada limited liability company ("NBC"), whose business office is located at
Suite 450, 695 Town Center Drive, Costa Mesa, California.
RECITALS
A. NBC has entered into arrangements with certain providers of services (the
"Service Providers") to provide the services which are more particularly
described hereafter. NBC may grant arrangements to others to locate,
identify, and introduce potential customers for the described services.
B. NBC has developed specific marketing techniques for the promotion, packaging
and sale of the services, and such techniques are proprietary to NBC.
C. Because of the proprietary nature of the arrangements with the Service
Providers and the development of the marketing, packaging, and selling
techniques, the resultant products are known as "NBC Products".
D. Consultant desires to enter into an arrangement with NBC to locate and
identify potential customers for the NBC Products, introduce said customers
to NBC, and to assist NBC with the introduction of NBC Products to any
pre-approved potential customer as requested by NBC. Consultant desires to
receive compensation for such services in conformance with the provisions
set forth hereafter.
E. NBC desires to grant a consulting arrangement to Consultant for the
identification of potential customers so long as Consultant's efforts are
directed only to certain specific prospects who have been identified and
introduced to NBC by Consultant, and who are then pre-approved by NBC
through its screening process so that NBC may make a determination that any
particular prospect fits the proprietary profile necessary for a successful
closing. Any particular prospect who has been screened, quantified, and
approved by NBC, in its sole and unfettered discretion, shall be then
accredited to Consultant as an "Approved Prospect". No promotion of any NBC
Product shall occur unless and until a particular potential customer has
been pre-approved by NBC pursuant to the provisions set forth hereafter.
PROVISIONS
NOW, THEREFORE, in consideration of the RECITALS (incorporated as
provisions as though fully re-written herein), these premises and the mutual
covenants, conditions and obligations contained herein, Consultant and NBC
mutually agree as follows:
ARTICLE 1
TERM
1.1 GENERAL.
This Agreement shall be effective as of the date first written above
and shall continue in effect until terminated as provided hereafter in Article
6.
Exhibit B
<PAGE> 20
ARTICLE 2
SCOPE OF THE CONSULTING ARRANGEMENT
2.1 GENERAL PROVISIONS OF ENGAGEMENT.
Consultant agrees that the scope of its engagement hereunder shall be
to use Consultant's best efforts to identify and introduce potential customers
to NBC in conformance with the restrictions and limitations set forth hereafter.
Consultant will receive performance-based compensation for its services strictly
from revenues received by NBC through the closing of sales of NBC Products to
any such Approved Prospects. This engagement is nonexclusive with respect to
geographic territory and the NBC Products.
2.2 SPECIFIC PROVISIONS REGULATING EFFORTS.
NBC has developed specific marketing techniques which have proven
successful in the sale of NBC Products throughout the United States. The
techniques involve a preliminary screening procedure which is conducted solely
by NBC prior to any communications with a prospective customer. If the
prospective customer does not meet the requirements of the profile established
by NBC, then NBC will not make its products available for marketing or sale to
that particular prospective customer. Therefore, Consultant agrees that it is in
its best interests to adhere specifically to the procedure developed by NBC.
Consultant will abide by the following procedure:
(a) Before Consultant has any discussion whatsoever with a
prospective customer regarding NBC, its programs, or its
products, Consultant will identify the prospective customer to
NBC. Such identification will be made to NBC on a "Prospect
Registration Form" which will be supplied by NBC. At such time as
Consultant delivers a Prospect Registration Form to NBC, NBC will
conduct its preliminary screening procedure. If the prospective
customer thus identified has originated from Consultant, and if
such prospective customer further meets the profile established
by NBC, Consultant will be informed of such determination by NBC.
(b) If the prospective customer thus identified has not originated
from Consultant, or such prospective customer does not meet the
profile established by NBC, no further action will be taken by
Consultant with respect to an introduction of the NBC Products.
(c) If the prospective customer thus identified has originated from
Consultant and meets the profile established by NBC, then
Consultant agrees to use its best efforts to arrange an
introductory meeting between a Managing Member of NBC, or its
designee, and a representative of the prospective customer who
must be identified as an executive officer within the
organization of the prospective customer having decision making
authority such as a chief financial officer, chief operating
officer or chief executive officer. If the prospective customer
is a state, city, or other type of local government, the
introductory meeting must be arranged with a person or persons
approved by an NBC Managing Member prior to the making of any
arrangements for such introductory meeting. It is agreed that
during the process of making the arrangements for an introductory
meeting, Consultant may discuss the NBC Products with the
prospective customer. NBC agrees to provide support with respect
to such discussions.
(d) Following the introductory meeting, if the prospective customer
continues to meet the criteria established for a successful
marketing effort as determined by NBC, in its sole and absolute
discretion, then the prospective customer shall be designated an
Approved Prospect. Consultant will be informed of such
designation in writing by NBC. Until a prospective customer is
designated as an Approved Prospect, Consultant agrees that no
effort will be
2
<PAGE> 21
made to promote a sale of any particular NBC Product to that
prospective customer. A sale of any particular NBC Product will
be deemed closed when the Approved Prospect signs a contract for
the purchase of the NBC Product in such form as will be supplied
by NBC.
2.3 WINDOW OF OPPORTUNITY.
Once a prospective customer becomes an Approved Prospect pursuant to
the procedure outlined in Section 2.2 above, Consultant shall have the exclusive
right to sell any one or more of the NBC products to the Approved Prospect for a
period of 6 months following the date of the designation of the prospective
customer as an Approved Prospect. If a sale of one or more of the NBC Products
is not closed within the 6-month period described, then the prospective customer
will no longer be an Approved Prospect and the exclusive right granted to
Consultant with regard to that particular customer will terminate, and NBC, in
its sole and absolute unfettered discretion, shall:
(a) renew the exclusive window of opportunity granted to Consultant
for an additional specified period if NBC determines, in its sole
and absolute unfettered discretion, that Consultant is using its
best efforts and is actively promoting NBC to the prospective
customer at the conclusion of the first described 6-month period
(such extension shall be granted to Consultant, in NBC's sole and
absolute unfettered discretion, and only in a writing delivered
to Consultant) or;
(b) grant an exclusive arrangement with any other NBC consultant
which will identify that particular prospective customer as an
Approved Prospect for the other NBC consultant, and Consultant
agrees to then refrain from any further promotion of NBC Products
to such prospective customer and to refrain from interfering with
any other NBC consultant; or
(c) have the right to continue soliciting the prospective customer
for the sale of one or more NBC Products and Consultant agrees to
refrain from making any further promotion of NBC Products to
such prospective customer and agrees to refrain from interfering
with such solicitation by NBC.
In the event that a sale of one or more NBC Products is made to a prospective
customer who had been identified as an Approved Prospect for Consultant, and
such sale is made following NBC's election to proceed under the provisions of
(b) or (c) above, then Consultant will be entitled to receive a fixed fee in
lieu of any other form of compensation. Such fixed fee shall be paid as the
result of the sale in conformance with the provisions set forth hereafter in
Section 3.2.
2.4 DESCRIPTION OF NBC PRODUCTS.
Currently, NBC has developed several products in conjunction with
several Service Providers. NBC has made arrangements with the Services Providers
to render services to NBC customers as subcontractors or in such other capacity
as agreed by NBC. This Agreement pertains to the following described NBC
Products:
a) HEALTH CARE RECOVERY SERVICES
b) HEALTH CARE COST REDUCTION SERVICES
c) DISBURSEMENT RECOVERY SERVICES
3
<PAGE> 22
d) CORPORATE OWNED LIFE INSURANCE AND ANNUITY PRODUCTS
e) TRAINING SERVICES
NBC will identify the Service Provider who will provide the services with
respect to any described NBC Product from time to time. NBC reserves the right
to delete or add any particular NBC Product.
ARTICLE 3
COMPENSATION FOR PERFORMANCE
3.1 ENTITLEMENT TO COMPENSATION.
Notwithstanding any other provision contained herein, Consultant shall
be entitled to receive compensation and shall be paid compensation only after
NBC has received revenues from the sale of an NBC Product to a customer who has
been designated as an Approved Prospect in conformance with the provisions set
forth in Article 2 above.
3.2 PAYMENT OF COMPENSATION.
If the sale of a particular NBC Product is made to a
Consultant-designated Approved Prospect within the initial 6-month window of
opportunity, or within an extended window of opportunity as described in Section
2.3(a), then NBC will, within 30 days following the receipt of any increments of
its compensation, pay Consultant compensation as described in Schedule "A"
attached hereto from its general account.
For all purposes within this Agreement, "NBC Compensation" shall mean the gross
amount collected by NBC from a sale of a particular NBC Product to a particular
Approved Prospect, less all charges and expenses paid to the Service Providers,
sub-contractors and any other suppliers of goods or services engaged to perform
the work necessary to provide that particular NBC Product to that particular
Approved Prospect.
3.3 PAYMENT OF COMPENSATION FOLLOWING TERMINATION OF THE AGREEMENT.
This Agreement may be terminated as set forth in Article 6 hereafter.
As set forth in Article 6, this Agreement may be terminated by NBC for cause as
defined in Article 6. If this Agreement is terminated by NBC for cause, then
Consultant will be paid its stated compensation for the sale of NBC Products to
Consultant-designated Approved Prospects which have agreed to purchase NBC
Products pursuant to a written agreement signed by such Approved Prospects prior
to the date of termination of this Agreement. Consultant will not be paid any
compensation for sale of NBC Products to Consultant-designated Approved
Prospects which have purchased said products through a written agreement signed
by said Approved Prospects after the date of termination of this Agreement for
cause. On the other hand, if NBC terminates this Agreement for any reason other
than cause as defined hereafter in Article 6, then Consultant shall be paid its
stated compensation for all NBC Products sold to Consultant-designated Approved
Prospects who enter into a written agreement for the purchase of the NBC
Products within the 6-month window of opportunity following the designation of
the prospective customer as an Approved Prospect, or within any extension of the
6-month window of opportunity as described in Section 2.3(a), even though the
sale is made following the date of Termination of this Agreement.
4
<PAGE> 23
3.4 COMPENSATION REPORTS.
NBC will provide Consultant with a report of NBC Compensation received
by NBC from a sale of NBC Products to a Consultant-designated Approved Prospect
for which Consultant is entitled to receive compensation. Reports will be made
to Consultant for each Consultant-designated Approved Prospect at such time as a
payment is made to Consultant pursuant to the provisions of this Article 3.
Under no circumstances shall Consultant have access to or right to inspect the
books, ledgers, files, reports, operating records or any accounting, financial
or other business information of NBC. In the event Consultant should dispute any
compensation report after communications with NBC relevant to the information
contained in such report, NBC will cause its independent auditors to supply
Consultant with a statement of reconciliation which demonstrates the amount of
payment made to Consultant was accurate. If an inaccuracy is found, the payment
made to Consultant will be adjusted in accordance with the report made by the
independent auditors. If the report made by the independent auditors discloses
that the payment of compensation made to Consultant was accurate, then
Consultant agrees to reimburse NBC for the cost of the report made by the
independent auditors.
ARTICLE 4
COMPLIANCE
4.1 COMPLIANCE WITH RULES AND REGULATIONS.
Consultant shall comply with the laws, rules, and regulations of any
governmental agency having jurisdiction with respect to Consultant's performance
of its obligations pursuant to this Agreement. Consultant will be solely
responsible for maintaining any and all licenses which may be required for
performing services required for the receipt of compensation to be paid
hereunder.
4.2 PAYMENT OF FINES AND PENALTIES.
Consultant shall indemnify and hold NBC harmless from any fines,
penalties, and related expenses incurred by Consultant as the result of
Consultant's failure to comply with the laws, rules, and regulations of any
governmental agency having jurisdiction over its performance of obligations
pursuant to this Agreement.
ARTICLE 5
INDEMNIFICATION
5.1 GENERAL PROVISION.
Consultant agrees to indemnify and hold harmless NBC, its members,
directors, officers, employees, agents, and representatives against any and all
claims, liabilities, losses or damages which arise from Consultant's intentional
or negligent acts during the performance of its duties under this Agreement. NBC
agrees to indemnify and hold harmless Consultant, its directors, officers,
employees, agents, and representatives against all claims, liabilities, losses
or damages which arise from NBC's intentional or negligent acts during the
performance of NBC's duties under this Agreement.
ARTICLE 6
TERMINATION
6.1 VOLUNTARY TERMINATION.
Either party may terminate this Agreement by giving 90 days written
notice to the other party. This Agreement shall automatically terminate without
further action upon the expiration of the ninety-day period following receipt of
the written notice.
5
<PAGE> 24
6.2 TERMINATION FOR CAUSE.
This Agreement may be terminated by either party for cause following a
written notice to the other party specifying the cause, and giving the other
party a thirty-day period in which to cure the specified cause. For these
purposes cause shall mean:
a) As to both parties, if either NBC or Consultant shall be
adjudicated insolvent or have an order for relief entered against
it or generally not pay its debts as they become due (within the
meaning of the United States Bankruptcy Code as at any time
amended or any successor statute thereto), or make an assignment
for the benefit of creditors; or shall apply for or consent to
the appointment of a custodian, receiver, trustee or similar
officer for it for all or any substantial part of its property,
or such custodian, receiver, trustee or similar officer shall be
appointed without its application or consent and such appointment
shall continue undischarged for a period of sixty days; or shall
institute (by petition, application, answer, consent or
otherwise) or take any action indicating its consent to, approval
of or acquiescence in any bankruptcy, insolvency, reorganization,
moratorium, arrangement, readjustment of debt, dissolution,
liquidation or similar proceeding relating to it under the laws
of any jurisdiction; or any such proceeding shall be instituted
(by petition, application or otherwise) against either of them
and shall remain undismissed for a period of sixty days; or any
judgment, writ, warrant of attachment or execution or similar
process shall be issued or levied against a substantial part of
any of their property, and such judgment, writ or similar process
shall not be released, vacated or fully bonded within sixty days
after its issue or levy.
(b) As to NBC, its failure to pay the performance-based compensation
or the introduction fee in a timely manner.
(c) As to Consultant:
i. its failure to perform its duties in a workmanlike
manner;
ii. its failure to comply with the provisions of any
applicable statute, rule or regulation of any
governmental entity exercising jurisdiction over NBC
Products, as determined by a court or government
agency having relevant jurisdiction;
iii. its commission of any act or course of action which may
jeopardize the relationship of NBC or any of its
Service Providers with any Approved Prospect or any
other prospective customer;
iv. its commission of any act or course of action which may
jeopardize the relationship of NBC with any of its
Service Providers;
v. its commission of any fraudulent act or any negligent
act with respect to any NBC Product or any NBC Service
Provider.
6
<PAGE> 25
ARTICLE 7
CONFIDENTIALITY AND NONDISCLOSURE
7.1 GENERAL.
Consultant hereby acknowledges that NBC's business and services are
highly specialized, that the NBC Products are highly specialized and technically
sophisticated, that the identity and particular needs of NBC's customers,
prospects, and Service Providers are not generally known, that documents,
materials and information regarding NBC's methods of marketing, outsourcing,
operations, services, pricing, costs and, without limitation, other NBC
customer, prospect, and product-related information, are highly confidential and
constitute trade secrets ("NBC Trade Secrets"). Consultant acknowledges that
under the terms of this Agreement it will receive or have access to certain NBC
Trade Secrets, which secrets are proprietary to NBC and not generally known or
available. The following information shall not be considered as confidential
information:
(a) information in the public domain at the time of disclosure to
Consultant by NBC;
(b) information which, after disclosure to Consultant, becomes a part
of public domain by dissemination by a third party and other than
by an act or omission of the Consultant;
(c) information which the Consultant can demonstrate by documentary
evidence to be in his possession at the time of disclosure to
Consultant, and not acquired directly or indirectly from NBC; and
(d) information which is subsequently disclosed or made available to
Consultant without an obligation of confidence by a third party
having a bona-fide right to disclose or make available such
information.
7.2 PROHIBITION.
Consultant agrees that it shall not use NBC Trade Secrets or
confidential information for any purpose other than as expressly allowed in this
Agreement. Consultant shall take all reasonable steps necessary to maintain the
confidentiality of NBC Trade Secrets and confidential information. Consultant
shall restrict distribution of NBC Trade Secrets and confidential information to
only those persons directly involved in performing the prescribed obligations
under this Agreement and as necessary to comply with the terms and conditions of
this Agreement. Consultant further agrees not to reproduce in any manner or
allow reproduction of NBC Trade Secrets and confidential information except as
reasonably necessary for the performance of its duties pursuant to this
Agreement.
7.3 RETURN OF INFORMATION.
Upon Termination of this Agreement, Consultant shall immediately return
to NBC any NBC Trade Secrets and confidential information, including all
reproductions thereof made by Consultant, if any. Consultant shall in no event
retain NBC Trade Secrets and confidential information in any form, except that
which is reasonably necessary for tax, audit and NBC customer servicing and
legal requirements.
Consultant shall indemnify and hold NBC harmless from any and all
damages, claims, losses, liabilities or costs (including reasonable attorneys'
fees) related to any breach of the provisions of this Article by Consultant.
7
<PAGE> 26
7.4 PROTECTIVE NOTICE.
In the event Consultant is required in a judicial, arbitral,
administrative or governmental proceeding to disclose any information,
materials, records and flies or NBC customer or prospect lists which are
obtained or furnished as a result of this Agreement, Consultant will use its
good faith efforts to provide NBC with prompt notice of such request(s) so that
NBC may seek an appropriate protective order or waive compliance with the
provisions of this Article.
7.5 RESTRAINT.
Consultant agrees that in view of Consultant's access to and receipt of
NBC Trade Secrets and confidential information, Consultant, any Consultant
affiliate, and any person or entity acting for Consultant shall not engage in
any services or other dealings with respect to NBC Products during the term of
this Agreement except to the extent provided in this Agreement or as NBC shall
otherwise expressly agree in writing.
7.6 REMEDIES.
Consultant agrees that NBC will suffer irreparable harm in the event
that Consultant fails to comply with its obligations under this Article and the
monetary damages alone will be inadequate to compensate NBC for such breach.
Accordingly, Consultant agrees that, in addition to all other remedies which may
be available to NBC in law or in equity, NBC shall be entitled to injunction
relief, and such costs associated with seeking such relief shall be borne by
Consultant.
7.7 SERVICE PROVIDER PROVISIONS.
Unless NBC otherwise consents in writing, Consultant shall not, nor
shall any Consultant affiliate, (a) contact or solicit a Service Provider or a
Service Provider's employee(s), or (b) use any Service Provider's name in
written materials in connection with activities related to this Agreement or
NBC.
ARTICLE 8
NONSOLICITATION
8.1 COMPETITION PROHIBITED.
Consultant agrees that, in view of Consultant's access to and receipt
of NBC Trade Secrets and confidential information, during the term of this
Agreement and for a period of twelve (12) months thereafter, Consultant shall
not, nor shall any Consultant affiliate, solicit any NBC customer or Approved
Prospect on behalf of any competing services ("Competing Services") without the
prior written consent of NBC, except for such products as the Consultant has
offered for sale and has submitted on a written list for NBC's review prior to
the execution of this Agreement. "Competing Services" shall mean any person or
entity (other than NBC) that deals in or provides any service or product similar
to the NBC Products, which service or product is marketed, offered or sold in
the United States during the term of this Agreement or during the period of 12
months following the termination of this Agreement.
8.2 INTERFERENCE PROHIBITED.
Consultant agrees that, in view of Consultant's access to and receipt
of NBC Trade Secrets and confidential information, during the term of this
Agreement and for a period of twelve (12) months thereafter, Consultant shall
not, nor shall any Consultant affiliate, induce or attempt to induce any NBC
customer or Approved Prospect to cease doing business with NBC with regard to
NBC Products. However, the Consultant may solicit NBC customers or Approved
Prospects introduced to NBC by the Consultant for services that are not NBC
Products nor similar to those products so long as such products
8
<PAGE> 27
or services are not in conflict with this Article. NBC Trade Secrets and
confidential information shall not be used by Consultant to invent, create,
modify, adopt or manufacture any products or services which would or could
compete with or be used in lieu of NBC Products or services.
8.3 EQUITABLE RELIEF.
Consultant agrees and acknowledges that a violation of the covenants of
this Article will result in substantial damage to NBC. Consultant agrees that
NBC shall be entitled to an injunction issued by any court of competent
jurisdiction (or, to the extent available, any arbitrator) restraining any
further violation of such covenant or covenants by Consultant or any of its
employees, agents, affiliates, or any entity acting for it, as means of
enforcing the prohibition of this Article, in addition to such other remedies as
may be available under applicable law.
ARTICLE 9
MISCELLANEOUS PROVISIONS
9.1 INDEPENDENT CONTRACTOR STATUS; NO GRANT OF AUTHORITY.
Consultant is an independent contractor and is not the agent, employee
or partner of NBC. This Agreement does not grant authority to Consultant to bind
NBC or any of its principals or members or any of its Service Providers as the
result of actions taken pursuant to this Agreement. Consultant shall act in
accordance with its own expertise, experience, manner and methods, and through
its own duly authorized employees. Consultant shall comply with all applicable
governmental laws, rules and regulations with reference to taxation and
otherwise. It is understood that any compensation received by Consultant under
this Agreement shall not be considered salary, and Consultant and its employees
will not be entitled to any fringe and supplemental benefits of NBC nor will NBC
withhold any Social Security (FICA) or similar contributions from the
compensation payable to Consultant. NBC shall have no liability whatsoever
except for the payment of compensation to Consultant as provided herein.
9.2 EXPENSES.
Each party shall be responsible for its own expenses incurred as the
result of performing its duties pursuant to this Agreement unless otherwise
set forth in this Agreement or mutually agreed to in writings.
9.3 MODIFICATION OR AMENDMENT.
This Agreement and any schedule hereto may not be modified or amended
unless such modification or amendment is contained in writing signed by the
parties.
9.4 GOVERNING LAWS.
Except to the extent provided in Section 9.10 herein, this Agreement
shall be subject to and construed pursuant to the laws of the State of Nevada
without giving effect to the choice of law principles thereof.
9.5 ASSIGNMENT OR SALE.
Neither party's rights under this Agreement are assignable or delegable
unless otherwise agreed to in writing by the other party, and any attempt at any
such assignment shall be deemed null and void ab initio. In the event 50% or
more of the ownership of NBC is assigned or otherwise transferred, the
Consultant shall be notified of such change in ownership, and Section 6.1 hereof
shall be amended by replacing "90 days" with "180 days" in the first sentence
thereof.
9
<PAGE> 28
9.6 WAIVER AND ESTOPPEL.
No waiver by either party or any act or omission to act in violation of
this Agreement on the part of either party shall stop or bar the other from
reasserting a similar act or omission to act as a breach or other violation of
the Agreement at a subsequent date.
9.7 HEADINGS.
The paragraph headings in this Agreement and any schedule hereto are
included solely as a matter of convenience for reference and are not intended to
be a part of this Agreement.
9.8 SEVERABILITY.
If any term or condition of this Agreement is held by any government
agency, court of competent jurisdiction or arbitrator appointed pursuant to
Section 9.10 herein, to be invalid or unenforceable, the balance of this
Agreement shall remain in effect. This Agreement shall be deemed to consist of a
series of separate covenants. Should any government agency, court of competent
jurisdiction or arbitrator determine that any covenant is not enforceable in
light of the circumstances as they then exist, then it is the intention of the
parties that this Agreement be construed by the government agency, court or
arbitrator in such a manner as to impose only those restrictions on the conduct
of a party which are enforceable in light of the circumstances as they then
exist and as necessary to assure the other party the intended benefit of this
Agreement. If in an agency, judicial or arbitration proceeding, such agency,
court or arbitrator shall refuse to enforce a series of separate covenants
because, cumulatively, they are more extensive than necessary to assure a party
the intended benefit of the Agreement, it is expressly agreed by the parties
that those covenants which, if eliminated, would permit the remaining separate
covenants to be enforced in such proceeding shall, for the purpose of such
proceeding, be deemed eliminated from this Agreement.
9.9 COUNTERPARTS.
This Agreement may be executed in one or more counterparts and when
executed by all parties hereto, such counterpart shall be deemed to be the
original.
9.10 ARBITRATION.
The parties hereby stipulate and agree that any and all disputes
between them arising out of or otherwise relating to this Agreement shall be
governed exclusively by the Federal Arbitration Act, as amended, and shall be
submitted for resolution to mandatory, exclusive and binding arbitration in the
State of Nevada before a single arbitrator in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. The party initiating
shall first provide the responding party written notice (the "Notice") of the
initiating party's intention to arbitrate, a brief statement of the nature of
the dispute, and a list of proposed arbitrators. The Notice shall be sent and
deemed given in accordance with Section 9.12. The parties shall then mutually
select an arbitrator. If the parties fail to agree to an arbitrator within 30
days following delivery of the Notice in accordance with Section 9.12, an
arbitrator shall be selected in the manner provided by the American Arbitration
Association. The parties agree to be bound by any final decision rendered by the
arbitrator, which final decision may be enforced in any court of competent
jurisdiction. The parties hereby consent to the exercise of personal
jurisdiction over them by such courts and the propriety of venue of such courts
for the purpose of carrying out this provision, and they waive any objection
that they would otherwise have to the same. The parties agree that the
arbitrator shall have no power or authority to make awards of punitive or
exemplary damages. The parties further agree that the arbitrator shall have the
power to dispense equitable relief in the manner provided in Articles 7 and 8 of
this Agreement. Either party may, without inconsistency with this Agreement,
seek from a court any interim or provisional relief that is necessary to protect
the rights
10
<PAGE> 29
or property of that party, until the arbitration award is rendered or the
controversy is otherwise resolved. The arbitrator shall render a single written
decision setting forth an award to the extent applicable, and state with
reasonable specificity the reasons for the decision reached. The parties hereby
further stipulate that each party to any such arbitration shall pay its own
costs in connection therewith, and that the losing party (as determined by the
arbitrator) shall pay the fees and expenses of the arbitrator. This Section
shall survive the termination of this Agreement. Unless prohibited by applicable
law, any arbitration under this Agreement must be commenced within one (1) year
of the conduct or event giving rise to the dispute. An arbitration shall be
deemed commenced upon effective delivery of the Notice. Consultant acknowledges,
understands and agrees that, in the event of a dispute under this Agreement with
NBC, Consultant has waived any right to a jury trial and a judicial resolution
of the dispute.
9.11 ENTIRE AGREEMENT.
This Agreement is entire in content and constitutes the sole and
complete understanding of the parties. It also serves as a complete revocation
of any previous written agreements between the parties.
9.12 NOTICES.
All Notices required by this Agreement shall be in writing, and shall
be given (i) by either party personally delivering Notice to the other party or
any officer thereof; or (ii) by certified or registered U.S. Mail, return
receipt requested, postage and charges prepaid; or (iii) by facsimile; or (iv)
by reputable overnight courier service (e.g., Federal Express) which provides
written proof of delivery. Notices shall be sent to the address shown below or
at any other address a party may furnish the other pursuant to this Section.
Notice shall be sent to:
NBC CONSULTANT
--- ----------
Erik Watts NAME
National Benefits Consultants, LLC MARKETER
695 Town Center Drive ADDRESS
Costa Mesa, California 92626 CITY STATE ZIP
Notice shall be deemed given and received (i) at the time actually received, if
personally delivered; or (ii) upon the date of receipt or refusal indicated on
the return receipt, if sent by registered or certified mail, return receipt
requested, postage and charges prepaid and properly addressed; or (iii) upon
confirmation of receipt if sent by facsimile; or (iv) upon the date of delivery
as set forth in the courier's delivery receipt if sent by overnight courier
service.
9.13 SIGNATURES.
Where required, signatures from the parties are deemed acceptable from
the facsimile transmission.
9.14 THIRD PARTY BENEFICIARY.
None of the obligations hereunder of either party shall run to or be
enforceable by any party other than a party to this Agreement or by one deriving
rights hereunder as a result of an assignment permitted pursuant to the terms
hereof. Consultant acknowledges and agrees that it is not a party beneficiary of
any agreement between NBC and any Service Provider.
11
<PAGE> 30
9.15 DEFINED TERMS.
Unless the context otherwise requires, defined terms may be used in the
singular or plural, depending on the reference.
9.16 CONSULTANT AFFILIATES.
For all purposes within this Agreement, Consultant affiliates means the
family members of each and every owner of an interest in Consultant, the agents,
employees, and representatives of the Consultant and its owners, partnerships in
which Consultant or its owners own any direct or indirect interest, corporations
in which Consultant or its owners own any direct or indirect interest, any other
form of business enterprise in which Consultant or the owners own any direct or
indirect interest, and financing arrangements with such entities which are
tantamount to ownership interests.
9.17 SURVIVAL OF PROVISIONS.
The provisions relating to compensation, general indemnification,
confidentiality, nondisclosure, and nonsolicitation shall survive the
termination of the Agreement.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement and
declared it effective on the date first written above.
NBC MARKETER (CONSULTANT)
- --- ---------------------
By: /s/ Erik Watts By: /s/ ILLEGIBLE
---------------------------- ----------------------------
ERIK WATTS
Title: MANAGING MEMBER Title: PRESIDENT
----------
12
<PAGE> 31
SCHEDULE A
COMPENSATION SCHEDULE
<TABLE>
<CAPTION>
SERVICE COMPENSATION
- ------- ------------
<S> <C>
Health Care Recovery Services (HCRS):
Retrospective Recovery Engagements with:
35% Fee 2.5% of recoveries
45% Fee 5% of recoveries
Prospective Cost Reduction Products and 20% of NBC gross revenue
Services
Disbursement Recovery Services (DRS)
Retrospective Recovery Engagements with:
45% Fee 1.5% of recoveries
50% Fee 2.5% of recoveries
Prospective Cost Reduction Products and 20% of NBC gross revenue
Services
Employee Benefit Insurance Services 50% of First Financial Resources
principal level revenue
Training Services Engagement 10% of gross fees
</TABLE>
NOTE: Compensation is subject to modification. Modifications will be
communicated to MARKETER in writing.
13
<PAGE> 1
CARRIER AGREEMENT
BETWEEN
AT&T CORP.
AND
LONG DISTANCE DIRECT INC.
CONFIDENTIAL AND PROPRIETARY
between
AT&T and Long Distance Direct, Inc.
<PAGE> 2
TABLE OF CONTENTS
-----------------
Section 0 Signature Page
Section 1: General Terms and Conditions
Section 2: Eligibility of Customer
Section 3: Responsibilities of Customer
Section 4: Responsibilities of AT&T
Section 5: Services and Service Descriptions
Section 6: Service Rates, Terms and Conditions
2
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 3
SECTION 0: SIGNATURE PAGE
THIS CARRIER AGREEMENT ("Agreement") is made and entered into by and
between AT&T Corp., a corporation organized and existing under the laws of the
State of New York and having an office at 295 North Maple Avenue, Basking Ridge,
New Jersey 07920 ("AT&T") and Long Distance Direct Inc., having an office at
________________________________________ ("Customer"). The terms and conditions
herein constitute an offer by Customer as of the date of Customer's signature
below which may be accepted only by AT&T's signature below. This Agreement shall
become effective when signed by both parties.
AT&T and Customer, acting through their duly authorized representatives,
hereby agree to the terms set forth in Sections 1 through 6 of this Agreement as
attached hereto.
CUSTOMER AT&T CORP.
By /s/ MICHAEL PRESTON By /s/ L.R. Zingale
----------------------- -----------------------
MICHAEL PRESTON L.R. Zingale
----------------------- -----------------------
Printed or Typed Name Printed or Typed Name
Vice-President, CFO Spec. Mkts. V.P.
----------------------- -----------------------
Title Title
February 6, 1997 2/10/97
----------------------- -----------------------
Date Date
3
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 4
[Logo] AT&T
================================================================================
SECTION 1: GENERAL TERMS AND CONDITIONS
1.A. Assignment. Customer may not assign this Agreement in whole or in part
without the prior written consent of AT&T, which shall not be unreasonably
withheld. AT&T may, in its discretion, condition its consent to such
assignment upon the posting of an appropriate deposit by the assignee
pursuant to Paragraph 4.D of this Agreement. AT&T reserves the right to
deny or revoke its consent to such assignment at any time if the assignee
proves unwilling or unable to meet the eligibility requirements of this
Agreement, in which event the Customer shall remain or again become
responsible for performance of all terms of this Agreement. This provision
shall not affect the Customer's right to resell Service. Further, any
resale or assignment shall not release the original Customer from its
obligations under this Agreement.
1.B. Combination with Other Services or Offers. This AT&T Carrier Agreement may
not be used in conjunction with any other AT&T Carrier Agreement, AT&T
Contract Tariff, or promotions for any AT&T Services.
1.C. Independent Parties. The relationship established by this Agreement shall
in no way constitute AT&T (or its agents or employees) as a partner, agent
or fiduciary of Customer. The relationship established by this Agreement
shall in no way constitute the Customer (or their agents or employees) as
a partner, agent or fiduciary of AT&T. The provision of Service described
in this Agreement does not establish any joint undertaking, joint venture,
or fiduciary relationship between AT&T and Customer.
I.D. Acknowledgment of Right to Compete. Customer acknowledges and understands
that it remains at all times solely responsible for the success and
profits of its business, and that AT&T makes no promises, warranties or
representations regarding the Customer's business success or prospects of
business success in connection with the provision of service pursuant to
this Agreement. Customer acknowledges and understands that AT&T will
continue to market AT&T services directly to the public and that such
marketing may from time to time bring AT&T into direct or indirect
competition with Customer, and that AT&T may also market its services to
competitors of Customer. Customer acknowledges and understands that
nothing in this Agreement diminishes or restricts in any way the rights of
AT&T to engage in competition with Customer or to market its services to
competitors of Customer.
1.E. Use of Proprietary Information. In the event that either Customer or AT&T,
in the course of performance of their obligations to each other under this
Agreement, obtains or receives proprietary information from the other, it
agrees to use such information only for the purpose of complying with its
obligations under this
4
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 5
[Logo] AT&T
================================================================================
Agreement and not to use such information for its own marketing
purposes. Customer acknowledges that AT&T may use for its own
marketing purposes any and all information that it obtains from
sources other than Customer, including but not limited to information
that AT&T may have regarding Customer's End-Users as a result of the
past or present sale or provision by AT&T of telecommunications
services or equipment to said End-Users.
1.F. Force Majeure. Neither party nor its affiliates, subsidiaries,
subcontractors, or parent corporation shall be liable in any way for
delay, failure in performance, loss or damage due to any of the following:
fire, strike, embargo, explosion, power blackout, earthquake, volcanic
action, flood, war, water, the elements, labor disputes, civil or military
authority, acts of God, acts of the public enemy, inability to secure raw
materials, inability to secure products, acts or omissions of carriers, or
other causes beyond its reasonable control, whether or not similar to the
foregoing.
1.G. Severability. If any portion of this Agreement shall be found to be
invalid or unenforceable, such portion shall be void and of no effect, but
the remainder of the Agreement shall continue in full force and effect
unless the Agreement fails of its essential purpose without the voided
portion.
1.H. Notices. All notices, identifications, formal requests or other formal
communications required or desired to be given in connection with this
Agreement, shall be in writing and shall be effective when delivered in
person, mailed by registered or certified post or sent by Telex or
facsimile ("FAX") to the recipient party, unless the parties otherwise
agree in writing. Notice shall be addressed to the following:
If to AT&T:
If to Customer:
5
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 6
[Logo] AT&T
================================================================================
1.I. Modification And Waiver. This Agreement may be modified only by a writing
signed by both parties. The failure of a party to enforce any right under
this Agreement at any particular point in time shall not constitute a
continuing waiver of any such right with respect to the remaining term of
this Agreement, or the waiver of any other right under this Agreement.
1.J. Compliance with Laws. Each party is responsible for its own compliance
with all laws and regulations affecting its business, including but not
limited to the collection and remittance of all taxes and other levies
imposed by law.
1.K. Choice of Law. The domestic law of the State of New York, except its
conflict-of-laws rules, shall govern the construction, interpretation, and
performance of this Agreement.
1.L. Confidentiality. The Terms, conditions, and rates contained in this
Agreement are confidential, and shall remain so unless and until it shall
be determined by AT&T that the Communications Act of 1934 (or any
subsequent legislation) and the regulations promulgated thereunder require
the filing of this Agreement with the Federal Communications Commission
("Commission"), or unless the Commission orders the filing of this
Agreement pursuant to authority granted to the Commission by law or
regulation. In such event, AT&T shall file the Agreement within thirty
days of its execution, or upon such determination that filing is required,
or upon being ordered by the Commission to do so (whichever is later);
provided, that AT&T nonetheless shall keep the identity of Customer
confidential unless required by law, regulation or the Commission to
disclose such identity. Absent such filing requirement, neither party
shall disclose the terms or conditions of this Agreement to any third
party, nor issue any public statements relating to this Agreement without
the written consent of the other party, unless such disclosure or
statement is reasonably believed by the party to be compelled by
governmental authority. A disclosing party shall furnish reasonable prior
notice to the other party before making the statement or disclosure unless
prohibited by law from doing so.
6
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 7
[Logo] AT&T
================================================================================
1.M. Dispute Resolution. If a dispute arises out of or relates to this
Agreement, or its breach, the parties agree to submit the dispute to a
sole mediator selected by the parties or, at any time at the option of a
party, to mediation by the American Arbitration Association ("AAA"), to be
held in Morristown, New Jersey. If not resolved by mediation, it shall be
referred to a sole arbitrator selected by the parties within thirty (30)
days of the mediation or, in the absence of such selection, to AAA
arbitration which shall be governed by the United States Arbitration Act
and judgment on the award may be entered in any court having jurisdiction.
The arbitrator may not limit, expand or otherwise modify the terms of this
Agreement. The parties, their representatives, other participants and the
mediator and arbitrator shall hold the existence, content and results of
mediation and arbitration in confidence.
1.N. Trade Names, Trademarks, Service Marks and Registered Marks. Neither
Customer nor AT&T shall use the other's trade names, trademarks or service
marks ("Marks") without the prior written approval of the other party.
Neither shall display or use the other's Marks, nor permit the same to be
displayed or used by third parties. Nothing in this Agreement creates in a
party rights in the Marks of the other.
1.0. Entire Agreement. This Agreement constitutes the entire agreement of the
parties with respect to the subject maker hereof and supersedes all prior
written or oral agreements, proposals or understandings.
7
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 8
[Logo] AT&T
================================================================================
1.P. Definitions. As used in this Agreement, the definitions set forth in AT&T
Tariff F.C.C. Nos. 1, 2, 9, 11 and 14 shall apply except to the extent
that they are modified or supplemented as follows:
1.P.1. End-Users: Those persons or entities to which Customer
provides service as a telecommunications common carrier utilizing
the service provided to Customer by AT&T pursuant to this Agreement.
1.P.2. Dispute: Any controversy or claim between the parties under
this Agreement or which relates directly or indirectly to this
Agreement or the services provided hereunder, whether based on
contract, product liability, statute, tort (including negligence or
strict liability) or other legal or equitable theory, whenever
brought, between the parties or any of their employees or agents.
1.P.3. CISD: The date for commencement of installation of Service
established pursuant to Paragraph 3.B. of this Agreement.
1.P.4. Tariffs: As used in this Agreement, the term "tariffs",
Applicable Tariffs", or any variation thereof shall mean AT&T Tariff
F.C.C. Nos. 1, 2, 9, 11 and 14, in effect on the effective date of
this Agreement and any subsequent revisions to such AT&T tariffs as
such tariffs pertain to the AT&T telecommunications services
provided pursuant to this Agreement, as well as the documents which
will replace those tariffs when AT&T cancels those tariffs.
l.P.5. Direct Dial Station Call: That service where the person
originating the call dials the telephone number desired, completes
the call without the assistance of an operator, and the call is
billed to the originating number.
8
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 9
[Logo] AT&T
================================================================================
SECTION 2: REQUIREMENTS AND CERTIFICATION OF ELIGIBILITY
2.A. Eligibility. The rates, terms and conditions herein are expressly
conditioned upon the Customer's meeting the following eligibility
requirements. Customer is an interexchange telecommunications common
carrier which certifies as follows:
2.A.1. Customer has obtained the required operating authority in all
states in which it conducts business, as well as all authority required by
the FCC for resale of telecommunications services, including but not
limited to authority required pursuant to Section 214 of the
Communications Act of 1934, 47 U.S.C. ss.214.
2.A.2. Customer complies and will continue to comply at all times with all
federal and state laws and regulations applicable to the sale and
provision of service to its customers, including but not limited to those
laws and regulations applicable to the authorization and proof of
authorization necessary to convert an End-Users former service to
Customer's service as the End-User's Primary Interexchange Carrier.
2.A.3. Customer will utilize the Service offered hereunder only for lawful
purposes, including but not limited to resale of the Service or components
thereof. In the event that Customer resells the Service provided
hereunder, it will do so only under its own names, tradenames, logos,
trademarks or servicemarks. Customer will not publish or use any
advertising, sales promotions, press releases, or other publicity matters
which use AT&T's corporate or trade names, logos, trademarks, service
marks, trade dress, or other symbols that serve to identify and
distinguish AT&T from its competitors (or which use confusingly similar
corporate or trade names, logos, trademarks, service marks, trade dress or
other symbols), and will not conduct business under AT&T's corporate or
trade names, logos, trademarks, service marks, trade dress, or other
symbols that serve to identify and distinguish AT&T from its competitors
(or under any confusingly similar corporate or trade names, logos,
trademarks, service marks, trade dress or other symbols). Customer
(including its agents, representatives and independent contractors) will
not indicate or imply to any person or entity that it is AT&T which is
selling or providing service to Customer's End-users, or that it is
affiliated or authorized by AT&T to sell or provide such service to them
or that it is selling or providing such service to them jointly or in
collaboration or partnership with AT&T, or as the agent of AT&T.
2.A.4. Customer has had no complaints or proceedings brought against it,
within two months prior to its execution of this Agreement, by the FCC, by
any state public utilities commission by any state Attorney General, or by
any other federal
9
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 10
[Logo] AT&T
================================================================================
or state authority charging Customer with misrepresenting its affiliation or
relationship to AT&T or to any other carrier whose service it has resold, and no
such complaints or proceedings are pending as of Customer's execution of this
Agreement.
2.B. Termination for Lack of Eligibility. If at any time during the term of
this Agreement Customer fails to comply with any requirement for
eligibility contained in Paragraphs 2.A.1 through 2.A.4., above, such
failure shall constitute a material breach of this Agreement which shall
entitle AT&T to terminate this Agreement and the Service provided
hereunder on five (5) days written notice. In the event of such
termination, Customer shall indemnify, defend and hold harmless AT&T from
any and all complaints, causes or action or other claims brought against
AT&T by any of Customer's End-Users due to said termination.
2.C. Default. If at any time during the term of this Agreement either party
shall commit an act of bankruptcy within the meaning of the United States
Federal Bankruptcy Act, or bankruptcy, receivership, insolvency,
reorganization, dissolution, liquidation, or other proceedings shall be
instituted by or against either party or all or any substantial part of
its property under an applicable law of the United States or any state
thereof, and such proceeding shall not be dismissed within ninety (90)
calendar days, the non-defaulting party shall have the right to terminate
this Agreement.
10
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 11
[Logo] AT&T
================================================================================
SECTION 3: RESPONSIBILITIES OF AT&T
3.A. Provision of Service. Subject to its Correspondence Agreements and
regulation by Federal and state authorities, AT&T shall provide Service in
accordance with its standard practices and procedures for the operation of
its network. AT&T is responsible for the provision of Service from station
to station, but is not responsible for the quality of transmission or
signaling on the Customer's side of the interface at a Customer's
premises. Service is furnished subject to the availability of the service
components required.
3.B. Installation. Upon execution of this Agreement AT&T shall establish a due
date for commencement of installation of Service and confirm said date
with the Customer (CISD). A Customer may delay said due date for
commencement of installation when the Customer's written request for said
delay is received by AT&T at least five (5) business days prior to said
due date, provided that the delay of said due date shall not exceed 30
cumulative calendar days. AT&T will make every reasonable effort to
commence installation of Service by the due date, but Customer
acknowledges that in some cases a delay in commencement of installation
may be unavoidable. If commencement of installation is delayed for more
than 45 days beyond the due date, and such delay is not requested or
caused in whole or in part by the Customer, the Customer may cancel its
order for Service pursuant to this Agreement and shall not thereby be
considered to have breached this Agreement; such cancellation shall be
Customer's sole remedy for such delay.
3.C. Maintenance. AT&T shall maintain Service in conformity with its standard
network operating procedures.
3.D. Limitation of Liability. AT&T (INCLUDING ITS SUBSIDIARIES, AFFILIATES,
PREDECESSORS, SUCCESSORS AND ASSIGNS) MAKES NO WARRANTIES, EXPRESS OR
IMPLIED, AND SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO SERVICES OR PRODUCTS
PROVIDED PURSUANT TO THIS AGREEMENT. AT&T'S LIABILITY FOR SERVICE
INTERRUPTIONS FOR ANY SERVICE PROVIDED PURSUANT TO THIS AGREEMENT SHALL
NOT EXCEED AN AMOUNT EQUAL TO A PRO-RATED PORTION OF THE RECURRING CHARGES
PROVIDED FOR UNDER THIS AGREEMENT FOR THE SERVICE AFFECTED FOR THE
PERIOD(S) DURING WHICH SAID SERVICE WAS AFFECTED. THIS LIMITATION OF
LIABILITY SHALL APPLY REGARDLESS OF THE FORM OF ACTION, WHETHER IN
CONTRACT, TORT, WARRANTY, STRICT LIABILITY, OR NEGLIGENCE (INCLUDING
WITHOUT LIMITATION ACTIVE AND PASSIVE NEGLIGENCE). IN NO EVENT SHALL AT&T
BE
11
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 12
[Logo] AT&T
================================================================================
LIABLE FOR CONSEQUENTIAL, SPECIAL OR INDIRECT DAMAGES OR LOST PROFITS SUSTAINED
BY REASON OF ITS PERFORMANCE OF THIS AGREEMENT, OR FOR ANY FAILURE, BREAKDOWN,
OR INTERRUPTION OF SERVICE, WHATEVER SHALL BE THE CAUSE, OR HOWEVER LONG IT
SHALL LAST, AND REGARDLESS OF WHETHER ANYONE HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES. AT&T SHALL HAVE NO LIABILITY FOR DAMAGES CAUSED (1) BY
CUSTOMER'S FAILURE TO PERFORM ITS RESPONSIBILITIES UNDER THIS AGREEMENT, OR (2)
BY THE ACTS OF THIRD PARTIES (INCLUDING WITHOUT LIMITATION CUSTOMER'S USERS OR
END USERS). AT&T DOES NOT GUARANTEE OR MAKE ANY WARRANTY WITH RESPECT TO THE
SERVICE PROVIDED PURSUANT TO THIS AGREEMENT WHEN USED IN AN EXPLOSIVE
ATMOSPHERE. THIS AGREEMENT DOES NOT CREATE ANY CLAIM OR RIGHT OF ACTION, NOR IS
IT INTENDED TO CONFER ANY BENEFIT ON ANY THIRD PARTY, INCLUDING BUT NOT LIMITED
TO ANY USER OR END-USER OF CUSTOMER. THE LIMITATIONS OF LIABILITY SET FORTH IN
THIS AGREEMENT SHALL SURVIVE FAILURE OF AN EXCLUSIVE REMEDY.
3.E. Service, Channels or Equipment of Others. AT&T is not liable for damages
associated with service, channels, or equipment that it does not furnish.
AT&T does not provide Customer equipment.
3.F. No Patent or Software License. No license under patents or software
copyrights (other than the limited license to use) is granted by AT&T or
shall be implied or arise by estoppel, with respect to Service offered
under this Agreement.
12
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 13
[Logo] AT&T
================================================================================
SECTION 4: RESPONSIBILITIES OF CUSTOMER
4.A. Placement of Orders and Compliance with Regulations. Customer is
responsible for placing any necessary orders and for assuming that it, its
Users and its End-Users comply with the provisions of this Agreement and
with all applicable federal and state laws and regulations.
4.B. Billing; Responsibility for Payment. Customer is liable for all amounts
due to AT&T hereunder, subject to the following. AT&T will provide to
Customer a single monthly bill for each of the Services provided under
this Agreement, or at AT&T's option a single monthly bill for all of the
Services provided under this Agreement. Said bill or bills will be sent to
one Customer location designated by the Customer. Payment of charges is
due upon presented of a bill unless a different due date appears on the
face of the bill, in which case payment shall be due on said date.
Customer shall be solely for rendering of bills to and collection of
charges from its end-users. Failure of Customer to bill and collect
charges from its end-users shall not excuse in whole or in part Customer's
responsibilities to AT&T under this Agreement, including but not limited
to the responsibility to render to AT&T timely payment of charges.
Customer shall reimburse AT&T for reasonable attorneys fees and any other
costs associated with collecting delinquent payments from Customer. At
AT&T's option, interest charges may be added to any undisputed adjudged
past due amounts at the rate of one and one-half per cent (1 1/2%) per
month, unless such interest rate exceeds the maximum allowed by applicable
law, in which case interest shall be at the maximum lawful rate.
4.C. Interfacing and Communicating with End-Users. Interfacing and
communicating with End-Users shall be the sole responsibility of Customer
with respect to any use that Customer may make of the service provided
pursuant to this Agreement to in turn provide service to other persons or
entities. Such interfacing and communicating shall include without
limitation installation of service, termination of service, placing of
orders, billing and billing inquiries, reporting of service outages and
problems, collection of charges and handling and resolution of all
disputes.
4.D. Deposits. If AT&T, in its reasonable discretion determines that the
security interest is not sufficient to guarantee the payment of charges
(including but not limited to shortfall charges attributable to Customer's
failure to comply with any revenue or volume commitment or any monitoring
condition in this Agreement), AT&T may require the Customer to tender a
deposit in an amount to be determined by AT&T, in an amount not to exceed
two million dollars or four times Customer's ________________ monthly
commitment whichever is higher. To determine
13
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 14
[Logo] AT&T
================================================================================
the financial responsibility of Customer and/or the specific amount of any
deposit required, AT&T may rely upon commercially reasonable factors to
assess and manage the risk of non-payment, including but not limited to
payment history for telecommunications service (including such service
purchased from AT&T), number of years in business, bankruptcy or
insolvency history, current AT&T account treatment status, financial
statement analysis, and commercial credit bureau rating. It shall be
Customer's responsibility to provide to AT&T upon request such information
as is necessary for AT&T to determine the financial responsibility of
Customer, including but not limited to Customer's tax returns, audited or
unaudited financial statements and loan applications. A deposit does not
relieve Customer of the responsibility for the prompt payment of bills on
presentation or the due date appearing on the face of the bills. In lieu
of a cash deposit, AT&T will accept Bank Letters of Credit and Surety
Bonds which have been approved by AT&T. Interest will be paid to a
Customer for the period that a cash deposit is held by AT&T. The interest
rate used will be simple interest at the rate of six percent annually
unless a different rate has been established by the appropriate legal
authority in the state where the Service offering is located. The failure
of Customer to post a deposit as required by AT&T pursuant to this
paragraph shall constitute a material breach of this Agreement by Customer
which shall entitle AT&T to terminate this Agreement and the service
provided hereunder upon five (5) days written notice to Customer. When the
service for which the deposit has been required is discontinued, the
deposit will be applied to the final bill and any credit balance will be
refunded to the Customer with applicable interest accrued.
4.E. Customer's Use of Service. Customer may use the services provided pursuant
to this Agreement for any lawful purpose consistent with the transmission
and switching parameters of the telecommunications network, and may resell
its use (or the use of any part thereof) to a third party in the normal
course of the Customer's business, subject to the following:
4.E.1. Abuse. The abuse of Service is prohibited. The following activities
constitute abuse:
4.E.1.A. Using Service to make calls that might reasonably be
expected to frighten, abuse, torment, or harass another, or
4.E.1.B. Using Service in such a way that it interferes
unreasonably with the use of Service or AT&T's network by others.
In any instance in which AT&T believes in good faith that there is
abuse of Service as set forth above, AT&T may, upon 5 days prior
written notice to the Customer, and without liability on the part of
AT&T,
14
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 15
[Logo] AT&T
================================================================================
restrict, suspend or discontinue providing Service, unless Customer
cures such abuse to AT&T's reasonable satisfaction within such
period.
4.E.2. Fraudulent Use. The fraudulent use of, or the intended or attempted
fraudulent use of, Service is prohibited. The following activities
constitute fraudulent use:
4.E.2.A. Using Service to transmit any message or code, locate a
person, or otherwise give or obtain information, without payment for
Service, or
4.E.2.B. Using or attempting to use Service with the intent to avoid
the payment, either in whole or in part, of any charges by any means
or device, or
4.E.2.C. Using Service to carry calls that originate on the network
of a facilities-based interexchange carrier other than AT&T and
terminate disproportionately to locations for which the cost to AT&T
of terminating switched access is above the average cost of
terminating switched access, based on the published access tariffs
of local exchange companies.
In any instance in which AT&T believes in good faith that there is
fraudulent use of Service as set forth above, AT&T may, immediately
and upon written notice to the Customer, and without liability on
the part of AT&T, restrict, suspend or discontinue providing
Service.
4.E.3. Interference, Impairment or Improper Use. Customer may not use
Service in any manner that subjects AT&T personnel or non-AT&T
personnel to hazardous conditions or results in immediate harm to
the AT&T network or other AT&T services. In any instance in which
AT&T believes in good faith that Service is being used in such
manner, AT&T may immediately restrict Service on a temporary basis.
In such cases, AT&T will make a reasonable effort to give the
Customer prior notice. In the event that Customer does not provide
to AT&T within five (5) business days of the temporary restriction
of service acceptable proof that said use has ceased and that
appropriate measures have been taken to prevent its recurrence, AT&T
may immediately and without further notice terminate service.
4.F. Access to Customer's Premises. The Customer is responsible for arranging
premises access at any reasonable time so that AT&T personnel may install,
repair, maintain, inspect or remove Service components. Premises access
must be made available at a time mutually agreeable to the Customer and
AT&T.
15
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 16
[Logo] AT&T
================================================================================
4.G. Loss. The Customer is liable to AT&T for the replacement cost of
AT&T-provided equipment installed at the Customer's premises in the event
of loss of said equipment for any reason, including but not limited to
theft.
4.H. Duty to indemnify and Defend. Customer shall indemnify, defend, and hold
harmless AT&T and its directors, officers, employees, agents, parent,
subsidiaries, successors, and assigns from all claims, damages and
expenses (including reasonable attorneys' fees) arising out of or
resulting from, in whole or in part, the acts or omissions of Customer or
its End-Users, their employees, agents or contractors affiliated companies
and their employees, agents or contractors, including but not limited to
claims for libel, slander, invasion of privacy, or infringement of
copyright arising from any communication and claims for patent
infringement arising from combining or using services or equipment
furnished by AT&T in connection with services or equipment furnished by
others. Customer shall also indemnify, defend and hold AT&T harmless for
all causes of action, claims, liabilities or expenses asserted or incurred
by any of Customer's Users or End-Users arising out of any failure,
breakdown, or interruption of service provided to Customer by AT&T or to
End-Users by Customer. Customer shall indemnify, defend and hold AT&T
harmless for all causes of action, claims, liabilities or expenses
asserted or incurred by Customer's End-Users due to Customer's marketing
efforts, including but not limited to Customer's violation of laws and
regulations applicable to the authorization and proof of authorization
necessary to convert an End-User's former service to Customer's service as
the End-User's Primary Interexchange Carrier. AT&T shall be indemnified,
defended, and held harmless by the Customer, Users and End-Users against
all claims, losses, or damages by any person relating to such Service when
used in an explosive atmosphere.
16
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 17
[Logo] AT&T
================================================================================
SECTION 5: SERVICES AND SERVICE DESCRIPTIONS
5.A. Domestic Interstate and International Services. The following domestic
interstate and international services are provided pursuant to this
Agreement:
5.A.1. AT&T Services (as described and defined AT&T Tariff F.C.C. No. 1,
as amended from time to time) consisting of:
a) AT&T Custom Software Defined Network (SDN) Service and
International Calling Capability
b) AT&T Distributed Network Service (DNS)
5.A.2. AT&T 800 Services (as described and defined in AT&T Tariff F.C.C.
No. 2 and 14, as amended from time to time) consisting of:
a) AT&T 800 Service-Domestic
b) AT&T 800 Service-Canada
c) AT&T 800 Service-Mexico
d) AT&T 800 Service-Puerto Rico and the U.S. Virgin Islands
e) AT&T MEGACOM/reg 800 Service-Domestic
f) AT&T MEGACOM/reg 800 Service-Canada
g) AT&T MEGACOM/reg 800 Service-Mexico
h) AT&T MEGACOM/reg 800 Service-Overseas
i) AT&T MEGACOM/reg 800 Service-Puerto Rico and the U.S.Virgin
islands
j) AT&T 800 READYLINE/reg Service-Domestic
k) AT&T 800 READYLINE/reg Service-Canada
1) AT&T 800 READYLINE/reg Service-Mexico
m) AT&T 800 READYLINE/res Service-Overseas
n) AT&T 800 READYLINE/res Service -Puerto Rico and the U.S. Virgin
Islands
5.A.3. AT&T Private Line Services (as described and defined in AT&T Tariff
F.C.C. No. 9, as amended from time to time) consisting of:
a) AT&T ACCUNET/sm Tl.5 Service
5.A.4. AT&T Local Channel Services (as described and defined in AT&T
Tariff F.C.C. No. 11, as amended from time to time) consisting of:
a) AT&T TERRESTRIAL 1.544 Mbps Local Channel Services
17
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 18
[Logo] AT&T
================================================================================
5.B. Intrastate Services. The following intrastate services are provided
pursuant to AT&T's state tariffs governing such service:
5.B.1. AT&T Custom Software Defined Network (SDN) Service
5.B.2. AT&T Distributed Network Service (DNS) Service - Domestic
5.B.3. AT&T MEGACOM 800 Service-Domestic
5.B.4. AT&T 800 READYLINE Service-Domestic
5.B.5. AT&T 800 Service - Domestic
18
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 19
[Logo] AT&T
================================================================================
SECTION 6: SERVICE RATES, TERMS AND CONDITIONS
6.A. Service Term. The term of this Agreement is 48 months beginning with the
first day of the Customer's first full billing month under this Carrier
Agreement, which is referred to as the Customer's Initial Service Date
(CISD). No renewal option is available for this Agreement.
6.B. Minimum Revenue Commitments
6.B.1. The Minimum Annual Revenue Commitment (MARC) for the AT&T SDN and
AT&T DNS Services provided under this Agreement, prior to the application
of the Discounts specified in 6.D., following, is $4,800,000 for years one
through three and $5,900,000 for year four.
If on any anniversary of the CISD, the Customer fails to satisfy the MARC
for the preceding year, the Customer will be billed an amount equal to the
difference between the MARC and the actual undiscounted charges for that
year.
6.C. Usage Rates. AT&T reserves the right to increase from time to time the
rates for the Services Provided under this Agreement, regardless of any
provisions in this Agreement that would otherwise stabilize rates or limit
rate increases, as a result of charges imposed on AT&T stemming from an
order, rule or regulation of the Federal Communications Commission or a
court having competent jurisdiction relating to compensation of payphone
service providers. If necessary, revisions will be filed in this Agreement
to reflect the actual rates. The Contract Prices for the Services Provided
pursuant to this Agreement are as follows:
6.C.1. The Contract Price for the AT&T SDN Services and International
Calling Capability provided under this Agreement is the same as the
undiscounted Recurring and Nonrecurring Rates and Charges specified in
AT&T Tariff F.C.C. No. 1, as amended from time to time, except for those
Usage Rates specified below:
AT&T SDN Rate Schedule A and A-PV (excluding NRA)
Initial 18 Seconds Each Additional 6 Seconds
------------------ -------------------------
A11
Mileage Day Evening Night Day Evening Night
--- ------- ----- --- ------- -----
Bands $0.0552 $0.0552 $0.0552 $0.0184 $0.0184 $0.0184
19
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 20
[Logo] AT&T
================================================================================
AT&T SDN Rate Schedule B and B-PV(excluding NRA)
Initial 18 Seconds Each Additional 6 Seconds
------------------ -------------------------
A11
Mileage Day Evening Night Day Evening Night
--- ------- ----- --- ------- -----
Bands $0.0339 $0.0339 $0.0339 $0.0113 $0.00113 $0.0113
6.C.2. The Contract Price for the AT&T DNS Services provided under this
Agreement is the same as the undiscounted Recurring and Nonrecurring Rates
and Charges specified in AT&T Tariff F.C.C. No. 1, as amended from time to
time.
6.C.3. The Contract Price for the AT&T 800 Services provided under this
Agreement is the same as the undiscounted Recurring and Nonrecurring Rates
and Charges specified in AT&T Tariff F.C.C. No. 2 and 14, as amended from
time to time.
6.C.4. The Contract Price for AT&T TERRESTRIAL 1.544 Mbps Local Channel
Services provided under this Agreement is the same as the undiscounted
Recurring and Nonrecurring Rates and Charges as specified in AT&T Tariff
F.C.C. No. 11, as amended from time to time.
6.C.5. The Contract Price for AT&T ACCUNET T1.5 Access Connections
provided under this Agreement is the same as the undiscounted Recurring
and Nonrecurring Rates and Charges as specified in AT&T Tariff F.C.C. No.
9, as amended from time to time.
6.D. Discounts. Volume discounts applicable to the services provided pursuant
to this Agreement are as follows. No other discounts apply.
6.D.1. AT&T SDN Services and International Calling Capability
a) Base Discounts - The customer will receive the following discounts in
lieu of those specified for the Term and Volume Plan (TVP) in AT&T Tariff
F.C.C. No. 1. These discounts will be applied in the same manner as the
TVP as specified in AT&T Tariff F.C.C. No. 1, as amended from time to
time.
Domestic AT&T SDN Services - Outbound Usage Discounts
------------------------------------------- ---------
All Domestic Outbound Usage 32%
International Usage Discounts
------------------- ---------
-20-
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 21
[Logo] AT&T
================================================================================
All International Usage 23%
b) Additional Discounts - None
6.D.2. AT&T DNS Services:
a) Base Discounts - The customer will receive the following Base Discounts
each month in lieu of those specified for the AT&T DNS Term Plan in AT&T
Tariff F.C.C. No. 1. The following discounts will be applied, each month,
using the same method as specified in Section 6.12. of AT&T Tariff F.C.C.
No. 1 (Method of Determining Discount). The following discounts for AT&T
DNS apply to DNS locations and are applied to AT&T DNS usage charges in the
billing month in which the AT&T DNS charges are billed.
Domestic Direct Dialed (1+) AT&T DNS monthly usage charges.
0% discount on the amounts over $0 up to $10,000.00
10% discount on the amounts over $10,000.00 up to $20,000.00
29% discount on the amounts over $20,000.00 up to $1,000,000.00
0% on amounts over $1,000,000.00
International Direct Dialed (1+) AT&T DNS monthly usage charges.
0% discount on the amounts over $0 up to $5,000.00
12% discount on the amounts over $5,000.01 up to $15,000.00
16% discount on the amounts over $15,000.01 up to $60,000.00
18% discount on the amounts over $60,000.01 up to $200,000.00
20% discount on the amounts over $200,000.01
b) Additional Discounts - None
6.D.3. AT&T 800 Services
a) Base Discounts - The customer will receive a 23% discount on all AT&T
800 Services usage charges. The Customer will receive the same monthly
discounts as the Revenue Volume Pricing Plan (RVPP) as specified in AT&T
Tariff F.C.C. 2.
b) Additional Discounts - None
6.E. Credits and Waivers.
-21-
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 22
[Logo] AT&T
================================================================================
6.E.1. AT&T DNS Credit - Customer will be eligible to receive a credit each
month that the Customer has satisfied one-twelfth of the MARC (as specified
in section 6.B.1 preceding) for AT&T SDN Service and AT&T DNS Services. The
credit, if any, will be applied to the Customer's second AT&T DNS bill
after the month in which the credit has been earned, and will be an amount,
not less than zero equal to: (a) the billed monthly usage charges for
interstate direct dial (1+) AT&T DNS calling after the application of the
discounts in Section 6.D.2., minus (b) the number of billed monthly
interstate direct dial (1+) AT&T DNS minutes for the month multiplied by
$0.1250.
Credit = [Billed Monthly Interstate Direct Dial (1+) AT&T DNS Usage
Charges, after application of discounts in Section 6.D.2.]
- [(Billed Monthly Interstate Direct Dial (1+) AT&T DNS minutes) *
($0.1250)]
6.F. Classifications, Practices and Regulations. Except as otherwise provided in
this Agreement, the terms, conditions, regulations and charges that apply
to the Services Provided specified in Section 5.A., preceding, are as set
forth in the Applicable AT&T Tariffs.
6.G. Monitoring Conditions. The Customer must satisfy the following Service
Requirements which will be monitored on each anniversary of the CISD. The
Monitoring Period is the 12 months immediately preceding each anniversary
of the CISD.
6.G.1. At least 65% of the AT&T SDN Domestic Direct Dialed annual minutes
of use must be interstate usage.
6.G.2. Customer must have an Average Length of Call (ALOC) of at least 2.5
minutes for AT&T SDN Outbound Domestic calls.
If the Customer, during any Monitoring Period, has failed to satisfy
any of the above Monitoring Conditions, AT&T will notify the Customer in
writing of the specific failure(s) and the Customer will be billed and
shall pay within 30 days an amount equal to 20% of all previously applied
discounts received by the Customer to which each unfulfilled Monitoring
Condition is applicable during the Monitoring Period.
6.H. Discontinuance - In lieu of any Discontinuance With or Without Liability
provisions that are specified in the AT&T Tariff F.C.C. Nos. 1, 2, 9, 11
and 14, the following provisions shall apply.
-22-
CONFIDENTIAL AND PROPRIETARY
______________ between
______________
Customer Initials AT&T and Long Distance Direct, Inc. AT&T
AT&T and Long Distance Direct, Inc.
Initials
<PAGE> 23
[Logo] AT&T
================================================================================
6.H.1 The Customer may discontinue this Agreement without incurring a
Termination Charge prior to the end of the Agreement Term, provided the
Customer 1) is current in payments to AT&T i.e. all bills paid by due date,
and 2) replaces this Agreement with another AT&T Carrier Agreement for AT&T
Tariff F.C.C. No. 1, 2, 9, 11 and 14 Services or equivalent services with
revenue commitments equal to or greater than all remaining revenue
commitments under this Agreement and with a term equal or greater than the
remaining term of this Agreement but at least two years.
6.H.2. If the Customer discontinues this Agreement prior to the expiration
of the Agreement Term, or if AT&T terminates this Agreement or the service
provided pursuant to this Agreement due to Customer's breach of this
Agreement, prior to the expiration of the Agreement Term, the Customer will
be billed for and shall pay within 30 days a Termination Charge. The
Termination Charge for the AT&T Services provided under this Agreement will
be an amount equal to 100% of the unsatisfied MARC for the year in which
the Customer discontinues and 100% of the MARC for each year remaining in
the Service Term.
<PAGE> 24
RELEASE AND
-----------
SETTLEMENT AGREEMENT
--------------------
This Release and Settlement Agreement ("Agreement") is entered into
between AT&T Corp. ("AT&T") and Long Distance Direct, Inc. ("LDDI" or
"Customer").
Recitals
WHEREAS, Customer currently subscribes to AT&T long distance service
under Contract Tariff 2507 ("CT 2507"), which comprises Distributed Network
Service ("DNS") and Software Defined Network ("SDN") service under DNS account
number MB1036; and SDN account numbers 205460 (the "Former Service"); and
WHEREAS a dispute has arisen concerning Customer's payment of
certain usage charges, which have already been billed to
Customer, tariffed- shortfall and termination charges, which are about to be
billed to Customer, and both AT&T and Customer acknowledge that additional usage
charges and tariffed shortfall and termination charges may be billed to Customer
in the future related to calls that have already been made or other events that
have already transpired ("Payment Dispute"); and
WHEREAS a dispute has arisen concerning billing tapes, AT&T's
invoicing of usage, fraud associated with NRA I Authorization Codes, certain
credits identified in CT 2507 and certain credits on the LDDI February 1996
inbound bill ("the Billing Disputes"); and
WHEREAS a dispute has arisen concerning Customer's commitment under
CT 2507 ("CT 2507 Dispute"); and
WHEREAS, Customer and AT&T desire to fully and finally settle and
resolve the Payment Dispute, the Billing Disputes and the CT 2507 Dispute and to
thereby avoid the time and expense of litigation;
THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:
1. New Agreement
Customer's subscription to CT 2507 will be discontinued with
liability, according to the terms of CT 2507, in conjunction with Customer's
order for service under a separate Carrier Agreement between AT&T and Customer
(the "New Service").
<PAGE> 25
2. Payments and Credits
(a) Payment to AT&T
AT&T and Customer agree that the total balance owed to AT&T for outstanding
charges billed through and including November 1, 1996 equals $ 320,142.83; (b)
Customer agrees to make full payment of this balance to AT&T according to the
payment schedule below and to continue to pay on a timely basis all future bills
for The Services:
PAYMENT SCHEDULE
----------------
Payment Due Date
------- --------
$60,000.00 January 1, 1997
$60,000.00 February l, 1997
$60,000.00 March 1, 1997
$60,000.00 April l, 1997
$60,000.00 May 1, 1997
$20,142.83 June 1, 1997
(i) All payments must be submitted by wire transfer on or before the
Due Date;
(ii) If AT&T fails to receive payment of any required amount by the
Due Date, AT&T may disconnect service upon one day's written notice.
2
AT&T/LDDI Confidential and Proprietary
<PAGE> 26
(b) Credit to Customer
(i) AT&T & Customer acknowledge that tariffed termination charges in
the amount of $965,786.71 have already been billed to Customer and tariffed
termination charges in the amount of $1.335,843.86 million shall be billed to
Customer. The total tariffed termination charges due and owing AT&T
(ii) Within thirty (30) days after AT&T receives full payment of all
past due charges from Customer, AT&T shall apply a credit in the amount of
$2,301,630.57 million to Customer's master account to satisfy the billed
shortfall charges. Such credit shall not be applied in the event Customer is in
breach of any provision of this Agreement.
4. Security Agreement
Customer agrees to execute a Security Agreement in the form attached
to this Agreement.
5. Unauthorized Use of AT&T Name and Corporate Logo
Customer agrees to immediately cease use of the AT&T name, logo,
trademark and servicemark in any manner including, but not limited to, use in
any advertising, promotional materials, stationery, business cards, billing,
singage and infomercials.
6. Existing Disputes
AT&T and Customer acknowledge that bona fide billing disputes exist
between the parties in the amount of $ 51,281.15 ("the Existing Disputes").
These disputes shall be investigated and resolved in the usual manner. Full
payment for the Existing Disuptes shall be due on or before fifteen (15) days
after the charges are sustained as correct by AT&T.
7. Arbitration
With respect to the Existing Disputes, Customer or AT&T shall have
the right to commence an arbitration proceeding. The party choosing arbitration
shall submit the dispute(s) to the Center for Public Resources ("CPR"). The
arbitration shall be held in Chicago, Illinois and shall be conducted under the
then-current rules and supervision of the CPR. The Federal Arbitration Act, 9
U.S.C. Sections 1 to 16, will govern the arbitrability of all claims. The
arbitral decision and award shall be binding and judgment on the award may be
entered in any
3
AT&T/LDDI Confidential and Proprietary
<PAGE> 27
court of competent jurisdiction. The arbitration will be conducted by a single
arbitrator who is knowledgeable in business information, commercial matters or
the telecommunications field, as applicable, except that either party may
require that the arbitration be conducted by a tribunal of three such
arbitrators by providing Notice of such a demand to the other party before a
single arbitrator is selected. The arbitrator(s) may not limit, expand or
otherwise modify the terms of this agreement and will not have authority to
award damages to either party beyond the limitations of liability provided in
this Agreement.
The arbitrator may not expand the amount sought regarding the
applicable dispute beyond that specified in Section 3. The parties, their
representatives, other participants and the arbitrator shall hold the existence,
content and result of the arbitration in confidence. Each party shall bear its
own costs and expenses if arbitration occurs.
8. Transfer of Obligations
The outstanding Customer obligations, not otherwise extinguished
under this Agreement, which have arisen or which may arise under the Former
Service shall be transferred to the New Service at such time as the New Service
Agreement is effective. Such obligations include all tariffed charges
provided-that there are no shortfall or termination charges associated with CT
2507 at the time of termination of CT 2507.
9. Releases
The following releases are effective as of the initial service date
of the Carrier Agreement for the New Service:
(a) Customer, on behalf of itself and its employees, agents,
shareholders, officers, subsidiaries, predecessors, affiliates, parent
corporations, if any, joint venturers, successors and assigns, heirs, executors,
administrators and trustees ("Customer Releasors"), hereby discharges and
releases AT&T and its past and present employees, agents, shareholders,
officers, subsidiaries, predecessors, affiliates, parent corporations, if any,
joint venturers, successors and assigns, heirs, executors, administrators and
trustees ("AT&T Releasees"), from any and all rights, claims, damages, actions,
judgments, obligations, attorneys' fees, indemnities, subrogations, duties,
demands, controversies or liabilities, at law or in equity, known or unknown,
matured or unmatured, foreseeable or unforeseeable, which Customer Releasors now
have or ever had against AT&T Releasees up to the date of this Agreement
relating to CT 2507 or the resale of AT&T long distance telecommunications
services,
4
AT&T/LDDI Confidential and Proprietary
<PAGE> 28
except Customer retains its rights with respect to the Existing Disputes
described in Section 3 of this Agreement.
(b) AT&T, on behalf of itself and its employees, agents,
shareholders, officers, subsidiaries, predecessors, affiliates, parent
corporations, if any, joint venturers, successors and assigns, heirs, executors,
administrators and trustees ("AT&T Releasors"), hereby discharges and releases
Customer and its past and present employees, agents, shareholders, officers,
subsidiaries, predecessors, affiliates, parent corporations, if any, joint
venturers, successors and assigns, heirs, executors, administrators and trustees
("Customer Releasees"), from any and all rights, claims, damages, actions,
judgments, obligations, attorneys' fees, indemnities, subrogations, duties,
demands, controversies or liabilities, at law or in equity, known or unknown,
matured or unmatured, foreseeable or unforeseeable, which AT&T Releasors now
have or ever had against Customer Releasees up to the date of this Agreement
relating to its CT 969 service and Customer's resale of AT&T long distance
telecommunications services, except AT&T retains its rights with respect to the
Existing Disputes described in Section 3 of this Agreement, and with respect to
the payments to be made as provided in Section 2(a) of this Agreement.
10. Entire Agreement
This Agreement (including any exhibits and CT 2507) is the sole,
only, entire and complete agreement of the parties relating in any way to the
subject matter hereof. No statements, promises or representations have been made
by any party to any party, or are relied upon, and no consideration has been or
is offered, promised, expected or held out, other than as stated in this
Agreement. There are no oral or written collateral agreements. All prior
discussions and negotiations regarding the dispute have been, and are, merged
and integrated into, and are superseded by, this Agreement.
11. Breach of Agreement
Except as provided for in Section 7, in the event that either party
is in breach of any material obligation hereunder, the other party, at its
option and without prior Notice to the breaching party, may commence an action
against such breaching party in any court of competent jurisdiction to enforce
the terms and obligations identified in this Agreement.
5
AT&T/LDDI Confidential and Proprietary
<PAGE> 29
12. Ownership of Claim
The parties hereto warrant that they have not assigned or
transferred, in any manner, to any person or entity, any right or interest to
which they may be entitled regarding the dispute between the parties. Each party
warrants and represents to the other party that it is the owner and holder of
all rights concerning the claim that is the subject of this Agreement.
13. No Admission of Liability
This Agreement, the contents thereof or its execution shall not be
construed as any admission of liability by either party.
14. Legal Counsel
Each of the parties represents that in the execution of this
Agreement, and the negotiations leading thereto, it had the opportunity to
consult legal counsel of its own selection. Prior to the execution of this
Agreement by each party, the party's attorney reviewed this Agreement, made any
desired changes and advised to the party with respect to making the settlement
and release provided herein and of executing this Agreement.
15. Applicable Law
This Agreement shall be construed in accordance with and be governed
by the internal laws of the State of New York in effect as of the date of
execution, without regard to the principles of conflicts of law thereof.
16. Enforcement of Agreement
Except as provided in Section 7, if any action at law or in equity,
including an action for declaratory or injunctive relief, is brought to enforce
or interpret the provisions of this Agreement, the prevailing party shall be
entitled to all of its ordinary and necessary costs in prosecuting or defending
said action, including reasonable attorneys' fees, which may be set by the court
in which the action for enforcement if brought, or in a separate action for that
purpose, in addition to any other relief to which the prevailing party may be
entitled.
17. Miscellaneous
(a) The delay or failure of a party to exercise any right, power or
privilege hereunder or failure to strictly enforce any breach or default shall
not constitute a waiver with respect thereto and no waiver of any such right,
power,
6
AT&T/LDDI Confidential and Proprietary
<PAGE> 30
privilege, breach or default on any one occasion shall constitute a waiver
thereof on any subsequent occasion unless clear and express notice thereof in
writing is provided.
(b) If any provision of this Agreement is held to be invalid or
unenforceable, all other provisions shall nevertheless continue in full force
and effect, except that non-occurrence of the conditions specified in paragraph
2(a) herein shall completely void this Agreement in accordance with the terms
thereof.
18 Confidentiality
The parties agree to use their best efforts to keep both the fact of
and the consideration for this Agreement confidential and agree not to disclose
it to others unless required to do so by legal process issued by a Court or
regulatory agency of competent jurisdiction. If asked about the dispute, each
party shall respond only that the dispute has been resolved to its satisfaction.
Customer may disclose the existence of this Agreement and may describe,
generally, its payment obligations to AT&T under the terms of this Agreement as
necessary to comply with State or Federal rules or regulations.
19. Notices
All notices hereunder shall be in writing and shall be deemed to
have been given pursuant to the following schedule:
Overnight Courier - business day following mail;
Telefax - business day of transmission if sent before 2 p.m.
recipient's time;
Personal Delivery - business day of delivery;
Mail - postage prepaid, third business day following
date of mailing (date of postmark);
Certified Mail - three days following date of postmark
TO: Long Distance Direct, Inc.
1 Blue Hill Plaza
Pearl River, NY 10965
7
AT&T/LDDI Confidential and Proprietary
<PAGE> 31
TO: AT&T CORP.
Attn: Michael Oyster
Division Manager
Room 14D13
Bridgewater, New Jersey 08807
WITH A COPY TO:
Carla M. Mascaro, Esq.
Room 3229A2
295 North Maple Avenue
Basking Ridge, New Jersey 08807
20. Amendments
Any amendments, modifications or supplements to this Agreement shall
be valid only if all such amendments, modifications, or supplements are in
writing and are signed by an authorized representative of all parties.
8
AT&T/LDDI Confidential and Proprietary
<PAGE> 32
21. Waiver
No waiver of any covenant, condition or limitation herein contained
shall be valid unless the same is made in writing and duly executed by the party
making the waiver. No waiver of any provision of this Agreement shall constitute
a waiver of any other provision, whether or not similar. The failure or neglect
of either party on any occasion to enforce any provision of this Agreement shall
not restrain or limit such party from enforcing such provisions upon any other
occasion or occasions if such party elects to do so, and no written waiver of
any breach of this Agreement shall be deemed to be a continuing waiver of such
breach unless so expressly stated. Any waiver shall be null and void if the
party requesting such waiver has not provided a full and complete disclosure of
all material facts relevant to the waiver requested.
22. Assignment
This Agreement is not assignable by any party.
23. Captions/References
The captions in this Agreement are inserted solely for the purpose
of facilitating easy reference and shall not be construed in any way as part of
this Agreement, or as altering the provisions of this Agreement. References
herein to Articles, Sections, Schedules or Exhibits are, unless otherwise
stated, references to the specified Article, Section, Schedule or Exhibit hereof
or hereto.
24. Multiple Originals
This Agreement is intended to have multiple executed originals. The
parties agree that each executed original is as valid and binding as any other
executed original.
9
AT&T/LDDI Confidential and Proprietary
<PAGE> 33
IN WITNESS whereof, the parties have affixed their signatures
effective as of the date first above written.
AT&T Corp. Long Distance Direct, Inc.
By: /s/ L.R. Zingale By: /s/ Michael Preston
----------------------- ------------------------
(Signature) (Signature)
L.R. Zingale Michael Preston
----------------------- -----------------------
(Name) (Name)
Spec. Mkts. V.P. Vice-President, CFO
----------------------- -----------------------
(Title) (Title)
2/10/97 February 6, 1997
----------------------- -----------------------
Title Title
10
AT&T/LDDI Confidential and Proprietary
<PAGE> 34
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made as of the day of , 1997 by and
between Long Distance Direct, Inc. ("LDDl"), a New York corporation, (the
"Debtor",) and AT&T Corp., a New York corporation (the "Secured Party").
W I T N E S S E T H T H A T:
WHEREAS, the Debtor currently 5ubscnbes to AT&T long distance
service under Contract Tariff 2507 ("CT 2507"), which comprises Distributed
Network Service ("DNS") and Software Defined Network ("SND") Service under DNS
account number MB1036; and SDN account numbers 205460 (the "Former Service"):
and
WHEREAS, the Debtor will order service under a Carrier Agreement
between the Secured Party and the Debtor (the ("New Service"); and
WHEREAS, Debtor has a total outstanding balance owed to AT&T for
charges billed under the Former Services through and including November 1,
1996, equal to $320,142.83;
WHEREAS, Debtor has agreed to make full payment of all amounts due
to AT&T under the Former Services according to the payment schedule in Paragraph
2(a) of the Release & Settlement dated ________________, and to continue to pay
on a timely basis all future bills for the Former Service and the New Service;
and
WHEREAS, to secure the payment of any indebtedness the Debtor now
has or may have to the Secured Party, and in order to induce the Secured Party,
inter alia, to provide the Debtor with the New Service without requiring a cash
deposit;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby agree as
follows:
Section 1. The Security Interests.
(a) In order to secure (i) the due and punctual payment of the
Obligations (as herein defined); (ii) the due and punctual payment and
performance of all obligations of the Debtor contained herein; and (iii) the due
and punctual payment and performance of all other indebtedness, guarantees,
liabilities and obligations of the Debtor to the Secured Party or any affiliate
of Secured Party, of every kind and description, whether direct, indirect,
absolute or contingent, whether now or hereafter existing, due or to become due,
whether otherwise secured or unsecured, whether acquired directly or by
assignment, whether acquired outright, conditionally or as collateral security
<PAGE> 35
from another, whether joint or several, liquidated or unliquidated, whether
arising by operation of law or otherwise, whether or not of the same or similar
class or of like kind to any indebtedness incurred contemporaneously with the
execution of this Agreement; and any extension, modifications, changes,
substitutions, restatements, renewals or increases or decreases of any or all of
the foregoing; and howsoever evidenced, incurred or arising (all of the
foregoing are hereinafter collectively called the "Obligations"), the Debtor
hereby pledges and assigns to the Secured Party, and grants to the Secured Party
a continuing security interest in and lien on, all of the following described
property, assets and rights (hereinafter collectively called the "Collateral"):
(A) All ACCOUNTS, which term shall mean all items described in
the definition thereof contained in the Uniform Commercial Code as
in effect from time to time in the State of New York (referred to
hereinafter as the "UCC") and all of the following, whether or not
so described (in all cases whether now existing or hereafter
created): all obligations of any kind at any time due or owing to
the Debtor and all rights of Debtor to receive payment or any other
consideration (whether classified under the UCC or the law of any
other state as accounts, accounts receivable, contract rights,
chattel paper, general intangibles, or otherwise) including without
limitation invoices, contract rights, accounts receivable, general
intangibles, chooses-in-action, notes, drafts, acceptances,
instruments and all other debts, obligations and liabilities in
whatever form owing to the Debtor from any person, firm,
corporation, governmental authority or other entity, together with
all security for any thereof, and all of the Debtor's rights to
goods sold (whether delivered, undelivered, in transit or returned),
represented by any of the foregoing, together with all proceeds and
products of any of the foregoing;
(B) All guarantee Security and liens for payment of any
ACCOUNTS and all documents of title, policies or certificates of
insurance, insurance proceeds, proceeds of condemnation or other
seizure, securities, chattel paper, and other documents and
instruments evidencing or pertaining to any items under (A); all
claims of the Debtor against third parties for loss of or damage to,
or otherwise relating to, any of the COLLATERAL; and all files,
correspondence, customer lists, computers, computer programs, tapes,
discs, data bases, and related data processing software, owned by
the Debtor or in which the Debtor has an interest, which contains
information identifying any of the COLLATERAL or identifying any
account debtor or the amount owed by same, or which would otherwise
be necessary or helpful in the realization of any of the COLLATERAL;
-2-
<PAGE> 36
(C) All moneys, securities, drafts, notes, items, contract
rights, leases, and all general or special deposits, balances, sums,
proceeds and credits of the Debtor;
(D) All rights and remedies which the Debtor might exercise
with respect to any of the foregoing; and
(E) All accessions and additions to, replacements and
substitutions for, and proceeds and products of, the items described
in the the preceding paragraphs (A) through (D).
(b) The security interests granted pursuant to this Section I (the
"Security Interests") are granted as security only and shall not subject the
Secured Party to, or transfer to the Secured Party, or in any way affect or
modify, any obligation or liability of the Debtor under any of the Collateral or
any transaction which give rise thereto.
Section 2. Filing; Further Assurances.
The Debtor will execute and deliver to Secured Party for filing
and/or recording (in such manner and form as the Secured Party may require), or
permit the Secured Party to file and record, in either case at Debtor's cost and
expense, any financing statements, any carbon, photographic or other
reproduction of a financing statement or of this Security Agreement (which the
parties hereto agree shall be sufficient as a financing statement hereunder),
any specific assignments or other paper that may be reasonably necessary or
desirable, or that the Secured Party may request, in order to create, confirm,
preserve, perfect or validate any Security Interest or to enable the Secured
Party to exercise and enforce its rights hereunder or under applicable law with
respect to any of the Collateral. The Debtor hereby appoints Secured Party as
the Debtor's attorney-in-fact to execute in the name and on behalf of the Debtor
such additional financing statements as the Secured Party may at any time
reasonably request or require in respect Of the Collateral.
Section 3. Representations and Warranties of the Debtor.
The Debtor hereby represents and warrants to the Secured Party that
all information, representations and warranties contained in Exhibit A attached
hereto and made a part hereof are true; accurate and complete on the date
hereof.
Section 4. Covenants of the Debtor.
The Debtor hereby covenants and agrees that so long as any of the
Obligations remain unpaid or unperformed:
(a) The Debtor will defend the Collateral against all claims and
demands of all persons (other than the Secured Party) at any time claiming any
interest therein.
-3-
<PAGE> 37
(b) The Debtor will not change its corporate name, identity or
structure, without forty-five (45) days' prior written notice to Secured Party
and the execution, delivery and filing of such documents as reasonably required
by the Secured Party.
(c) The Debtor shall not remove any Collateral from its present
location or transfer any Collateral to any other location.
Section 5. Records Relating to Collateral.
The Debtor will keep its records concerning the Collateral at its
offices located at One Blue Hill Plaza, Pearl River, NY 10965-3104, or at such
other place or places of business as the Secured Party may approve in advance in
writing. The Debtor will hold and preserve such records and will permit
representatives of the Secured Party at any time, on prior notice, during normal
business hours to examine and inspect the Collateral and to make abstracts from
such records, and will furnish to the Secured Party such information and copies
of records regarding the Collateral in the possession or control of the Debtor
as the Secured Party may from time to time reasonably request.
Section 6. General Authority.
(a) The Debtor hereby irrevocably appoints the Secured Party (and
any employee or agent of Secured Party) the Debtor's true and lawful attorney
and agent in fact, with full power of substitution, in the name of the Debtor,
the Secured Party or otherwise, for the sole use and benefit of the Secured
Party, but at the Debtor's expense, to the extent permitted by law to exercise,
at any time, and from time to time, after any Event of Default has occurred, all
or any of the following powers with respect to all or any of the Collateral
(which power shad be in addition and supplemental to any powers, rights and
remedies of the Secured Party described herein or otherwise available to the
Secured Party under any other document or otherwise under applicable law):
(i) to demand, sue for, collect, receive and give
acquittance for any and all moneys due or to become due upon or by
virtue thereof,
(ii) to demand, sue for, collect, receive, take,
endorse, assign and deliver any and all checks, notes, drafts,
documents and other negotiable and non-negotiable instruments and
chattel paper taken or received by the Secured Party in connection
therewith,
(iii) to settle, compromise, compound, prosecute or
defend any action or proceeding with respect thereto,
-4-
<PAGE> 38
(iv) to sell, transfer, assign or otherwise deal in or
with the same or the proceeds or avails thereof, as fully and
effectually as if the Secured Party were the absolute owner thereof,
(v) to extend the time of payment of any or all thereof
and to make any allowance and other adjustments with reference
thereto, and
(vi) to notify account debtors on any accounts to make
payment directly to the Secured Party.
(b) The Debtor covenants and agrees that (i) the powers of attorney
granted by this Agreement are coupled with an interest and shall be irrevocable
until full and final payment and performance of all the Obligations, (ii) said
powers are granted solely for the protection of the Secured Party's interest and
the Secured Party shall have no duty to exercise any of such powers, (iii) the
decision whether to exercise any such powers and the manner of exercise shall be
solely within the Secured Party's discretion, and (iv) neither Secured Party nor
any of its directors, officers, employees or agents shall be liable for any act
of omission or commission, or for any mistake or error judgement, in
connection with any such powers, absent gross negligence or willful misconduct.
Section 7. Events of Default.
The Debtor shall be in default under this Security Agreement upon
the occurrence of any one or more of the following events (each such event is
herein referred to as an "Event of Default"):
(a) default by the Debtor in the observance or performance of any
covenant or agreement herein contained: or
(b) any representation or warranty herein contained shall have been
untrue or misleading in any material respect at the time it was made; or
(c) the occurrence of any "Event of Default" or of any agreement now
or hereafter evidencing or securing any of the Obligations.
Section 8. Remedies Upon Event of Default.
(a) If any Event of Default shall have occurred, the Secured Party
may exercise all the rights and remedies of a secured party under the Uniform
Commercial Code of New York (whether or not the Uniform Commercial Code is in
effect in the jurisdiction where such rights and remedies are exercised) and, in
addition, the Secured Party may, without being required to give any notice,
except as herein provided or as may be required by mandatory provisions of law.
The Secured Party may require the Debtor to assemble all or any part of the
Collateral and make it available to the Secured party at a place to be
designated by the Secured Party which is reasonably convenient.
-5-
<PAGE> 39
(b) No remedy referred to in this Agreement is intended to be
exclusive, and all rights and remedies contained herein shall be separate and
cumulative and in addition to all other rights and remedies available to a
secured party under other documents evidencing or securing any of the
Obligations or otherwise applicable law, and the exercise of one shall not in
any way limit or prejudice the exercise of any other such rights or remedies;
and the Secured Party may exercise its remedies concurrently, independently or
successively, without in any way affecting any other remedy.
Section 9. Application of Collateral and Proceeds.
The proceeds of any sale of, or other realization upon, all or any
part of the Collateral shall be applied in the following order of priorities:
(a) first, to pay the expenses of such sale or other realization,
including reasonable commission to any agents or brokers, and all expenses,
liabilities and advances incurred or made by the Secured Party in connection
therewith, and any other unreimbursed expenses for which the Secured Party is to
be reimbursed pursuant to Section 10;
(b) second, to the payment of the Obligations in such order and
manner as the Secured Party, in its sole discretion, shall determine; and
(c) finally, unless applicable law otherwise provides, to pay to the
Debtor, or its successors or assigns, or as a court of competent jurisdiction
may direct, any surplus then remaining from such proceeds.
Section 10. Expenses; Second Party's Lien.
The Debtor will forthwith upon demand pay to the Secured Party:
(i) the amount of any and all reasonable out-of-pocket
expenses, including the reasonable fees and disbursements of its counsel and of
any agents not regularly in its employ, and all other expenses of Secured Party
(including, without limitation, court costs, and the allocated costs of Secured
Party's in-house counsel), which the Secured Party may incur in connection with
(a) the preparation and administration of this Security Agreement, (b) the
collection or other disposition of any of the Collateral, (c) the exercise by
the Secured Party of any of the powers, rights or remedies conferred upon it
hereunder, or (d) any default on the Debtor's part hereunder.
Section 11. Notices.
All notices, requests, demands and other communications provided for
hereunder shall be in writing (including telegraphic communication) and mailed
certified, return receipt requested, or telegraphed or delivered to the
applicable party at the addresses indicated below:
-6-
<PAGE> 40
(i) If to the Debtor, to it at:
One Blue Hill Plaza
Pearl River, NY 10965-3104
Attn: Steven Lampett
with a copy to:
[_________________________]
[_________________________]
[_________________________]
[_________________________]
(ii) If to the Secured Party, to it at:
AT&T Corp.
55 Corporate Drive
Bridgewater,NJ 08807
Attn: Michael Oyster
with a copy to:
Carla M. Mascaro, Esq.
AT&T Corp.
295 North Maple Avenue
Rm. 3229A2
Basking Ridge. NJ 07920
or, as to each party, at such other address as shall be
designated by such parties in a written notice to the other party complying as
to delivery with the terms of this Section. All such notices, requests, demands
and other communications shall be deemed given upon the earlier to occur of (a)
the third day following deposit thereof in the United States mail or deposit
thereof with the telegraph company as aforesaid, or (b) receipt by the party to
whom such notice is directed.
Section 12. Waivers; Non-Exclusive Remedies.
No failure on the part of the Secured Party to exercise, and no
delay in exercising, and no course of dealing with respect to, any right, power
or remedy under this Security Agreement shall operate as a waiver thereof; nor
shall any single or partial exercise by the Secured Party of any right, power or
remedy under this Security Agreement exhaust the same or preclude any other
right,
-7-
<PAGE> 41
power or remedy. The remedies in This Security Agreement are cumulative and are
not exclusive of any other remedies provided by law or otherwise available to
the Secured Party. The Debtor, to the extent it may lawfully do so, hereby
consents to the jurisdiction of the courts of the State of New York and the
United States District Court for the District of New York for the purpose of any
suit or proceeding brought in connection with or respect to this Security
Agreement.
Section 13. Consent and Waiver.
(A) THE DEBTOR HEREBY WAIVES TRIAL BY JURY IN ANY ACTION BROUGHT ON
OR WITH RESPECT TO THIS SECURITY AGREEMENT. NEITHER THE DEBTOR NOR ANY ASSIGNEE
OF OR SUCCESSOR TO THE DEBTOR, SHALL SEEK A JURY TRIAL IN ANY LAWSUIT,
PROCEEDING, COUNTERCLAIM, OR ANY OTHER LITIGATION OR PROCEDURE BASED UPON, OR
ARISING OUT OF, THIS SECURITY AGREEMENT OR THE DEALINGS OR THE RELATIONSHIP
BETWEEN OR AMONG THE PARTIES HERETO. NO PARTY WILL SEEK TO CONSOLIDATE ANY
SUCH ACTION, IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN
WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS
SECTION HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO, AND THESE PROVISIONS
SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY AGREED WITH OR
REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE
FULLY ENFORCED IN ALL INSTANCES.
(B) THE DEBTOR CONSENTS TO THE JURISDICTION AND VENUE OF ANY LOCAL,
STATE OR FEDERAL COURT LOCATED WITHIN THE STATE OF NEW YORK AND WAIVES PERSONAL
SERVICE OF ANY AND ALL PROCESS UPON THE DEBTOR, AND CONSENTS THAT ALL SUCH
SERVICE OF PROCESS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT
REQUESTED, DIRECTED TO THE DEBTOR AT THE ADDRESS STATED BELOW AND SERVICE SO
MADE SHALL BE DEEMED TO BE COMPLETED THREE (3) DAYS AFTER THE SAME SHALL HAVE
BEEN POSTED AS AFORESAID. THE DEBTOR WAIVES ANY OBJECTION TO VENUE OF ANY ACTION
INSTITUTED HEREUNDER AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE
RELIEF AS IS DEEMED APPROPRIATE BY THE COURT. THE DEBTOR WAIVES, TO THE EXTENT
PERMITTED BY LAW, ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT
FOR THIS WAIVER BE REQUIRED OF THE SECURED PARTY. NOTHING CONTAINED IN THIS
PARAGRAPH SHALL AFFECT THE RIGHT OF THE SECURED PARTY TO SERVE LEGAL PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF THE SECURED PARTY TO
BRING ANY ACTION OR PROCEEDING AGAINST THE DEBTOR IN THE COURTS OF ANY
JURISDICTION.
(C) THE DEBTOR HEREBY WAIVES ALL DEFENSES AND RIGHTS TO INTERPOSE
ANY SETOFF OR COUNTERCLAIM OF ANY NATURE EXCEPT ONLY A DEFENSE PERTAINING TO THE
EXISTENCE OF AN EVENT OF DEFAULT OR A COUNTERCLAIM TO THE EXTENT THAT THE
FAILURE TO SO ASSERT SUCH
-8-
<PAGE> 42
COUNTERCLAIM WOULD PERMANENTLY PRECLUDE THE PROSECUTION OR RECOVERY UPON THE
SAME.
Section 14. Changes in Writing.
Neither this Security Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally, but only by a statement in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
Section 15. Choice of Law; Meaning of Terms.
This Security Agreement shall be construed in accordance with and
governed by the internal laws (as opposed to conflict of law provisions) and
decisions of the State of New York applicable to contracts made and performed in
said State, except to the extent that remedies provided by the laws of any State
other than New York are governed by the laws of said State. Unless otherwise
defined herein, or unless the context otherwise requires, all terms used herein
which are defined in the New York Uniform Commercial Code have the meanings
therein stated.
Section 16. Marshalling; Payments Set Aside.
The Secured Party shall be under no obligation to marshall any
assets in favor of the Debtor or any other party or against or in payment of any
or all of the Obligations. To the extent that the Debtor makes a payment or
payments to the Secured Party or the Secured Party enforces its security
interests or exercises its rights of setoff, and such payment or payments or the
proceeds of such enforcement or setoff or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then to the
extent of such recovery, the obligation or part thereof originally intended to
be satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.
Section 17. Severability.
Any provision of this Security Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
Section 18. Headings.
The headings in this Security Agreement are for the purposes of
reference only and shall not limit or otherwise affect the meaning, construction
or effect of this Agreement or any other provision of this Agreement.
-9-
<PAGE> 43
IN WITNESS WHEREOF, this Security Agreement has been executed by the
parties hereto all as of the day and year first above written.
WITNESS:
LONG DISTANCE DIRECT, INC. By /s/ Michael Preston
- -------------------------- --------------------------------------
Name: Michael Preston
Title: V-P, CFO
By /s/ L.R. Zingale
__________________________ --------------------------------------
Name: L. R. Zingale
Title: Spec. Mkts. V.P.
-10-
<PAGE> 44
EXHIBIT A
Additional Representations and Warranties
1. The exact title of the Debtor is: Long Distance Direct, inc. The
Debtor has not need any other corporate name within the previous ten (10) years.
2. The Debtor uses in its business and owns the following trade
names: LDDI
3. The Debtor maintains its books and records relative to its
accounts and its inventory at:
One Blue Hill Plaza, Pearl River, New York 10965-3104
4. No tangible property constituting any of the Collateral is or
will be, or has been in the six months preceding the date of this Agreement,
located in or at any premises other than those identified in items 5 and 6
below.
5. The chief executive office of the Debtor is:
One Blue Hill Plaza, Pearl River, New York 10965-3104
6. In addition to the location described in item 3 above, the Debtor
owns or has an interest in personal property located at:
Address Record Owner of Real Estate
------- ---------------------------
<PAGE> 1
EXHIBIT 10.11
[MCI LOGO]
MCI TELECOMMUNICATIONS
CORPORATION
205 North Michigan Avenue
Chicago, IL 60601
312 856 2121
FIRST AMENDMENT
This First Amendment is made this 23rd day of Sept. 1996 between LONG DISTANCE
DIRECT, INC. ("Customer") and MCI TELECOMMUNICATIONS CORPORATION ("MCI").
WHEREAS, Customer and MCI entered into a Carrier Agreement signed by Customer
on March 14, 1996, and subsequently accepted by MCI on March 26, 1996 (the
"Agreement").
WHEREAS, Customer and MCI desire to enter into this First Amendment for the
purpose of amending the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Customer and MCI agree as follows:
1. Paragraph 2 of Agreement is hereby deleted and replaced in its entirety
with the following:
2. Monthly Commitment
(a) During each of the first eight (8) months of the
Agreement, Customer shall have no minimum usage requirements.
(b) During the ninth (9) through twelfth (12) monthly
billing periods under this Agreement, Customer's Monthly Usage
shall equal or exceed Two Hundred Fifty Thousand Dollars
($250,000).
(c) During the thirteenth (13th) through fifteenth (15th)
monthly billing periods under this Agreement, Customer's Monthly
Usage shall equal or exceed Five Hundred Thousand Dollars
($500,000).
(d) During the sixteenth (16th) through eighteenth (18th)
monthly billing periods under this Agreement, Customer's Monthly
Usage shall equal or exceed Seven Hundred Fifty Thousand Dollars
($750,000).
(e) During the nineteenth (19th) monthly billing period
through the remainder of the Service term of this Agreement,
Customer's Monthly Usage shall equal or exceed One Million
Dollars ($1,000,000).
(f) For purposes of this Agreement Paragraphs 2(a), 2(b),
2(c) and 2(d) combined shall comprise the "Ramp Period" (as more
fully described in
MCI CONFIDENTIAL
1
<PAGE> 2
Paragraph 14 below). Additionally, each such dollar amount set
forth in the subparagraphs above shall be referred to as the
"Monthly Commitment".
(g) In the event Customer's Carrier Identification Code
("CIC") is not 80 percent (80%) loaded upon the completion of
the fourth (4th) monthly billing period of the Ramp Period, MCI
and Customer shall promptly meet to discuss the extension of the
Ramp Period.
(h) Monthly Usage shall mean Customer's domestic interstate
usage of: MCI Carrier Network Service at the rates identified in
Paragraph 4 below, MCI Carrier Operator Service, MCI Directory
Assistance, MCI Debit Card Units, MCI Card Service, networkMCI
Conferencing, MCI PRISM I Service and MCI 800 DAL Service after
application of discounts earned hereunder, but not including any
applicable taxes (and gross receipts taxes) and tax-related
surcharges on MCI Services. Monthly Usage also includes usage
of: (i) International Service (including MCI Service terminating
in Canada and Mexico) at the rates set forth below but before
any of the discounts earned under this Agreement, and
International 800 DAL Service at standard tariffed rates less
discounts earned under this Agreement (hereinafter
"International Services"), but not including any applicable
taxes (and gross receipts taxes) and tax-related surcharges on
MCI International Services; and (ii) intrastate MCI Services at
standard tariffed rates after application of any applicable
tariffed discounts (hereinafter "Intrastate Services") but not
including any applicable taxes (and gross receipts taxes) and
tax-related surcharges on MCI Intrastate Services.
(i) During and after the Ramp Period, if Customer's Monthly
Usage is less than the applicable Monthly Commitment identified
above, for that month Customer will pay the Customer's actual
combined monthly recurring and usage charges for MCI services at
standard MCI tariffed rates less applicable tariffed discounts,
and an underutilization charge (which Customer agrees is
reasonable) equal to fifteen percent (15%) of the difference
between Monthly Commitment and Customer's Monthly Usage capped
at the Monthly Commitment.
(j) During any three (3) monthly billing periods of the
Service Term ("Quarter") in which Customer's total aggregate
Monthly Usage equals or exceeds an amount equal to three (3)
times the applicable Monthly Commitment or Customer's aggregate
Monthly Usage of CNS Outbound International Subcommitment,
Customer shall receive a credit in an amount equal to any
underutilization charges paid by Customer during such Quarter
for the Monthly Commitment or CNS International Subcommitment,
whichever is applicable. The credit shall be applied to
Customer's domestic interstate invoiced usage charges (excluding
taxes, surcharges and pass-
MCI CONFIDENTIAL
2
<PAGE> 3
through access/egress (or related) charges) appearing on Customer's
monthly invoice following such Quarter.
(k)(i) During each monthly billing period of the eighteen (18) month
Ramp Period in which Customer's Monthly Usage exceeds the Monthly
Commitment, for such month, Customer shall receive a credit equal to the
amount by which Customer's Monthly Usage exceeds the Monthly Commitment.
However, in no event, shall the aggregate value of such credit(s) during
the eighteen (18) month Ramp Period exceed One Million Dollars
($1,000,000).
(ii) If at the conclusion of the eighteen (18) month Ramp Period,
Customer's aggregate credit amount equals or exceeds Seven Hundred Fifty
Thousand Dollars ($750,000), Customer shall be eligible to receive the
credit(s) for two (2) additional monthly billing periods. However, in no
event shall the aggregate value of the credits received during such two
(2) additional monthly billing periods exceed the difference between the
aggregate value of the credit at the conclusion of month eighteen of the
Ramp Period and One Million Dollars ($1,000,000).
(iii) The credits set forth in Paragraphs 2(k)(i) and 2(k)(ii) above
shall be applied to Customer's Monthly Usage charges (exclusive of
applicable taxes, surcharges, and pass-through access/egress (or
related) charges) for MCI Services hereunder.
2. Paragraph 14 of the Agreement is hereby deleted and replace in its entirety
with the following:
14. Term
The Ramp Period under this Agreement shall begin on April 1,
1996, provided Customer executes this Agreement on or before March 31,
1996 and shall continue for eighteen (18) months. Alternatively, the
Ramp Period shall begin on the first day of the first full month
following the execution of this Agreement by MCI ("Effective Date") and
shall continue for eighteen (18) months. The service term shall begin on
the first day of the nineteenth (19th) consecutive monthly billing
period and will continue for a period of thirty (30) months thereafter
("Service Term"). In the event Customer's CIC is not eighty percent
(80%) loaded as identified in Paragraph 2(g) above, MCI and Customer
shall promptly meet to discuss the extension of the Ramp Period. In the
event the Ramp Period is extended, the Service Term shall commence upon
the completion of the revised Ramp Period. Nothing contained herein,
however, shall modify or be deemed to modify MCI's right to terminate
this Agreement either as provided herein, or as authorized in Section
B-11.01 of the Tariff,
MCI CONFIDENTIAL
3
<PAGE> 4
immediately upon notice to Customer if Customer fails or refuses to
provide alternative or additional security requested pursuant to Section
B-7.04 of the Tariff, or to terminate provision of service for any other
cause as provided for in this Agreement. Upon expiration of the Service
Term, Customer shall receive tariffed rates less applicable tariff
discounts for services hereunder.
3. The terms of this First Amendment will become effective, following execution
by both parties, as of the first full month following execution.
4. Except as expressly provided in this First Amendment, all of the terms and
conditions contained in the Agreement shall remain in full force and effect.
5. This First Amendment, together with the Agreement, is the complete
agreement of the parties and supersedes all other prior agreements and
representations concerning its subject matter.
6. This offer will remain open and be capable of being accepted by Customer
until September 27, 1996. Any and all prior offers made to Customer, whether
written or oral, shall be in writing and signed by both parties.
LONG DISTANCE DIRECT, INC. MCI TELECOMMUNICATIONS
CORPORATION
/s/ Steven Lampert /s/ Edward W. Smith
- ---------------------------- ------------------------------
Signature Signature
STEVEN LAMPERT EDWARD W. SMITH
- ---------------------------- ------------------------------
Printed Name Printed Name
President Director
- ---------------------------- ------------------------------
Title Title
9/23/96 9/27/96
- ---------------------------- ------------------------------
Date Date
MCI CONFIDENTIAL
4
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in Amendment No. 1 to the Registration Statement on
Form SB-2 (File No. 333-18039) of our report dated March 21, 1997 relating to
the financial statements of Long Distance Direct Holdings, Inc. for the years
ended December 31, 1996 and December 31, 1995, respectively, and the reference
to our firm under the caption "EXPERTS" in the Prospectus.
Adelman, Katz & Mond, LLP Certified Public Accountants
New York, NY March 25, 1997
LONG DISTANCE DIRECT HOLDINGS, INC.
FORM SB-2
EXHIBIT 23.1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LONG
DISTANCE DIRECT HOLDINGS, INC. COMBINED STATEMENT OF OPERATIONS AND
BALANCE SHEET AT 12/31/96. AND, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH LONG DISTANCE DIRECT HOLDINGS, INC. FORM 10KSB FOR THE YEAR ENDED
12/31/96.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 962,471
<SECURITIES> 0
<RECEIVABLES> 1,444,962
<ALLOWANCES> 318,976
<INVENTORY> 0
<CURRENT-ASSETS> 3,273,623
<PP&E> 505,754
<DEPRECIATION> 193,576
<TOTAL-ASSETS> 3,715,424
<CURRENT-LIABILITIES> 2,298,193
<BONDS> 0
0
0
<COMMON> 6,598
<OTHER-SE> 1,410,633
<TOTAL-LIABILITY-AND-EQUITY> 3,715,424
<SALES> 5,310,237
<TOTAL-REVENUES> 5,310,237
<CGS> 3,650,162
<TOTAL-COSTS> 379,670
<OTHER-EXPENSES> 2,718,970
<LOSS-PROVISION> 222,754
<INTEREST-EXPENSE> 739,916
<INCOME-PRETAX> (2,401,236)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,401,236)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,401,236)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> 0.0
</TABLE>
