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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-25314
e.spire COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 52-1947746
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
133 National Business Parkway
Annapolis Junction, MD. 20701
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(Address of principal executive offices) (Zip code)
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301-361-4200
(Issuer's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value
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Title of Securities
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. / /
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The aggregate market value of the Common Stock of e.spire Communications,
Inc.,("e.spire") held by non-affiliates of the registrant (24,329,299 shares) as
of March 19, 1999, was $ 264,581,127. The number of shares of common stock of
e.spire, outstanding on March 19, 1999, was 49,593,674.
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DOCUMENTS INCORPORATED BY REFERENCE
The Index to Exhibits appears on page E-1.
The registrant's definitive 1999 Proxy Statement that will be filed
pursuant to Regulation 14A is incorporated by reference into Part III of this
Annual Report on Form 10-K.
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e.spire COMMUNICATIONS, INC.
FORM 10-K
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TABLE OF CONTENTS
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Page
Part I. Number
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Item 1. Business 7
Item 2. Properties 29
Item 3. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of Security Holders 31
Part II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 31
Item 6. Selected Financial Data 33
Item 7. Management's Discussion and Analysis 52
Item 7a. Quantitative & Qualitative Disclosure About Market Risk
Item 8. Financial Statements and Supplementary Data 53
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 53
Part III.
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial
Owners and Management 54
Item 13. Certain Relationships and Related Transactions 54
Part IV.
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 55
SIGNATURES __
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Information Regarding Forward-Looking Statements
This report contains or incorporates by reference "forward-looking
statements" (as such term is defined in the Private Securities Litigation Reform
Act of 1995) about our financial condition, results of operations and business.
These statements include, among others:
- statements concerning the benefits that e.spire expects will
result from its business activities and certain transactions
e.spire has completed, such as increased revenues, decreased
expenses and avoided expenses and expenditures,
- e.spire's plans to complete its communications network, and
- other statements of e.spire's expectation, beliefs, future plans
and strategies, anticipated developments and other matters that
are not historical facts.
These statements may be made expressly in this document, or may be
incorporated by reference to other documents e.spire has filed with the SEC. You
can find many of these statements by looking for words such as "believes,"
"expects," "anticipates," "estimates," or similar expressions used in this
report or incorporated by reference in this report.
These forward-looking statements are subject to numerous
assumptions, risks and uncertainties that may cause e.spire's actual results to
be materially different from any future results expressed or implied by e.spire
in those statements. The important factors that could cause actual results to
differ materially from those in the forward-looking statements include, without
limitation, the Company's degree of financial leverage, risks associated with
debt service requirements and interest rate fluctuations, risks associated with
acquisitions and the integration thereof, the impact of restriction under the
Company's financial instruments, dependence on availability of transmission
facilities, regulation risks including the impact of the Telecommunications Act
of 1996, contingent liabilities, the impact of competitive services and pricing,
and the ability of the Company to successfully implement its strategies. In
addition, the risks and uncertainties include those risks, uncertainties and
risk factors identified, among other places, under "Risk Factors" in e.spire's
registration statement on Form S-4, SEC file number 333-64079, beginning on page
10, incorporated by reference, and under "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained in this report.
The most important factors that could prevent e.spire from
achieving its stated goals include, but are not limited to, the following:
- e.spire's failure to construct its communications network on
schedule and on budget;
- operating and financial risks related to managing rapid growth,
integrating acquired businesses and sustaining operating cash flow
to meet e.spire's debt service requirements, and making capital
expenditures and fund operations;
- potential fluctuation in quarterly results;
- volatility of stock price;
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- intense competition in the communications services market;
- dependence on new product development;
- e.spire's ability to achieve year 2000 compliance;
- rapid and significant changes in technology and markets;
- adverse changes in the regulatory or legislative environment
affecting e.spire's business; and
- failure to maintain necessary rights of way.
Because the statements are subject to risks and uncertainties,
actual results may differ materially from those expressed or implied by the
forward-looking statements. e.spire cautions you not to place undue reliance on
the statements, which speak only as of the date of this report or, in the case
of documents incorporated by reference, the date of the document.
The cautionary statements contained or referred to in this section
should be considered in connection with any subsequent written or oral
forward-looking statements that e.spire or persons acting on its behalf may
issue. e.spire undertakes no obligation to review or confirm analysts'
expectations or estimates or to release publicly any revisions to any
forward-looking statements to reflect events or circumstances after the date of
this report or to reflect the occurrence of unanticipated events.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
e.spire Communications, Inc., formed in 1993, seeks to be a leading
facilities-based integrated communications provider to businesses. The Company
currently operates in 35 markets throughout the United States where it has
state-of-the-art local fiber optic networks. By the end of 1997, the Company had
become one of the first Competitive Local Exchange Carriers ("CLECs") to combine
the provision of dedicated, local and long distance voice services with frame
relay, ATM and Internet services. Having established this suite of
telecommunications services which emphasizes data capabilities in addition to
traditional CLEC offerings, e.spire seeks to provide customers with superior
service and competitive prices while offering a single source for integrated
communications services designed to meet its business customers' needs. In
August 1998, the Company announced its plan to enter the New York and
Philadelphia local markets, and to provide long-haul fiber capabilities between
New York and Baltimore through a long-term dark fiber lease with Metromedia
Fiber Network, Inc. The Company's facilities-based network infrastructure is
designed to provide services to customers on an end-to-end basis, and, as of
December 31, 1998, was comprised of 1,742 route miles of fiber in its 35 local
networks in 21 states, 66 Newbridge ATM switches, 19 Lucent 5ESS switches and
approximately 22,000 backbone long haul miles in its leased coast-to-coast
broadband data network.
With the passage of the federal Telecommunications Act of 1996 ("Telecom
Act, FTA or the Act"), the Company enhanced the scope of its product offerings
from dedicated services to a full range of switched voice, data and Internet
services in order to meet the needs of business end-users, and is expanding its
sales, marketing, customer care and operations support systems ("OSS")
capabilities. The Company introduced local switched voice services, including
local exchange services, in late 1996 and long distance services in late 1997.
As of December 31, 1998, e.spire had installed 133,070 customer access lines
representing a significant increase over the 35,105 access lines installed as of
December 31, 1997.
The development of the Company's business and the construction,
acquisition and expansion of its networks require significant capital
expenditures, a substantial portion of which are incurred before realization of
revenues. These expenditures, together with the associated early operating
expenses, result in negative cash flow until an adequate customer base is
established. However, as the Company's customer base grows, the Company expects
that incremental revenues can be generated with decreasing incremental operating
expenses, which may provide positive contributions to cash flow. The Company has
made specific strategic decisions to build high capacity networks with broad
market coverage, which initially increases its level of capital expenditures and
operating losses. However, the Company believes that over the long term this
strategy will enhance the Company's financial performance by increasing the
traffic flow over its network.
STRATEGY
The Company seeks to provide its customers via its facilities-based
network infrastructure state-of-the-art voice, data and Internet solutions from
a single communications provider. In order to increase penetration in its target
markets, build brand recognition and achieve its strategic objectives, the
Company seeks to:
PROVIDE "ONE-STOP" INTEGRATED COMMUNICATIONS SERVICES
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To meet customer demand and to accelerate penetration in its markets, the
Company has broadened the range of voice, data and Internet services it offers
and has integrated these services into a bundled package offering a single
source solution designed to meet its customers' communications needs. In 1998,
the Company introduced e.spire Platinum, which provides integrated communication
services for voice and data and Internet over a single multipurpose T1 line. The
Company believes that its ability to provide one-stop integrated communications
services will enable it to capture a larger portion of its customers' total
expenditures on communication services, and reduce customer turnover.
EXPLOIT RAPIDLY GROWING MARKET FOR DATA/INTERNET SERVICES
The Company believes that the market for data/Internet services is one of
the fastest growing segments of the communications market. The Company's suite
of products consists primarily of the e.spire family of high-speed Internet and
data products such as Frame Relay and ATM for small and medium-sized businesses.
Product traffic will be transported over the Company's coast-to-coast, leased
broadband data communications network and through Cybergate, Inc. ("Cybergate")
the Company's wholly-owned Internet Service Provider ("ISP") subsidiary.
ENHANCE FACILITIES-BASED INFRASTRUCTURE
Expansion of the Company's facilities-based infrastructure will increase
the proportion of communications traffic that is originated and/or terminated on
its network and switching facilities, which the Company believes will result in
higher long-term operating margins and greater control over its network
operations. The Company employs an on-net strategy to capture new customers.
The Company will continue to install voice and data switches, construct
SONET digital local fiber networks, increase the reach of its data backbone and
extend Cybergate's Internet capabilities to additional markets. The Company's
expansion decisions are structured to efficiently deploy capital and are based
upon a number of economic factors, including customer demographics in each
market and anticipated cost savings associated with particular installations.
The Company's state-of-the-art infrastructure and high capacity bandwidth
facilitate efficient network expansion. In 1999, the Company intends to increase
its route miles and fiber optic networks and its infrastructure of voice and
data switches.
BUILD MARKET SHARE THROUGH FOCUSED CUSTOMER SALES AND SERVICE
The Company believes that its local, customer-oriented, single
point-of-service sales structure facilitates greater customer care in both the
sales and customer service processes and differentiates e.spire as a
customer-focused telecommunications services provider. In addition to its field
sales force, the Company's major account team targets large national accounts,
and its carrier sales group targets dedicated services to long distance carriers
and ISPs. As of December 31, 1998 and 1997, the Company had 245 and 256
respectively, employees in its marketing and sales forces. The Company
supplements its internal marketing and sales force through alternative sales
channels, and had 33 executed sales agency agreements as of December 31, 1998.
In accordance with the Company's plans for strategic product direction, it
terminated most of its sales agency agreements, retaining only agents who met
certain performance criteria.
The Company has begun to implement e.spectrum, an initiative designed to
integrate diverse information technology systems and business processes for
improved customer service and internal efficiencies. e.spectrum will use
state-of-the-art information technology solutions to deliver better quality of
service, productivity, marketing competitiveness and profitability. In addition,
the Company continues to implement its integrated customer care strategy that
emphasizes infrastructure improvements, training of personnel, performance
monitoring and image/brand recognition. The customer care strategy is intended
to provide a heightened level of responsive and cost efficient customer service
across the Company's full range of existing and planned products and services,
with a particular emphasis on operational support and other
information/financial systems. In 1998, the Company delivered its first
integrated invoice via Kenan's
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Arbor/BP Enhanced Billing Platform.
EXTEND GEOGRAPHIC FOCUS ON ATTRACTIVE MARKETS NATIONALLY
In 1998, the Company announced that it was expanding its geographic
coverage by entering the New York and Philadelphia local markets, and its plan
to provide long-haul fiber capabilities between New York and Baltimore through a
long-term lease with Metromedia Fiber Network, Inc.
EXPAND THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES
The Company believes that acquisitions of, and joint ventures and other
strategic alliances with, related or complementary businesses in its region will
enable it to more rapidly execute its business plan by providing additional
customers, new products and services, service and technical support and
additional cash flow. As part of its expansion strategy, the Company plans to
consider additional acquisitions, joint ventures and strategic alliances in
communications, Internet access and other related service areas.
DESIGN AND MANAGE THE CONSTRUCTION OF ADVANCED FIBER OPTIC NETWORKS
Through its ACSI Network Technologies, Inc. ("ACSI NT") subsidiary, the
Company designs and constructs high speed advanced fiber optic networks for
third parties, such as other CLECS, interexchange carriers ("IXC's") and
businesses. The continued growth of the Internet and bandwidth intensive
advanced data services has generated increasing demand for optimal network
design and efficient network construction by the providers of such services.
ACSI NT intends to meet the growing demand for network capacity by designing and
constructing high-quality, low-cost, customized networks that provide its
customers with unparalleled speed-to-market advantages. ACSI NT has built its
reputation performing the mission critical services that few telecommunications
service providers or construction contractors are equipped to provide,
including: executing preliminary market analyses, authoring business plans,
performing site assessments, managing liability and risk, managing construction,
installing fiber and monitoring completed networks.
e.spire SERVICES
VOICE SERVICES
SWITCHED VOICE SERVICES. As of December 31, 1998, the Company had installed 19
Lucent 5ESS switches to provide facilities-based local exchange service in 19 of
its 35 markets. Also, the Company has provided these services on a resale basis
in all 35 of its markets. However, the Company announced on December 14, 1998
its plan to phase out its resale business from its product portfolio. As an
adjunct to its local switched services, the Company provides long distance,
calling card and other interLATA services on a resale basis.
The Company's switched voice services include telephone exchange service,
including optional enhanced services such as call waiting, caller ID and
three-way conference calling; switching traffic between e.spire's switch and a
business customer's PBX and routing local, intraLATA and interLATA phone calls
according to the customers' specific requirements; providing local dial tone
services with functionality such as free internal communications, call
forwarding, call transfer, conference call and speed dialing; Integrated
Services Digital Network ("ISDN") data services; and origination and termination
of long distance traffic between a customer premises and interexchange carrier
via shared trunks utilizing the Company's local switch.
- e.spire PLATINUM. e.spire PLATINUM provides integrated local, long
distance, toll free and Dedicated Internet Access using a single
multipurpose T1. Voice services come complete with a full range of
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standard and optional custom features, and Internet access can be
provided up to 512Kbps. One of the first of its kind, Platinum provides
an unprecedented mix of voice and data services on a consolidated
invoice.
- e.spire GOLD. An integrated service that offers local, long distance,
and toll free service, along with a complete line of optional calling
features. e.spire Gold provides a single source solution for both
local, long distance, and Toll Free service - all on a single invoice.
It provides the benefits of integrated service by reducing local
service costs. It offers the benefits of bundled/integrated voice
services, a simplified consolidated invoice and aggressive fixed term
discounts for both local and long distance service.
DEDICATED SERVICES. The Company's dedicated services provide high
capacity non-switched interconnections: (i) between Points of Presence ("POP")
of the same Inter Exchange Carriers ("IXC"); (ii) between POPs of different
IXCs; (iii) between large business and government end-users and their selected
IXCs; (iv) between an IXC POP and an Incumbent Local Exchange Carrier ("ILEC")
central office or between two ILEC central offices; and (v) between different
locations of business or government end-users.
- SPECIAL ACCESS SERVICES. Special access services provide a link
between an end-user location and the POP of its IXC, or links
between IXC POPs, thus bypassing the facilities of the ILEC. These
services, which may be ordered by either the long distance
customer or directly by its IXC, typically provide the customer
better reliability, shorter installation intervals, and lower
costs than similar services offered by the ILEC. Customer charges
are based on the number of channel terminations, fixed and
mileage-sensitive transport charges, and costs for any services
required to multiplex circuits.
- SWITCHED TRANSPORT SERVICES. Switched transport services are offered to
IXCs that have large volumes of long distance traffic aggregated by a
ILEC switch at a central office where the Company has collocated its
network. The Company provides dedicated facilities for transporting
these aggregated volumes of long distance traffic from the ILEC central
office to its POP or between ILEC central offices.
- PRIVATE LINE SERVICES. Private line services provide dedicated
facilities between two end-user locations in the same metropolitan area
(e.g., a central banking facility and a branch office or a
manufacturing facility and its remote data processing center) and are
priced like special access services (channel termination charges plus
transport and any associated multiplexing charges). The Company expects
the demand for private line service to increase in conjunction with
higher bandwidth customer applications.
DATA/INTERNET SERVICES
HIGH SPEED INTERNET AND DATA SERVICES AND CYBERGATE ACQUISITION. In
January 1997, the Company acquired Cybergate. Cybergate, an ISP, delivers
high-speed data communications services, including computer network connections
and related infrastructure services, that provide both commercial and
residential customers access to the Internet through their personal computers
and the use of a modem. The Cybergate acquisition enabled e.spire to become a
major provider of high-speed data communications services in the southern United
States. As of December 31, 1998, Cybergate had over 75,000 customers,
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due in part to the acquisition of the customer base in November 1998, of
Miami-based Internet Communications of America, Inc. ("ICANECT"), a leading
provider of dial-up and dedicated Internet access and web hosting services. By
merging the customer base and strengths in web hosting of ICANECT with
Cybergate's Internet access products and customer base, the Company has
significantly expanded its Internet presence in Florida.
In 1997, the Company introduced the e.spire family of high-speed Internet
and data services for businesses as well as government and educational
institutions, ISPs and carriers. The e.spire family of services operates over
the Company's coast-to-coast, leased broadband data communications network which
supports the following services:
- e.spire INTERNET ACCESS SERVICE. The data and Internet backbone is
connected to the Global Internet via public and private peering
arrangements with Tier I-Internet backbone providers at strategic
Network Access Points ("NAPs") across the United States. This
enables the Company to provide high-quality dedicated and dial-up
Internet connectivity and IP transport for the business and
reseller community. The service is targeted to consumers, local
and regional ISPs and corporate Internet users requiring dedicated
access. The service operates at dedicated speeds ranging from 56
kbps to 45 Mbps and at industry-standard dial-up speeds.
- e.spire DIGITAL SUBSCRIBER LINE (DSL). e.spire plans to begin
offering DSL service in two markets in the first quarter of 1999.
The DSL service will initially be available to e.spire customers
in New York and Washington D.C. e.spire's DSL services will enable
businesses and telecommuters to use standard phone lines to access
the Internet or a corporate local area network at speeds ranging
from 144kbps to 1.5Mbps. DSL service is an always-on, dedicated
connection that can be up to 25 time faster than a connection via
a standard 56K modem. Turnkey service packages include DSL
modem/routers, e-mail accounts, domain name registration services
and around-the-clock monitoring.
- e.spire WEB HOSTING. Web hosting allows customers to benefit from
high-speed network connectivity, high performance servers, around
the clock monitoring and emergency provisioning, at a fraction of
what it would cost the customer to put a comparable internal
infrastructure in place. e.spire provides the hardware and
software necessary to establish a company's presence on the web.
Hosted sites are provisioned on shared commercial grade Unix
servers, complete with operating system and web server software.
Each server is provisioned with its' own 10Mb Ethernet connection
to the Internet.
- e.spire BUNDLED INTERNET SOLUTIONS. The Company also provides
turnkey business Internet solutions. These solutions include
dedicated Internet Access, pre-configured Customer Premises
Equipment, web site hosting account, domain name registration and
maintenance, news feed, and end-to-end service installation. These
solutions enable businesses to benefit from integrated billing and
network management.
- e.spire FRAME RELAY SERVICE. This service is designed for
bandwidth needs that vary, and for interconnecting geographically
dispersed networks and equipment. Businesses of any size can take
advantage of e.spire Frame Relay for internetworking, application
sharing, e-mail, file transfer, PC-to-PC and PC-to-Server
communications. The Frame Relay backbone is connected to frame
relay networks of other key providers via NNIs (Network-to-Network
Interfaces) thus enabling the
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Company to offer comprehensive solutions to local, regional, and
national businesses regardless of their location. This service
supports standard multi-protocol encapsulation which makes it
easier to integrate new and legacy systems. The service support
user port connections range from 56 kbps to 1.5 Mbps with a wide
range of Committed Information Rates.
- e.spire ATM SERVICE. This service provides a solution to local,
regional and national businesses with highbandwidth,
delay-sensitive data communications applications. With e.spire ATM
service, the performance needs of complex, media-rich applications
such as CAD/CAM, remote super-computing, medical imaging, video
conferencing, and voice calls are easily met. This service is also
ideal for higher-volume users of applications such as PC-to-server
and file transfer. The service supports both Constant Bit Rate and
Variable Bit Rate service levels over Permanent Virtual Circuits
with user port speeds ranging from 2 Mbps to 45 Mbps.
- e.spire CUSTOM NETWORK SERVICES. These services include design,
installation, maintenance, hardware (such as switches, routers and
modems) and configuration (such as maintaining consistent versions
of the router software and deploying consistent configurations) of
a customer's network. The Company's custom network services are
designed to eliminate many of the timing, coordination and
inter-operability issues that arise in installations requiring
multiple vendors.
- e.spire MANAGED NETWORK SERVICE. This service provides complete
management and monitoring of all customer equipment and network
elements needed to operate dedicated Internet or frame relay
services. Companies of all sizes can enhance their competitive
performance, eliminating the need to commit their own resources to
the costly, time-consuming job of network management.
ACSI NT
In 1998, the Company formed ACSI NT, Inc. to pursue market opportunities
within the fiber optic network design and construction arena primarily focused
on municipalities and providers such as Qwest, Frontier and others. ACSI Network
Technologies is a wholly owned subsidiary of e.spire which provides full service
network development solutions including business planning, market analysis,
engineering, project management, construction and network monitoring center
design.
SALES, MARKETING AND SERVICE DELIVERY
The Company seeks to provide its customers a choice for local access,
utilizing its facilities-based network infrastructure to deliver both voice and
data solutions. The Company's customers include corporations, financial services
companies, government departments and agencies, and academic, scientific and
other major institutions as well as ISPs, IXCs and other carriers.
The Company's sales and marketing approach is to build long-term business
relationships with its customers, with the intent of becoming the single source
provider of their telecommunications services. The Company's sales force
includes specialized professionals who focus on sales to retail, wholesale and
alternate channel (agents and value-added resellers) consumers of the Company's
telecommunications
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services. The Company's sales staff works to gain a better understanding of the
customer's operations in order to develop innovative, application-specific
solutions to each customer's needs. Sales personnel locate potential business
customers by several methods, including customer referral, market research, cold
calling and networking alliances.
Enhanced data services, like all other Company services, are sold through
the Company's existing sales force and supported by engineers and other sales
channels such as agents and value-added resellers, including independent
providers of communications hardware to customers. This approach enables the
Company to (i) emphasize the applications solutions aspects of enhanced data
services and (ii) utilize the expertise and resources of other vendors. The
Company intends to continue expanding its sales and engineering support staff
and other technical specialists in order to meet the growing demand for enhanced
data services.
Historically, the Company has established new customer relationships by
providing customers with local or data services and subsequently marketing
additional services to such customers. The Company intends to emphasize its
ability to provide customers "one-stop" integrated voice, data and Internet
communications services in its sales and marketing efforts.
The Company's service delivery staff is primarily responsible for
coordinating service and installation activities. Service delivery activities
include coordinating installation dates and equipment delivery and testing. The
Company's customer service and technical staff plans, engineers, monitors and
maintains the integrity, quality and availability of the Company's networks. The
Company's technical staff are available to customers 24 hours every day.
NETWORK
The Company has deployed its network infrastructure approach by selecting
the most economic alternative of constructing or leasing facilities or a
combination thereof. As of December 31, 1998, the Company had local fiber optic
networks in service in 35 markets. The Company continues to expand those
networks and will look to identify new markets for other network expansion
opportunities. The Company generally chooses to own facilities where (i) there
is no attractive fiber optic network alternative, (ii) ownership creates
strategic value for the Company and/or (iii) large concentrations of
telecommunications traffic are accessible, or have been secured, to justify
network construction. In addition to the "build" vs. "lease" decision for
network deployment, the Company also will consider potential network
acquisitions from time to time.
The Company also seeks to expand the reach of its backbone data network
through agreements with certain third parties to deliver enhanced data
communications services through a seamless data network. Often, the Company
offers data services in geographic markets where it has not deployed its own
local fiber optic network by leasing facilities from a variety of entities,
including ILECs, utilities, IXCs, cable companies and various transit/highway
authorities. In many cases, such capacity is obtained through the purchase or
lease of "dark fiber." The combination of the Company's local networks and its
broadband data backbone network comprise the seamless network platform which the
Company utilizes to offer its broad array of telecommunications services to
customers.
The Company utilizes Newbridge ATM networking technology on its data
backbone network, allowing its network capacity to be efficiently shared between
multiple platforms. The Company's local networks are comprised of fiber optic
cable, integrated switching facilities, advanced electronics, data switching
equipment (e.g., frame relay and ATM), transmission equipment and associated
wiring and equipment. By virtue of their state-of-the-art equipment and
ring-like architecture, the Company's networks offer electronic redundancy and
diverse access routing. Through automatic protection switching, if any
electrical component or fiber optic strand fails, the signal is instantaneously
switched to a "hot standby" component
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or fiber. Since network outages and transmission errors can be very disruptive
and costly to long distance carriers and other customers, consistent reliability
is critical to customers.
In those markets where the Company chooses to deploy broadband fiber
networks, the Company's strategy is to first develop the "carrier ring" portion
of its network, a high capacity network designed to be accessible to all the
major long distance carriers and key ILEC central offices in the area. This
portion of the network allows the Company to provide access to the ILEC central
offices, the IXC POPs and customer buildings. Second, the Company designs a
larger "backbone ring" extending from the carrier ring, with a view toward
making the network accessible to the largest concentration of
telecommunications-intensive business and government customers in the area. Hubs
are strategically located on the backbone ring. Third, the Company concentrates
its sales and marketing efforts on adding business and government customers
located on or very near its backbone network and hub locations. Once the Company
determines that there is sufficient customer demand in a particular area, it
extends "distribution rings" from the backbone ring to reach specific business
customers in that area. The Company's emphasis is on the building and expansion
of these local networks to reach end user customers in buildings or office parks
with substantial telecommunications needs.
The Company's network management center in Annapolis Junction, Maryland
monitors all of the Company's networks from one central location. Centralized
electronic monitoring and control of the Company's networks allows the Company
to avoid duplication of this function in each city. This consolidated operations
center also helps make the Company's per customer monitoring and customer
service costs lower than if such costs were monitored on a single-city basis.
The Company also plans to enhance its use of this facility to monitor the
performance of data and switched voice services.
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INDUSTRY OVERVIEW
The continuing deregulation of the telecommunications industry and
technological change have resulted in an increasingly information-intensive
business environment. Regulatory, technological, marketing and competitive
trends have expanded substantially the Company's opportunities in the converging
voice and data communications services markets. Technological advances,
including rapid growth of the Internet, the increased use of packet switching
technology for voice communications and the growth of multimedia applications,
are expected to result in substantial growth in the high-speed data services
market.
DEDICATED SERVICES. Competition in the local exchange services market
began in the mid-1980s. In New York City, Chicago and Washington, D.C., newly
formed companies provided dedicated non-switched services by installing fiber
optic facilities connecting POPs of IXCs within a metropolitan area and, in some
cases, connecting business and government end-users with IXCs. Most of the early
competitors operated limited networks in the central business districts of major
cities in the U.S. where the highest concentration of voice and data traffic,
including IXC traffic, is typically found. Competitive Access Providers ("CAPs")
used the substantial capacity and economies of scale inherent in fiber optic
cable to offer customers service that was generally less expensive and of higher
quality than could be obtained from the ILECs due, in part, to antiquated
copper-based facilities used in many ILEC networks.
LOCAL SWITCHED VOICE SERVICES. The FCC Interconnection Decisions in 1992
and 1993 enabled CAPs to provide interstate switched access services in
competition with ILECs, which has encouraged the development of the competitive
interstate switched access market. Competition in this market was further
enhanced with the passage of the FTA, which requires (i) removal of state, local
and long distance entry barriers, (ii) ILECs to provide interconnections to
their facilities, and (iii) access to rights-of-way.
DATA COMMUNICATIONS SERVICES. The Company believes that high-speed data
communications services represent one of the fastest growing segments of the
telecommunications services market, due in part to the continuing proliferation
of computers and the increasing need to interconnect these computers via local
and wide area networks, the dramatic growth of the Internet and the emergence of
multimedia applications. Together, these applications have spawned numerous
network technologies and communications protocols to support legacy, current and
emerging needs. The domestic network infrastructure currently supporting both
voice and data transport requirements, which focuses on IP switching and framed
relay services, is being strained by the increasing demand for high-bandwidth
transport at both the local and national levels. The Company believes that the
increasing volume and complexity of high-speed applications will further strain
the domestic network infrastructure and create an opportunity for e.spire to
provide a single high-quality ATM-based network capable of consistently
supporting diverse data communications needs. In addition, businesses are
increasingly using the Internet to transmit e-mail, engage in commercial
transactions (e.g., electronic commerce) and develop internal communications
networks, or "intranets." Increasing business utilization of the Internet has
added to the demand for higher-speed access applications.
ACSI NT. ACSI NT was established as a separate business unit of the
Company to design and manage the construction of fiber optic telecommunication
networks for third parties. ACSI NT provides broadband telecommunications
infrastructure solutions to communications carriers, corporate clients, and
government agencies throughout the U.S. and plans to provide similar services in
Europe and South America. ACSI NT's service offering covers the full range of
fiber optic infrastructure solutions from initial design, planning, and
implementation of the data communications network to the construction of the
network management center and required network management architecture. ACSI NT
provides both customer driven services that are customized to meet a specific
client development plan either with project-based consulting or a turn-key
solution, and high-bandwidth infrastructure, that may include the lease of
conduit or darkfiber.
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COMPETITION
The Company operates in a highly competitive environment and currently
does not have a significant market share in any of its markets. Most of its
actual and potential competitors have substantially greater financial,
technical, marketing and other resources (including brand name recognition) than
the Company. Also, the continuing trend toward business alliances in the
telecommunications industry and the absence of substantial barriers to entry in
the data and Internet services markets, could give rise to significant new
competition.
In each of its markets, the Company's primary competitor is the ILEC
serving that geographic area. ILECs are established providers of dedicated and
local telephone services to all or virtually all telephone subscribers within
their respective service areas. ILECs also have long-standing relationships with
regulatory authorities at the federal and state levels. While recent FCC
administrative decisions and initiatives provide increased business
opportunities to voice, data and Internet-service providers such as the Company,
they also provide the ILECs with increased pricing flexibility for their private
line and special access and switched access services. In addition, with respect
to competitive access services (as opposed to switched local exchange services),
the FCC on October 5, 1998, proposed a rule that would provide for increased
ILEC pricing flexibility and deregulation for such access services either
automatically or after certain competitive levels are reached see "Regulation".
If the ILECs are allowed additional flexibility by regulators to offer discounts
to large customers through contract tariffs, engage in aggressive volume and
term discount pricing practices for their customers, and/or seek to charge
competitors excessive fees for interconnection to their networks, the income of
competitors to the ILECs, including the Company, could be materially adversely
affected. If future regulatory decisions afford the ILECs increased access
services, pricing flexibility or other regulatory relief, such decisions could
also have a material adverse effect on competitors to the ILEC, including the
Company.
In the local exchange market, the Company also faces competition or
prospective competition from several other carriers, many of which have
significantly greater financial resources than the Company. For example, AT&T
Corp., MCI Worldcom and Sprint Corporation, which historically have been purely
long distance carriers, have each begun to offer local telecommunications
services in major U.S. markets using their own facilities or by resale of the
ILECs' or other providers' services. In addition to these long distance service
providers, entities that currently offer or are potentially capable of offering
local switched services include companies that have previously been known purely
as CAPs, cable television companies, electric utilities, microwave carriers,
wireless telephone system operators and large customers who build private
networks. These entities, upon entering into appropriate interconnection
agreements or resale agreements with ILECs, including Regional Bell Operating
Companies (RBOCs), can offer single source local and long distance services,
like those offered by the Company. In addition, a continuing trend towards
business combinations and alliances in the telecommunications industry may
create significant new competitors to the Company. Many of these combined
entities may have resources far greater than those of the Company. These
combined entities may provide a bundled package of telecommunications products,
including local and long distance telephony, that is in direct competition with
the products offered by the Company.
The Company will also face competition from other fixed wireless
services, including Multichannel Multipoint Distribution Service ("MMDS"), Local
Multipoint Distribution Service ("LMDS"), 24 GHz and 38 GHz wireless
communications systems, Wireless Communications Service ("WCS"), FCC Part 15
unlicensed wireless radio devices, and other services that use existing
point-to-point wireless channels on other frequencies. The FCC has issued or is
in the process of issuing licenses for these services to provide broadband
integrated telecommunications services on a point-to-point and/or
point-to-multipoint basis. Many of these service providers have already raised
substantial capital and have commenced building their wide-area networks,
primarily in urban areas. Upon entering into appropriate interconnection
agreements with ILECs, these service providers are expected to provide
integrated voice and data services comparable
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to those the Company currently offers or intends to offer. Many of these
companies have announced plans to target small and medium-sized businesses and
may enjoy certain advantages over the Company with respect to the speed with
which they can deploy their own facilities directly serving end user premises to
the extent that they need not lease or resell "last mile" facilities from the
ILEC. In addition, the FCC has allocated a number of spectrum blocks for use by
wireless devices that do not require site or network licensing. A number of
vendors have developed such devices that may provide competition to the Company,
in particular for certain low data-rate transmission services.
With respect to mobile wireless telephone system operators, the FCC has
authorized cellular, personal communications service ("PCS"), and other cellular
mobile radio service ("CMRS") providers to offer wireless services to fixed
locations, rather than just to mobile customers, in whatever capacity such CMRS
providers choose. Previously, cellular providers could provide service to fixed
locations only on an ancillary or incidental basis. This authority to provide
fixed as well as mobile services will enable CMRS providers to offer wireless
local loop service and other services to fixed locations (e.g., office and
apartment buildings) in direct competition with the Company and other providers
of traditional wireless telephone service.
Section 271 of the FTA prohibits a RBOC from providing long-distance
service that originates (or in certain cases terminates) in one of its in-region
states until the RBOC has satisfied certain statutory conditions in that state
and has received the approval of the FCC. The FCC has denied the following
applications for such approval: SBC Communications, Inc.'s Oklahoma application
in June 1997; Ameritech Inc.'s Michigan application in August 1997; BellSouth
Corporation's applications for South Carolina in December 1997; and two
BellSouth applications for Louisiana, in February and October 1998. The Company
anticipates that a number of RBOCs will file additional applications for
in-region long distance authority in 1999. The FCC has 90 days from the date an
application for in-region long distance authority is filed to decide whether to
grant or deny the application.
Once the RBOCs are allowed to offer widespread in-region long distance
services, both they and the largest IXCs will be in a position to offer
single-source local and long distance. On December 31, 1997, a United States
District Court judge in Texas held unconstitutional certain sections of the FTA,
including Section 271. This decision would have permitted the three RBOCs
immediately to begin offering widespread in-region long distance services. The
decision, however, was reversed by the U.S. Court of Appeals for the Fifth
Circuit, and the US Supreme Court has declined to review the case. The U.S.
Court of Appeals for the District of Columbia Circuit rejected a similar
petition filed by BellSouth; a petition for review by the U.S. Supreme Court is
pending in that case.
The market for data communications and Internet access services,
including IP switching, is extremely competitive. There are no substantial
barriers to entry, and the Company expects that competition will intensify in
the future. The Company believes that its ability to compete successfully
depends on a number of factors, including: market presence; the ability to
execute a rapid expansion strategy: the capacity, reliability and security of
its network infrastructure; ease of access to and navigation of the Internet;
the pricing policies of its competitors and suppliers; the timing of the
introduction of new services by the Company and its competitors; the Company's
ability to support industry standards; and general industry and economic trends.
The Company's success in this market will depend heavily upon its ability to
provide high quality Internet connectivity and value-added Internet services at
competitive prices.
The Company's subsidiary, ACSI NT provides complete turnkey
telecommunications infrastructure solutions to its customers throughout the
United States. These services encompass initial design, planning and
implementation of the data communications network to the construction of the
network management center and required network management architecture. ACSI
NT's customers are those that demand optimal network design and efficient
network construction. These customers look to outside independent suppliers to
meet growth needs and to address other high-level service and network management
requirements. The Company believes that ACSI NT is one of the few suppliers that
are able to provide the complete telecommunications infrastructure solutions
that customers
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demand.
REGULATION
OVERVIEW
As a common carrier, the Company is subject to substantial federal, state
and local regulation. The FCC exercises jurisdiction over all facilities and
services of telecommunications common carriers to the extent those facilities
are used to provide, originate or terminate interstate or international
communications. State Commissions retain jurisdiction over the Company's
facilities and services to the extent they are used to originate or terminate
intrastate communications. Local governments may require the Company to obtain
licenses or franchises permitting access to or use of public rights-of-way to
install and operate its networks.
THE FEDERAL TELECOMMUNICATIONS ACT OF 1996
STATUTORY REQUIREMENTS. On February 1, 1996, the U.S. Congress enacted
comprehensive telecommunications reform legislation, which the President signed
into law as the FTA on February 8, 1996. The Company believes that this
legislation is likely to enhance competition in the local telecommunications
marketplace because it (i) preempts state and local entry barriers and gives the
FCC authority to enforce such preemption, (ii) requires ILECs to provide
interconnection to their facilities, (iii) facilitates end-users' choice to
switch service providers from ILECs to CLECs and (iv) requires access to
rights-of-way.
The FTA requires all LECs (including ILECs and CLECs): (i) not to
prohibit or unduly restrict resale of their services; (ii) to provide number
portability; (iii) to provide dialing parity and nondiscriminatory access to
telephone numbers, operator services, directory assistance and directory
listings; (iv) to afford access to poles, ducts, conduits and rights-of-way; and
(v) to establish reciprocal compensation arrangements for the transport and
termination of local telecommunications traffic. It also requires ILECs to
negotiate local interconnection agreements in good faith and to provide
interconnection (a) for the transmission and routing of telephone exchange
service and exchange access, (b) at any technically feasible point within the
ILEC's network, (c) that is at least equal in quality to that provided by the
ILEC to itself, its affiliates or any other party to which the ILEC provides
interconnection and (d) at rates, terms and conditions that are just, reasonable
and nondiscriminatory. ILECs also are required under the new law to provide
nondiscriminatory access to network elements on an unbundled basis at any
technically feasible point, to offer their local telephone services for resale
at wholesale rates, and to facilitate collocation of equipment necessary for
competitors to interconnect with or access unbundled network elements.
In addition, Section 271 of the FTA requires RBOCs to comply with certain
safeguards and offer interconnection that satisfies a prescribed 14-point
competitive checklist before the RBOCs are permitted to provide in-region
interLATA (i.e. long distance) services. These safeguards are designed to ensure
that the RBOCs' competitors have access to local exchange and exchange access
services on nondiscriminatory terms and that subscribers of regulated
non-competitive RBOC services do not
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subsidize their provision of competitive services. The safeguards also are
intended to promote competition by preventing RBOCs from using their market
power in local exchange services to obtain an anti-competitive advantage in the
provision of other services.
Three RBOCs have filed applications with the FCC for authority to provide
in-region interLATA service in selected states. Requests by SBC Communications
in Oklahoma, by Ameritech in Michigan, and by BellSouth in South Carolina and
Louisiana to provide long distance, all were denied by the FCC. Other RBOCs have
begun the process of applying to provide in-region interLATA service by filing
with State Commissions notice of their intent to seek relief from the interLATA
services restriction by the FCC.
Notably, several RBOCs challenged the constitutionality of certain
provisions of the FTA which bar the RBOCs from providing in-region interexchange
and other services by filing a lawsuit in the U.S. District Court for the
Northern District of Texas. On December 31, 1997, Judge Kendall released an
order which invalidated Sections 271-275 of the FTA as they pertain to SBC, US
West and Bell Atlantic, after finding that these provisions violated the
constitutional prohibition against "bills of attainder." However, Judge
Kendall's decision was reversed by the U.S. Court of Appeals for the Fifth
Circuit on September 4, 1998. The U.S. Supreme Court declined to review the
Fifth Circuit's decision on January 19, 1999. On December 22, 1998, the U.S.
Court of Appeals for the District of Columbia rejected a similar petition filed
by BellSouth; a petition for review by the Supreme Court is pending in that
case.
However, the FTA also granted important regulatory relief to industry
segments which compete with CLECs. ILECs were given substantial new pricing
flexibility. RBOCs have the ability to obtain authorization to provide long
distance services under prescribed circumstances and were granted new rights to
provide certain cable TV services. IXCs were permitted to construct their own
local facilities and/or resell local services. State laws no longer can require
CATVs to obtain a franchise before offering telecommunications services nor
permit CATVs' franchise fees to be based on their telecommunications revenues.
In addition, under the FTA all utility holding companies are permitted to
diversify into telecommunications services. See "Risk Factors -- Competition."
Finally, Section 706 of the FTA empowered the FCC to forbear from regulation as
necessary to encourage the widespread deployment of "advanced communications
services," and the FCC has proposed invoking that authority to permit ILECs to
provide advanced services through separate affiliates that would not be subject
to network unbundling and service resale obligations.
FCC RULES IMPLEMENTING THE LOCAL COMPETITION PROVISIONS OF THE FTA. On
August 8, 1996, the FCC released a First Report and Order, a Second Report and
Order and a Memorandum Opinion and Order in its CC Docket 96-98 (combined, the
"Interconnection Orders") that established a framework of minimum, national
rules enabling State Commissions and the FCC to begin implementing many of the
local competition provisions of the FTA. In its Interconnection Orders the FCC
prescribed certain minimum points of interconnection necessary to permit
competing carriers to choose the most efficient points at which to interconnect
with the ILECs' networks. The FCC also adopted a minimum list of unbundled
network elements that ILECs must make available to competitors upon request and
a methodology for State Commissions to use in establishing rates for
interconnection and the purchase of unbundled network elements. The FCC also
adopted a methodology for states to use when applying the FTA's "avoided cost
standard" for setting wholesale prices with respect to retail services.
The following summarizes the FCC's rulings on key issues addressed in the
Interconnection Orders.
- INTERCONNECTION. ILECs are required to provide interconnection for
telephone exchange or exchange access service, or both, to any
requesting telecommunications carrier at any technically feasible
point. The interconnection must be at least equal in quality to
that provided by the ILEC to itself or its affiliates and must be
provided on rates, terms and conditions that are just, reasonable
and nondiscriminatory.
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- ACCESS TO UNBUNDLED ELEMENTS. ILECs are required to provide
requesting telecommunications carriers with nondiscriminatory
access to network elements on an unbundled basis at any
technically feasible point on rates, terms, and conditions that
are just, reasonable and nondiscriminatory. At a minimum, ILECs
must unbundle and provide access to network interface devices,
local loops, local and tandem switches (including all software
features provided by such switches), interoffice transmission
facilities, signaling and call-related database facilities, OSS
and information and operator and directory assistance facilities.
Further, ILECs may not impose restrictions, limitations or
requirements upon the use of any unbundled network elements by
other carriers. ILECs must make available to any requesting local
carrier any individual interconnection, service, or network
element arrangement contained in their existing agreements with
others (the "pick-and-choose" rule).
- METHODS OF OBTAINING INTERCONNECTION AND ACCESS TO UNBUNDLED
ELEMENTS. ILECs are required to allow physical collocation of
equipment necessary for interconnection or access to unbundled
network elements at the ILEC's premises, except that the ILEC may
offer virtual collocation if it demonstrates to the PSC that
physical collocation is not practical for technical reasons or
because of space limitations.
- TRANSPORT AND TERMINATION CHARGES. The FCC rules require that ILEC
charges for transport and termination of local traffic delivered
to them by competing LECs must be cost-based and should be based
on the LECs' Total Element Long-Run Incremental Cost ("TELRIC") of
providing that service.
- PRICING METHODOLOGIES. New entrants were required to pay for
interconnection and unbundled elements at rates based on the
ILEC's TELRIC of providing a particular network element plus a
reasonable share of forward-looking joint and common costs,
including a reasonable profit. ILECs were required to establish
different rates for network elements in at least three defined
geographic areas to reflect cost differences.
- RESALE. ILECs are required to offer for resale any
telecommunications service that they provide at retail to
subscribers who are not telecommunications carriers. State
Commissions were required to identify which marketing, billing,
collection and other costs will be avoided or that are avoidable
by ILECs when they provide services on a wholesale basis and to
calculate the portion of the retail rates for those services that
is attributable to the avoided and avoidable costs.
- ACCESS TO RIGHTS-OF-WAY. The FCC established procedures and
guidelines designed to facilitate the negotiation and mutual
provision of nondiscriminatory access by telecommunications
carriers and utilities to their poles, ducts, conduits, and
rights-of-way.
- UNIVERSAL SERVICE REFORM. All telecommunications carriers,
including the Company, are required to contribute funding for
universal service support, on an equitable and nondiscriminatory
basis, in an amount sufficient to preserve and advance universal
service pursuant to a specific or predictable universal service
funding mechanism. On May 8, 1997, the FCC released an order
implementing these requirements by reforming its existing access
charge and universal service rules. See "Other Federal Regulation
-- Universal Service Reform" below.
Most provisions of the Interconnection Orders were appealed. Numerous
appeals were consolidated for consideration by the Eighth Circuit (captioned
Iowa Utilities Board v. FCC). On July 18, 1997, the Court of Appeals released
its decision regarding issues raised in the consolidated appeals of the
Interconnection Orders, upholding the Orders in part and reversing them in part;
it modified that decision on August 22, 1997. Among other things, the Eighth
Circuit vacated FCC rules that: (i) governed the manner in which State
Commissions established rates for access to ILEC unbundled network elements and
resale of ILEC retail services; (ii) required ILECs to combined certain ILEC
unbundled network elements; and (iii)
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allowed CLECs to select the terms and conditions of ILEC interconnection
agreements with other telecommunications carriers (i.e. "pick and choose") for
use in their own interconnection agreements with such ILECs. In addition, on
August 10, 1998, the Eighth Circuit issued a ruling in a related appeal
upholding the FCC's regulations that "shared transport" be made available as an
unbundled network element.
On January 25, 1999, the U.S. Supreme Court reversed important portions
of the Eighth Circuit's holding in AT&T Corp. v. Iowa Utilities Board.
Specifically, the Supreme Court ruled that: (i) the FCC properly exercised its
authority under the FTA in establishing pricing rules applicable to ILEC
unbundled network elements and resale; (ii) the FCC had authority to preclude
ILECs from separating unbundled network elements which are already combined; and
(iii) the FCC was justified in imposing a "pick and choose" requirement.
However, the Supreme Court also held that the FCC's analysis in support of
creating a minimum list of seven mandatory ILEC unbundled network elements was
inadequate. The Court ruled that the FCC failed to consider whether access to
proprietary network elements was "necessary," or whether lack of access to any
such element would "impair" the ability of CLECs to offer telecommunications
services. The Court vacated the relevant rule and remanded the matter to the FCC
either to modify the rule or justify it, subject to further court review.
The Eighth Circuit Court of Appeals has not yet reinstated the FCC rules
that the Supreme Court affirmed. Several ILECs have asked the Eighth Circuit not
to reinstate those rules until it considers their argument that the FCC's
pricing rules for network elements represent an unconstitutional taking of
property without just compensation. ILECs had previously argued that the FCC's
pricing method ignores their historic costs and underestimates the actual costs
of providing interconnection and unbundled access. The Eighth Circuit did not
reach that issue when it first reviewed the FCC's Interconnection Orders, and
the Supreme Court noted that the issue was not before it. The FCC, the U.S.
Department of Justice, and a coalition of local exchange competitors have asked
the Eighth Circuit to reject the ILECs' request and immediately recall its prior
mandate vacating the FCC's pricing rules and other related rules.
Even if the Eighth Circuit recalls its prior mandate, it remains to be
seen how soon or how vigorously the FCC will enforce its pricing rules for
unbundled network elements. The chairman of the FCC has indicated that the
agency may defer reinstating its rule requiring ILECs to establish at least
three geographic pricing zones for network elements until state and federal
regulators have completed a realignment of universal service support mechanisms.
(See "Universal Service Reform," below.) As noted above, the Supreme Court's
action also provides an opportunity for ILECs to argue that the FCC should
refrain from requiring ILECs to provide access to at least some network elements
on the ground that they do not satisfy the FTA's "necessary" and "impair"
standards. The Company is unable to predict what the outcome of these decisions
or any resulting litigation will be or when these matters will be resolved.
Certain other aspects of the FCC's Interconnection Orders were vacated by
the Eighth Circuit and were not appealed to the Supreme Court; thus, they remain
vacated. These include FCC rules that had directed ILECs to combine network
elements requested by competitors whether or not those elements had previously
been combined ("the new combinations rule"), and a provision requiring ILECs to
provide interconnection superior in quality to those provided by the ILECs to
themselves, when requested to do so by competitors. A trade association
representing competitive long distance carriers has petitioned the Eighth
Circuit to interpret the Supreme Court's decision as implying that the new
combinations rule should be reinstated, even though it was not directly
addressed by the Supreme Court.
ADVANCED COMMUNICATIONS SERVICES. On August 6, 1998, the FCC took two
related actions regarding the deployment of advanced communications services.
"Advanced communications services" are wireline, broadband telecommunications
services, such as services that rely on digital subscriber line technology
(commonly referred to as xDSL) and packet-switched technology. In its first
action, the FCC issued a Notice of Inquiry ("NOI") pursuant to Section 706 of
the FTA seeking information regarding whether advanced telecommunications
capability is being deployed to all Americans in a reasonable and timely
fashion. Section 706 gives the FCC the right to forbear from regulating a
market,
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including ILEC activities, if the FCC concludes that such forbearance is
necessary to encourage the rapid deployment of advanced telecommunications
capability. The FCC issued a report in the NOI proceeding on February 2, 1999.
The FCC concluded that significant changes in existing policies presently are
not necessary, but that it should continue to monitor the deployment of
broadband services and issue another report in the year 2000. In the meantime,
the Commission said that it will continue to allocate, auction, and license more
radio spectrum for uses that include broadband data transmission, and will be
considering the issue of access to multiple dwelling units in several
proceedings.
In a second action on August 6, 1998, the FCC issued a Memorandum Opinion
and Order ("Order") and a Notice of Proposed Rulemaking ("NPRM") which (i)
clarified its views on the applicability of existing statutory requirements in
Sections 251 and 271 to advanced services, and (ii) sought comment on a wide
variety of issues associated with the provision of advanced services by wireline
carriers. Generally, the FCC clarified that the Section 251 interconnection,
unbundling and resale obligations of ILECs extend to their provision of advanced
services, and proposed measures to promote the deployment of advanced services
by both ILECs and CLECs. Among the proposals that generally were favorable to
CLECs are those for expanded physical collocation rights and strengthened rights
to order unbundled network elements required to provide advanced services.
However, the FCC also interpreted the FTA as permitting ILECs to deploy advanced
services through separate affiliates that would not be regulated as an ILEC.
Thus, such a separate affiliate of the ILEC would not be subject to Section 251
and 252 unbundling and resale obligations.
On March 18, 1999, the FCC adopted a First Report and Order in these
proceedings requiring ILECs to make available to requesting CLEC's shared cage
and cageless collocation arrangements. The FCC also ruled that ILECs must permit
CLECs to collocate equipment used for interconnection and/or access to unbundled
network elements even if it includes switching or enhanced services functions.
ILECs were barred from requiring that the switching or enhanced services
functionalities be disengaged under those circumstances. The FCC also adopted
rules designed to limit ILECs' ability to deny CLECs' ability to deploy
transmission hardware by purporting that the equipment will cause electrical
interference with other wires, and it issued a notice proposing rules to make
these requirements more specific. The Company cannot predict the final outcome
of these proceedings or any court appeals that might ensue.
OTHER FEDERAL REGULATION. In general, the FCC has a policy of encouraging
the entry of new competitors, such as the Company, in the telecommunications
industry and preventing anti-competitive practices. Therefore, the FCC has
established different levels of regulation for dominant carriers and nondominant
carriers. For domestic common carrier telecommunications regulation, large ILECs
such as GTE and the RBOCs are currently considered dominant carriers in their
local exchange markets, while CLECs such as the Company are considered
nondominant carriers.
- TARIFFS. As a nondominant carrier, the Company may install and
operate facilities for the transmission of domestic interstate
communications without prior FCC authorization. Services of
nondominant carriers have been subject to relatively limited
regulation by the FCC, primarily consisting of the filing of
tariffs and periodic reports. However, nondominant carriers like
the Company must offer interstate services on a nondiscriminatory
basis, at just and reasonable rates, and remain subject to FCC
complaint procedures. With the exception of informational tariffs
for operator-assisted services and tariffs for interexchange
casual calling services, the FCC has ruled that IXCs must cancel
their tariffs for domestic, interstate interexchange services.
Tariffs remain required for international services. The
effectiveness of those orders currently is subject to a stay
issued by the U.S. Court of Appeals for the District of Columbia
Circuit. The FCC also has issued an order providing CLECs the
option to cease filing tariffs for interstate interexchange access
services and has proposed to make the withdrawal of CLEC access
service tariffs mandatory. Pursuant to these FCC requirements, the
Company has filed and maintains tariffs for its interstate
services with the FCC. All of the interstate access and retail
"basic" services (as defined by the FCC) provided by the Company
are described therein. "Enhanced" services (as defined by the FCC)
need not be tariffed. The Company believes that its enhanced voice
and Internet services
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are "enhanced" services that need not be tariffed.
- INTERNATIONAL SERVICES. Nondominant carriers such as the Company
also are required to obtain FCC authorization pursuant to Section
214 of the Communications Act and file tariffs before providing
international communications services. The Company has obtained
authority from the FCC to provide voice and data communications
services between the United States and all foreign points (other
than points that have been proscribed for foreign policy reasons)
on a resale basis.
- ILEC PRICE CAP REGULATION REFORM. In 1991, the FCC replaced
traditional rate of return regulation for large ILECs with price
cap regulation. Under price caps, ILECs can only raise prices for
certain interstate services by a small percentage each year. In
addition, there are constraints on the pricing of ILEC services
that are competitive with those of CLECs. On September 14, 1995,
the FCC proposed a three-stage plan that would substantially
reduce ILEC price cap regulation as local markets become
increasingly competitive and ultimately would result in granting
ILECs nondominant status. Adoption of the FCC's proposal to reduce
significantly its regulation of ILEC pricing would significantly
enhance the ability of ILECs to compete against the Company and
could have a material adverse effect on the Company. The FCC
released an order on December 24, 1996 which adopted certain of
these proposals, including the elimination of the lower service
band index limits on price reductions within the access service
category. The FCC's December 1996 order also eased the
requirements necessary for the introduction of new services by
ILECs. On May 7, 1997, the FCC took further action in its CC
Docket No. 94-1 updating and reforming its price cap plan for the
ILECs. Among other things, the changes require price cap LECs to
reduce their price cap indices by 6.5 percent annually, less an
adjustment for inflation. The FCC also eliminated rules that
require ILECs earning more than certain specified rates of return
to "share" portions of the excess with their access customers
during the next year in the form of lower access rates. These
actions could have a significant impact on the interstate access
prices charged by the ILECs with which the Company competes.
- ACCESS CHARGES. Over the past few years, the FCC has granted ILECs
significant flexibility in pricing their interstate special and
switched access services. Under this pricing scheme, ILECs may
establish pricing zones based on access traffic density and charge
different prices for each zone. The Company anticipates that this
pricing flexibility will result in ILECs lowering their prices in
high traffic density areas, the probable area of competition with
the Company. The Company also anticipates that the FCC will grant
ILECs increasing pricing flexibility as the number of
interconnections and competitors increases. On May 7, 1997, the
FCC took action in its CC Docket No. 96-262 to reform the current
interstate access charge system. The FCC adopted an order which
makes various reforms to the existing rate structure for
interstate access that are designed to move access charges, over
time, to more economically efficient rate levels and structures.
The following is a nonexclusive list of actions announced by the
FCC:
- SUBSCRIBER LINE CHARGE ("SLC"). The maximum permitted amount which
an ILEC may charge for SLC's on certain lines was increased.
Specifically, the ceiling was increased significantly for second
and additional residential lines, and for multi-line business
customers. SLC ceiling increases began in July 1997 and will be
phased-in over a two-year period.
- PRESUBSCRIBED INTEREXCHANGE CARRIER CHARGE ("PICC"). The FCC
created a new PICC access charge rate element. The PICC is a
flat-rated, per-line charge that is recovered by LECs from IXCs.
The charge is designed to recover common line revenues not
recovered through SLCs. A schedule of maximum permitted PICC
charges was established. The rate ceilings will be permitted to
increase over time.
- CARRIER COMMON LINE CHARGE ("CCL"). As the ceilings on the SLCs
and PICCs increase, the per-minute CCL charge will be eliminated.
Until then, the CCL will be assessed on
23
<PAGE> 24
originating minutes of use. Thus, ILECs will charge lower rates
for terminating then originating access. In addition, Long Term
Support ("LTS") payments for universal service were eliminated
from the CCL charge.
- LOCAL SWITCHING. Effective January 1, 1998, ILECs subject to
price-cap regulation were required to move non-traffic-sensitive
("NTS") costs of local switching associated with line ports to
common line and recover them through the common line charge
discussed above. Local switching costs attributable to dedicated
trunk ports must be moved to the trunking basket and recovered
through flat-rate monthly charges.
- TRANSPORT. The "unitary" rate structure option for tandem-switched
transport was eliminated effective July 1, 1998. For price cap
LECs, additional rate structure changes became effective on
January 1, 1998, which altered the recovery of certain NTS costs
of tandem-switching and multiplexing and the minutes-of-use
assumption employed to determine tandem-switched transport prices.
Also effective January 1, 1998, certain costs previously recovered
through the Transport Interconnection Charge ("TIC") were
reassigned to specified facilities charges. The reassignment of
tandem costs previously recovered through the TIC to the tandem
switching charge will be phased in evenly over a three-year
period. Residual TIC charges will be recovered in part through the
PICC, and price cap reductions will be targeted at the per-minute
residual TIC until it is eliminated.
In other actions, the FCC clarified that incumbent ILECs may not assess
interstate access charges on the purchasers of unbundled network elements or
information services providers (including ISPs); decided not to adopt any
regulations governing the provision of terminating access by CLECs; ordered
ILECs to adjust their access charge rate levels to reflect contributions to and
receipts from the new universal service funding mechanisms; and announced that
it will, in a subsequent Report and Order, provide detailed rules for
implementing a market-based approach to further access charge reform. That
process presumably would give ILECs progressively greater flexibility in setting
rates as competition develops, gradually replacing regulation with competition
as the primary means of setting prices. The FCC also adopted a "prescriptive
safeguard" to bring access rates to competitive levels in the absence of
competition. For all services then still subject to price caps and not
deregulated in response to competition, the FCC required ILECs subject to price
caps to file Total Service Long Run Incremental Cost ("TSLRIC") costs studies no
later than February 8, 2001.
Appeals of the FCC's access charge reform order were denied by the U.S.
Court of Appeals for the Eighth Circuit on August 19, 1998. On October 5, 1998,
the FCC released a public notice inviting comment on proposals to accelerate
reductions in ILEC access charges and grant the ILECs increased flexibility when
setting prices in response to competition. In an order released on the same day,
the Commission deferred a scheduled increase in PICC charges from January 1,
1999, to July 1, 1999, explaining that on the latter date it expects concurrent
proceedings to have a significant downward effect on ILEC access charges. ILEC
annual access charge revisions taking effect at that time will reflect
implementation of a revised mechanism for determining universal service high
cost support for non-rural carriers (discussed below), and ILEC price caps will
be adjusted downward on the basis of a large productivity improvement factor and
low inflation experienced in the economy as a whole. This series of decisions
could reduce the prices of ILEC access services with which the Company competes
and could therefore have a significant impact on the operations, expenses,
pricing and revenue of the Company.
UNIVERSAL SERVICE REFORM. On May 8, 1997, the FCC released an order in
its CC Docket No. 96-45, which reforms the current system of interstate
universal service support and implements the universal service provisions of the
FTA. The FCC established a set of policies and rules to ensure that low-income
consumers and consumers living in rural, insular and other high cost areas
receive a defined set of local telecommunications services at affordable rates.
This is to be accomplished in part through expansion of direct consumer subsidy
programs and in part by ensuring that rural, small and high cost LECs continue
to receive universal service subsidy support. The FCC also created new programs
to subsidize connection
24
<PAGE> 25
of eligible schools, libraries and rural health care providers to
telecommunications networks. These programs will be funded by assessment of
eligible revenues of nearly all providers of interstate telecommunications
carriers, including ICPs such as the Company.
On July 13, 1998, the FCC extended by six months, to July 1, 1999, the
date on which so-called "non-rural" LECs will for the first time begin receiving
explicit subsidies for the services that they provide to rural subscribers. The
larger ILECs maintain that, at present, they must price the services that they
provide in urban areas substantially above cost in order to support the services
that they provide in rural areas. The implementation of an explicit subsidy for
these carriers could affect the company in two ways. Like all carriers that
provide interstate telecommunications services, the Company will be required to
contribute to the subsidy. The subsidy could also enable the ILECs to reduce
prices that they charge to urban business customers, putting additional
competitive pressure on the Company. However, the Company also is eligible to
qualify as a recipient of universal service support if it elects to provide
facilities-based service to areas designated for universal service support.
The Company presently is unable to predict the potential impact of these
universal service funding reforms. On October 28, 1998, the FCC adopted an
econometric model incorporating a framework of fixed assumptions about network
design and other basic issues. This model will be used to estimate non-rural
carriers' reimbursable costs for providing the supported services, but it is
dependent upon input values for the cost of network components and other
parameters. The Commission has not yet determined what those input values should
be.
The FCC's decisions in CC Docket No. 96-45 could have a significant
impact on future operations of the Company. Significant portions of the FCC's
order have been appealed and are under review by the U.S. Court of Appeals for
the Fifth Circuit, or are the subject of further proceedings by the FCC. The
Company cannot predict the outcome of these proceedings.
STATE REGULATION
The Company believes that most, if not all, states in which it proposes
to operate will require a certification or other authorization to offer
intrastate services. In some states, existing state statutes, regulations or
regulatory policy may preclude some or all forms of local service competition.
However, Section 253 of the FTA prohibits states and localities from adopting or
imposing any legal requirement that may prohibit, or have the effect of
prohibiting, the ability of any entity to provide any interstate or intrastate
telecommunications services. The FCC has the authority to preempt any such state
or local requirements to the extent necessary to enforce the FTA's open market
entry requirements. States and localities may, however, continue to regulate the
provision of intrastate telecommunications services, and, presumably, require
carriers to obtain certificates or licenses before providing service.
The Company has obtained intrastate authority for the provision of
dedicated services and a full range of local switched services in each of the
states where it provides local telecommunications services. In addition, the
Company has obtained State Commission certification to provide interexchange
services in each state where it offers to provide interexchange services to the
public. There can be no assurance that the Company will receive the
authorizations it may seek in the future to the extent it expands into other
states or seeks to offer additional services. In most states, the Company is
required to file tariffs setting forth the terms, conditions and prices for
services that are classified as intrastate.
Some states in which the Company operates are considering legislation
which could impede efforts by new entrants in the local services market to
compete effectively with ILECs. In addition, the Company believes that, as the
degree of intrastate competition increases, some states are likely to offer the
ILECs increasing pricing flexibility. This flexibility may present the ILECs
with an opportunity to subsidize services that compete with the Company's
services with revenues generated from other competitive services, thereby
allowing ILECs to offer services competing with those of the Company at prices
below the cost of providing the service. The Company cannot predict the extent
to which this may occur or its
25
<PAGE> 26
impact on the Company's business.
Numerous states have adopted or are considering adoption of new programs
to fund state universal programs. The Company could be required to contribute a
significant portion of its intrastate end user revenues toward the funding of
such programs, and such a development could have a significant impact on future
operations of the Company.
LOCAL INTERCONNECTION. The FTA imposes a duty upon all ILECs to negotiate
in good faith with potential interconnectors to provide interconnection to ILEC
networks, exchange local traffic, make unbundled network elements available, and
permit resale of most local services. In the event that negotiations do not
succeed, the Company has a right to seek State Commission arbitration of any
unresolved issues. The Company has signed, negotiated or arbitrated
interconnection arrangements with BellSouth, Pacific Bell, Southwestern Bell, U
S West, Bell Atlantic, GTE and Sprint/Central Telephone. Arbitration decisions
involving the Company's interconnection arrangements in several states have been
challenged in lawsuits filed in U.S District Courts by the affected ILECs. In
addition, the Company has filed a lawsuit in U.S. District Court in Louisiana
seeking review of the pricing of interconnection and unbundled network elements
approved by the Louisiana PSC. Some of the Company's local interconnection
agreements expire during 1999 and will require extension or renegotiation this
year. There can be no assurance that these negotiations and renegotiations of
interconnection agreements will be successful, that the agreements can be
extended in a favorable manner, or that State Commission arbitration of any
unresolved issues will be decided favorably to the Company.
The Company has experienced some difficulty in obtaining timely ILEC
implementation of local interconnection agreements. Delays encountered in
obtaining facilities have caused the Company to file complaints against
BellSouth and U S West. Similar problems have been experienced with other ILECs,
and there can be no assurance that ILEC performance will improve.
Under its interconnection agreements with ILECs, the Company has a right
to charge ILECs reciprocal compensation for the transport and termination of
local traffic routed from ILEC end users to end users of the Company's local
exchange services. Many CLECs, like the Company, have accrued substantial
revenue based on reciprocal compensation for the termination of calls placed to
ISPs that are subscribers to their local exchange services. ILECs have taken the
position that calls placed to ISPs do not terminate with the ISP and, therefore,
are not "local" traffic for which the CLEC is entitled to receive reciprocal
compensation under these interconnection agreements. Consequently, certain ILECs
currently are refusing to pay reciprocal compensation amounts for traffic
attributable to calls placed to ISPs. Since a significant portion of the
Company's customer base is comprised of ISPs, a failure by ILECs to pay
ISP-related reciprocal compensation could have a substantial impact on the
Company's past and future revenues. The obligation of ILECs to remit such
compensation currently is the subject of numerous proceedings at the FCC and
State Commissions, and in Federal and state courts, including complaint
proceedings initiated by the Company at State Commissions and through commercial
arbitration for collection of such compensation under its interconnection
agreements. Any final order by the FCC or a State Commission in a state in which
the Company's interconnection agreements entitle it to reciprocal compensation,
or a final determination by a Federal or applicable state court or arbitration
panel that no reciprocal compensation is owed for calls placed to ISPs, could
have a material adverse effect on the Company.
As of March 25, 1999, over 30 state PUCs have rendered decisions
holding that ILECs were required to make reciprocal compensation payments to
CLECs for dial-up traffic originating on ILEC public switched telecommunications
networks ("PSTNs") and terminated by CLECs to ISPs. On the other hand, several
other state PUCs recently have ruled that CLECs are not entitled to collect
reciprocal compensation for terminating ISP-bound traffic, at least under
newly arbitrated interconnection agreements on a going forward basis. These
decisions did not address the issue of payment for past due reciprocal
compensation for ISP traffic.
It is possible that some states may choose to revisit their reciprocal
compensation decisions in light of a February 26, 1999, ruling by the FCC
declaring that ISP-bound traffic is predominantly "interstate" traffic
26
<PAGE> 27
that is subject to federal jurisdiction. Rejecting CLEC arguments that calls
delivered to ISPs terminate at the ISPs' local servers, the FCC concluded that
calls delivered to ISPs continue to the ultimate Internet website destinations
that often are located in other states. Having concluded that the local access
call and ISP routing constitute a single end-to-end transmission, the FCC then
found that most traffic delivered to ISPs is jurisdictionally "interstate" in
nature, does not constitute "telephone exchange service," and does not
constitute local traffic of a type which is subject to the reciprocal
compensation requirements enunciated by Section 251(b)(5) of the FTA. Each of
these findings standing alone would substantially undercut CLEC arguments that
compensation is due to them from ILECs for traffic delivered to ISPs. Since most
current agreements provide that compensation is owed for the termination of
"local" traffic, which commonly is defined as calling which originates and
terminates in a single local exchange area, the FCC's findings provide ILECs
with a basis for arguing that ISP traffic is not compensable. ILECs can be
expected to argue that the FCC's jurisdictional determination is decisional, and
that the FCC's conclusion that the local access call to an ISP and the
associated ISP routing constitute a single end-to-end communication for
jurisdictional purposes forecloses a finding that calls placed to ISP servers
terminate in the exchange area where such servers are located, and, therefore
constitute "local" calls within the meaning of local interconnection agreements.
However, having found that most ISP-bound traffic is jurisdictionally
interstate, the FCC went on to clarify that its jurisdictional determination
does not preclude parties from including ISP-bound traffic within the scope of
the reciprocal compensation provisions included in their local interconnection
agreements. Given that the FCC historically has treated ISP-bound traffic as
though it were local, and ILECs have treated ISP-bound traffic as intrastate for
jurisdictional separation purposes, the FCC found that parties to local
interconnection agreements reasonably may have agreed that reciprocal
compensation must be paid for ISP-bound traffic. Where parties have so agreed,
the FCC stated that the parties are bound by those agreements, as interpreted
and enforced by the State Commissions. The FCC repeatedly stated that its
conclusion that ISP-bound traffic is jurisdictionally interstate does not (i)
interfere with existing PUC findings that contractual reciprocal compensation
requirements apply to ISP-bound traffic, (ii) prevent additional PUCs from
reaching the same conclusion, or (iii) preclude PUCs from establishing contract
terms through arbitration which apply reciprocal compensation to ISP-bound
traffic.
The FCC also recognized that the topic of ISP-bound traffic rarely is
addressed in express terms in existing interconnection agreements. The FCC
indicated that State Commissions should consider all of the relevant facts,
including the negotiation of the agreements in the context of the FCC's
longstanding policy of treating this traffic as local, and the conduct of the
parties pursuant to those agreements. To aid State Commissions in discerning the
intent of the parties, the FCC identified a list of illustrative factors which
may indicate whether the parties intended to treat ISP-bound traffic as "local"
for reciprocal compensation purposes.
On a prospective basis, the FCC has initiated a proceeding to establish
new rules applicable to inter-carrier compensation arrangements for ISP-bound
traffic. The FCC expressed a preference for continuing to rely on private
negotiation and State Commission arbitration, but also raised the possibility of
adopting federal rules governing inter-carrier compensation for ISP-bound
traffic.
However, the FCC distinguished its conclusion with respect to PSTN
traffic en route to ISPs from traffic that reaches ISPs via circuits that do not
use public switching facilities. On October 30, 1998, the FCC released a
decision holding that certain forms of dedicated high-speed data circuits used
for Internet access must be obtained pursuant to federal tariffs.
The FCC's order concerning the payment of reciprocal compensation for
ISP-bound traffic has been appealed by several parties to the U.S. Court of
Appeals for the District of Columbia. Any portion of the order could be reversed
by the Court, and the Company is unable to predict the outcome of these appeals.
The Company is prepared to argue on the merits that neither of these
recent FCC decisions should provide a basis for overturning any State Commission
findings that existing interconnection agreements
27
<PAGE> 28
require ILECs to pay CLECs reciprocal compensation for dial-up ISP-bound
traffic. The Company recognizes, however, that many ILECs are likely to draw a
different conclusion and ask State Commissions to revisit their decisions on the
reciprocal compensation issue. While the Company believes that it ultimately
will prevail and collect reciprocal compensation accrued under past
interconnection agreements, the possibility remains that some or all amounts
will ultimately prove uncollectible. Adverse decisions on this issue could have
a materially adverse effect on the Company's financial position.
LOCAL GOVERNMENT AUTHORIZATIONS. The Company is required to obtain street
use and construction permits and licenses and/or franchises to install and
expand its fiber optic networks using municipal rights-of-way. Termination of
the existing franchise or license agreements prior to their expiration dates
could have a materially adverse effect on the Company. In some municipalities
where the Company has installed or anticipates constructing networks, it will be
required to pay license or franchise fees based on a percentage of gross
revenues or on a per linear foot basis, as well as post performance bonds or
letters of credit. There can be no assurance that the Company will not be
required to post similar bonds in the future, nor is there any assurance that,
following the expiration of existing franchises, fees will remain at their
current levels. In many markets, the ILECs do not pay such franchise fees or pay
fees that are substantially less than those required to be paid by the Company.
To the extent that competitors do not pay the same level of fees as the Company,
the Company could be at a competitive disadvantage. However, the FTA provides
that any compensation extracted by states and localities for use of public
rights-of-way must be "fair and reasonable," applied on a "competitively neutral
and nondiscriminatory basis" and be "publicly disclosed" by such government
entity.
CONTENT REGULATION. Because the Company does not hold itself out as
editing or otherwise controlling the content of communications that traverse its
systems, it is generally unaffected by government content regulation. On June
26, 1997, the U.S. Supreme Court ruled unconstitutional provisions of the FTA,
referred to as the Communications Decency Act, which restricted transmission of
"indecent" or "patently offensive" material over the Internet, though it upheld
restrictions on transmission of obscene material. Congress attempted to remedy
the constitutional defects of the Constitutional Decency Act in 1998 by adopting
the Child Online Protection Act, but on February 1, 1999, a federal district
court judge issued a preliminary injunction against enforcement of that
legislation on the ground that it, too, will probably be held unconstitutional.
In recent years, Congress has adopted legislation designed to limit the
liability of data communications and online service providers. On November 12,
1997, the U.S. Court of Appeals for the Fourth Circuit ruled that under certain
defined circumstances the FTA protects interactive computer service providers
from liability for defamatory material posted on their systems by third parties;
the Supreme Court declined to review that case on June 22, 1998. The Digital
Millenium Copyright Act, signed into law on October 28, 1998, provides
limitations against liability for online copyright infringement, provided that
certain conditions are met. Both acts are subject to interpretation, however,
and it is not certain that the Company will be able to make successful use of
the defenses provided if plaintiffs were to accuse it of facilitating the
dissemination of defamatory or copyright-infringing material. Moreover, those
statutes do not address every potential form of content liability. On July 2,
1998, a federal district court in Ohio rejected a First Amendment challenge to
regulations administered by the U.S. Department of Commerce that restrict the
posting of certain forms of encryption programs on Internet sites that are
accessible to foreigners. In other circumstances, courts have held that
communications companies can be held liable for consequential damages if they
are grossly negligent or engage in willful misconduct that delays or distorts
the transmission of important or time-sensitive information.
EMPLOYEES
As of December 31, 1998, the Company employed a total of 1,230
individuals full time. The Company believes that its future success will depend
on its continued ability to attract and retain highly skilled and qualified
employees. None of the Company's employees are subject to a collective
bargaining agreement. The Company believes that its relations with its
employees are good.
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<PAGE> 29
ITEM 2. PROPERTIES
The Company leases 59,545 and 24,255 square foot office spaces in
Annapolis Junction, Maryland for its corporate headquarters and network
management center for $89,069 and $31,031 per month as of December 31,1998,
subject to periodic increases in specified amounts. The primary lease expires in
2003 with an option to renew for one additional five-year period. The secondary
lease terminates in April 2005. Additional office space of 55,515 square feet is
leased in Columbia, Maryland and Laurel, Maryland for two additional corporate
offices, local network operations and the Company's billing center. These leases
expire in 2007, 2000, 1999, and 2000, respectively. On October 28, 1998, the
Company executed a lease for 167,285 square feet in Herndon, Virginia, with rent
to commence July 1, 1999 for $395,629 per month for the first twelve months.
As of December 31, 1998, the Company's various operating subsidiaries
have leased facilities for their offices and network nodes. The aggregate
monthly rent on these properties is approximately $619,000. The various leases
expire on dates ranging from January 1999 to October 2008. Most have renewal
options. Additional office space and equipment rooms will be leased as
additional networks are constructed and the Company's operations are expanded.
The Company believes that its insurance coverage on these properties is
adequate and in compliance with the related leases.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are currently parties to routine
litigation incidental to their business, none of which, individually or in the
aggregate, are expected to have a material adverse effect on the Company. The
Company and its subsidiaries are parties to various court appeals and regulatory
arbitration proceedings relating to certain of the Company's interconnection
agreements and continue to participate in regulatory proceedings before the FCC
and state regulatory agencies concerning the authorization of services and the
adoption of new regulations. (See "Regulation")
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The NASDAQ Stock Market under the
symbol "ESPI". From May 22, 1996 until April 14, 1998, the Company's NASDAQ
trading symbol for its Common Stock was "ACNS". On April 15, 1998, in connection
with the Company's change in name, the Company changed its NASDAQ trading
symbol.
The following table sets forth, for the periods indicated, the range of
high and low closing bid quotations for the Common Stock obtained from The
Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH PRICE LOW PRICE
---------- ---------
<S> <C> <C>
FISCAL PERIOD ENDED DECEMBER 31, 1996
First Quarter....................................................... $13.25 $ 8.50
Second Quarter...................................................... 12.50 9.88
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter....................................................... 11.13 6.50
Second Quarter...................................................... 7.69 4.75
</TABLE>
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<PAGE> 30
<TABLE>
<S> <C> <C>
Third Quarter............................. .......................... 12.25 6.38
Fourth Quarter....................................................... 14.00 10.63
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter........................................................ $19.63 $ 11.63
Second Quarter....................................................... 22.56 15.00
Third Quarter............................. .......................... 23.03 9.00
Fourth Quarter....................................................... 14.06 5.31
</TABLE>
On March 19, 1999, the last reported sales price for the Common Stock as
reported on The Nasdaq Stock Market was $10.875. As of December 31, 1998, there
were approximately 291 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never paid dividends on the Common Stock and does not
expect to declare any dividends on the Common Stock in the foreseeable future.
The Company's indentures and its credit facilities with AT&T Commercial Finance
Corporation contain certain covenants that restrict the Company's ability to
declare or pay dividends on the Common Stock.
Recent Sales of Unrestricted Securities
On November 6, 1998, the Company issued 203,438 shares of Common Stock to
ICANECT pursuant to an Asset Purchase Agreement by and among e.spire
Communications, Inc.; Internet Communications of America, Inc.; Robert Hurwitz
and Elmer Hurwitz. The shares of Common Stock were issued as partial
consideration for the exchange of the right, title and interest in certain of
the assets (primarily customers and equipment) of Internet Communications of
America, Inc. The shares were issued pursuant to Section 4(2) of the Securities
Act of 1933, as amended, and Rule 506 promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below under the
captions "Statement of Operations Data" for the years ended June 30, 1995 and
1996, December 31, 1997 and 1998, and "Balance Sheet Data" as of June 30, 1995
and 1996, and December 31, 1996, 1997 and 1998 are derived from and qualified by
reference to the audited Consolidated Financial Statements of the Company and
the related notes thereto, and should be read in conjunction therewith and in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations". Subsequent to June 30, 1996, the Company changed its
fiscal year-end from June 30 to December 31. The "Statement of Operations Data"
for the year ended December 31, 1996 has been derived from the unaudited
consolidated financial statements of the Company which, in the opinion of
Management includes all adjustments consisting of normal recurring adjustments
which the Company considers necessary for a fair presentation of the results of
operations for that period.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except share data)
Fiscal Fiscal
Year Ended Year Ended Year Ended Year ended Year ended
June 30, June 30, December 31, December 31, December 31,
1995 1996 1996 1997 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 389 $ 3,415 $ 9,417 $ 59,001 $ 156,759
Operating expenses:
Network, development and operations 3,282 5,265 11,046 52,881 106,813
Selling, general and administrative 4,598 13,464 30,656 59,851 103,639
Non-cash stock compensation 6,419 2,736 2,081 4,274 9,928
Depreciation and amortization 498 3,078 7,228 24,131 47,332
------------------------------------------------------------------------------
Total operating expenses 14,797 24,543 51,011 141,137 267,712
------------------------------------------------------------------------------
Loss from operations (14,408) (21,128) (41,594) (82,136) (110,953)
Interest and other income 218 4,410 6,390 8,685 23,348
</TABLE>
30
<PAGE> 31
<TABLE>
<S> <C> <C> <C> <C> <C>
Interest and other expense (170) (10,477) (18,032) (41,565) (75,474)
Debt conversion expense (385) 0 0 0 0
------------------------------------------------------------------------------
Net loss before minority interest (14,746) (27,195) (53,236) (115,016) (163,079)
Minority interest (2) 48 413 417 0 0
------------------------------------------------------------------------------
Net loss $ (14,698) $ (26,782) $ (52,819) $ (115,016) $ (163,079)
==============================================================================
Preferred stock dividends and accretion (1,071) (3,871) (4,021) (11,630) (36,080)
------------------------------------------------------------------------------
Net loss to common stockholders $ (15,769) $ (30,653) $ (56,840) $ (126,646) $ (199,159)
==============================================================================
Net loss per common share $ (3.30) $ (4.96) $ (8.54) $ (4.65) $ (4.45)
==============================================================================
Weighted average shares outstanding 4,772 6,185 6,653 27,234 44,752
OTHER DATA:
EBITDA(3) $ (7,443) $ (14,901) $ (31,868) $ (53,732) $ (53,693)
Capital expenditures 15,303 60,856 107,773 135,036 249,256
<CAPTION>
BALANCE SHEET DATA (END OF PERIOD): June 30, June 30, December 31, December 31, December 31,
1995 1996 1996 1997 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 20,351 $ 134,116 $ 78,619 $ 260,837 $ 328,758
Total assets 37,627 223,600 230,038 638,896 982,957
Working capital 13,908 114,966 46,001 272,234 325,734
Property, plant and equipment, net 15,567 76,739 136,083 250,478 485,934
Long-term debt, including current portion 3,798 184,382 210,410 461,285 749,815
Long-term liabilities 4,723 189,072 216,484 461,321 746,765
Redeemable stock, options and warrants 2,931 2,155 2,000 206,160 241,044
Stockholders' equity (deficit) 22,141 8,982 (27,038) (65,356) (101,734)
</TABLE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Subsequent to June 30, 1996, the Company changed its fiscal year-end from
June 30 to December 31.
(2) Minority interest represents a 7.25% ownership of AT&T Credit Corporation in
the Company's subsidiaries that operate its networks in Louisville, Fort Worth,
Greenville, Columbia and El Paso. Such minority interest of AT&T in the
Company's subsidiaries was exchanged for 207,964 shares of Common Stock on
December 30, 1997 in connection with the Company entering into the New AT&T
Credit Facility.
(3) EBITDA consists of net income (loss) before net interest, income taxes,
depreciation and amortization, and noncash stock compensation. It is a measure
commonly used in the telecommunications industry and is presented to assist in
understanding the Company's operating results. However, it is not intended to
represent cash flow or results of operations in accordance with Generally
Accepted Accounting Principles. Noncash compensation associated with employee
stock and stock options was $6.4 million, $2.7 million, $2.0 million, $4.3
million and $9.9 million for the years ended June 30, 1995 and 1996 and the
years ended December 31, 1996, 1997 and 1998, respectively. See Note 9 of Notes
to the Company's Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
e.spire, formed in 1993, seeks to be a leading facilities-based
integrated communications provider to businesses. The Company currently
operates in 35 markets throughout the United States. By the end of 1997, the
Company had become one of the first CLECs to combine the provision of
dedicated, local and long distance voice services with frame relay, ATM and
Internet services. Having established this suite of telecommunications services
which emphasizes data capabilities in addition to traditional CLEC offerings,
e.spire seeks to provide customers with superior service and competitive prices
while offering a single source for integrated communications services designed
to meet its business customers' needs. In August 1998, the Company announced
its plan to enter the New York and Philadelphia local markets, and to provide
long-haul fiber capabilities between New York and Baltimore through a long-term
dark fiber lease with Metromedia Fiber Network, Inc. The Company's
facilities-based network infrastructure is designed to provide services to
customers on an end-to-end basis, and, as of December 31, 1998, was comprised
of 1,742 route miles of fiber in its 35 local networks in 21 states, 66
Newbridge ATM switches, 19 Lucent 5ESS switches and approximately 22,000
backbone long haul miles in its leased coast-to-coast broadband data network.
With the passage of the federal Telecommunications Act of 1996 (Telecom
Act, FTA or the "Act"), the Company enhanced the scope of its product offerings
from dedicated services to a full range of switched voice, data and Internet
services in order to meet the needs of business end-users, and is expanding its
sales, marketing, customer care and operations support systems ("OSS")
capabilities. The Company introduced local switched voice services, including
local exchange services, in late 1996 and long distance services in late 1997.
As of December 31, 1998, e.spire had installed 133,070 customer access lines
representing a significant increase over the 35,105 access lines installed as of
December 31, 1997.
The development of the Company's business and the construction,
acquisition and expansion of its networks require significant capital
expenditures, a substantial portion of which are incurred before realization of
revenues. These expenditures, together with the associated early operating
expenses, result in negative cash flow until an adequate customer base is
established. However, as the Company's customer base grows, the Company expects
that incremental revenues can be generated with decreasing incremental operating
expenses, which may provide positive contributions to cash flow. The Company has
made specific strategic decisions to build high capacity networks with broad
market coverage, which initially increases its level of capital expenditures and
operating losses. However, the Company believes that over the long term this
strategy will enhance the Company's financial performance by increasing the
traffic flow over its network.
In 1998, the Company formed ACSI NT to pursue opportunities in fiber
optic network design and construction with carriers, large end user customers
and municipalities. ACSI NT is a wholly owned subsidiary of e.spire which
provides full service network development solutions including business
planning, market analysis, engineering, project management, construction and
network monitoring center design.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
The Company reported an increase in total revenues of $97.7 million, or
166%, to $156.8 million for the year ended December 31, 1998, compared with
revenues of $59.1 million for the year ended December 31, 1997 as discussed
below.
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Telecommunications services
The Company reported an increase in telecommunications services revenues
of $71.2 million, or 127%, to $127.3 million for the year ended December 31,
1998, compared with revenues of $56.2 million for the year ended December 31,
1997. Included in Telecommunications services are revenues from the dedicated
access, switch services and data/Internet products. The increase in revenues was
attributable to the Company's greater presence and expansion in its 35 local
fiber optic networks. Also, the introduction of new service offerings such as
e.spire Platinum and Gold have contributed to the increase in revenues. The
Company also increased the number of route miles, buildings connected and voice
and data switches deployed. Between December 31, 1997 and December 31, 1998, the
Company increased route miles by 681, or 64% and buildings connected increased
by 1,308, or 82%. Lucent 5ESS switches deployed increased to 19 as of December
31, 1998 from 16 as of December 31, 1997. In addition, the Company has deployed
66 ATM switches over its coast-to-coast data network as of December 31, 1998, up
from 44 as of December 31, 1997. Also, access lines installed, net of
disconnects resulting from the Company's previously announced plan to eliminate
switched resale, increased by 97,965, or 279% to 133,070 at December 31, 1998,
from 35,105 at December 31, 1997. More than 80% of net access lines installed
during the three months ended December 31, 1998 were on-net.
Included in telecommunications services revenues are revenues of
approximately $17.7 million and $1.6 million, for the years ended December 31,
1998 and 1997, respectively, for reciprocal compensation relating to the
transport and termination of local traffic primarily to ISPs from customers of
incumbent local exchange carriers pursuant to various interconnection
agreements. These local exchange carriers have not paid and have disputed the
majority of these charges based on the belief that such calls are not local
traffic as defined by the various agreements and under state and federal law and
public policies. The resolution of these disputes will be based on rulings by
state PUCs, or the FCC, the courts and/or commercial arbitrators. The FCC
recently ruled that ISP-bound traffic is jurisdictionally "interstate in nature"
but delegated to state PUCs the decision of whether reciprocal compensation must
be paid under the terms of existing local interconnection agreements. To date,
there have been no unfavorable final rulings concerning payment of past due
reciprocal compensation amounts for ISP traffic in states in which e.spire
billed reciprocal compensation through December 31, 1998. Although there can be
no assurance that future regulatory rulings will be favorable to the Company,
the Company believes that all of these amounts are ultimately collectible,
although the timing of receipts cannot be predicted at this time. (See
"Regulation")
Network technologies services
Network technologies services revenues increased $26.5 million, or 930%,
to $29.4 million for the year ended December 31, 1998, compared with revenues of
$2.9 million for the year ended December 31, 1997. The increase in revenues is
attributable to the increased growth in the size and number of construction
contracts in this expanded operation. The network technologies segment offers
fiber optic network design, project management and construction services by ACSI
NT. Also, included in network technologies revenues are revenues for
construction contracts and grants of indefeasible rights of use ("IRUs") on
portions of e.spire's networks to IXCs and other customers. Included in the
year ended December 31, 1998 revenues was approximately $23.5 million derived
from contracts with five major customers with approximately $9.5 million coming
from a single customer. The Company recognized approximately $14 million in
non-monetary proceeds from agreements to exchange IRUs multiple fibers along
certain sections of e.spire's networks for IRUs on other companies networks. The
Company expects to see continued increases in revenues from network technologies
due to future growth and expansion in this line of business.
COST OF SALES
For the year ended December 31, 1998, compared with the year ended
December 31, 1997, total cost of sales increased $53.9 million, or 102%, to
$106.8 million from $52.9 million for the twelve months ended December 31, 1997,
as discussed below.
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Telecommunications services
Cost of sales for telecommunications services increased $45.6 million, or
87%, to $98.1 million for the year ended December 31, 1998, from $52.5 million
for the same period of 1997. These increases relate to growth in the delivery of
switched, data and special access services and the addition of engineering and
operations personnel dedicated to supporting the network infrastructure.
Included in cost of sales are costs of telecommunications services paid
to IXCs, ILECs and others for leased telecommunications facilities, access
charges and services. Such costs increased to approximately $84.6 million for
the year ended December 31, 1998, from approximately $39.7 million for the year
ended December 31, 1997. In addition, network related personnel costs such as
employee salaries and benefits are also included in cost of sales. For the year
ended December 31, 1998 and 1997, these costs were approximately $22.2 million
and $13.2 million, respectively.
Network technologies services
Cost of sales for network technologies services increased $8.3 million,
to approximately $8.7 million for the year ended December 31, 1998, compared
with $.4 million for the same period of 1997. Included in network technologies
cost of sales are direct materials and labor associated with the construction of
networks and costs associated with contracted services. The increase in these
costs was attributable to the increased growth in this expanded line of
business. The Company expects this growth to continue into the future as network
technologies continues to expand.
GROSS MARGIN
For the year ended December 31, 1998, total gross margins increased $43.8
million, or 716%, to $49.9 million from $6.1 million for the year ended December
31, 1997.
Telecommunications services
Telecommunications services gross margin increased $25.6 million, or 699%
to $29.3 million for the year ended December 31, 1998 from $3.7 million for the
same period of 1997. This increase was due to the increased sales volume as
described above.
Network technologies services
Network technologies services gross margin increased $18.2 million, or
742% to $20.7 million for the twelve months ended December 31, 1998 from $2.5
million for the twelve months ended December 31, 1997. The increase was due to
the sale of new higher margin construction projects in 1998.
OPERATING EXPENSES
Selling, General and Administrative
For the year ended December 31, 1998, selling, general and administrative
(SG&A) expenses increased $43.8 million, or 73%, to $103.6 million from $59.9
million for the same period of 1997.
Included in selling, general and administrative expenses are personnel
costs such as employee salaries, benefits and commissions. Such costs increased
to $32.4 million for the year ended December 31, 1998, from $19.9 million for
the year ended December 31, 1997. Also, included in selling, general and
administrative expenses are operating costs such as rent, advertising and
general administrative and office expenses. These expenses increased to $71.2
million for the year ended December 31, 1998 from $40.0 million for the year
ended December 31, 1997.
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<PAGE> 35
Increases in selling, general and administrative expenses are a result of
the Company's efforts directed at obtaining more on-net customers through direct
sales, as well as conversion of customers that are not presently served on the
Company's facilities. The costs associated with the increase in direct sales
include commissions and marketing costs that have increased from 1997 and are
expected to continue to increase. Also contributing to the increases in SG&A
costs were backoffice expenses that were a result of increases in personnel and
professional service costs associated with the Company's rapid growth which were
necessary to maintain and improve existing processes. In addition, as the
Company implement continues implementation of its operations support systems
("OSS") program over the next twelve to eighteen months in which it will
continue to invest capital dollars. As these systems are being installed, the
Company will continue to incur backoffice operating expenses to support the
existing processes.
Non-Cash Stock Compensation
Non-cash stock compensation expense increased $5.7 million, or 132%, to
$9.9 million for the year ended December 31, 1998 from $4.3 million for the year
ended December 31, 1997. Included in non-cash compensation for 1998 are accruals
for the issuance of common stock in connection with 1998 performance bonuses,
costs of grants of employee stock options, as well as costs associated with
stock options for former executives. Costs associated with the accrual for
performance bonuses were approximately $6.1 million and $2.9 million for the
years ended December 31, 1998 and 1997, respectively. The costs for the
compensation associated with stock option plans was approximately $3.8 million
for the year ended December 31, 1998 and $1.4 million for the same period of
1997.
Depreciation and Amortization
Depreciation and amortization expenses increased $23.2 million, or 96%,
to $47.3 million for the year ended December 31, 1998 from $24.1 million for the
year ended December 31, 1997. These increases were due to an increase in gross
capital assets to $562.0 million at December 31, 1998 compared with capital
assets of $282.2 million at December 31, 1997.
INTEREST AND OTHER INCOME
Interest and other income increased $14.7 million, or 169%, to $23.3
million for the year ended December 31, 1998 from $8.7 million for the year
ended December 31, 1997. The increases in interest and other income reflects the
increase in earnings from the proceeds received from the issuance of the 13 3/4%
Senior Notes due 2007 (the "2007 Notes"), the 14 3/4% Redeemable Preferred Stock
due 2008 (the "14 3/4% Preferred Stock"), the 12 3/4% Junior Redeemable
Preferred Stock due 2009 (the "12 3/4% Preferred Stock"), the 8,100,000 shares
of Common Stock (the "1998 Common Stock Offering") and the 10.625% Senior
Discount Notes due 2008 (the "2008 Notes") which have been invested in
commercial paper, U.S. Government Securities and money market instruments.
INTEREST AND OTHER EXPENSE
Interest and other expense increased $33.9 million, or 82%, to $75.5
million for the year ended December 31, 1998 from $41.6 million for the year
ended December 31, 1997. The increase reflected the accrual of interest related
to the 13% Senior Discount Notes due 2005 (the "2005 Notes"), the 12 3/4% Senior
Discount Notes due 2006 (the "2006 Notes"), and the 2008 Notes as well as
interest expense associated with the 2007 Notes and the Company's capital
leases.
EBITDA
Loss before interest, taxes, depreciation and amortization ("EBITDA")
remained constant at ($53.7) million for the years ended December 31, 1998 and
1997. The increases in revenues were offset by increases in cost of sales and
operating expenses as discussed above.
NET LOSS & NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
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<PAGE> 36
As a result of the aforementioned increases in revenues, cost of sales,
operating expenses, depreciation and amortization, and interest income and
expense, net loss increased $48.1 million, or 42%, to $163.1 million for the
year ended December 31, 1998 from $115.0 million for the year ended December 31,
1997. Further, net loss applicable to common stockholders increased $72.5
million, or 57%, to $199.2 million for the year ended December 31, 1998 from
$126.6 million for the same period of 1997. These increases to net loss
applicable to common stockholders are primarily attributable to the preferred
stock dividends and accretion related to the 14 3/4% Preferred Stock and the 12
3/4% Preferred Stock.
NOTE: SUBSEQUENT TO JUNE 30, 1996, THE COMPANY CHANGED ITS FISCAL YEAR-END FROM
JUNE 30 TO DECEMBER 31.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
REVENUES
Revenues for the year ended December 31, 1997, increased $49.6 million,
or 527%, to $59.0 million from $9.4 million for the year ended December 31,
1996. This increase was primarily attributable to the Company's rapid expansion
of its local fiber optic networks in 32 markets by the end of 1997 (up from 21
at the end of 1996) and the increase in route miles, buildings connected and
voice and data switches deployed. In late 1996, the Company introduced its
coast-to-coast data network, deploying 39 Newbridge ATM switches by mid-1997. In
addition, the Company introduced local switched service on a resale basis in its
markets, and also provided facilities-based services in 16 of those markets by
installing Lucent 5ESS switches. Revenues also increased as a result of the
acquisition of Cybergate, Inc. . For the year ended December 31, 1997,
approximately 42% of the Company's 1997 revenues were derived from special
access and dedicated services, approximately 38% from data and Internet services
and approximately 20% from switched local and other services. By contrast, 1996
revenues were derived primarily from dedicated and special access services.
COST OF SALES
Cost of sales for the year ended December 31, 1997, increased $41.9
million, or 379%, to $52.9 million from $11.0 million for the year ended
December 31, 1996. Of these amounts, approximately $44.4 million and $4.1
million, respectively, represented the cost of providing telecommunications
services paid to IXCs, ILECs and others for leased telecommunications facilities
and services. In addition, approximately $8.5 million and $6.9 million,
respectively, represented network-related personnel costs. The increase in costs
was due primarily to the Company's rapid deployment of operational networks,
Lucent 5ESS switches and access lines.
OPERATING EXPENSES
Selling, General and Administrative
For the year ended December 31, 1997, selling, general and administrative
expenses increased $29.2 million, or 95%, to $59.9 million from $30.7 million
for the year ended December 31, 1996. Related personnel costs increased to $16.5
million for the year ended December 31, 1997 from $8.3 million for the year
ended December 31, 1996. Other sales and administrative costs increased to $43.4
million for the year ended December 31, 1997 from $22.4 million for the year
ended December 31, 1996. This increase reflected costs associated with the
Company's efforts to significantly expand its network support, sales, marketing
and administrative staff and facilities.
Non-Cash Stock Compensation
Non-cash stock compensation expense increased $2.2 million, or 105%, to
$4.3 million for the year ended December 31, 1997 from $2.1 million for the year
ended December 31, 1996. Included in non-cash
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<PAGE> 37
compensation for 1997 was approximately $2.9 million accrued for the issuance of
Common Stock to be issued in connection with 1997 performance bonuses.
Depreciation and Amortization
Depreciation and amortization expenses increased $16.9 million, or 234%,
to $24.1 million for the year ended December 31, 1997 from $7.2 million for the
year ended December 31, 1996. This increase was due to an increase in capital
assets to $282.2 million at December 31, 1997 from $144.4 million at December
31, 1996.
INTEREST AND OTHER INCOME
Interest and other income increased $2.3 million, or 36%, to $8.7 million
for the year ended December 31, 1997 from $6.4 million for the year ended
December 31, 1996. The increase in interest and other income reflects the
increase in earnings from the proceeds received from the 13 3/4% Senior Notes
due 2007 (the "2007 Notes"), the 14 3/4% Redeemable Preferred Stock due 2008
(the "14 3/4% Preferred Stock") and the 12 3/4% Junior Redeemable Preferred
Stock due 2009 (the "12 3/4% Preferred Stock) which have been invested.
INTEREST AND OTHER EXPENSE
Interest and other expense increased $23.6 million, or 131%, to $41.6
million for the year ended December 31, 1997 from $18.0 million for the year
ended December 31, 1996. The increase reflected the accrual of interest related
to the 2006 Notes and 2007 Notes and the Company's increased borrowings under
the credit facility with AT&T Credit Corporation.
EBITDA
EBITDA decreased $21.8 million, or 69%, to ($53.7) million for the year
ended December 31, 1997 from ($31.9) million for the year ended December 31,
1996. This decrease was due to the changes in revenues, network development and
operations and selling, general and administrative expenses discussed above.
NET LOSS & NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $62.2 million, or 118%, to $115.0 million for the year ended
December 31, 1997, from $52.8 million for the year ended December 31, 1996.
Further, net loss applicable to common stockholders increased to $126.6 million
from $56.8 million for the same periods, due to the increase in preferred stock
dividends and accretion during 1997. This increase is primarily attributable to
the issuance of 14 3/4% Preferred Stock and the 12 3/4% Preferred Stock.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1995 (UNAUDITED)
REVENUES
During the six months ended December 31, 1996, the Company's revenues
increased $6.0 million, or 600%, to $7.0 million from $1.0 million during the
six months ended December 31, 1995. Four of the largest IXCs accounted for
approximately $2.8 million, or 40%, of revenues for the six months ended
December 31, 1996.
COST OF SALES
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Cost of sales for the six months ended December 31, 1996 increased $5.8
million, or 200%, to $8.7 million from $2.9 million for the six months ended
December 31, 1995, reflecting significant increases in personnel, network
development and non-payroll operating expenses. Related personnel costs
increased to $3.9 million in the fiscal period ended December 31, 1996, from
approximately $1.5 million in the six months ended December 31, 1995. Other
operating expenses related to the development of prospective new markets, which
include expenses such as contract labor and legal expenses and certain franchise
fees, travel expenses, rent, utilities, charges and taxes increased to $4.8
million in the six months ended December 31, 1996 from approximately $1.4
million in the six months ended December 31, 1995.
OPERATING EXPENSES
Selling, General and Administrative
In the six months ended December 31, 1996, selling, general and
administrative expenses increased $17.2 million, or 555%, to $20.3 million from
$3.1 million in the six months ended December 31, 1995. Related personnel costs
increased to $6.6 million in the six months ended December 31, 1996 from $1.5
million in the six months ended December 31, 1995, and corresponding operating
costs increased to $13.7 million in the six months ended December 31, 1996 from
$1.6 million in the six months ended December 31, 1995. This increase reflected
costs associated with the Company's efforts in the rapid expansion of its
services offered, network deployment and geographic coverage as well as
significantly increasing its national and local city sales, marketing and
administrative staffs and increased legal and other consulting expenses
associated with its programs for obtaining regulatory approvals and
certifications and providing quality network services.
Non-Cash Stock Compensation
Non-cash stock compensation expense decreased $0.7 million, or 58%, to
$0.5 million for the six months ended December 31, 1996 from $1.2 million for
the six months ended December 31, 1995. This expense reflects the Company's
accrual of non-cash costs for options granted to key executives, employees and
others arising from the difference between the exercise price and the valuation
prices used by the Company to record such costs and from the vesting of those
options. Certain of these options had put rights and other factors that required
variable plan accounting in both 1996 and 1995 but, on or about June 30, 1995,
the Company renegotiated contracts with certain of its officers, establishing a
limit of $2.5 million on the Company's "put right" obligations with respect to
those contracts. Between July 1, 1995 and June 30, 1996, the limit was further
reduced to $2.0 million.
Depreciation and Amortization
Depreciation and amortization expenses increased $4.1 million, or 513%,
to $4.9 million in the six months ended December 31, 1996 from $0.8 million in
the six months ended December 31, 1995. The Company's capital assets increased
to $144.4 million as of December 31, 1996, from $32.6 million in capital assets
as of December 31, 1995.
INTEREST AND OTHER INCOME
Interest and other income increased $2.0 million, or 250%, to $2.8
million for the six months ended December 31, 1996 from $0.8 million in the six
months ended December 31, 1995. The increase in interest and other income
reflects the significant increase in available funds from the Company's sale of
its 9% Series B Preferred Stock in June and November 1995, the 2005 Notes in
November 1995 and the 2006 Notes in March 1996.
INTEREST AND OTHER EXPENSES
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<PAGE> 39
Interest and other expense increased $7.6 million, or 271%, to $10.4
million in the six months ended December 31, 1996 from $2.8 million in the six
months ended December 31, 1995. The increase reflected the accrual of interest
related to the 2005 Notes and 2006 Notes and the Company's increased borrowings
under the old credit facility with AT&T Credit Corporation.
MINORITY INTEREST
AT&T Credit Corporation's minority interest in certain of the Company's
operating subsidiaries reduced operating losses by approximately $0.2 million
for each of the six months ended December 31, 1996, and 1995.
EBITDA
EBITDA decreased $16.9 million, or 345%, to ($21.8) million for the six
months ended December 31, 1996 from ($4.9) million for the six months ended
December 31, 1995. This decrease was due to the changes in revenues, network
development, operations and selling, general and administrative expenses
discussed above.
NET LOSS & NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $26.0, or 292%, to $34.9 million for the fiscal period ended
December 31, 1996, from $8.9 million for the six months ended December 31, 1995.
Further, net loss applicable to common stockholders increased to $36.9 million
from $10.7 million for the same periods, due primarily to the increase in net
loss, accompanied by a slight increase in preferred stock dividends between
periods.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
REVENUES
During the fiscal year ended June 30, 1996 ("fiscal 1996"), the revenues
increased $3.0 million, or 750%, to $3.4 million from $0.4 during the fiscal
year ended June 30, 1995 ("fiscal 1995"). Four of the largest IXCs accounted for
approximately $2.1 million, or 60%, of revenues for fiscal 1996 as compared to
fiscal 1995, when three of the largest IXCs accounted for approximately $0.3
million, or 85% of revenues for fiscal 1995, reflecting the Company's increased
sales to end-users during fiscal 1996.
COST OF SALES
Network development and operations expenses for fiscal 1996 increased
$2.0 million to $5.3 million from $3.3 million in fiscal 1995, reflecting
significant increases in personnel, network development and non-payroll
operating expenses. These increased costs were associated with developing and
establishing centralized engineering, circuit provisioning and network
management functions, constructing and initially operating the Company's
competitive access networks and performing market feasibility, engineering,
rights-of-way and regulatory evaluations in additional target cities. Related
personnel costs increased to $4.5 million in fiscal 1996 from approximately $1.3
million in fiscal 1995. Other operating expenses related to the development of
prospective new markets, which include expenses such as contract labor and legal
expenses and certain franchise fees, travel expenses, rent, utilities, charges
and taxes, decreased to $0.8 million in fiscal 1996 from approximately $1.9
million in fiscal 1995.
OPERATING EXPENSES
Selling, General and Administrative
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In fiscal 1996, selling, general and administrative expenses increased
$8.9 million to $13.5 million from $4.6 million in fiscal 1995. Related
personnel costs increased to $3.2 million in fiscal 1996 from $2.0 million in
fiscal 1995, and corresponding operating costs increased to $10.2 million in
fiscal 1996 from $2.2 million in fiscal 1995. This increase reflected costs
associated with the Company's efforts in expanding its national and local city
sales, marketing and administrative staffs, as well as increased legal and other
consulting expenses associated with its aggressive programs for obtaining
regulatory approvals and certifications and providing quality network services.
Non-Cash Compensation
Non-cash stock compensation expense decreased $3.7 million to $2.7
million for fiscal 1996 from $6.4 million for fiscal 1995. This expense reflects
the Company's accrual of non-cash costs for options and warrants granted to key
executives, employees and others arising from the difference between the
exercise price and the valuation prices used by the Company to record such costs
and from the vesting of those options and warrants. Certain of these options had
put rights and other factors that required variable plan accounting in fiscal
1994 and fiscal 1995 but, at the end of fiscal 1995, the Company renegotiated
contracts with certain of its officers, establishing a limit of $2.5 million on
the Company's put right obligations with respect to those contracts. During
fiscal 1996, the limit was further reduced to $2.0 million.
Depreciation and Amortization
Depreciation and amortization expenses increased $2.6 million to $3.1
million in fiscal 1996 from $0.5 million in fiscal 1995. During fiscal 1996 the
Company increased its capital assets to approximately $80.2 million,
representing an increase from $15.9 million at the end of fiscal 1995.
INTEREST AND OTHER INCOME
Interest and other income increased $4.2 million to $4.4 million for
fiscal 1996 from $0.2 million in fiscal 1995. The increase reflected the
significant increase in available funds from the Company's sale of its 9% Series
B Preferred Stock in June and November 1995 and the 2005 Notes in November 1995.
INTEREST AND OTHER EXPENSES
Interest and other expenses increased $10.3 million to $10.5 million in
fiscal 1996 from $0.2 million in fiscal 1995. The increase reflected the accrual
of interest related to the 2005 Notes and the Company's increased borrowings
under the credit facility with AT&T Credit Corporation.
DEBT CONVERSION EXPENSE AND MINORITY INTEREST
Debt conversion expense in fiscal 1995 totaled $0.4 million, reflecting
expenses incurred in connection with the conversion of certain of the Company's
debt to equity in September 1994. AT&T Credit Corporation's minority interest in
the Company's operating subsidiaries for which it provided funding reduced
operating losses by approximately $0.4 million for fiscal 1996, and by $48,055
for fiscal 1995.
EBITDA
EBITDA decreased $7.5 million to ($14.9) million at June 30, 1996 from
($7.4) million at June 30, 1995. This change was due to the changes in revenues,
network development, operations and selling, general and administrative expenses
discussed above.
NET LOSS & NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
As a result of the aforementioned increases in revenues, operating
expenses, depreciation and amortization, and interest income and expense, net
loss increased $12.1 million to $26.8 million for the
40
<PAGE> 41
fiscal year ended June 30, 1996, from $14.7 million for the fiscal year ended
June 30, 1995. Further, net loss applicable to common stockholders increased to
$30.7 million from ($15.7) million for the same periods, due primarily to the
increase in net loss, accompanied by a slight increase in preferred stock
dividends between periods.
CAPITAL EXPENDITURES; OPERATING CASH FLOW
As of December 31, 1998, the Company was operating 35 digital local fiber
optic networks. The costs associated with the initial construction and operation
of a network may vary, primarily due to market variations in geographic and
demographic characteristics, and the types of construction technologies, which
can be used to deploy the network. In addition, the Company has implemented
aggressive network expansion and optimization programs. This is evidenced by an
increase in fiber miles to 159,634 fiber miles at December 31, 1998, from 92,528
fiber miles at December 31, 1997. The Company also significantly increased the
number of buildings connected to its network to 2,912 at December 31, 1998 from
1,604 at December 31, 1997.
As the Company develops, introduces and expands its high-speed
data/Internet and voice services in each of its markets, additional capital
expenditures and net operating costs will be incurred. The amount of these costs
will vary, based on the number of customers served and the actual services
provided to the customers.
Although, as of December 31, 1998, the Company was generating revenues from all
of its fiber optic networks, on a consolidated basis it is still incurring
negative cash flows due, in part, to the funding requirements for continuing
network construction or development and to the roll-out of new data and voice
services. In 1998, the Company invested approximately $225 million in network
and telecommunications equipment. The Company expects it will continue to incur
negative cash flow for at least two years. There can be no assurance that the
Company's networks or any of its other services will ever provide a revenue base
adequate to sustain profitability or generate positive cash flow. The Company
estimates that in 1999, capital required for implementation of its integrated
networks and its other services and to fund negative cash flow, including
interest payments, will be approximately $260 million. The Company anticipates
that current cash resources are sufficient to fund its continuing negative cash
flow and required capital expenditures through mid-2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's further development and enhancement of new services, as
well as the continued development, construction, expansion, operation and
potential acquisition of networks will require substantial capital expenditures.
The funding of these expenditures is dependent upon the Company's ability to
raise substantial financing. From the Company's inception through December 31,
1998, the Company has raised net proceeds of approximately $1.0 billion from
debt and equity financings. During the year ended December 31,1998, capital
expended for the expansion of the Company's infrastructure and services and to
fund negative cash flow, including principal and interest payments was
approximately $310 million. The Company expects to incur additional capital
expenditures for the expansion of its infrastructure and services and to fund
negative cash flow in the future. At December 31, 1998, the Company had
approximately $374.7 million of cash, cash equivalents and restricted cash
available for such purposes. The Company continues to consider potential
acquisitions or other arrangements that may fit the Company's strategic plan.
Any such acquisitions or arrangements that the Company might consider are likely
to require additional equity or debt financing, which the Company will seek to
obtain as required and which may also require that the Company obtain the
consent of its debt holders.
Management anticipates that the Company's current cash resources are
sufficient to fund the Company's continuing negative cash flow and required
capital expenditures through mid-2000. To meet its additional remaining capital
requirements and to successfully implement its strategy, the Company will be
required to sell additional equity securities, increase its existing credit
facility, acquire additional credit facilities or sell additional debt
securities, certain of which may require the consent of the Company's debt
holders. Accordingly, there can be no assurance that the Company will be able to
obtain the additional financing
41
<PAGE> 42
necessary to satisfy its cash requirements or to implement its strategy
successfully, in which event the Company will be unable to fund its ongoing
operations, which would have a material adverse effect on its business, results
of operations and financial condition.
On November 14, 1995, the Company completed a private offering of the
2005 Notes and warrants from which the Company received approximately $96.1
million in net proceeds. The 2005 Notes will accrue to an aggregate principal
amount of $190.0 million by November 1, 2000, after which cash interest will
accrue and be payable on a semi-annual basis.
On March 21, 1996, the Company completed a private offering of the 2006
Notes from which the Company received net proceeds of approximately $61.8
million. The 2006 Notes will accrue to an aggregate principal amount of $120.0
million by April 1, 2001, after which cash interest will accrue and be payable
on a semi-annual basis.
On April 15, 1997, the Company completed the offering of 8,000,000 shares
of Common Stock. In connection therewith, the Company completed the sale of an
additional 660,000 shares on May 14, 1997 upon exercise of the underwriters'
over-allotment option and received aggregate net proceeds of approximately $40.0
million from the sale of these 8,660,000 shares.
On July 10, 1997, the Company completed the issuance and sale of 75,000
units (the "Unit Offering"), consisting of 14 3/4% Redeemable Preferred Stock
due 2008 and warrants (the "Unit Warrants") from which the Company received net
proceeds of approximately $67.7 million. Dividends on the 14 3/4% Preferred
Stock accrue from the date of issuance, are cumulative and are payable quarterly
in arrears, at a rate per annum of 14 3/4% of the liquidation preference per
share. Dividends on the 14 3/4% Preferred Stock will be paid, at the Company's
option, either in cash or by the issuance of additional shares of 14 3/4%
Preferred Stock; provided, however, that after June 30, 2002, to the extent and
for so long as the Company is not precluded from paying cash dividends on the 14
3/4% Preferred Stock by the terms of any then outstanding indebtedness or any
other agreement or instrument to which the Company is then subject, the Company
shall pay dividends on the 14 3/4% Preferred Stock in cash.
On July 23, 1997, the Company completed the sale of the 2007 Notes. Of the
total net proceeds of $204.3 million, the Company placed $70.0 million
representing funds sufficient to pay the first five interest payments on the
2007 Notes into an escrow account for the benefit of the holders thereof.
Payments of interest on the 2007 Notes are payable semi-annually, and began in
January 1998.
In October 1997, the Company issued the 12 3/4% Preferred Stock from
which the Company received net proceeds of approximately $146.0 million.
Dividends on the 12 3/4% Preferred Stock accrue from the date of issuance, are
cumulative and are payable quarterly in arrears, at a rate per annum of 12 3/4%
of the liquidation preference per share. Dividends on the 12 3/4% Preferred
Stock will be paid, at the Company's option, either in cash or by the issuance
of additional shares of 12 3/4% Preferred Stock; provided, however, that after
October 15, 2002, to the extent and for so long as the Company is not precluded
from paying cash dividends on the 12 3/4% Preferred Stock by the terms of any
agreement or instrument governing any of its then outstanding indebtedness, the
Company shall pay dividends on the 12 3/4% Preferred Stock in cash.
On December 30, 1997, the Company entered into the New AT&T Credit
Facility for the development and construction of fiber optic local networks. The
Company has financing commitments for $35.0 million under the New AT&T Credit
Facility, of which $35.0 had been borrowed as of December 31, 1997. Payments of
principal and interest on borrowings under the New AT&T Credit Facility are
payable quarterly, commencing in 1998. The loans under the New AT&T Credit
Facility are secured by the capital stock of the material subsidiaries of the
Company and the promissory notes (the "Intercompany Notes") of certain
subsidiaries of the Company evidencing the debt. In addition, the New AT&T
Credit Facility includes covenants, some of which impose certain restrictions on
the Company and its material subsidiaries including restrictions on the
declaration or payment of dividends, the conduct of certain activities, certain
investments, the creation of additional liens or indebtedness, the disposition
of assets, transactions with affiliates and extraordinary corporate
transactions.
On February 26, 1998, the Company paid approximately $10.3 million to
effect amendments (the "Amendments") to the indentures under which three classes
of its outstanding debt securities were issued.
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<PAGE> 43
The Amendments revised certain covenants in the indentures which significantly
limited the ability of the Company and its subsidiaries to incur additional
indebtedness or make certain investments or acquisitions. The limitations on
indebtedness contained in the indentures were amended to provide an alternative
test permitting the incurrence of additional indebtedness based on a debt to
capital ratio test, and increases the amount of unrestricted indebtedness that
the Company can incur. The Amendments also permit the incurrence of indebtedness
solely for the construction, acquisition, and improvement of telecommunications
assets, subject to certain limitations.
On March 31, 1998, the Company restructured certain leases resulting in a
change from operating to capital lease treatment. This transaction resulted in
capital leases obligations totaling $24.5 million being included in liabilities
as of December 31, 1998.
On April 3, 1998, the Company completed the public offering of 8,100,000
shares of Common Stock at a price of $18.50 per share of which 7,502,418 shares
were issued and sold by the Company and certain stockholders of the Company sold
597,582 shares. Total net proceeds to the Company from the 1998 Common Stock
Offering and the exercise of certain options and warrants in connection
therewith were approximately $134.2 million.
On July 24,1998, the Company completed a private placement of 10 5/8%
Senior Discount Notes due 2008 yielding net proceeds to the Company of
approximately $225 million. The 2008 Notes will accrue to an aggregate principal
amount of $375 million by July 2008. The 2008 Notes will require payment of cash
interest semi-annually in arrears beginning January 1, 2004.
YEAR 2000 PROGRAM
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the Year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based upon a comprehensive systems assessment of its Year 2000 readiness, which
assessed both hardware and software for the Company's telecommunications network
and information systems, the Company has determined that 70% of its hardware and
software is Year 2000 compliant. Accordingly, the Company believes that it will
not be required to modify or replace a significant portion of its software and
hardware so that its computer systems will function properly with respect to
dates in the Year 2000 and thereafter. Additionally, because the majority of the
hardware and software in use by the Company is of the commercial off-the-shelf
variety and requires minimal customization, the Company expects that its efforts
to bring 100% of the software and hardware into compliance will be manageable.
The Company has completed its overall planning phase, and currently is well into
the execution phase, which includes verification and updating of its initial
assessment, and the development and execution of specific initiatives to upgrade
the remaining non-compliant hardware and software to Year 2000 compliance not
later than October 31, 1999.
The Company has engaged an Information Technology Association of America Year
2000 certified consulting firm to help execute its Year 2000 readiness program
in conjunction with e.spire staff.
Based upon the results of the comprehensive bringing system assessment, the
Company believes that the work associated with bringing the Company into full
Year 2000 compliance is manageable and limited to installing available
compliant software upgrades for commercial-off-the-shelf software, the
remediation of the general ledger of its subsidiary CyberGate, and the
replacement of a small number of personal computers. If the replacement
software is not in place before the year 2000, the most reasonably likely worst
case scenario is that e.spire would not be able to add new customers to its
network using an automated system, although it
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<PAGE> 44
would be able to add new customers manually for a limited time. If the
remediation of Cybergate's general ledger is not completed, it may have to
resort to manual reporting processes for that subsidiary. The Company's Year
2000 plan includes risk assessment and contingency planning processes that are
designed to provide alternative courses of action for the Company to follow if
any of the remediation efforts are not successful or if a supplier's processes
or products are not Y2K ready. The full contingency planning processes are
planned to be completed by the end of July 1999.
The Company is in ongoing communications with all of its significant hardware
and software suppliers and has been in communication with large customers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failure to remediate their own Year 2000 issues. The
Company's total Year 2000 project cost and estimates to complete include the
estimated costs and time associated with the impact of third party Year 2000
issues based on presently available information. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems. The Company is working with its vendors to remove any
non-compliant installed hardware and software by October 31, 1999. If third
party vendors do not remediate prior to the Year 2000, the most reasonably
likely worst case scenario is that there may be significant problems associated
with service fulfillment, billing, trouble reporting and service provisioning.
Contingency plans will be developed as necessary if a vendor cannot provide the
necessary Year 2000 compliant product on a timely basis for the Company to meet
that date.
The Company anticipates completing the Year 2000 project not later than October
31, 1999, which is prior to any anticipated impact on its operating systems. As
of December 31, 1998, the Company has incurred approximately $.7 million for the
initial Year 2000 Assessment Report, inventory database and validation, and
beginning remediation efforts. The total cost of the Year 2000 project is
estimated to be $5-$6 million and will be expensed as incurred and funded with
existing cash resources. The costs of the project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived from numerous assumptions of
future events, including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ materially
from those anticipated.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 (FAS No. 130), "Reporting
Comprehensive Income." FAS No. 130 established standards for the reporting and
display of comprehensive income and its components in the financial statements.
The Company adopted the provisions of this Statement in the quarter ended March
31, 1998. The adoption of this statement had no impact in the manner of the
presentation of the Company's financial statements as currently or previously
reported.
In June 1997, the FASB issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"). This statement
establishes additional standards for segment reporting in the financial
statements and is effective for fiscal years beginning after December 15, 1997.
The Company has adopted the provisions of FASB 131 which resulted in additional
financial statement disclosures.
On March 4, 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This SOP provides guidance on
capitalizing certain costs related to computer software developed or obtained
for internal use. The SOP is effective for financial statements for fiscal years
beginning after December 15, 1998. The Company has not completed its analysis of
the impact on the financial statements that will be caused by the adoption of
this statement.
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<PAGE> 45
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-up Activities". This statement
requires that the costs of start-up activities, including organization costs, be
expensed as incurred and is effective for fiscal years beginning after December
15, 1998. The Company believes that the impact of the statement will not be
material.
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133"). This statement
requires all derivatives to be recorded on the balance sheet at fair value and
establishes new accounting procedures for hedges that will effect the timing of
recognition and the manner in which hedging gains and losses are recognized in
the Company's financial statements. The statement is effective for fiscal years
beginning after June 15, 1999. The Company has adopted SFAS 133 and its adoption
has had no effect on the Company's earnings or financial position.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's long term debt includes both fixed and variable rate
instruments, the fair market value of the Company's fixed rate long-term debt is
sensitive to changes in interest rates. The Company runs the risk that market
rates will decline and the required payments will exceed those based on current
market rate. Under its current policies, the Company does not use interest rate
derivative instruments to manage its exposure to interest rate changes.
The following table provides information about the Company's significant
financial instruments that are sensitive to changes in interest rates. (In
thousands)
<TABLE>
<CAPTION>
Future Principal
Payments
Fair Value ----------------------
on December 31, 1998 1999 2000 2001
-------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Long-term debt, including Current portion:
Fixed rate:
2005 Senior Discount Notes, interest at 13%, maturing 2005 142,500 0 0 0
2006 Senior Discount Notes, interest at 12 3/4%, maturing 2006 73,200 0 0 0
2007 Senior Discount Notes, interest at 13 3/4%, maturing 2007 265,100 0 0 0
2008 Senior Discount Notes, interest at 10 5/8%, maturing 2008 146,250 0 0 0
Variable rate:
AT&T Credit Corporation facility, interest variable at
three-month Commercial Paper rate on LIBOR plus 4.5 percent
(9.7 percent at December 31, 1998) 34,563 2,188 3,938 5,688
Total 661,613 2,188 3,938 5,688
</TABLE>
<TABLE>
<CAPTION>
Future Principal Payments
------------------------------
2002 2003 Thereafter
---- ---- ----------
<S> <C> <C> <C>
Long-term debt, including Current portion:
Fixed rate:
2005 Senior Discount Notes, interest at 13%, maturing 2005 0 0 144,593
2006 Senior Discount Notes, interest at 12 3/4%, maturing 2006 0 0 90,821
2007 Senior Discount Notes, interest at 13 3/4%, maturing 2007 0 0 220,000
2008 Senior Discount Notes, interest at 10 5/8%, maturing 2008 0 0 235,316
Variable rate:
AT&T Credit Corporation facility, interest variable at
three-month Commercial Paper rate on LIBOR plus 4.5 percent
(9.7 percent at December 31, 1998) 7,437 8,750 6,562
Total 7,437 8,750 697,292
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are included in this Report
beginning on page F-1 following the signature page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
--------
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<PAGE> 46
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections of the Company's 1999 Proxy Statement entitled "Election of
Directors - Information Concerning Director Nominees," "--Business Experience of
Director Nominees," "Section 16(a) Beneficial Ownership Reporting Compliance,"
and "Management - Business Experience of Executive Officers" are incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections of the Company's 1999 Proxy Statement entitled "Election of
Directors - Directors' Compensation," "--Compensation Committee Interlocks and
Insider Participation," "Compensation of Executive Officers and Directors -
Summary Compensation Table," "--Option Grants in Fiscal Year Ended December 31,
1998," "--Option Exercises and Fiscal Year End Values," and "Management -
Employment and Termination Agreements" are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section of Company's 1999 Proxy Statement entitled "Stock Ownership of
Certain Beneficial Owners, Directors and Management" is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section of the Company's 1999 Proxy Statement entitled "Certain
Relationships and Related Transactions" is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. OR
EXHIBIT INCORPORATION
NO. DESCRIPTION BY REFERENCE
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 3rd Amended and Restated Certificate of Incorporation of the Company. !!!
3.2 Certificate of Designation of the Company's 14.75% Redeemable Preferred Stock due 2008. ####
3.3 Certificate of Amendment of the Certificate of Designation of the Company's 14.75% Redeemable ####
Preferred Stock due 2008.
3.4 Amended and Restated By-Laws of the Company, as amended. !!!!
3.5 Governance Agreement dated November 8, 1995, between the Company and the holders of its Preferred ++
Stock.
3.6 Certificate of Designation of the Company's 12 3/4% Junior Redeemable Preferred Stock due 2009. !
3.7 Certificate of Correction dated March 11, 1996 #
3.8 Supplemental Governance Agreement dated February 26, 1996. #
4.1 Specimen Certificate of the Company's Common Stock. *
4.3 March 11, 1996 Supplement to 1995 Indenture #####
4.2 Indenture dated November 14, 1995, between the Company and Chemical
Bank, as trustee, relating to $190,000,000 in principal amount of
13% Senior Discount Notes due 2005, including the form of global note. ++
4.4 Initial Global Note dated November 14, 1995. ++
4.5 Warrant Agreement dated November 14, 1995, between the Company and
Smith Barney Inc. and Salomon Brothers Inc. +++
4.6 Initial Global Warrant dated November 14, 1995. +++
4.7 Indenture dated March 21, 1996, between the Company and Chemical Bank,
</TABLE>
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<TABLE>
<S> <C> <C>
as trustee, relating to $120,000,000 in principal amount of 12 3/4%
Senior Discount Notes due 2006, including the form of global note (the "1996 Indenture"). +++++
4.8 Supplemental Indenture dated as of January 13, 1997, between the Company and the +++++
Chase Manhattan Bank, as trustee, to the Indenture dated November 14, 1995, as
amended, relating to the Company's 13% Senior Discount Notes due 2005.
4.9 Supplemental Indenture dated as of January 13, 1997, between the Company and the Chase Manhattan ++++
Bank, as trustee, to the Indenture dated March 26, 1996, as amended, relating to the Company's
12 3/4% Senior Discount Notes due 2006.
4.10 Supplemental Indenture dated as of July 7, 1997, between the Company and the Chase Manhattan Bank, ####
as trustee, to the Indenture dated November 14, 1995, as amended, relating to the Company's 13%
Senior Discount Notes due 2005.
4.11 Supplemental Indenture dated as of July 7, 1997, between the Company and the Chase Manhattan Bank, ####
as trustee, to the Indenture dated March 26, 1996, as amended, relating to the Company's 12 3/4%
Senior Discount Notes due 2006.
4.12 Specimen Certificate of the Company's 14.75% Redeemable Preferred Stock due 2008. ####
4.13 Warrant Agreement dated as of July 10, 1997, between the Company and The Chase Manhattan Bank, as ####
warrant agent.
4.14 Form of Warrant. ####
4.15 Indenture dated as of July 23, 1997, between the Company and The Chase Manhattan Bank, as trustee, ####
relating to the Company's 13 3/4% Senior Notes due 2007.
4.16 Escrow and Disbursement Agreement dated as of July 23, 1997, among the Company, the ####
Bank of New York, as escrow agent, and the The Chase Manhattan Bank, as trustee,
relating to the Company's 13 3/4% Senior Discount Notes due 2007.
4.17 Specimen Certificate of the Company's 12 3/4% Junior Redeemable Preferred Stock due 2009. !
4.18 Warrant Agreement dated March 6, 1997 between the Company and MCI metro
Access Transmission Services, Inc. *****
4.19 Supplemental Indenture dated as of February 27, 1998 between the Company and the Chase Manhattan ####
Bank, as trustee, to the Indenture dated November 14, 1995, as amended, relating to the Company's
13% Senior Discount Notes due 2005.
4.20 Supplemental Indenture dated as of February 27, 1998 between the Company and the Chase Manhattan ####
Bank, as trustee, to the Indenture dated March 26, 1996, as amended, relating to the Company's
12 3/4% Senior Discount Notes due 2006.
4.21 Supplemental Indenture dated as of February 27, 1998 between the Company and the Chase Manhattan ####
Bank, as trustee, to the Indenture dated July 23, 1997, as amended, relating to the Company's
13 3/4% Senior Discount Notes due 2007.
4.22 Indenture dated as of July 24, 1998, between the Company and the Chase Manhattan Bank, as trustee, !!
relating to the Company's 10.625% Senior Discount Notes due July 1, 2008, including the form of
global note.
9.1 Standstill Agreement dated June 26, 1995, between the Company and
certain of its Preferred Stockholders. ****
9.2 Standstill Agreement dated November 8, 1995, between the Company and
certain of its Preferred Stockholders. ++
9.3 Voting Rights Agreement dated November 8, 1995, between the Company and
certain of its Preferred Stockholders. ++
9.4 Amendment to Voting Rights Agreement dated December 14, 1995. #
10.1 Exchange Agreement, dated June 1, 1994, between the Company and certain of
its Preferred Shareholders. *
10.2 Exchange Agreement, dated June 26, 1995, between the Company and its 9%
Series A Preferred Shareholders. **
10.3 Company's amended 1994 Stock Option Plan. ++
10.4 Company's Employee Stock Purchase Plan ++++
10.5 Registration Rights Agreement dated July 1, 1992, between American
Lightwave, Inc. and persons named therein. *
10.6 Supplemental Registration Rights Agreement dated June 26, 1995. ****
10.7 Management Registration Rights Agreement dated June 30, 1995. ****
10.8 Registration Rights Agreement dated June 26, 1995, between the Company
and certain Preferred Stockholders. **
10.9 Form of Warrant Agreement issued to certain Preferred Stockholders on
June 26, 1995. ****
10.10 Form of $.01 Warrant Agreement. ****
10.11 Form of $1.79 Warrant Agreement. ****
10.12 Form of $2.25 Warrant Agreement. ****
10.13 Stockholders Agreement dated June 26, 1995, between the Company and
certain Preferred Stockholders. ****
10.14 2nd Amendment to the Third Amended and Restated Employment Agreement between the Company and %%%
Anthony J. Pompliano ##
</TABLE>
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<PAGE> 48
<TABLE>
<S> <C> <C>
10.15 Third Amended and Restated Employment Agreement between the Company ##
and Riley M. Murphy. ****
10.16 Employment Agreement between the Company and David L. Piazza ## *****
10.17 Employment Agreement dated as of January 23, 1998 by and between the Company and Ronald E. Spears ###
##
10.18 Form of Stock Option Certificates, as amended, issued to executive officers under employment ****
agreements.
10.19 Agreement, dated October 19, 1994, between the Company and Marvin
Saffian & Company. *
10.20 Lease Agreement for the Company's executive offices at 131 National
Business Parkway, Suite 100, Annapolis Junction, Maryland, as amended. ****
10.21 Consulting Agreement, dated October 25, 1993, between the Company and
Thurston Partners, Inc. *
10.22 Consulting Agreement, dated June 16, 1994, between the Company and Thurston
Partners. Inc. and Global Capital, Inc. *
10.23 Note Purchase Agreement, dated June 28, 1994. *
10.24 Stock Purchase Agreement dated December 17, 1996 by and between the Company and CyberGate, Inc. + + + +
10.25 Stock Purchase Agreement, dated May 12, 1995, by and among the Company,
Piedmont Teleport, Inc., Randal Holcombe and Karen Holcombe, as amended. ****
10.26 Stock and Warrant Purchase Agreement, dated June 26, 1995, between the
Company and the Purchasers named therein. **
10.27 Form of Indemnity Agreement between the Company and its Director, as
amended. ****
10.28 Assignment and Assumption Agreement dated June 21, 1995, between the
Company and Apex Investment Fund II, L.P. ****
10.29 Letter Agreement dated November 14, 1995, between the Company and ING Equity Partners,
L.P.I, with respect to the purchase of 50,000 shares of the Company's 9% Series
B-4 Convertible Preferred Stock and warrants to purchase 214,286 shares of Common Stock. ++
10.30 Warrant to Purchase Shares of American Communications Services, Inc.
Common Stock dated December 28, 1995, between the Company
and Gerard Klauer, Mattison & Co. ("GKM Warrant I"). ++
10.31 Warrant to Subscribe For and Purchase Common Stock of American Communications Services, Inc.
dated December 28, 1995, between the Company and Gerard Klauer, Mattison & Co. ("GKM Warrant II"). ++
10.32 Amended 1994 Stock Option Plan of the Company. ++
10.33 Amendment to Amended 1994 Stock Option Plan of the Company !!!!!
10.34 Registration Rights Agreement dated as of July 10, 1997 among the Company, BT Securities ####
Corporation, Alex. Brown & Sons, Incorporated, The Huff Alternative Income Fund,
L.P., General Motors Domestic Group Pension Trust, Societe
Generale Securities Corporation, ING Baring (U.S.)
Securities, Inc. and McDermott Inc. Master Trust.
10.35 Registation Rights Agreement dated as of July 23, 1997 among the Company and BT Securities as ####
representatives of the Initial Purchasers therein.
10.36 Supplemental Registration Rights Agreement, dated as of July 10, 1997, among the Company, the Huff %
Alternative Income Fund, L.P., General Motors Domestic Group Pension Trust and McDermott Inc. Master
Trust.
10.37 Loan and Security Agreement dated December 30, 1997 between the Company and AT&T Commercial Finance %%
Corporation.
10.38 Lease Agreement dated as of August 26, 1997, between the Company and Constellation Real Estate, ###
Inc. for the Company's executive offices at 133 National Business Parkway, Suite 200, Annapolis
Junction, Maryland.
10.39 Registration Rights Agreement, dated as of July 24, 1998 between the Company and Goldman Sachs & !!
Co., Bear, Stearns & Co. Inc. and ING Furman Selz LLC
10.40 Form of Non-Qualified Stock Option Certificates, as amended, issued to ++++
Anthony J. Pompliano.
10.41 Registration Rights Agreement dated March 6, 1997 between the Company and MCI metro ++++
Access Transmission Services, Inc.
10.42 American Communications Services, Inc. Annual Performance Plan effective as of January 1, 1997 ###
10.43 Lease Agreement dated as of October 28, 1998, between the Company and Monument One LLC for the E-1
Company's offices at 12975 Worldgate Drive, Herndon, Fairfax County, Virginia.
10.44 e.spire Communications, Inc. Non Qualified Deferred Compensation Plan effective as of October 1, E-2
1998 (terminated by the Compensation Committee on January 15, 1999, due to lack of participation)
11.1 Statement re: computation of per share earnings (loss). E-3
16.1 Letter re: change in certifying accountant. ***
21.1 Subsidiaries of the Registrant. ++++
23.1 Consent of KPMG LLP E-4
27.1 Financial Data Schedules. E-5
99.1 Supplemental Financial Information E-6
</TABLE>
48
<PAGE> 49
- ------------
* Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-87200) and incorporated by
reference.
** Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated June 26, 1995, and incorporated by reference.
*** Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended March 31, 1995, and
incorporated by reference.
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1995, and incorporated
reference
***** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal period ended December 31, 1996, and
incorporated by reference.
+ Previously filed as an exhibit to the Company's Annual Report on Form
10-QSB for the fiscal year ended June 30, 1995, and the Company's
Quarterly Report on Form 10-QSB for the fiscal quarter ended
September 30, 1995, both of which are incorporated by reference
++ Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 33-80305) and incorporated by
reference.
+++ Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-80673) and incorporated by
reference.
++++ Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-20867) and incorporated by
reference.
+++++ Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated March 26, 1996 and incorporated by reference.
# Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 333-3632) and incorporated by
reference.
## Management contracts or compensatory plan or arrangement.
### Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal year ended December 31, 1998 and
incorporated by reference.
#### Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the fiscal quarter ended June 30, 1997 and
incorporated by reference.
##### Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 333-20867) and incorporated by
reference.
! Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 (File No. 333-34395) and incorporated by
reference.
!! Previously filed as an exhibit to the Company's Registration
Statement on Form S-4 ( File No. 333-64079) and incorporated by
reference.
!!! Previously filed as an exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-58457) and incorporated by
reference.
!!!! Previously filed as exhibit to Company's Registration Statement on
Form S-8 (File No. 333-71387) and incorporated by reference.
!!!!! Previously filed with the Definitive Proxy Statement filed on
October 14, 1996 and incorporated by reference.
<PAGE> 50
% Previously filed as exhibit to Company's Registration Statement on
Form S-3 (File No. 333-58457) and incorporated by reference.
%% Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated January 17, 1997 and incorporated by reference.
%%% Filed as an exhibit to the Company's Form 10-Q filed for the quarter
ending September 30, 1998, and incorporated by reference.
b) REPORTS ON FORM 8-K
(a) On November 23, 1998, the Company filed with the SEC a Current Report
on Form 8-K announcing that Anthony J. Pompliano, founder and
Chairman of the Board, reassumed his role as Chief Executive Officer.
In addition, the Company also announced the resignation of Jack E.
Reich as President, Chief Executive Officer and Director.
(b) On February 22, 1999, e.spire Communications, Inc. filed with the SEC
a Current Report on Form 8-K announcing that Dennis Kern was named
Chief Operating Officer of the Company. Mr. Kern replaced Ronald E.
Spears, who has resigned from the Company, effective July 1, 1999.
<TABLE>
<CAPTION>
e.spire COMMUNICATIONS, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions Of Period
- ---------------------------------------- --------------- --------------- --------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Deducted from assets accounts:
Allowance for doubtful accounts $1,921 $6,853 $3,193 $5,581
Year ended December 31, 1997
Deducted from assets accounts:
Allowance for doubtful accounts $ 433 $2,171 $ 683 $1,921
Six months ended December 31, 1996
Deducted from assets accounts:
Allowance for doubtful accounts $ 190 $ 243 $ 0 $ 433
Year ended June 30, 1996
Deducted from assets accounts:
Allowance for doubtful accounts $ 9 $ 181 $ 0 $ 190
</TABLE>
<PAGE> 51
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
e.spire COMMUNICATIONS, INC.
<TABLE>
<S> <C>
March 31, 1999 By: /s/ Anthony J. Pompliano
- -------------- ------------------------
Date Anthony J. Pompliano, Chairman of the Board of Directors and
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
March 31, 1999 By: /s/ Anthony J. Pompliano
- -------------- ------------------------
Date Anthony J. Pompliano, Chairman of the Board of Directors
(Principal Executive Officer)
March 31, 1999 By: /s/ David L. Piazza
- -------------- -------------------
Date David L. Piazza, Chief Financial Officer
(Principal Financial and Accounting Officer)
March 31, 1999 By: /s/ George M. Middlemas
- -------------- -----------------------
Date George M. Middlemas, Director
March 31, 1999 By:
- -------------- -------------------
Date Edwin M. Banks, Director
March 31, 1999 By: /s/ Christopher L. Rafferty
- -------------- ---------------------------
Date Christopher L. Rafferty, Director
March 31, 1999 By:
- -------------- ---------------------
Date Benjamin P. Giess, Director
March 31, 1999 By: /s/ Olivier L. Trouveroy
- -------------- ------------------------
Date Olivier L. Trouveroy, Director
March 31, 1999 By:
- -------------- -------------------
Date Peter C. Bentz, Director
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
INDEX OF EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
<S> <C> <C>
10.43 Lease Agreement dated as of October 28, 1998 between E-1
the Company and Monument One LLC for the Company's offices
At 12975 Worldgate Drive, Herndon, Fairfax County, Virginia
10.44 e.spire Communications, Inc. Non-Qualified Deferred E-2
Compensation Plan effective as of October 1, 1998 (terminated)
by the Compensation Committee on January 15, 1999, due to lack
of participation)
11.1 Statement re: computation of per share earnings (loss). E-3
23.1 Consent of KPMG LLP E-4
27.1 Financial Data Schedule E-5
99.1 Supplemental Financial Information E-6
</TABLE>
<PAGE> 53
e.spire Communications, Inc.
Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(With Independent Auditors' Report Thereon)
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
e.spire Communications, Inc.:
We have audited the accompanying consolidated balance sheets of e.spire
Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the year ended June 30, 1996, the six months ended December
31, 1996, and the years ended December 31, 1997 and 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 e.spire
Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for the year ended June 30,
1996, the six months ended December 31, 1996, and the years ended December 31,
1997 and 1998, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Washington, D.C.
February 16, 1999, except for Note 2 which is as of
February 26, 1999
<PAGE> 55
e.spire COMMUNICATIONS, INC.
Consolidated Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
ASSETS 1997 1998
------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 260,837 328,758
Restricted cash and investments 26,526 30,769
Trade accounts receivable, net of allowance for doubtful accounts of $1,921 and $5,581 at
December 31, 1997 and 1998, respectively 15,514 42,254
Unbilled revenue -- 12,093
Other current assets 6,127 8,742
------------- ------------
Total current assets 309,004 422,616
Networks, equipment and furniture, gross 282,153 561,954
Less - accumulated depreciation and amortization (31,675) (76,020)
------------- ------------
Networks, equipment and furniture, net 250,478 485,934
Deferred financing fees, net of accumulated amortization of $3,649, and $7,855 at
December 31, 1997 and 1998, respectively 25,031 42,184
Intangible assets, net of accumulated amortization of $776 and $3,897 at December 31, 1997
and 1998, respectively 8,132 14,743
Restricted cash and investments 45,375 15,125
Other assets 876 2,355
------------- ------------
Total assets $ 638,896 982,957
============= ============
<CAPTION>
LIABILITIES, REDEEMABLE STOCK AND OPTIONS, MINORITY
INTEREST, AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Notes payable - current portion $ 438 2,188
Obligations under capital leases - current portion -- 3,607
Accounts payable 18,308 66,647
Accrued interest 13,360 13,864
Accrued employee costs 2,353 1,682
Other accrued liabilities 2,311 8,894
-------------- -------------
Total current liabilities 36,770 96,882
Long-term liabilities:
Notes payable, less current portion 460,848 723,105
Obligations under capital leases, less current portion -- 20,915
Other long-term liabilities 474 2,745
Dividends payable -- --
-------------- -------------
Total liabilities 498,092 843,647
Redeemable stock and options:
Redeemable options 1,000 --
14 3/4% Redeemable Preferred Stock due 2008 55,061 70,136
12 3/4% Junior Redeemable Preferred Stock due 2009 150,099 170,908
-------------- -------------
Total redeemable stock and options 206,160 241,044
-------------- -------------
Stockholders' equity (deficit):
Common stock, $.01 par value, 125,000,000 shares authorized, 37,219,419 and 48,446,064
shares issued and outstanding at December 31, 1997 and 1998, respectively 372 484
Additional paid-in capital 131,728 258,317
Accumulated deficit (197,456) (360,535)
-------------- -------------
Total stockholders' deficit (65,356) (101,734)
-------------- -------------
Commitments and contingencies (notes 1, 2, 7, 12, 13 and 16)
Total liabilities, redeemable stock and options, and stockholders' deficit $ 638,896 982,957
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 56
e.spire COMMUNICATIONS, INC.
Consolidated Statements of Operations
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEARS ENDED
FOR THE MONTHS ENDED DECEMBER 31,
YEAR ENDED DECEMBER 31, -------------------------------
JUNE 30, 1996 1996 1997 1998
------------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications services $ 3,415 6,991 56,144 127,343
Network technologies services -- -- 2,857 29,416
------------------ --------------- --------------- -------------
3,415 6,991 59,001 156,759
------------------ --------------- --------------- -------------
Cost of sales:
Telecommunications services 5,265 8,703 52,481 98,074
Network technologies services -- -- 400 8,739
------------------ --------------- --------------- -------------
5,265 8,703 52,881 106,813
------------------ --------------- --------------- -------------
Gross margin:
Telecommunications services (1,850) (1,712) 3,663 29,269
Network technologies services -- -- 2,457 20,677
------------------ --------------- --------------- -------------
(1,850) (1,712) 6,120 49,946
------------------ --------------- --------------- -------------
Operating expenses:
Selling, general, and administrative 13,464 20,270 59,851 103,639
Noncash stock compensation 2,736 549 4,274 9,928
Depreciation and amortization 3,078 4,912 24,131 47,332
------------------ --------------- --------------- -------------
Total operating expenses 19,278 25,731 88,256 160,899
------------------ --------------- --------------- -------------
Operating loss (21,128) (27,443) (82,136) (110,953)
Nonoperating income (expenses):
Interest and other income 4,410 2,757 8,685 23,348
Interest and other expense (10,477) (10,391) (41,565) (75,474)
------------------ --------------- --------------- -------------
Loss before minority interest (27,195) (35,077) (115,016) (163,079)
Minority interest 413 160 -- --
------------------ --------------- --------------- -------------
Net loss (26,782) (34,917) (115,016) (163,079)
Preferred stock dividends and accretion (3,871) (2,004) (11,630) (36,080)
------------------ --------------- --------------- -------------
Net loss applicable to common
stockholders $ (30,653) (36,921) (126,646) (199,159)
================== =============== =============== =============
Basic and diluted net loss per common
share $ (4.96) (5.48) (4.65) (4.45)
================== =============== =============== =============
Weighted average number of common
shares outstanding 6,185,459 6,733,759 27,233,642 44,751,690
================== =============== =============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 57
e.spire COMMUNICATIONS, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
Year ended June 30, 1996, the six months ended December 31, 1996,
and the years ended December 31, 1997 and 1998
(in thousands, except share data)
<TABLE>
<CAPTION>
SERIES A-1 SERIES B
PREFERRED STOCK PREFERRED STOCK
---------------------- -----------------
SHARES AMOUNT SHARES AMOUNT
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Balances at June 30, 1995 186,664 $ 187 227,500 $ 228
Issuance of Series B-4 Preferred Stock -- -- 50,000 50
Issuance of detachable warrants -- -- -- --
Warrants and stock options exercised -- -- -- --
Series A and B Preferred Stock dividends accrued -- -- -- --
Cancellation of put right obligations -- -- -- --
Stock compensation expense -- -- -- --
Net loss -- -- -- --
-------- ---- -------- ----
Balances at June 30, 1996 186,664 187 277,500 278
Warrants and stock options exercised -- -- -- --
Series A and B Preferred Stock dividends accrued -- -- -- --
Accretion of consulting agreement credit to exercise price of warrants -- -- -- --
Cancellation of put right obligations -- -- -- --
Stock compensation expense -- -- -- --
Net loss -- -- -- --
-------- ---- -------- ----
Balances December 31, 1996 186,664 187 277,500 278
Shares issued as consideration for acquisitions -- -- -- --
Series A and B Preferred Stock dividends -- -- -- --
Issuance of common stock -- -- -- --
Conversion of preferred shares (186,664) (187) (277,500) (278)
Preferred dividends paid in stock -- -- -- --
Warrants and stock options exercised -- -- -- --
Cancellation of put right obligation -- -- -- --
Stock compensation expense -- -- -- --
Warrants issued -- -- -- --
Redeemable Preferred Warrants -- -- -- --
Preferred stock dividends/accretion -- -- -- --
Shares issued to AT&T -- -- -- --
Shares issued under employee stock purchase plan -- -- -- --
Accretion of consulting agreement credit to exercise price of warrants -- -- -- --
Net loss -- -- -- --
-------- ---- -------- ----
Balances at December 31, 1997 -- -- -- --
Issuance of common stock -- -- -- --
Warrants and stock options exercised -- -- -- --
Stock compensation expense -- -- -- --
Warrants issued -- -- -- --
Preferred stock dividends/accretion -- -- -- --
Shares issued under employee stock purchase plan and performance plan -- -- -- --
Cancellation of put right obligations -- -- -- --
Shares issued as consideration for acquisitions -- -- -- --
Net loss -- -- -- --
-------- ---- -------- ----
Balances at December 31, 1998 -- $ -- -- $ --
======== ==== ======== ====
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
---------- --------- ------------ --------------- -------------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 1995 5,744,782 $ 57 $ 42,412 $ (20,741) $ 22,143
Issuance of Series B-4 Preferred Stock -- -- 4,950 -- 5,000
Issuance of detachable warrants -- -- 8,684 -- 8,684
Warrants and stock options exercised 900,909 9 289 -- 298
Series A and B Preferred Stock dividends accrued -- -- (3,871) -- (3,871)
Cancellation of put right obligations -- -- 776 -- 776
Stock compensation expense -- -- 2,736 -- 2,736
Net loss -- -- -- (26,782) (26,782)
---------- ---- -------- --------- ---------
Balances at June 30, 1996 6,645,691 66 55,976 (47,523) 8,984
Warrants and stock options exercised 139,305 1 176 -- 177
Series A and B Preferred Stock dividends accrued -- -- (2,004) -- (2,004)
Accretion of consulting agreement credit to
exercise price of warrants -- -- 18 -- 18
Cancellation of put right obligations -- 1 154 -- 155
Stock compensation expense -- -- 550 -- 550
Net loss -- -- -- (34,917) (34,917)
---------- ---- -------- --------- ---------
Balances December 31, 1996 6,784,996 68 54,870 (82,440) (27,037)
Shares issued as consideration for acquisitions 1,081,166 11 9,374 -- 9,385
Series A and B Preferred Stock dividends -- -- (1,114) -- (1,114)
Issuance of common stock 8,660,000 86 39,866 -- 39,952
Conversion of preferred shares 17,377,275 174 291 -- --
Preferred dividends paid in stock 1,650,207 16 7,791 -- 7,807
Warrants and stock options exercised 1,367,460 14 3,254 -- 3,268
Cancellation of put right obligation -- -- 1,000 -- 1,000
Stock compensation expense -- -- 4,274 -- 4,274
Warrants issued -- -- 480 -- 480
Redeemable Preferred Warrants -- -- 21,604 -- 21,604
Preferred stock dividends/accretion -- -- (10,516) -- (10,516)
Shares issued to AT&T 207,964 2 (2) -- --
Shares issued under employee stock purchase plan 90,351 1 538 -- 539
Accretion of consulting agreement credit to
exercise price of warrants -- -- 18 -- 18
Net loss -- -- -- (115,016) (115,016)
---------- ---- -------- --------- ---------
Balances at December 31, 1997 37,219,419 372 131,728 (197,456) (65,356)
Issuance of common stock 7,502,418 75 130,236 -- 130,311
Warrants and stock options exercised 3,148,993 32 16,767 -- 16,799
Stock compensation expense -- -- 8,975 -- 8,975
Warrants issued -- -- 805 -- 805
Preferred stock dividends/accretion -- -- (36,080) -- (36,080)
Shares issued under employee stock purchase
plan and performance plan 404,169 4 2,201 -- 2,205
Cancellation of put right obligations -- -- 1,000 -- 1,000
Shares issued as consideration for acquisitions 171,065 1 2,685 -- 2,686
Net loss -- -- -- (163,079) (163,079)
---------- ---- -------- --------- ---------
Balances at December 31, 1998 48,446,064 $484 $258,317 $(360,535) $(101,734)
========== ==== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 58
e.spire COMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR MONTHS ENDED FOR THE YEARS ENDED
ENDED DECEMBER 31, DECEMBER 31,
-----------------------------
JUNE 30, 1996 1996 1997 1998
----------------- ---------------- ----------------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (26,782) (34,917) (115,016) (163,079)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,078 4,912 23,526 47,332
Interest deferral and accretion 10,448 10,041 41,032 39,489
Amortization of deferred financing fees 668 335 2,579 4,206
Noncash compensation, consultants, and other
expenses 2,736 550 4,274 9,928
Non-monetary revenue -- -- -- (13,950)
Other operating activities (413) 178 498 569
Changes in operating assets and liabilities:
Trade accounts receivable (385) (1,694) (12,959) (33,766)
Other assets (1,019) (852) (4,762) (4,075)
Accounts payable 17,474 12,270 (19,232) 48,101
Accrued liabilities (1,987) 2,471 3,707 7,270
------- ------- -------- --------
Net cash provided by (used in) operating
activities 3,818 (6,706) (76,353) (57,975)
------- ------- -------- --------
Cash flows from investing activities:
Acquisitions -- -- -- (6,734)
Restricted cash related to network activities (1,590) -- (1,119) (1)
Network development costs and purchases of
equipment and furniture (60,856) (64,574) (135,036) (242,522)
------- ------- -------- --------
Net cash used in investing activities (62,446) (64,574) (136,155) (249,257)
------- ------- -------- --------
Cash flows from financing activities:
Issuance of notes payable 166,888 16,330 223,698 224,959
Payment of deferred financing fees (8,710) (381) (19,230) (21,359)
Warrant and stock option exercises 298 177 3,268 16,799
Issuances of Series B Preferred Stock, net of offering
costs 5,000 -- -- --
Issuance of warrants with 2005 Notes 8,684 -- -- --
Proceeds from sale of minority interest in subsidiaries 379 -- -- --
Payments of notes and other financing (146) (343) (495) (438)
</TABLE>
(Continued)
5
<PAGE> 59
e.spire COMMUNICATIONS, INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR MONTHS ENDED FOR THE YEARS ENDED
ENDED DECEMBER 31, DECEMBER 31,
-----------------------
JUNE 30, 1996 1996 1997 1998
------------------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
Cash flows from financing activities, continued:
Payment of obligations under capital leases $ -- -- -- (3,081)
Restricted cash related to notes payable -- -- (68,439) 26,007
Shares issued under the Employee Stock Purchase Plan -- -- 539 1,149
Issuance of common stock -- -- 39,953 130,311
Issuance of redeemable preferred stock -- -- 216,248 --
Other financing activities -- -- (816) 806
------- ------- ------- -------
Net cash provided by financing activities 172,393 15,783 394,726 375,153
------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents 113,765 (55,497) 182,218 67,921
Cash and cash equivalents, beginning of year 20,351 134,116 78,619 260,837
------- ------- ------- -------
Cash and cash equivalents, end of year $ 134,116 78,619 260,837 328,758
======= ======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid on all debt obligations $ 29 15 2,085 31,087
Supplemental disclosure of noncash investing and
financing activities:
Equipment financing $ 343 -- -- --
Dividends declared in connection with Series A
and B Preferred Stock $ 3,871 2,004 1,114 --
Dividends declared with Preferred Stock $ -- -- 5,349 27,730
Accrual of stock bonuses $ -- -- 2,886 4,762
Cancellation of put right obligations $ (776) (155) (1,000) (1,000)
Shares issued as consideration for acquisitions $ -- -- 8,755 2,686
Assets acquired under capital leases and
non-monetary transactions $ -- -- -- 37,231
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 60
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
(1) BASIS OF PRESENTATION AND RELATED MATTERS
(a) ORGANIZATION
The consolidated financial statements include the accounts of e.spire
Communications, Inc. and its wholly-owned subsidiaries ("e.spire" or
the "Company"). All material intercompany accounts and transactions
have been eliminated in consolidation.
Effective December 31, 1996, the Company changed its fiscal year from
a twelve-month period ending June 30 to a twelve-month period ending
December 31. The consolidated statements of operations, stockholders'
equity (deficit) and cash flows are presented for the twelve month
period ended June 30, 1996, the six month period ended December 31,
1996, and the years ended December 31, 1997 and 1998.
(b) BUSINESS
e.spire is an integrated communications provider. The Company owns
and operates digital fiber optic networks and offers a variety of
telecommunications services to long distance companies and business,
government and consumer end users in selected target markets
throughout the United States. The Company provides nonswitched
dedicated services, including special access, switched transport, and
private line services, as well as high speed data services, Internet
services, local switched voice services and long-distance services
using its own facilities and on a resale basis.
In 1997, the Company began offering fiber optic network design,
construction and project management services ("network technologies
services") to carriers, large customers and municipalities. In 1998,
the Company formed ASCI Network Technologies, Inc. ("Network
technologies"), a wholly owned subsidiary, to further pursue these
opportunities.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, with original
maturity dates of three months or less, to be cash equivalents. The
Company's investments consist of commercial paper, US Government
Securities and money market instruments. The cost of these
investments approximates fair value.
(d) RESTRICTED CASH AND INVESTMENTS
The Company has provided performance bonds and letters of credit in
various cities in connection with its operations, resulting in a
restriction to cash amounting to approximately $1,223 and $1,222 at
December 31, 1997 and 1998, respectively. The face amount of all
bonds and letters of credit is approximately $12,292 as of December
31, 1998. In addition, the
(Continued)
7
<PAGE> 61
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
Company placed approximately $70,677 into an escrow account during
1997 to fund the first five interest payments of its 13 3/4 percent
Senior Notes due 2007 (see note 8). Of this amount, approximately
$44,672 is remaining at December 31, 1998 for the last three unpaid
interest payments. Approximately $29,547 of the escrow account, which
relates to interest payments expected to be made during 1999, is
classified as current at December 31, 1998. The escrow account is
invested in marketable securities consisting of government and
commercial securities with maturity dates ranging from January 7,
1999 to July 31, 1999.
(e) MARKETABLE SECURITIES
The Company's short- and long-term debt securities and marketable
equity securities are carried at estimated fair value. The estimated
fair value of short- and long-term investments is determined based on
quoted market prices. The Company's marketable securities have been
classified as available for sale and are recorded at current
estimated fair value with an offsetting adjustment, if any, to
stockholders' equity (deficit). At December 31, 1997 and 1998, fair
value approximated amortized cost.
(f) NETWORKS, EQUIPMENT, AND FURNITURE
Networks, equipment, and furniture are stated at cost less
accumulated depreciation and amortization. Costs capitalized during
the network development stage include expenses associated with
network engineering, design and construction, negotiation of
rights-of-way, obtaining legal and regulatory authorizations and the
amount of interest costs associated with the network development.
Provisions for depreciation of networks, equipment, and furniture are
computed using the straight-line method over the estimated useful
lives of the assets, beginning in the month a network is
substantially complete and available for use and equipment and
furniture are acquired.
The estimated useful lives of the Company's principle classes of
assets are as follows:
<TABLE>
<CAPTION>
<S> <C>
Networks:
Fiber optic cables and installation costs 20 years
Telecommunications equipment 3 - 10 years
Interconnection and collocation costs 3 - 10 years
Capitalized network development costs 18 months - 20 years
Leasehold improvements Shorter of term of lease
or useful life
Furniture and fixtures 5 years
Computer software 3 years
</TABLE>
(Continued)
8
<PAGE> 62
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
(g) INTANGIBLE ASSETS
Intangible assets include customer lists and goodwill. Goodwill is
being amortized on a straight-line basis over the period of expected
benefit, generally a period of ten years. Amortization expense
related to goodwill for the years ended December 31, 1997 and 1998
was approximately $726 and $1,144, respectively.
The costs of purchased customer lists are amortized on a
straight-line basis over their estimated useful lives, generally
eighteen months. The Company determines the useful lives of customer
lists based upon the estimated length of the acquired customers'
future service. Amortization expense related to purchased customer
lists was approximately $50 and $1,977 for the years ended December
31, 1997 and 1998, respectively.
(h) VALUATION OF LONG-LIVED ASSETS
The Company accounts for the valuation of long-lived assets under
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of. This statement requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the estimated fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value
less costs to sell.
(i) DEFERRED FINANCING FEES
Deferred financing fees include commitment fees and other costs
related to certain debt financing transactions and are being
amortized using the effective interest method over the initial term
of the related debt. Deferred finance fees also include payments to
bondholders for debt modifications that do not result in debt
extinguishment.
(j) REVENUE RECOGNITION
Revenue from telecommunications services is recognized as services
are provided. Billings to customers for services in advance of
providing such services are deferred and recognized as revenue when
earned. The Company also enters into managed services agreements with
certain customers. Under such agreements the Company provides use of
Company owned equipment, collocation, and network access services.
Revenue is recognized on a monthly basis as these services are
provided to the customer.
(Continued)
9
<PAGE> 63
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
The Company recognizes revenue associated with engineering and
construction contracts using the percentage-of-completion method,
based primarily on contract costs incurred to date compared with
total estimated contract costs. These revenues are included as
Network technologies in the consolidated statement of operations.
Network construction costs include all direct material and labor
costs and those indirect costs related to contract performance.
Revenue that has been earned under the percentage of completion
method, but has not been billed to the customer is included in
unbilled revenue in the consolidated balance sheets. Changes to total
estimated contract costs or losses, if any, are recognized in the
period in which they are determined.
(k) EARNINGS (LOSS) PER COMMON SHARE
The computations of basic and diluted earnings (loss) per common
share are based upon the weighted average number of common shares
outstanding during the year. Dilutive earnings per share give effect
to all potentially dilutive common securities. Potentially dilutive
securities include convertible preferred stock, stock options and
warrants.
(l) INCOME TAXES
Deferred income taxes are recognized for temporary differences
between financial statement and income tax bases of assets and
liabilities and loss carryforwards and tax credit carryforwards for
which income tax benefits are expected to be realized in future
years. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that all, or some portion, of
such deferred tax assets will not be realized. The effect on deferred
taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
(m) STOCK OPTIONS
Prior to July 1, 1996, the Company accounted for stock options in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On July 1, 1996, the Company
adopted SFAS No. 123, Accounting for Stock Based Compensation, which
permits entities to recognize as expense over the vesting period the
fair value of all stock based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosure for employee stock option
grants as if the fair-value based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosures of SFAS No. 123.
(Continued)
10
<PAGE> 64
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
(n) RECLASSIFICATIONS
Certain reclassifications were made in the 1997 and prior
consolidated financial statements to conform to the December 31, 1998
presentation. Such reclassifications had no effect on net loss or
total stockholders' equity (deficit).
(o) USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the dates of the consolidated financial statements
and the reported amounts of revenue and expenses during the reporting
periods. Actual results may differ from those estimates.
(2) RISKS AND UNCERTAINTIES
(a) NEGATIVE CASH FLOW
To date, the Company has funded the construction of its networks and
its operations with external financing though various preferred
stock, common stock, and debt issuances, as well as through capital
lease financing. As a result of certain of these transactions, the
Company will be required to satisfy substantially higher periodic
cash debt service obligations in the future. There can be no
assurance that the Company will be able to generate sufficient cash
flow or otherwise obtain funds to cover interest, principal and
redeemable preferred stock dividend payments associated with
currently outstanding and future debt and other obligations.
The Company has never been profitable, has never generated positive
cash flow from consolidated operations and, since its inception has
incurred significant net operating losses and negative cash flow. In
accordance with the terms of its debt facilities, the Company has
also deferred payment of most of its interest charges. The Company's
continued development, construction, expansion, and operation of
local networks, as well as the further development of additional
services, including local switched voice and high-speed data
services, will require continued substantial capital expenditures.
The Company's ability to fund these expenditures is dependent upon
the Company raising substantial financing. To meet its remaining
capital requirements and to fund operations and cash flow
deficiencies, the Company will be required to sell additional equity
securities, increase its existing credit facility, acquire additional
credit facilities or sell additional debt securities, certain of
which may require the consent of the Company's bondholders. There can
be no assurance that the Company will be able to obtain the
additional financing necessary to satisfy its cash requirements or to
successfully implement its growth strategy. Failure to raise
sufficient capital could compel the Company to delay or abandon some
or all of its plans or expenditures, which could have a material
adverse effect on
(Continued)
11
<PAGE> 65
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
its business, results of operations, and financial condition.
Management believes that the Company's current cash resources will be
sufficient to fund the Company's continuing negative cash flow and
required capital expenditures through mid-2000.
(b) RECIPROCAL COMPENSATION
The Company has recorded revenue of approximately $1.6 million and
$17.7 million, respectively, for fiscal 1997 and 1998 for reciprocal
compensation relating to the transport and termination of local
traffic primarily to Internet service providers ("ISPs") from
customers of incumbent local exchange carriers pursuant to various
interconnection agreements. These local exchange carriers have not
paid and have disputed the majority of these charges based on the
belief that such calls are not local traffic as defined by the
various agreements and under state and federal laws and public
policies. The resolution of these disputes will be based on rulings
by state public utility commissions ("PUCs"), or the FCC, the courts
and/or commercial arbitrators. On February 26, 1999, the FCC ruled
that ISP-bound traffic is jurisdictionally "interstate in nature" but
delegated to state PUCs the decision of whether reciprocal
compensation must be paid under the terms of existing local
interconnection agreements. To date, there have been no unfavorable
final rulings concerning payment of past due reciprocal compensation
amounts for ISP traffic in states in which e.spire billed reciprocal
compensation through December 31, 1998. The Company has outstanding
trade accounts receivable related to reciprocal compensation of
approximately $16.8 million at December 31, 1998. Although there can
be no assurance that future regulatory rulings will be favorable to
the Company, the Company believes that all of these amounts are
ultimately collectible, although the timing of receipts cannot be
predicted at this time.
Certain of the Company's interconnection agreements with the
incumbent local exchange carriers have expired or soon will expire.
The Company believes that there is substantial risk that the future
rates for reciprocal compensation under new interconnection
agreements, some of which are currently in negotiation, will be
significantly less than current rates.
(c) YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any
company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather that the year
2000. This could result in system failures or miscalculations causing
disruptions of operations including, among other things, an inability
to process transactions, provide service, send invoices or engage in
similar business activities.
The Company believes it has completed its assessment of its Year 2000
risk and has developed and is currently implementing a remediation
plan which includes modification of certain current
(Continued)
12
<PAGE> 66
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
systems, the implementation of new systems and coordination with
vendors and customers with which the Company shares date sensitive
data.
The Company anticipates fully implementing its Year 2000 plan no
later than October 31, 1999, which is prior to any anticipated impact
on its operations. The completion of this plan is contingent on
future events, including the continued availability of certain
resources, the implementation of third party modification plans and
other factors. However, there can be no assurance that these
deadlines will be achieved and actual results could differ materially
from those anticipated.
(d) CONCENTRATION OF CREDIT RISK
The Company receives a significant portion of its revenues from a
small number of major customers, particularly the long distance
telecommunications companies that service the Company's markets. For
the year ended June 30, 1996, the six months ended December 31, 1996,
and the years ended December 31, 1997 and 1998, approximately 60
percent, 40 percent, 20 percent, and 12 percent, respectively, of the
Company's revenues was attributable to services provided to four,
four, five, and five, respectively, of the largest long distance
telecommunications companies. The loss of any one of these customers
could have a material adverse impact on the Company's financial
condition and results of operations.
The Company provides services to certain ISPs. Such companies operate
in a highly competitive and uncertain environment. Approximately 19
percent, 20 percent, and 10 percent, respectively, of the Company's
revenues for the six months ended December 31, 1996 and the years
ended December 31, 1997 and 1998 was attributed to these companies.
At December 31, 1997, and 1998, the Company had trade accounts
receivable of $5,000 and $4,800, respectively, from ISPs. At December
31, 1998, the Company also has equipment with a carrying value of
approximately $16,900 that is dedicated to providing service to these
ISPs. The Company believes that, if necessary, this equipment can be
redeployed throughout the Company's data network.
(e) SYSTEMS IMPLEMENTATIONS
The Company delayed the implementation of several back office
information systems during the fourth quarter of 1998. The Company
currently intends to resume the implementation of each of these
systems before the end of 1999. If the Company decides in the future
not to continue with some or all of these systems implementations,
certain assets may become impaired and it would be necessary for the
Company to write-off all or part of the $15,300 of costs incurred in
connection with these system implementations, which are included in
network, equipment and furniture in the consolidated financial
statements as of December 31, 1998.
(Continued)
13
<PAGE> 67
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
(3) SEGMENT REPORTING
During 1998, the Company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The Company has identified two
reportable segments: Telecommunications and Network technologies. The
Telecommunications segment provides special access, local switched voice,
data transmission, and Internet services, over the Company's own
facilities and on a resale basis. The Network Technologies segment offers
fiber optic network design, project management and construction services.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business unit requires different technology and marketing strategies.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies included in note 1. The
Company evaluates performance based on revenue from third parties and
gross margin. The Network Technologies segment began operations in 1997
and was not a material part of the Company's operations until 1998.
A summary of the information related to the Company's operations for 1998
is as follows (revenue is generated solely from external customers):
<TABLE>
<CAPTION>
TELE- NETWORK
COMMUNICATIONS TECHNOLOGIES TOTAL
----------------- -------------- --------------
<S> <C> <C> <C>
Revenue $127,343 29,416 156,759
Cost of revenue 98,074 8,739 106,813
-------- ------ -------
Gross margin $ 29,269 20,677 49,946
======== ====== =======
Total assets $969,318 13,639 982,957
======== ====== =======
Increase in long-lived assets $279,353 448 279,801
======== ====== =======
Significant noncash items:
Noncash revenue $ -- 13,950 13,950
MCI warrant expense (805) -- (805)
-------- ------ -------
Total noncash items $ (805) 13,950 13,145
======== ====== =======
</TABLE>
The Company reports separately, in its consolidated statement of
operation, revenue and the associated cost of sales of its reportable
segments. Selling, general, and administrative expenses, noncash stock
compensation, depreciation and amortization, nonoperating income and
expense and minority interest are not allocated at a segment level.
(Continued)
14
<PAGE> 68
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
The Company has one large customer that represents approximately 11
percent of total revenues for the year ended December 31, 1998. Of these
revenues, approximately $9,500 and $7,637 was earned by the network
technologies and telecommunications segments, respectively.
(4) NETWORKS, EQUIPMENT, AND FURNITURE
Networks, equipment, and furniture consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
Networks and telecommunications equipment $ 269,214 494,721
Furniture and fixtures 2,054 15,934
Operating support systems 9,700 44,211
Leasehold improvements 1,185 7,088
-------------- --------------
282,153 561,954
Less: accumulated depreciation and amortization 31,675 76,020
-------------- --------------
Total, net of accumulated depreciation
and amortization $ 250,478 485,934
============== ==============
</TABLE>
For the year ended June 30, 1996, the six months ended December 31, 1996,
and the years ended December 31, 1997 and 1998, the Company capitalized
interest of approximately $3,051, $2,268, $3,933 and $3,246, respectively.
(5) PREFERRED STOCK
In October 1994, the Company completed a private placement of its 9
percent Series A Convertible Preferred Stock, $1.00 par value (the "Series
A Preferred Stock"). There were 138,889 shares issued for cash at $90 per
share resulting in proceeds of $10,962, net of placement agent commissions
and related placement fees and costs. In addition, bridge financing was
converted and several other obligations were retired with proceeds of the
offering. A total of 186,664 shares of the Series A Preferred Stock were
issued. Further, as discussed in note 9 to the consolidated financial
statements, certain parties obtained warrants to purchase shares of the
Company's common stock. In June 1995, the Series A Preferred Stock was
exchanged for an identical number of 9 percent Series A-1 Convertible
Preferred Stock, $1.00 par value (the "Series A-1 Preferred Stock").
In June 1995, the Company completed a private placement of its 9 percent
Series B-1 Convertible Preferred Stock (the "Series B-1 Preferred"), 9
percent Series B-2 Convertible Preferred Stock (the "Series B-2
Preferred") and 9 percent Series B-3 Convertible Preferred Stock (the
"Series B-3
(Continued)
15
<PAGE> 69
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
Preferred"), each having a par value of $1.00 per share. There were
227,500 shares issued for cash at $100 per share with proceeds of $20,662,
net of placement agent commissions and related placement fees and costs.
In November 1995, 50,000 shares of 9 percent Series B-4 Convertible
Preferred Stock (the "Series B-4 Preferred") were issued for cash of $100
per share resulting in proceeds of $5,000. The Series B-1 Preferred, the
Series B-2 Preferred, the Series B-3 Preferred and the Series B-4
Preferred are hereafter collectively referred to as the "Series B
Preferred Stock." The Series A-1 Preferred Stock and the Series B
Preferred Stock are hereafter collectively referred to as the "Preferred
Stock." Further, as discussed in note 9 to the consolidated financial
statements, certain parties obtained warrants to purchase shares of the
Company's Common Stock.
During 1997, the Preferred Stock was converted into 17,377,275 shares of
Common Stock. In connection with its Series A-1 and Series B Preferred
Stock, the Company recorded approximately, $3,871, $2,004, and $1,114 for
the year ended June 30, 1996, the six months ended December 31, 1996 and
the year ended December 31, 1997, respectively, as a reduction in
additional paid-in capital, for the payment of anticipated dividends. The
Company's certificate of incorporation required the Company to accrue
dividends, on a quarterly basis, at an annual rate of 9 percent of the
face value of the Series A-1 and B Preferred Stock. These dividends were
paid during 1997 in connection with the conversion of the Preferred Stock
(see note 6).
(6) COMMON STOCK OFFERINGS
During 1997, the Company issued 8,660,000 shares of Common Stock for net
proceeds of approximately $40,000, net of underwriters discounts and other
expenses of the offering. Concurrently with this transaction, 186,664
shares of the Company's Series A-1 Preferred Stock and 277,500 shares of
the Company's Series B Preferred Stock were converted into 17,377,275
shares of the Company's Common Stock (see note 5). In addition, of the
approximately $8,000 of dividends accrued on the Preferred Stock prior to
conversion, approximately $7,750 was paid with 1,650,207 shares of the
Company's common stock. The remaining accrued dividends were paid in cash.
On April 3, 1998, the Company completed a public offering of 8,100,000
shares of Common Stock at a price of $18.50 per share, of which 7,502,418
shares were issued and sold by the Company and 597,582 shares were sold by
certain shareholders of the Company. The total net proceeds to the Company
from this offering were approximately $130,311, net of underwriters
discounts and other expenses of the offering.
(Continued)
16
<PAGE> 70
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
(7) REDEEMABLE PREFERRED STOCK
On July 10, 1997, the Company consummated the sale of 75,000 units
consisting of its 14 3/4 percent Redeemable Preferred Stock due 2008 (the
"Redeemable Preferred Stock due 2008") and warrants to purchase
approximately 6,023,800 shares of its Common Stock yielding net proceeds
to the Company of approximately $70,200, net of underwriters fees and
other related expenses. The value attributed to the warrants was
approximately $21,600. The Company will be required to redeem all
outstanding shares of Redeemable Preferred Stock due 2008 at a price equal
to $1,000 per share plus any accrued and unpaid dividends.
The Redeemable Preferred Stock due 2008 may be redeemed, in whole or in
part, at the option of the Company, at any time after January 1, 2003, at
the redemption prices set forth below, plus any accrued and unpaid
dividends as of that date. The redemption prices, expressed in
percentages, are as follows:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
------------------- -----------------------
<S> <C>
2003 107.375%
2004 104.917%
2005 102.458%
2006 and thereafter 100.000%
</TABLE>
On October 6, 1997, the Company consummated the sale of 150,000 shares of
its 12 3/4 percent Junior Redeemable Preferred Stock due 2009 (the "Junior
Redeemable Preferred Stock due 2009") for proceeds of approximately
$146,000, net of underwriters fees and other related expenses. The Company
will be required to redeem all outstanding shares of the Junior Redeemable
Preferred Stock due 2009 on October 15, 2009 at $1,000 per share plus any
accrued and unpaid dividends.
The Junior Redeemable Preferred Stock due 2009 may be redeemed, in whole
or in part, at the option of the Company, at any time after October 15,
2003 at the redemption prices set forth below, plus any accrued and unpaid
dividends as of that date. The redemption prices, expressed in
percentages, are as follows:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
------------------- ------------------------
<S> <C>
2003 106.375%
2004 104.781%
2005 103.188%
2006 101.594%
2007 and thereafter 100.000%
</TABLE>
Dividends on the Redeemable Preferred Stock due 2008 and Junior Redeemable
Preferred Stock due 2009 (collectively "the Redeemable Preferred Stock")
may be paid, at the Company's option, either in cash or by the issuance of
additional shares of the Redeemable Preferred Stock; provided, however,
(Continued)
17
<PAGE> 71
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
that after June 30, 2002, to the extent and so long as the Company is not
precluded from paying cash dividends on the Redeemable Preferred Stock by
the terms of any then outstanding indebtedness, the Company is required to
pay dividends on the Redeemable Preferred Stock in cash.
The holders of the Redeemable Preferred Stock are not entitled to vote on
any matter required or permitted to be voted upon by the stockholders of
the Company. If, however, after June 30, 2002, the Company violates
certain covenants, including the payment of dividends, the Redeemable
Preferred Stockholders are permitted to vote as a single class to elect
not less than 25 percent of the members of the Board of Directors.
A summary of the changes in the Redeemable Preferred Stock is as follows:
<TABLE>
<CAPTION>
JUNIOR
REDEEMABLE REDEEMABLE
PREFERRED PREFERRED
STOCK STOCK
DUE 2008 DUE 2009
-------------------- --------------------
<S> <C> <C>
Balance at issuance, net of underwriters fees and
other related expenses $48,598 146,045
Payment of dividends in shares of Redeemable
Preferred Stock 5,349 --
Accrued dividends -- 3,985
Accretion to redemption value 1,114 69
------------- -------------
Balance at December 31, 1997 55,061 150,099
Payment of dividends in shares of Redeemable
Preferred Stock 12,480 15,250
Accrued dividends -- 4,517
Accretion to redemption value 2,595 1,042
------------- -------------
Balance at December 31, 1998 $70,136 170,908
============= =============
</TABLE>
(Continued)
18
<PAGE> 72
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
(8) DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1998
----------------------- -----------------------
<S> <C> <C>
AT&T Credit Corporation equipment and working
capital financing facility $ 35,000 34,563
2005 Senior Discount notes, interest at 13%,
maturing November 1, 2005 126,043 144,593
2006 Senior Discount notes, interest at 12 3/4%,
maturing April 1, 2006 80,243 90,821
2007 Senior Notes, interest at 13 3/4%, maturing
July 15, 2007 220,000 220,000
2008 Senior Notes, interest at 10.625%, maturing
July 1, 2008 -- 235,316
----------------------- -----------------------
Total long-term debt 461,286 725,293
Less current portion 438 2,188
----------------------- -----------------------
$ 460,848 723,105
======================= =======================
</TABLE>
Principal payments for each of the years from 1999 to 2003 and thereafter,
are due as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
<S> <C>
1999 $ 2,188
2000 3,938
2001 5,688
2002 7,437
2003 8,750
Thereafter 697,292
----------------
$ 725,293
================
</TABLE>
(a) AT&T CREDIT CORPORATION EQUIPMENT AND WORKING CAPITAL FINANCING
FACILITY
In October 1994, the Company entered into the AT&T Credit Facility
pursuant to which AT&T Credit Corporation agreed to provide financing
for the development and construction of fiber optic networks by
certain of the Company's subsidiaries. Pursuant to the AT&T Credit
Facility, during 1996 the Company's subsidiaries in Louisville, Fort
Worth, Greenville, Columbia, and El Paso entered into loan agreements
with AT&T Credit Corporation providing for up to $31,200 in loans
collateralized by the assets of such subsidiaries. Pursuant to the
AT&T Credit Facility,
(Continued)
19
<PAGE> 73
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
AT&T Credit Corporation purchased 7.25 percent of the outstanding
capital stock of each of the Company's operating subsidiaries for
which it provided financing.
On December 30, 1997, the Company and AT&T Credit Corporation agreed
to amend the terms of the facility, increasing the facility to
$35,000 and transferring the loan agreements from the Company's five
subsidiaries to the Company as a whole. The amendment also changed
the interest rates on the outstanding loans from a range of 11.93
percent to 14.47 percent to a variable rate equal to the three-month
Commercial Paper Rate or LIBOR Rate plus 4.5 percent (9.7 percent at
December 31, 1998). In addition, as part of the modification, the
Company issued 207,964 shares of common stock in exchange for all of
AT&T Credit Corporation's 7.25 percent ownership interest in the five
subsidiaries. The Company has pledged all of its shares of capital
stock in its material subsidiaries and Intercompany Notes to AT&T
Credit Corporation. Under certain circumstances, the pledge agreement
also restricts the Company's ability to receive and retain dividends
in respect of the pledged collateral.
The AT&T Credit Facility includes covenants which impose certain
restrictions on the Company, including restrictions on the
declaration or payment of dividends, the conduct of certain
activities, certain capital expenditures, the creation of additional
liens or indebtedness, the disposition of assets, transactions with
affiliates and extraordinary corporate transactions.
(b) SENIOR NOTES
On November 14, 1995, the Company completed an offering of 190,000
Units (the "Units") consisting of $190,000 principal amount of 13
percent Senior Discount Notes due 2005 (the "2005 Notes") and
warrants to purchase 2,432,000 shares of the Company's common stock
at a price of $7.15 per share (the "Warrants"). The 2005 Notes will
accrete at a rate of 13 percent compounded semi-annually to an
aggregate principal amount of $190,000 by November 1, 2000.
Thereafter, interest on the 2005 Notes will accrue at the annual rate
of 13 percent and will be payable in cash semi-annually. The 2005
Notes will mature November 1, 2005. The Company received net proceeds
of approximately $96,100 from the sale of the Units. The value
ascribed to the Warrants was $8,684.
On March 21, 1996, the Company completed an offering of $120,000 of
12 3/4 percent Senior Discount Notes due 2006 (the "2006 Notes")
resulting in net proceeds of approximately $61,800. The 2006 Notes
will accrete at a rate of 12 3/4 percent compounded semi-annually to
an aggregate principal amount of $120,000 by April 1, 2001.
Thereafter, interest on the 2006 Notes will accrue at the annual rate
of 12 3/4 percent and will be payable in cash semi-annually. The 2006
Notes will mature on April 1, 2006.
On July 23, 1997, the Company completed the sale of $220,000
aggregate principal amount of 13 3/4 percent Senior Notes due 2007
(the "2007 Notes"). Of the total net proceeds of approximately
$204,300, the Company placed approximately $70,000, representing
funds,
(Continued)
20
<PAGE> 74
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
together with interest thereon, sufficient to pay the first five
semi-annual interest payments on the 2007 Notes, into an escrow
account for the benefit of the holders. The 2007 Notes accrue
interest at a rate of 13 3/4 percent, payable in cash semi-annually,
on January 15 and July 15, commencing January 15, 1998. The 2007
Notes will mature on July 15, 2007.
On February 26, 1998, the Company paid approximately $10.3 million to
effect amendments (the "Amendments") to the indentures under which
the three classes of its outstanding debt securities were issued. The
Amendments revised certain covenants in the indentures which
significantly limited the ability of the Company and its subsidiaries
to incur additional indebtedness or make certain investments or
acquisitions. The limitations on indebtedness contained in the
indentures were amended to provide an alternative test permitting the
incurrence of additional indebtedness based on a debt to capital
ratio test, and increased the amount of unrestricted indebtedness
that the Company can incur. The Amendments also permit the incurrence
of indebtedness solely for the construction, acquisition, and
improvement of telecommunications assets, subject to certain
limitations.
On July 24, 1998, the Company completed the sale of $375,000
aggregate principal amount of 10.625 percent Senior Discount Notes
due 2008 (the "2008 Notes") resulting in net proceeds of
approximately $225,000. The 2008 Notes will accrete at a rate of
10.625 percent compounded semi-annually to an aggregate principal
amount of $375,000 by July 1, 2003. No cash interest will be paid on
the 2008 Notes prior to July 1, 2003. Thereafter, the 2008 Notes will
accrue cash interest at the annual rate of 10.625 percent payable
semi-annually. The 2008 Notes will mature on July 1, 2008.
The 2005 Notes, 2006 Notes, 2007 Notes and 2008 Notes (collectively
the "Notes") are general, unsubordinated and unsecured senior
obligations of the Company. The Company's subsidiaries have no
obligation to pay amounts due on the Notes and do not guarantee the
notes. Therefore, the Notes are effectively subordinated to all
liabilities of the Company's subsidiaries, including trade payables.
Any rights of the Company and its creditors, including the holders of
the Notes, to participate in the assets of any of the Company's
subsidiaries upon any liquidation or reorganization of any such
subsidiaries will be subject to the prior claims of that subsidiary's
creditors.
The Notes are subject to certain covenants which, among other things
restrict the ability of e.spire and certain of its subsidiaries to
incur additional indebtedness, pay dividends, or make distributions.
(Continued)
21
<PAGE> 75
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
(9) STOCK COMPENSATION AND STOCK PURCHASE WARRANTS
(a) STOCK COMPENSATION
The Company has a stock option plan which provides for the granting
of options to officers, employees, directors, and consultants of the
Company to purchase shares of its common stock within prescribed
periods.
In 1994, the Company entered into employment agreements with five
executive officers. Pursuant to the agreements, as amended, such
officers were granted options to purchase shares of Common Stock of
the Company. In accordance with their employment agreements, these
individuals had the right to sell certain of their shares to the
Company (the put right) for a price equal to fair market value. On
June 26, 1995, the employment agreements were amended to limit the
purchase price paid by the Company pursuant to the put right to a
maximum of $2,500, which amount is subject to further reductions
based on the employees' sales of stock. During the year ended
December 31, 1996, the limit was further reduced to $2,000. During
the year ended December 31, 1997, put rights related to $1,000
expired without exercise. During the year ended December 31, 1998 the
final $1,000 expired without exercise.
In 1997, the Company's Board of Directors adopted an Annual
Performance Plan, through which it will award its 1998 performance
bonuses to management and employees through the issuance of shares of
the Company's Common Stock. The Company has accrued approximately
$2,900 and $6,900, in noncash compensation cost at December 31, 1997
and 1998, respectively, for this purpose.
(Continued)
22
<PAGE> 76
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, compensation cost has been
recognized for its stock option plans based on the intrinsic value of
the option at the date of grant. The compensation cost that has been
charged against income for stock option plans was approximately,
$2,700, $550, $1,400 and $3,800 for the year ended June 30, 1996, the
six months ended December 31, 1996, and the years ended December 31,
1997 and 1998, respectively. Had compensation cost for the Company's
plan been determined based on the fair value at the grant dates,
consistent with the method of FASB Statement 123, for all options
granted after June 30, 1995, and the intrinsic value for all options
granted prior to July 1, 1995, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED DECEMBER 31,
YEAR ENDED ENDED -----------------------------------------
JUNE 30, 1996 DECEMBER 31, 1996 1997 1998
---------------------- --------------------------- ------------------------ ----------------
<S> <C> <C> <C> <C>
Net loss:
As reported $(26,782) (34,917) (115,016) (163,079)
Pro forma $(27,534) (36,829) (120,538) (175,657)
Loss per common share:
As reported: $ (4.96) (5.48) (4.65) (4.45)
Pro forma $ (5.08) (5.77) (4.85) (4.73)
</TABLE>
Pro forma net loss reflects compensation cost under SFAS No. 123 only
for options granted for the year ended June 30, 1996, the six months
ended December 31, 1996, and the years ended December 31, 1997 and
1998. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma
net loss amounts presented above because compensation cost is
reflected over the vesting period and compensation cost under SFAS
No. 123 for options granted prior to July 1, 1995 is not considered.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in the year ended June
30, 1996, the six months ended December 31, 1996, and the years ended
December 31, 1997 and 1998, respectively: dividend yield of 0 percent
for all periods, expected volatility of 50 percent, 50 percent, 50
percent, and 75 percent, risk-free interest rates of 5.97 percent,
6.4 percent, 6.0 percent and 5.14 percent and expected lives of 4.74,
4.37, 4.06, and 3.18 years.
(Continued)
23
<PAGE> 77
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
A summary of the status of the Company's stock options as of June 30,
1996 and December 31, 1996, 1997, and 1998 and changes during the
periods ending on those dates is presented below:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------------- ------------------------ --------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(`000S) PRICE (`000S) PRICE (`000S) PRICE (`000S) PRICE
------------ ------------ ----------- ----------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 5,042 $1.72 6,095 $ 2.21 7,457 $3.60 7,827 $ 4.69
Granted 1,228 $4.30 1,433 $ 9.45 2,141 $8.25 2,873 $10.46
Exercised (105) $2.46 (48) $ 2.02 (926) $2.39 (1,411) $ 3.23
Forfeited (70) $3.57 (23) $ 3.54 (845) $6.60 (645) $ 9.02
------ ------ ----- ------
Outstanding at end
of year 6,095 $2.21 7,457 $ 3.60 7,827 $4.69 8,644 $ 6.60
====== ====== ===== ======
Options exercisable
at year-end 3,461 4,140 4,379 5,279
====== ====== ===== ======
Weighted-average fair
value of options
granted during the
year $ 3.35 $ 5.95 $4.96 $ 6.60
</TABLE>
The following table summarizes information about fixed stock options
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ---------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE OUTSTANDING AVERAGE
RANGE OF AT 12/31/98 CONTRACTUAL EXERCISE AT 12/31/98 EXERCISE
EXERCISE PRICES (`000S) LIFE PRICE (`000S) PRICE
------------------ ----------------- ----------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.875 to $2.25 2,649 2.10 years $ 1.49 2,597 $ 1.49
$2.80 to $7.76 2,239 5.22 years $ 5.69 970 $ 4.92
$7.86 to $9.99 2,283 5.13 years $ 9.54 1,561 $ 9.41
$10.09 to $21.50 1,472 6.65 years $ 12.60 150 $ 14.96
------------------ ----------------- ----------------- --------------------- -----------------
$0.875 to $21.50 8,643 4.49 years $ 6.60 5,278 $ 4.84
================== ================= ================= ===================== =================
</TABLE>
(b) STOCK PURCHASE WARRANTS
During fiscal years ended June 30, 1995 and 1996, in connection with
the Series A-1 and Series B Preferred Stock private placements and
related bridge note conversions, warrants for 4,367,078 shares of
common stock were issued at prices ranging from $.01 to $3.10. In
fiscal 1996, as part of the issuance of the 2005 Notes, detachable
warrants to purchase 2,432,000 shares of the Company's common stock
at a price of $7.15 per share were issued. During 1997, as part of
the issuance of the Redeemable Preferred Stock due 2008, the Company
issued warrants to
(Continued)
24
<PAGE> 78
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
purchase 6,023,850 shares of Common Stock at $7.15 per share. The
Company also issued 657,582 warrants to MCIMetro Access Transmission
Services, Inc. during 1997. These warrants include certain
anti-dilution provisions.
On March 6, 1997, the Company entered into a preferred provider
agreement with MCIMetro Access Transmission Services, Inc. In
connection with the agreement, the Company issued warrants to
purchase 620,000 shares of the Company's Common Stock at $9.87 per
share. 360,000 of these warrants vested during 1997. The value
attributed to the vested warrants was approximately $1,300, which is
being recognized as network cost over the five year term of the
agreement. The Company also agreed to issue warrants to purchase up
to an aggregate of approximately 1.7 million additional shares of the
Company's Common Stock at fair market value on the date of grant in
tranches every six months, contingent upon certain increases in
revenue to the Company generated under the agreement. At December 31,
1998, the Company had issued 93,423 of such warrants with exercise
prices ranging from $9.50 to $16.88 per share. The value attributed
to these warrants was approximately $705. During 1997 and 1998,
respectively, the Company recognized approximately $480 and $805 in
network expense related to these warrants.
At December 31, 1998, unexercised warrants outstanding are as
follows:
<TABLE>
<CAPTION>
NUMBER
(`000S) PRICE PER SHARE
------------ ----------------------
<S> <C> <C>
Series A and Series B Preferred Stock placements 952 $ 0.01 - 3.10
2005 Senior Discount Notes offering 2,526 6.47
Redeemable Preferred Stock due 2008 offering 5,727 7.15
Other 316 9.87 - 16.88
------------ ----------------------
Total 9,521 $ 0.01 - 16.88
============ ======================
</TABLE>
The gross proceeds that would be received by the Company on the
exercise of all outstanding options and warrants are approximately
$120,000.
(c) EMPLOYEE STOCK PURCHASE PLAN
The Company adopted the Employee Stock Purchase Plan (the "ESPP") on
November 15, 1996. Under the ESPP, an aggregate of 500,000 shares of
Common Stock may be purchased from the Company by the employees
through payroll withholding pursuant to a series of offerings. All
full-time employees who have met certain service requirements (as
defined in the ESPP), except for employees who own Common Stock of
the Company or options on such stock which represent more than 5
percent of Common Stock of the Company, are eligible to participate.
The purchase price of the Common Stock is 85 percent of the fair
market value on the date the
(Continued)
25
<PAGE> 79
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
Common Stock is purchased. Purchases of Common Stock are made on a
monthly basis. During the years ended December 31, 1997 and 1998,
the Company sold 96,784 and 108,601 shares, respectively, of Common
Stock to the ESPP for a total of $748,811 and $1,149,736,
respectively.
The fair value of the employees' purchase rights of ESPP shares is
estimated using the Black-Scholes option pricing model with the
following weighted-average assumptions used for purchases in the
years ended December 31, 1997 and 1998, respectively: dividend yield
of 0 percent for both years, expected volatility of 50 percent and 75
percent, risk free interest rate of 6.0 percent and 5.14 percent and
expected life of one month for both years.
The weighted-average fair value of the purchase rights granted in
1998 was $10.59 per share.
(10) BASIC AND DILUTED EARNINGS PER SHARE
The following tables present the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1996
---------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------------- -------------------- ------------------
<S> <C> <C> <C>
Net loss $ (26,782)
Less: preferred stock dividends/accretion (3,871)
-------------------
Basic and diluted earnings per share:
Net loss to common stockholders $ (30,653) 6,185,459 $(4.96)
=================== ========= =======
</TABLE>
Convertible Preferred Stock outstanding as of June 30, 1996, convertible
into 17,377,264 shares of Common Stock, and options and warrants to
purchase 6,094,814 and 4,367,394 shares of Common Stock, respectively,
were not included in the computation of diluted earnings per share for the
year ended June 30, 1996 as their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------------- ------------------- ------------------
<S> <C> <C> <C>
Net loss $ (34,917)
Less: preferred stock dividends/accretion (2,004)
--------------
Basic and diluted earnings per share:
Net loss to common stockholders $ (36,921) 6,733,759 $(5.48)
============== ========= ========
</TABLE>
(Continued)
26
<PAGE> 80
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
Convertible Preferred Stock outstanding as of December 31, 1996,
convertible into 17,377,264 shares of Common Stock, and options and
warrants to purchase 7,457,085 and 4,771,836 shares of Common Stock,
respectively, were not included in the computation of diluted earnings per
share for the year ended December 31, 1996 as their inclusion would be
anti-dilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------------ ----------------- -----------------
<S> <C> <C> <C>
Net loss $ (115,016)
Less: Preferred Stock dividends/accretion (11,630)
------------------
Basic and diluted earnings per share:
Net loss to common stockholders $ (126,646) 27,233,642 $ (4.65)
================== ================= =================
</TABLE>
Options and warrants to purchase 7,827,318 and 11,267,365 shares of Common
Stock, respectively, were not included in the computation of diluted
earnings per share for the year ended December 31, 1997 as their inclusion
would be anti-dilutive.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------------- ----------------- --------------
<S> <C> <C> <C>
Net loss $ (163,079)
Less: preferred stock dividends/accretion (36,080)
-------------------
Basic and diluted earnings per share:
Net loss to common stockholders $ (199,159) 44,751,690 $ (4.45)
=================== ================= ==============
</TABLE>
Options and warrants to purchase 8,643,545 and 9,521,130 shares of Common
Stock, respectively, were not included in the computation of diluted
earnings per share for the year December 31, 1998 as their inclusion would
be anti-dilutive.
(11) RETIREMENT PLAN
On February 1, 1996, the Company began sponsoring the e.spire
Communications, Inc. 401(k) Plan (the "Plan"), a defined contribution
plan. All individuals employed on February 1, 1996 were eligible to
participate. Participation to all other employees is available after three
months of full-time equivalent service. The Company contributions under
the Plan are discretionary and may be as much as 6 percent of an
employee's gross compensation subject to certain limits. Total expense
under the Plan amounted to approximately $30, $95, $244 and $320 for the
year ended June 30, 1996, the six months ended December 31, 1996, and the
years ended December 31, 1997 and 1998, respectively.
(Continued)
27
<PAGE> 81
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
(12) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is a party to certain litigation and regulatory proceedings
arising in the ordinary course of business. In the opinion of management,
based upon the advice of counsel, the ultimate disposition of these
matters will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
(13) LEASES
The Company restructured several operating leases into capital leases
during 1998, for the leasing of telecommunications equipment. The capital
leases provide for the lessee to pay taxes, maintenance, insurance and
certain other operating costs of the leased equipment. These new leases
also contain renewal provisions.
The equipment under capital leases is included in networks and
telecommunications equipment as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------
<S> <C>
Networks and telecommunications equipment $ 27,803
Less: accumulated depreciation 2,357
-------------------
$ 25,446
====================
</TABLE>
The Company is obligated under various noncancelable operating leases for
office and node space, telecommunications equipment, and office furniture.
(Continued)
28
<PAGE> 82
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
The minimum future lease obligations under these noncancelable operating
and capital leases as of December 31, 1998 are approximately as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
----------------------- -----------------------
<S> <C> <C>
1999 $ 10,303 5,341
2000 8,537 5,472
2001 7,225 5,437
2002 7,330 5,228
2003 6,328 5,208
Thereafter 18,310 3,224
----------------------- -----------------------
Total minimum lease payments $ 58,033 29,910
=======================
Less: amounts representing interest and executory costs 5,388
-----------------------
Present value of minimum lease payments 24,522
Less: current portion 3,607
-----------------------
Long-term obligations under capital leases $ 20,915
=======================
</TABLE>
Rent expense for the year ended June 30, 1996, the six months ended
December 31, 1996, and the years ended December 31, 1997 and 1998 was
approximately $1,200, $1,700, $6,100 and $10,900, respectively.
(14) INDEFEASIBLE RIGHTS OF USE
The Company has entered into various agreements to provide indefeasible
rights of use ("IRUs") of multiple fibers along certain sections of
e.spire's networks. Such agreements include contracts with five major
customers for an aggregate purchase price of approximately $38,355.
Revenue related to these five major customers was approximately $0 and
$23,450 for the years ended December 31, 1997 and 1998, respectively, and
is included in Network technologies services revenue. Progress billings
are made primarily based on customers' acceptance of certain performance
milestones.
The Company expects to bill and collect all costs and estimated earnings
in excess of billings as of December 31, 1998, in 1999. In 1998, the
Company recognized approximately $14,000 in revenue from non-monetary
proceeds from IRU transactions. Non-monetary proceeds related to transfers
of dissimilar assets, as well as exchanges of similar assets with
significant cash payments.
(Continued)
29
<PAGE> 83
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
Although these construction agreements provide for certain penalties if
the Company does not complete construction within the time frames
specified in each respective agreement, management does not anticipate
that the Company will incur any substantial penalties under these
provisions.
(15) INCOME TAXES
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1998
----------------------- -----------------------
<S> <C> <C>
Deferred tax assets:
Start-up and other costs capitalized for tax purposes $ 5,265 5,829
Stock options - noncash compensation 5,548 7,162
Net operating loss carryforwards 76,387 151,670
Bond discounts 17,510 29,494
Other accrued liabilities (618) 1,188
----------------------- -----------------------
Total gross deferred assets 104,092 195,343
Less: valuation allowance 81,366 152,082
----------------------- -----------------------
Net deferred tax assets 22,726 43,261
Deferred tax liabilities - fixed assets depreciation and
amortization 22,726 43,261
----------------------- -----------------------
Net deferred tax assets (liabilities) $ -- --
======================= =======================
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1997 and 1998 was an increase of $49,375 and $70,716,
respectively. The valuation allowances at December 31, 1997 and 1998 are a
result of the uncertainty regarding the ultimate realization of the tax
benefits related to the deferred tax assets. The utilization of the tax
benefits associated with net operating losses of approximately $379,000 at
December 31, 1998 is dependent upon the Company's ability to generate
future taxable income. The net operating loss carryforward period expires
commencing in 2008 through the year 2018. Further, as a result of certain
financing and capital transactions, an annual limitation on the future
utilization of a portion of the net operating loss carryforward has
occurred. As a result of this annual limitation, the net operating loss
carryforward may not be fully utilized before 2006.
(Continued)
30
<PAGE> 84
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
No income tax provision has been provided for the year ended June 30,
1996, the six months ended December 31, 1996, or the years ended December
31, 1997 and 1998, as the aforementioned deferred tax assets have provided
no tax benefit.
(16) ACQUISITIONS
On January 17, 1997, the Company acquired 100 percent of the outstanding
capital stock of CyberGate, Inc. ("CyberGate") in exchange for 1,030,000
shares of Common Stock plus up to an additional 150,000 shares if certain
performance goals are achieved, for an aggregate purchase price of
approximately $8,800. CyberGate, a Florida based ISP, delivers high-speed
data communications services. The acquisition has been accounted for using
the purchase method and, therefore, the Company's consolidated financial
statements include the results of operations of CyberGate from the date of
acquisition. The purchase price of $8,800 plus transaction expenses of
approximately $500 has been allocated to assets and liabilities acquired
based on their fair values and goodwill of approximately $8,400 has been
recorded. The goodwill is being amortized on a straight-line basis over a
ten year period.
On October 3, 1997, the Company acquired the customers and receivables of
NetRunner, Inc., a Florida based ISP, in exchange for 51,166 shares of
Common Stock for an initial purchase price of $685. In conjunction with
this acquisition, the Company also placed 130,705 shares of the Company's
Common Stock in escrow to be issued upon the seller meeting certain
obligations. The Company recorded an intangible asset for that portion of
the purchase price attributable to the customer list, which is being
amortized over 18 months. During 1998, the Company released the remaining
130,705 shares held in escrow, resulting in a $2,200 increase in
intangible assets.
On September 2, 1998, the Company acquired 100 percent of the outstanding
capital stock of Data Access Technologies, Inc. in exchange for $1,500 and
149,275 shares of Common Stock for an aggregate purchase price of $2,100.
In conjunction with this acquisition, 40,360 shares were issued on
September 2, 1998 and the remaining 108,915 shares were placed in escrow
to be issued upon the seller meeting certain obligations. At December 31,
1998, the 108,915 shares remained in escrow. These shares of Common Stock
are released from escrow as contingent events occur, at which time the
Company will record the transactions as an increase in goodwill. The
acquisition has been accounted for using the purchase method and,
therefore, the Company's consolidated financial statements include the
results of operation of Data Access Technologies from the date of
acquisition. The purchase price has been allocated to assets and
liabilities acquired based on their estimated fair values, and goodwill of
approximately $2,300 has been recorded. The goodwill is being amortized on
a straight-line basis over an 18 month period.
On November 17, 1998, the Company acquired the customers and certain
assets of Internet Communications of America, Inc. (ICANECT) in exchange
for $5,300 and 203,438 shares of Common Stock for an initial purchase
price of $5,300. In accordance with the purchase agreement, these shares
(Continued)
31
<PAGE> 85
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
were placed in escrow to be issued upon the seller meeting certain
obligations. As of December 31, 1998 none of these shares had been issued.
The Company recorded an intangible asset of approximately $5,300, which is
being amortized over an 18 month period.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following notes summarize the major methods and assumptions used in
estimating the fair value of financial instruments:
(a) CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the relatively
short period to maturity of these instruments.
The Company's short- and long-term debt securities are carried at
fair market value as determined by quoted market prices.
(b) LETTERS OF CREDIT
The fair value of the letters of credit is based on fees currently
charged for similar agreements.
(c) LONG-TERM DEBT AND REDEEMABLE PREFERRED STOCK
The fair value of the Company's long-term debt and redeemable
preferred stock are estimated based on the quoted market prices for
the same or similar issues if available or based on the present value
of expected cash flows at rates currently available to the Company
for borrowings with similar terms.
The carrying amounts and estimated fair values of the Company's
financial instruments at December 31, 1998 were:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
------------------- -----------------
<S> <C> <C>
Cash and cash equivalents (including restricted cash) $ 374,652 374,652
Letters of credit $ -- 21
Redeemable preferred stock $ 241,044 202,795
Long-term debt, including obligations under capital
leases $ 749,815 685,936
</TABLE>
(Continued)
32
<PAGE> 86
e.spire COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
June 30, 1996 and December 31, 1996, 1997 and 1998
(in thousands, except share and per share data)
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
MAR. 31, JUN. 30, SEPT. 30, DEC. 31,
----------------- --------------- ---------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998:
Revenues $ 27,469 $ 35,752 $ 45,460 $ 48,078
Cost of sales 19,253 24,344 29,197 34,019
Operating expenses 29,690 33,219 41,798 56,192
Non-operating income (expense) (10,621) (10,634) (13,241) (17,630)
Net loss (32,095) (32,445) (38,776) (59,763)
Preferred stock dividends/accretion 8,493 8,607 9,022 9,958
Net loss to common stockholders (40,588) (41,052) (47,798) (69,721)
Net loss per common share
(Basic & Diluted) (1.08) (0.91) (1.00) (1.44)
1997:
Revenues 8,177 11,616 16,055 23,152
Cost of sales 8,669 10,400 13,676 20,136
Operating expenses 18,282 20,774 22,243 26,957
Non-operating income (expense) (5,249) (6,094) (10,100) (11,436)
Net loss (24,023) (25,652) (29,964) (35,377)
Preferred stock dividends/accretion 989 106 2,489 8,046
Net loss to common stockholders (25,012) (25,758) (32,453) (43,423)
Net loss per common share
(Basic & Diluted) (3.19) (0.92) (0.90) (1.18)
</TABLE>
33
<PAGE> 1
EXHIBIT NO.10.43
OFFICE SPACE LEASE
by and between
MONUMENT ONE LLC
as Landlord,
and
E.SPIRE COMMUNICATIONS, INC.
as Tenant
Fairfax County, Virginia
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SCHEDULE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. DEMISE AND TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
A. Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
B. Delays. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
C. Partial Substantial Completion. . . . . . . . . . . . . . . . . . . . . . . . 3
D. Extended Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
E. Prior Occupancy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2. RENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
A. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
B. Components of Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
C. Payment of Rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
D. Allocation of Rent Abatement for Tax Purposes. . . . . . . . . . . . . . . . . 11
3. USE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. CONDITION OF PREMISES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5. BUILDING SERVICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
A. Basic Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
B. Electricity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
C. Telephones. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
D. Additional Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
E. Failure or Delay in Furnishing Services. . . . . . . . . . . . . . . . . . . . 13
F. Tenant's Option to Provide Electricity and Char Service. . . . . . . . . . . . 13
G. Excess Use of Utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6. RULES AND REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7. CERTAIN RIGHTS RESERVED TO LANDLORD. . . . . . . . . . . . . . . . . . . . . . . . . . 15
8. MAINTENANCE AND REPAIRS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
A. General Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
B. Noise and Vibration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9. ALTERATIONS; SIGNS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
A. Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
B. Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
C. Signs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
D. Building Signage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
A. Tenant's Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
B. Landlord's Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
C. Risk of Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11. TENANT'S AND LANDLORD'S RESPONSIBILITIES. . . . . . . . . . . . . . . . . . . . . . . 19
A. Tenant's Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . 19
B. Landlord's Responsibilities. . . . . . . . . . . . . . . . . . . . . . . . . . 20
12. FIRE OR OTHER CASUALTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
A. Destruction of the Building 20
B. Destruction of the Premises. . . . . . . . . . . . . . . . . . . . . . . . . . 20
13. CONDEMNATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
14. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
A. Landlord's Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
B. Standards for Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
C. Recapture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
D. Assignment or Subletting to Affiliates. . . . . . . . . . . . . . . . . . . . 23
E. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
15. SURRENDER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
16. DEFAULTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
A. Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
B. Right of Re-Entry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
C. Termination of Right to Possession. . . . . . . . . . . . . . . . . . . . . . 25
D. Termination of Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
E. Other Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
F. Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
G. Waiver of Trial by Jury. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
H. Venue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
17. HOLDING OVER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
18. SECURITY DEPOSIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
A. Amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
B. Security. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
C. Form. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
D. Right to Draw. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
E. Right to Pledge or Assign. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
F. Reservation of Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
G. Reduction of Security Deposit. . . . . . . . . . . . . . . . . . . . . . . . . 28
H. Return of Security Deposit. . . . . . . . . . . . . . . . . . . . . . . . . . 28
19. INTENTIONALLY OMITTED. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
20. ESTOPPEL CERTIFICATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
21. FINANCING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
A. Subordination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
B. Mortgagee Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
22. QUIET ENJOYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
23. BROKER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
24. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
25. PARKING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
26. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
A. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
B. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
C. Time of Essence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
D. Execution, Delivery and Authority. . . . . . . . . . . . . . . . . . . . . . . 31
E. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
F. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
G. Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
H. Joint and Several Liability. . . . . . . . . . . . . . . . . . . . . . . . . . 32
I. Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
J. Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
K. No Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
L. Limitation of Liability; Effect of Sale. . . . . . . . . . . . . . . . . . . . 32
M. No Partnership. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
N. Tenant's Duty to Mitigate. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
O. Compliance with Laws as of Commencement Date. . . . . . . . . . . . . . . . . 33
P. Environmental Representation. . . . . . . . . . . . . . . . . . . . . . . . . 33
27. ACCESS RIGHTS TO ADDITIONAL MONUMENT BUILDINGS. . . . . . . . . . . . . . . . . . . . 33
28. AVAILABLE SPACE IN ADDITIONAL MONUMENT BUILDINGS. . . . . . . . . . . . . . . . . . . 34
29. ANTENNA RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
A. Scope of Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
B. Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
C. Installation Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
D. Interference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
E. Maintenance and Removal of the Antenna Equipment. . . . . . . . . . . . . . . 36
F. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
G. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
H. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
30. ACCESS RIGHTS FOR CABLING COMMUNICATIONS EQUIPMENT. . . . . . . . . . . . . . . . . . 37
</TABLE>
iii
<PAGE> 5
OFFICE SPACE LEASE
THIS OFFICE SPACE LEASE ("Lease"), a deed of lease, is made as of the
_____ day of _____, 1998, between MONUMENT ONE LLC, A DELAWARE LIMITED
LIABILITY COMPANY ("Landlord"), and E.SPIRE COMMUNICATIONS, INC. ("Tenant"),
for space in the building commonly known as Monument I which is located at
12975 Worldgate Drive, Herndon, Fairfax County, Virginia 20765 (such building,
together with the land upon which it is situated (which land is depicted on
EXHIBIT A-1) and common areas, including, without limitation, all sidewalks,
parking areas and landscaped areas, being herein referred to as the
"Building"). The following schedule (the "Schedule") sets forth certain basic
terms of this Lease:
SCHEDULE
<TABLE>
<S> <C>
1. PREMISES - FLOORS: The entire rentable square
feet on each floor of the
Building (i.e., floors 1
through 7).
2. COMMENCEMENT DATE: March 1, 1999.
2a. PHASE I COMMENCEMENT DATE: March 1, 1999.
2b. PHASE II COMMENCEMENT DATE: April 1, 1999.
3. EXPIRATION DATE: February 28, 2009, subject to
adjustment as set forth in Section
1.D hereof.
4. RENTABLE SQUARE FEET OF THE PREMISES: 167,285, as determined in accordance
with the BOMA Method of Measurement.
5. RENTABLE SQUARE FEET OF THE BUILDING: 167,285, as determined in accordance
with the BOMA Method of Measurement.
6. BASE RENT: The base rent ("Base Rent")for each
Lease Year (being defined as each
consecutive twelve-month period
beginning on the Commencement Date)
during the Term shall be as follows:
</TABLE>
<TABLE>
<CAPTION>
ANNUAL
LEASE BASE RENT ANNUAL MONTHLY
YEAR PER SQ FT BASE RENT BASE RENT
<S> <C> <C> <C>
1 $28.38 $4,747,548.36 $395,629.03
2 $29.09 $4,866,320.64 $405,526.72
3 $29.82 $4,988,438.76 $415,703.23
4 $30.56 $5,112,229.56 $426,019.13
5 $31.33 $5,241,039.00 $436,753.25
6 $32.11 $5,371,521.36 $447,626.78
7 $32.91 $5,505,349.32 $458,779.11
8 $33.73 $5,642,523.00 $470,210.25
9 $34.58 $5,784,715.32 $482,059.61
10 $35.44 $5,928,580.44 $494,048.37
</TABLE>
7. TENANT'S PROPORTIONATE SHARE: 100%
<PAGE> 6
8. SECURITY DEPOSIT: $791,258.06.
9. BROKER(S): LANDLORD'S: Millennium Realty Advisors LLC
TENANT'S: CB Richard Ellis, Inc.
10. EXHIBITS: A. Floor Plans
A-1 Description of Land
B. Work Agreement
B-1 Modified Shell Definition
C. Rules and Regulations
D. Estoppel Certificate
E. Intentionally Omitted
F. HVAC Specifications
G. Letter of Credit
H. Antenna Equipment and Location
11. COMMENCEMENT DATE OF EXTENSION TERM: First Extension Term - The first day
after the Expiration Date (being
March 1, 2009 if the Expiration Date
is February 28, 2009).
Second Extension Term - The first day
after the expiration of the first
Extension Term (being March 1, 2012
if the Expiration Date of the First
Extension Term is February 29, 2012).
12. EXPIRATION DATE OF EXTENSION TERM: First Extension Term - Three (3)
years after the Commencement Date of
the first Extension Term (being
February 29, 2012 if the
Commencement Date of the first
Extension Term is March 1, 2009).
Second Extension Term - Five (5)
years after the Commencement Date of
the second Extension Term (being
February 28, 2017 if the Commencement
Date of the second Extension is Term
March 1, 2012).
1. DEMISE AND TERM.
A. TERM. This Lease shall be effective as of the date hereof.
Landlord leases to Tenant and Tenant leases from Landlord the premises (the
"Premises") described in ITEM 1 of the Schedule and shown on the plans attached
hereto as EXHIBIT A, subject to the covenants and conditions set forth in this
Lease, for a term (as it may be extended in accordance with the terms of this
Lease, the "Term") commencing on the date (the "Commencement Date") described
in ITEM 2 of the Schedule and expiring on the date (the "Expiration Date")
described in ITEM 3 of the Schedule, as may be extended in accordance with the
terms of Section 1.D below, unless terminated earlier as otherwise provided in
this Lease. The Tenant Work (as defined in EXHIBIT B) to be constructed in the
Premises may be constructed in two (2) phases: Phase I (as hereinafter defined)
and Phase II (as hereinafter defined). References herein to "any phase" shall
refer to either Phase I or Phase II, and references herein to "each phase"
shall refer to Phase I and Phase II. The portion of the Premises located on
the 3rd, 4th, 5th 6th and 7th floors of the Building shall hereinafter be
referred to as "Phase I" and the portion of the Premises located on the 1st and
2nd floors of the Building shall hereinafter be referred to as "Phase II."
B. DELAYS. If (i) the Phase I portion of the Tenant Work to be
built by Landlord pursuant to EXHIBIT B is not substantially completed by
Landlord on or before the Phase I Commencement Date or Landlord is otherwise
unable to deliver possession of the Phase I portion of the Premises to Tenant on
or before the Phase I Commencement Date for any reason or cause, or (ii) the
Phase II portion of the Tenant
2
<PAGE> 7
Work to be built by Landlord pursuant to EXHIBIT B is not substantially
completed by Landlord on or before the Phase II Commencement Date or Landlord is
otherwise unable to deliver possession of the Phase II portion of the Premises
to Tenant on or before the Phase II Commencement Date, this Lease shall not be
void or voidable, nor shall Landlord or Landlord's agents and employees be
liable to Tenant for any loss or damage resulting therefrom, and, subject to the
abatement set forth in this Section 1.B, all the obligations of Tenant
hereunder, including, but not limited to, the obligations of Tenant to pay Base
Rent, Adjustment Rent and any other Rent payable hereunder shall not be delayed
and shall begin on the Commencement Date. Notwithstanding the foregoing, in the
event that (i) substantial completion of the Tenant Work on any floor of the
Phase I portion of the Premises is delayed beyond the Phase I Commencement Date
as a result of a Landlord Delay, or (ii) substantial completion of the Tenant
Work on any floor of the Phase II portion of the Premises is delayed beyond the
Phase II Commencement Date as a result of a Landlord Delay, then Tenant shall be
entitled to an abatement of one (1) day of Base Rent applicable to such floor
(the "Per Diem Base Rent") for each day of Landlord Delay applicable to such
floor (but in no event shall such number of days be more than the number of days
that substantial completion of such floor is delayed beyond the applicable
commencement date for such floor (i.e., the Phase I Commencement Date for any
floor in the Phase I portion of the Premises and the Phase II Commencement Date
for any floor in the Phase II portion of the Premises) as a result of a Landlord
Delay). The Per Diem Base Rent for any floor shall be (i) the rentable square
footage of such floor(s), times (ii) the per square foot rate payable hereunder
during Lease Year 1, as set forth in ITEM 6 of the Schedule, divided by (iii)
three hundred sixty-five (365). Substantial Completion of the Premises, or any
floor thereof, shall be determined as set forth in Paragraph 7.1 of the Work
Agreement.
C. PARTIAL SUBSTANTIAL COMPLETION. In the event that any portion
of any floor(s) of the Premises is occupied by Tenant for the purpose of
conducting business therein (as opposed to preparing the Premises for Tenant's
use) prior to the applicable commencement date for such floor (i.e., the Phase
I Commencement Date for any floor in the Phase I portion of the Premises and
the Phase II Commencement Date for any floor in the Phase II portion of the
Premises), then with respect to such floor(s), Tenant's tenancy thereof shall
be deemed to be by the day and all of Tenant's obligations hereunder shall
commence as of the first day of such occupancy; provided, however, that for
each day prior to such applicable commencement date that Tenant occupies any
floor(s) of the Premises, Tenant shall be responsible for paying Base Rent only
for such floor(s) (such Base Rent to be calculated as the rentable square feet
of such floor(s) times the per square foot rate payable hereunder during Lease
Year 1 as set forth in ITEM 6 of the Schedule, pro rated for the number of days
in such tenancy). The foregoing sentence shall not be deemed to imply a right
of Tenant to occupy any floor of the Premises prior to the date that the Tenant
Work for such floor is substantially complete and Landlord notifies Tenant
thereof nor an obligation that Tenant occupy any portion of the Premises prior
to the applicable commencement date for such portion of the Premises, nor shall
it be deemed an obligation of Landlord to deliver any portion of the Premises
prior to the applicable commencement date for such portion of the Premises.
D. EXTENDED TERM.
(i) Landlord grants Tenant the options (together referred
to as the "Extension Options," and individually sometimes referred to
as an "Extension Option") to extend the Term for up to two (2)
consecutive periods the first of which (the "First Extension Option")
shall be for three (3) years (the "First Extension Term") and the
second of which (the "Second Extension Option") shall be for five (5)
years (the "Second Extension Term") (together sometimes referred to as
the "Extension Terms"). The First Extension Term and the Second
Extension Term shall commence upon the dates described in ITEM 11 of
the Schedule and shall expire on the dates described in ITEM 12 of the
Schedule subject to the covenants and conditions set forth in this
Section. Tenant shall have no right to an extension of the Term if at
the time Tenant seeks to exercise the applicable Extension Option, or
at the time the applicable Extension Term would have otherwise
commenced, (a) Tenant has then assigned this Lease or is then
subletting more than fifty percent (50%) of the Premises (other than
to any Qualified Tenant Affiliates); and (b) Tenant's financial
strength and general creditworthiness is less than the financial
strength and general creditworthiness of Tenant as of the date hereof;
provided, however, that the occurrence of the foregoing condition set
forth in this Section 1.D(i) shall not void Tenant's exercise of the
Extension Option if Tenant delivers to Landlord with its Exercise
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Notice (hereinafter defined) an additional Security Deposit in an
amount equal to four (4) times the monthly Base Rent then in effect
(which additional Security Deposit may be delivered in the form of
cash or Letter of Credit (in the form required in Section 18) and
shall be added to the original Security Deposit and be governed by the
provisions of Section 18 hereof), or (iii) Tenant is in default under
this Lease. In addition, Tenant shall have no right to exercise the
Second Extension Option unless the First Extension Option has been
exercised and the Lease is otherwise in full force and effect. To
exercise the First Extension Option, Tenant shall give notice of its
exercise ("Exercise Notice") to Landlord not earlier than twenty-four
(24) months prior to the Expiration Date and not later than nine (9)
months prior to the Expiration Date, and to exercise the Second
Extension Option, Tenant shall give its Exercise Notice to Landlord
not earlier than twenty-four (24) months prior to the expiration of
the First Extension Term and not later than nine (9) months prior to
the expiration of the First Extension Term. If Tenant is entitled to
and gives Landlord notice in accordance with the terms of this
Section, the Term shall be extended for the period commencing on the
Commencement Date of the applicable Extension Term and expiring on the
Expiration Date of the applicable Extension Term and, except as set
forth below in this Section, shall be on the same terms and condition
as are set forth in this Lease. Base Rent during the extended Term
shall be the then-current (i.e., as of the commencement of the
applicable Extension Term) market rent for first-class office
properties in Herndon and Reston, Virginia of comparable quality and
character to the Building built no later than the Building (the
"Market Rate"), with subsequent escalations in Base Rent thereafter to
be determined by market practice with respect to comparable space, as
such Base Rent is reasonably determined by Landlord (and notice
thereof delivered to Tenant); provided, however, Landlord shall have
no obligation to deliver to Tenant notice of such Base Rent
determination earlier than the later of the following dates (i) the
date that is twelve (12) months prior to the Expiration Date in the
case of a Base Rent determination in connection with the First
Extension Option and twelve (12) months prior to the expiration of the
First Extension Term in the case of a Base Rent determination in
connection with the Second Extension Option, or (ii) the date that is
forty-five (45) days after the date that Tenant delivers to Landlord
the applicable Exercise Notice. Further, the Base Year, as such term
is hereinafter defined in Section 2.B.(ii) hereof, for the First
Extension Term shall be the calendar year during which the
commencement of the First Extension Term occurs and the Base Year for
the Second Extension term shall be the calendar year during which the
commencement of the Second Extension Term occurs. The new Base Year
shall be taken in consideration in determining the Market Rent.
(ii) If Tenant disagrees with Landlord's determination of
Base Rent for any Extension Term, Tenant shall give Landlord notice of
objection within five (5) days after Landlord delivers to Tenant
notice of Landlord's Base Rent determination; otherwise Landlord's
determination shall be deemed conclusive. If Tenant timely delivers
to Landlord such notice of objection as provided above, then Landlord
and Tenant shall negotiate in good faith to determine the amount of
Base Rent within ten (10) days of the date of Landlord's receipt of
Tenant's written notice of objection (the "Negotiation Period").
(iii) In the event Landlord and Tenant are unable to agree
upon the Base Rent for the applicable Extension Term within the
Negotiation Period, then Tenant shall be entitled to elect to proceed
with the binding arbitration process set forth below by delivering to
Landlord written notice of such election within fifteen (15) days
after the expiration of the Negotiation Period. If Tenant timely
elects to proceed with binding arbitration, then the Base Rent for the
applicable Extension Term shall be based upon the Market Rate for
first-class office properties of comparable quality and character to
the Building built no later than the Building in Reston and Herndon,
Virginia, as determined by binding arbitration in accordance with the
following procedures. Within fifteen (15) days after Tenant delivers
to Landlord notice of its election to proceed to binding arbitration,
Landlord and Tenant shall each select a real estate broker (based on
the criteria set forth in subsection 1.D. (iv) hereof). Within twenty
(20) days of their selection, each broker shall make a written
determination of the Market Rate for the Extension Term. All
determinations of the Market Rate shall be in writing. The party
appointing each broker shall be obligated, promptly after receipt of
the valuation report prepared by the broker appointed by such party,
to deliver a copy of such valuation report to the other party. If
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the Market Rate determination of the broker designated by Landlord is
within five percent (5%) of the Market Rate determination of the
broker designated by Tenant, then the Base Rent for the applicable
Extension Term shall be the average of the two Base Rent
determinations for the Extension Term. If the Market Rate
determinations of these two brokers vary by more than five percent
(5%), then a third broker shall be selected by the initial two brokers
within fifteen (15) business days after the initial two valuation
reports have been delivered to the parties (the third broker also
having the qualifications set forth in subsection 1.D. (iv) below).
If a third broker is appointed, the third broker shall review the
valuation reports of the initial two brokers and select the one of the
initial two valuation reports that most closely reflects the Market
Rate for the applicable Extension Term. The third broker shall
promptly deliver a report of his determination to each of the parties.
The determination of the Market Rate for the applicable Extension Term
pursuant to this subsection 1.D. (iv) hereof shall be final and
binding upon Landlord and Tenant. The expenses of each of the first
two brokers appointed under this subsection 1.D. (iv) shall be borne
by the party appointing such broker. The expenses of the third broker
appointed under this subsection 1.D. (iv) shall be paid one-half
(1/2) by Landlord and one-half ( 1/2) by Tenant.
(iv) The real estate brokers selected by Landlord and
Tenant shall have the following qualifications: (i) must be a
independent and licensed real estate broker in the Commonwealth of
Virginia; (ii) must have a minimum of ten (10) years' experience in
commercial office leasing in the Fairfax, Virginia area; (iii) must be
an active broker in the Northern Virginia area and known for
commercial office expertise; (iv) must have experience representing
both landlords and tenants; (v) in the case of the third broker only,
is not then representing either Landlord or Tenant; and (vi) in the
case of the third broker only, shall not have been involved in any
disputes with Landlord, Tenant or any of the other brokers. In the
event that real estate brokers with the qualifications described in
this subsection 1.D. (iv) are unavailable, qualified consultants with
similar qualifications may be substitutes.
(v) An amendment modifying the Lease to set forth the
Base Rent and new Base Year for the Premises during the applicable
Extension Term shall be executed by Landlord and Tenant within ten
(10) days of Landlord's determination thereof, of the parties'
agreement thereto (if applicable) or of the determination of the Base
Rent by the brokers pursuant to subsection 1.D. (iii) hereof. In the
event that (i) Tenant and Landlord fail to agree on the Base Rent for
the Extension Term within the Negotiation Period, and Tenant does not
timely elects to proceed with binding arbitration, or (ii) any of the
conditions set forth in subsection 1.D. (i) are not satisfied, then
this extension option shall be null, void and of no further force or
effect and the Lease shall end on the date otherwise scheduled for
expiration thereof, unless earlier terminated in accordance with the
terms thereof. Tenant shall have no further right or option to extend
the Term. Time is of the essence with respect to this Section 1.D.
E. PRIOR OCCUPANCY. Tenant and Tenant's contractors shall have
joint access (24 hours per day) to the Premises with Landlord and Landlord's
contractor prior to Landlord's delivery of possession of the Premises to Tenant
for the purpose of installing telephone, computer, other special equipment and
furniture, optic fibers, a telecommunications switch and to inspect the
progress of the Tenant Work in the Premises, provided that in Landlord's
judgement (i) such joint access will not cause unreasonable interference with
the work of Landlord's contractor; (ii) there are no delays created thereby in
the construction process of the improvements to be constructed by Landlord in
the Premises or the Building; (iii) an acceptable schedule of work is agreed
upon between Landlord's contractor and Tenant's contractors. Any delay in
substantial completion of the Premises that results therefrom shall be deemed a
Tenant Delay. Tenant shall indemnify, hold harmless, and defend Landlord from
any loss, damage, cost or expense (including attorneys' fees and court costs)
incurred by Landlord, whether before or after the applicable commencement date,
as a result of the performance of such work by Tenant or Tenant's contractor,
and in addition to any other rights Landlord may have as a result thereof,
Landlord shall have the right to apply all or a portion of the Improvement
Allowance (hereinafter defined) against any such loss,damage, cost or expense
incurred by Landlord as a result thereof. In addition, Tenant shall not be
permitted to enter the Premises until Landlord has approved all furniture,
equipment and other items to be installed by Tenant or its contractor, as well
as the plans for such
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installation, and Landlord and Tenant have agreed in writing to a schedule for
all of the foregoing work to be completed by Tenant or its contractor in the
Premises. Access, if any, to the Premises by Tenant in accordance with the
foregoing and solely for the purposes set forth above shall not be deemed to
advance the applicable commencement date.
F. EXTENDED DELAY IN COMMENCEMENT DATE. Notwithstanding anything
to the contrary contained in this Section 1 above, if (i) the Phase I portion
of the Tenant Work (as defined in EXHIBIT B) or the Phase II portion of the
Tenant Work to be built by Landlord pursuant to EXHIBIT B is not substantially
completed by Landlord on or before the date that is three hundred forty-eight
(348) days after the Award Date (as defined in EXHIBIT B hereof) applicable to
such phase for any reason or cause other than due to an event of Tenant Delay
(as defined in EXHIBIT B hereof) or Termination Force Majeure (as defined
below) or (ii) the Phase I portion of the Tenant Work or the Phase II portion
of the Tenant Work to be built by Landlord pursuant to EXHIBIT B is not
substantially completed by Landlord on or before the date that is five hundred
thirty-three (533) days after the Award Date applicable to such phase for any
reason or cause other than due to an event of Tenant Delay, then Tenant shall
have the right to terminate this Lease by delivering to Landlord, no later than
ten (10) days after such date, fifteen (15) days prior written notice of such
termination. In the event Landlord substantially completes the applicable
phase of the Tenant Work on or before the expiration of such fifteen (15)-day
period, such right of termination shall be deemed to be void and without
effect. In the event the applicable phase of the Tenant Work is not
substantially complete on or before the expiration of such fifteen (15)-day
period, this Lease shall immediately terminate, and all rights, obligations and
liabilities of the parties hereunder shall be released and discharged. If any
phase of the Tenant Work (i.e., Phase I or Phase II) to be built by Landlord
pursuant to EXHIBIT B is not substantially completed by Landlord on or before
the date that is three hundred forty-eight (348) days after the Award Date
applicable to such phase, Landlord shall deliver to Tenant a good faith
estimate of the date that Landlord then anticipates that such phase of the
Tenant Work will be substantially completed. The term "Termination Force
Majeure" shall mean acts of God, strikes, sabotage, accidents, acts of war,
fire and casualty, legal requirements, government restrictions or controls on
construction, insurance reimbursement problems or delays, emergencies,
shortages or inability to obtain labor, materials or equipment, energy
shortage, the failure of the applicable governmental authority to issue
building permits for the Tenant Work within twenty-one (21) days after Landlord
has submitted to the appropriate authority an application for such building
permit with the required documentation, the failure of the applicable
governmental authority to conduct inspections required in connection with the
Tenant Work (and issue its approval or disapproval thereof) within three (3)
business days after Landlord has submitted to the appropriate authority a
request for such inspection or the failure of the applicable governmental
authority to issue a certificate of occupancy for the Premises within five (5)
business days after Landlord has submitted to the appropriate authority an
application (which application shall have been submitted after receipt of the
approvals from all inspections that are required as a condition precedent to
submitting such application) for such certificate of occupancy, or any causes
beyond the reasonable control of Landlord.
2. RENT.
A. DEFINITIONS. For purposes of this Lease, the following terms
shall have the following meanings:
(i) INTENTIONALLY OMITTED.
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(ii) "EXPENSES" shall mean all expenses, costs and
disbursements (other than Taxes) paid or incurred by Landlord in
connection with the ownership, management, maintenance, operation,
replacement and repair of the Building, including, without limitation,
exterior common areas. Tenant acknowledges that the Building is
located in the Worldgate Corporate Park and that certain expenses
("Worldgate CAM Charges") associated with the maintenance, security
and/or operation of certain portions of the Worldgate Corporate Park
will be shared by various owners of property in the Worldgate
Corporate Park. Accordingly, for purposes of this Lease "Expenses"
shall also include the Landlord's or the Building's share of any
Worldgate CAM Charges and any other costs, charges or assessments
incurred by Landlord or charged against the Building for the common
maintenance, security or operations of one or more buildings in the
Worldgate Corporate Park or any other expenses shared by the owners of
one or more buildings in the Worldgate Corporate Park. Expenses shall
not include: (a) costs of tenant alterations; (b) costs of capital
improvements (except for costs of any capital improvements ("Permitted
Capital Improvements") (1) made or installed for the purpose of
reducing Expenses (provided, however, if any such capital improvement
is anticipated to cost more than $500,000, then Landlord shall give
Tenant notice thereof and if Tenant delivers to Landlord within
fifteen (15) days after such notice a report from a Virginia licensed
engineer demonstrating that such capital improvement is not likely to
reduce Expenses, then such improvement shall be considered a Permitted
Capital Improvement only if Landlord obtains and delivers to Tenant a
report from an engineer approved by Landlord and Tenant stating that
it is likely that such capital improvement will reduce Expenses), or
(2) made or installed pursuant to governmental requirement or
insurance requirement (provided, however, in no event shall Expenses
include in any calendar year more than $40,000.00 for the amortization
of any Permitted Capital Improvement made pursuant to any governmental
requirement or any insurance requirement), which Permitted Capital
Improvements shall be amortized by Landlord in accordance with any
method permitted for federal tax purposes or generally accepted
accounting principles); (c) interest and principal payments on
mortgages (except interest on the cost of any capital improvements for
which amortization may be included in the definition of Expenses) and
penalties and late charges related thereto; (d) advertising expenses
and leasing commissions; (e) any cost or expenditure for which
Landlord is reimbursed, whether by insurance proceeds or otherwise,
except through Adjustment Rent (hereinafter defined); (f) the cost of
any kind of service furnished to any other tenant in the Building
which Landlord does not generally make available to all tenants in the
Building; (g) legal expenses of negotiating leases; (h) salaries and
fringe benefits of employees above the grade of building manager; (i)
management fees in excess of those customarily charged for similar
types of first-class buildings in Fairfax County, Virginia; (j)
depreciation expenses on any fixed assets (except as set forth above
in connection with costs of capital improvements which may be included
in the definition of Expenses); (k) cost of correcting any defect
(excluding standard repairs and replacements resulting from ordinary
wear and tear, use, fire, casualty, or vandalism) in the physical
condition of the Building resulting from the original construction of
the Building, provided that, except with respect to a Latent Building
Defect, such corrections are made, or Tenant delivers to Landlord
written notice thereof, within the first Lease Year; (l) Taxes; (m)
Landlord's general corporate overhead and general administrative
expenses relating exclusively to maintaining Landlord's existence,
either as a corporation, partnership or other entity, such as annual
fees, partnership organization and administration expenses and deed
recordation expenses; (n) the cost of any repair made by Landlord
because of a condemnation of the Building (or any part thereof), but
only to the extent Landlord is reimbursed therefor from condemnation
proceeds; (o) the profit portion of any amount paid to a corporation,
entity, or person which controls, is controlled by, or is in common
control with Landlord for goods or services, to the extent such amount
is not reasonably comparable to the amount paid for similar goods or
services provided to first-class office buildings in the Reston and
Herndon, Virginia area providing services similar to, and to the same
level as, those provided for the Building (for purposes of this item,
"control" shall be deemed to be ownership of more than twenty-five
percent (25%) of the legal and equitable interest of the controlled
corporation or other business entity); (p) ground rent payments on any
ground lease, except for that portion of any ground rent payments made
by Landlord that represent the pass-through of real estate taxes and
operating expenses from any ground lessor to Landlord that are
otherwise permitted hereunder; (q) the cost of any capital
expenditures as determined for federal income tax purposes, except for
any
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Permitted Capital Improvements; (r) fines or penalties incurred by
Landlord as a result of Landlord's failure to pay when due Taxes, but
only if Tenant is current on all payments of Rent due hereunder at the
time such payments are due and at the time any such fines or penalties
are incurred by Landlord; (s) any compensation paid to clerks,
attendants or other persons in commercial concessions operated by
Landlord in the Building for a profit, with respect to which tenants
of the Building receive no benefit without paying a separate fee
therefor; (t) any penalties or finesincurred as a result of Landlord's
negligent violation of any federal, state or local law or regulation,
unless the violation results in whole or in part from any act or
omission of Tenant, any other tenant of the Building (to the extent
not recovered directly from such tenant) or any other cause not within
Landlord's exclusive control; (u) the cost of any repair, restoration,
replacement or other item, to the extent Landlord is actually
reimbursed therefor by insurance, warranties or condemnation proceeds
or directly by any tenant in the Building (other than through the
pass-through of operating expenses); (v) costs incurred for any items
to the extent Landlord is reimbursed therefor from the proceeds of a
manufacturer's materialman's, vendor's or contractor's warranty; (w)
costs (including any construction allowance or similar consideration
paid to a tenant) incurred in renovating or otherwise improving,
decorating, painting or redecorating space leased to specific tenants
or vacant rentable space leased or available to lease to prospective
tenants of the Building (specifically excluding any common areas),
unless such items are similarly provided to, or benefit generally,
Tenant; or (x) costs of HVAC outside normal business hours sold to
tenants of the Building by Landlord, but only if and to the extent
Landlord receives reimbursement therefor from such tenants as an
additional charge. Expenses shall be determined on a cash or accrual
basis, as Landlord may elect, based on generally accepted accounting
principles, consistently applied. Tenant shall promptly give Landlord
notice of any defect in the Building of which Tenant is aware. As
used herein, the term "Latent Building Defect" shall mean a defect in
the condition of the Building existing as of the date that the
Premises is delivered to Tenant that could not have reasonably been
discovered within the first Lease Year by a reasonable visual
inspection of the Premises and the common area of the Building or in
the ordinary course of Tenant's business.
(iii) "RENT" shall mean Base Rent, Adjustment Rent and any
other sums or charges due by Tenant hereunder.
(iv) "TAXES" shall mean all taxes, assessments and fees,
general or special, extraordinary or ordinary or foreseen or
unforeseen, now or hereafter assessed, imposed or levied upon the
Building, the property of Landlord located therein or the rents
collected therefrom, by any governmental entity based upon the
ownership, leasing, renting or operation of the Building, including,
without limitation, those related to school, public betterment,
general or local improvements and operations or imposed in connection
with any business improvement or special taxing district, storm water
management taxes, assessments or fees and all costs and expenses of
protesting any such taxes, assessments or fees. Taxes shall not
include any net income, capital stock, succession, transfer,
franchise, gift, estate or inheritance taxes; provided, however, if at
any time during the Term, a tax or excise on income is levied or
assessed by any governmental entity, in lieu of or as a substitute for
or in addition to, in whole or in part, real estate taxes or other ad
valorem taxes, such tax shall constitute and be included in Taxes.
For the purpose of determining Taxes for any given year, the amount to
be included for such year shall be Taxes which are assessed for,
become a lien during, accrued for or allocated to such year rather
than Taxes which are due for payment or paid during such year.
(v) "TENANT'S PROPORTIONATE SHARE" shall mean the
percentage set forth in ITEM 7 of the Schedule which has been
determined by dividing the Rentable Square Feet of the Premises (as
defined in ITEM 4 of the Schedule) by the Rentable Square Feet of the
Building (as defined in ITEM 5 of the Schedule). Such rentable square
feet have been determined using the modified Building Owners and
Managers Association method of measurement (1996 edition).
B. COMPONENTS OF RENT. Tenant agrees to pay the following
amounts to Landlord at the office of the Building or at such other place as
Landlord designates:
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(i) Commencing on the Commencement Date, Base Rent to be
paid in monthly installments in the amount set forth in ITEM 6 of the
Schedule in advance on or before the first day of each month of the
Term, without demand. Base Rent for any partial month during the Term
shall be prorated on a daily basis based upon a thirty (30)-day month
and shall be paid in advance. Notwithstanding the foregoing, the Base
Rent applicable to Phase II of the Premises shall be abated for the
period beginning with the Commencement Date and ending with the
earlier of (i) the Phase II Commencement Date, or (ii) the date any
portion of Phase II of the Premises is occupied by Tenant for the
purpose of conducting business therein. The per diem Base Rent for
each floor in Phase II shall be calculated as set forth in Section 1.B
hereof.
(ii) Commencing one year after the Commencement Date,
Adjustment rent ("Adjustment Rent") in an amount equal to the sum of
(a) Tenant's Proportionate Share of the amount by which Expenses for
each calendar year (or portion thereof in the event of a partial
calendar year during the Term) exceeds Expenses for calendar year 1999
(the "Base Year"), plus (b) Tenant's Proportionate Share of the amount
by which Taxes for each calendar year (or portion thereof in the event
of a partial calendar year during the Term) exceeds Taxes for the Base
Year. Prior to each calendar year during the Term, or as soon as
reasonably possible, Landlord shall estimate, in good faith, and
notify Tenant of the amount of Adjustment Rent due for such year, and
Tenant shall pay Landlord one-twelfth of such estimate on the first
day of each month during such year. Such estimate may be revised by
Landlord whenever it obtains information relevant to making such
estimate more accurate, provided such revisions shall not be made more
frequently than twice in any twelve month period. After the end of
each calendar year, Landlord shall deliver to Tenant a report setting
forth the actual Expenses and Taxes for such calendar year and a
statement of the amount of Adjustment Rent that Tenant has paid and is
payable for such year (the "Expense Statement"). Tenant acknowledges
that actual Taxes for a calendar year may not be determined until
after actual Expenses for such calendar year are determined.
Accordingly, Tenant acknowledges that Landlord may report the actual
Expenses and actual Taxes for a calendar year separately. Within
thirty (30) days after receipt of such Expense Statement or Expense
Statements, Tenant shall pay to Landlord the excess of Adjustment Rent
due for such calendar year over any payments of Adjustment Rent made
by Tenant for such year, it being acknowledged by Tenant that in the
event Landlord separately reports actual Expenses and actual Taxes for
a calendar year, Landlord may reasonably allocate Adjustment Rent paid
by Tenant for such calendar year between Expenses and Taxes for such
calendar year. If Tenant's estimated payments of Adjustment Rent
exceed the amount due Landlord for such calendar year, Landlord shall
promptly refund such excess to Tenant, provided Tenant is not then in
default hereunder, in either case without interest to Tenant. For any
partial Adjustment Year (i.e., less than a full calendar year), the
Expenses for the Base Year and the Taxes for the Base Year shall be
pro rated based upon the number of days in such Adjustment Year and
the resulting amounts shall be compared to the Expenses and the Taxes,
respectively, in determining the Adjustment Rent for such partial
Adjustment Year.
(iii) Within ninety (90) days of receipt of any Expense
Statement, Tenant shall be entitled to the following audit right with
respect to such Expense Statement. Such audit right shall be
exercisable by Tenant providing Landlord with a written notice of its
exercise of such audit right. If within sixty (60) days after
Landlord's receipt of Tenant's written notice and statement, Landlord
and Tenant are unable to resolve Tenant's objections, then not later
than fifteen (15) days after the expiration of such sixty (60)-day
period Tenant shall deliver to Landlord written notice (the "Audit
Notice") that it wishes to employ an independent certified public
accounting firm reasonably acceptable to Landlord to inspect and audit
Landlord's books and records relating to the objections raised in
Tenant's statement. If Tenant elects to employ such accountant as set
forth above, then Tenant shall deliver to Landlord a confidentiality
and nondisclosure agreement satisfactory to Landlord executed by such
accountant, and provide Landlord not less than fifteen (15) days
notice of the date on which the accountant desires to examine
Landlord's books and records during regular business hours; provided,
however, that such date shall be between thirty (30) and ninety (90)
days after Tenant delivers to Landlord the Audit Notice. Such audit
shall be limited to a determination of
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whether Landlord calculated the Expense Statement in accordance with
the terms and conditions of this Lease. All costs and expenses of any
such audit shall be paid by Tenant. Any audit performed pursuant to
the terms of this section shall be conducted only by an independent
certified public accounting firm reasonably acceptable to Landlord.
Notwithstanding anything contained herein to the contrary, Tenant
shall be entitled to exercise its right to audit pursuant to this
Section 2.B only in strict accordance with the foregoing procedures
and each suchaudit shall relate only to the most recent calendar year
covered by the audited Expense Statement; provided, however, if (i)
such audit indicates that there was a demonstrated error in the
calculation of a component of Expenses resulting in an overstatement
of Expenses in the Expense Statement, and (ii) such component is a
reoccurring Expense and because of the nature of the component it is
likely that such component was similarly overstated in any prior
calendar year during the Term, then Tenant shall have the right to
audit the books and records relating solely to such component for each
such prior year but such audit shall be limited to determining whether
or not the same component was similarly in error in such prior years.
Such limited audit right must be exercise only by Tenant delivering to
Landlord written notice thereof within thirty (30) days after the
earlier of (i) the date Tenant receives the audit report from the
independent certified public accounting firm, or (ii) one hundred
twenty (120) days after the date that Tenant delivers to Landlord the
Audit Notice in connection with the Expense Statement in which the
error was first discovered. The audit rights pursuant to this Section
2.B shall not transfer or apply to any subtenant or any other person
or entity other than the "tenant" hereunder. If on account of any
demonstrated errors in the Expense Statement under audit, Tenant is
entitled to a refund of the amount paid by Tenant for Tenant's
Proportionate Share of Expenses for the calendar year or years under
audit because such Expense Statement overstated the amounts to which
Landlord was entitled hereunder by more than five percent (5%) of the
amount of Expenses for the applicable calendar year, then Landlord
shall promptly reimburse Tenant for the reasonable costs and expenses
incurred in such audit, but in no event more than Twelve Thousand
Dollars ($12,000.00).
(iv) If Taxes paid by Landlord for any calendar year
during the Term, or any part thereof, for which Tenant has paid
Tenant's Proportionate Share of Expenses, are refunded to Landlord as
a result of a final determination of such Taxes, then, provided Tenant
is not then in default under this Lease, Tenant shall be entitled to a
refund of Tenant's Proportionate Share of Expenses in an amount equal
to Tenant's share of such refund (net of expenses incurred to obtain
the refund).
C. PAYMENT OF RENT. The following provisions shall govern the
payment of Rent: (i) if this Lease commences or ends on a day other than the
first day or last day of a calendar year, respectively, the Rent for the year
in which this Lease so begins or ends shall be prorated on a daily basis (based
upon a thirty (30) day month) and the monthly installments shall be adjusted
accordingly; (ii) all Rent shall be paid to Landlord without offset or
deduction except any rent abatement provided for in Section 12 hereof, and the
covenant to pay Rent shall be independent of every other covenant in this
Lease; (iii) if during all or any portion of any year the Building is not fully
rented and occupied (fully rented and occupied shall mean that one-hundred
percent (100%) of the Rentable Square Feet of the Building is occupied by
tenants under lease), Landlord shall make an appropriate adjustment of Taxes
and variable Expenses for such year to determine the Taxes and Expenses that
would have been paid or incurred by Landlord had the Building been fully rented
and occupied for the entire year and the amount so determined shall be deemed
to have been the Taxes and Expenses for such year; (iv) any sum due from Tenant
to Landlord which is not paid when due shall bear interest from the date due
until the date paid at the annual rate of two percentage (2%) points above the
rate then most recently announced by The First National Bank of Chicago as its
corporate base lending rate, from time to time in effect, but in no event
higher than the maximum rate permitted by law (the "Default Rate"); and, in
addition, Tenant shall pay Landlord a late charge for any Rent payment which is
paid more than five (5) business days after its due date equal to five percent
(5%) of such payment; provided, however, that on the first occasion of the late
payment of Rent in any calendar year, and no more than once in any calendar
year, Landlord agrees to waive its right to collect interest and late charges
on such payment of Rent if such payment is made no later than the fifth (5th)
business day after Landlord delivers to Tenant written notice of such late
payment; (v) if changes are made to this Lease or the Building, changing the
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number of square feet contained in the Premises or in the Building, Landlord
shall make an appropriate adjustment to Tenant's Proportionate Share; (vi) in
the event of the expiration or termination of this Lease prior to the
determination of any Adjustment Rent, Tenant's agreement to pay any such sums
and Landlord's obligation to refund any such sums (provided Tenant is not in
default hereunder) shall survive the expiration or termination of this Lease;
(vii) INTENTIONALLY DELETED; (viii) Landlord may at any time change the fiscal
year of the Building upon prior written notice to Tenant; (ix) each amount owed
to Landlord under this Lease for which the date of payment is not expressly
fixed shall be due on the date listed on the statement showing such amount is
due (which date shall not be earlier than thirty (30) days after the date
Tenant receives such statement); (x) if Landlord fails to give Tenant an
estimate of Adjustment Rent prior to the beginning of any calendar year, Tenant
shall continue to pay Adjustment Rent at the rate for the previous calendar
year until Landlord delivers such estimate or notice, at which time Tenant
shall pay retroactively the increased amount for all previous months of such
calendar year; and (xi) if Landlord permits Tenant to take possession of any
phase of the Premises (other than for the purposes set forth in Section 1.E
hereof) prior to the commencement date applicable to such phase, such tenancy
shall be by the day and Tenant shall be responsible for payment of Rent, in
advance, at the rate of one-thirtieth (1/30th) of the monthly Rent as set forth
above for each day of such occupancy prior to the commencement date applicable
to such phase, and Tenant shall comply fully with all other terms and
provisions of this Lease upon Tenant's possession of any portion of the
Premises.
D. ALLOCATION OF RENT ABATEMENT FOR TAX PURPOSES. Landlord and
Tenant agree that no portion of the Base Rent paid by Tenant during the portion
of the Term occurring after the expiration of any period during which such rent
was abated shall be allocated, for income tax purposes, nor is such rent
intended by the parties to be allocable, for income tax purposes, to any
abatement period.
3. USE. Tenant will occupy and use the Premises solely for first-class
non-governmental business offices (including the Specific Authorized Uses
(hereinafter defined), to the extent ancillary and accessory to such office
use) in accordance with applicable zoning regulations. The Premises will not
be used for any other purposes. "Specific Authorized Uses" shall mean the
following uses: (i) operation, installation, maintenance, repair and
replacement of the communications equipment of Tenant and its customers, (ii)
the location and operation of Network Operations Center Equipment (hereinafter
defined) and (iii) to serve pre-prepared food and/or non-alcoholic beverages in
an area of the Premises that also contains computers, display equipment and/or
network or Internet connections. "Network Operation Center Equipment" shall
mean the following equipment of Tenant (i) telecommunications switching
equipment and transport nodes and telecommunications equipment of Tenant's
customers, (ii) AC and DC power equipment and sealed batteries, (iii)
projection and computer equipment to facilitate network management and
monitoring, and (iv) computer and data processing equipment. The term "Network
Operations Center" shall mean an area of the Premises used for the location and
operation of the Network Operations Center Equipment. The term "Cyber Cafe"
shall mean an area of the Premises used to serve pre-prepared food and/or
non-alcoholic beverages, which area will also contain computers, display
equipment, and/or network or Internet connections. Landlord represents that it
is not bound by any proffer or any private covenants, conditions or
restrictions that prohibit the use of the Premises for any of the Specific
Authorized Uses; provided, however, Tenant shall be entitled to use the
Premises for any of the Specific Authorized Uses only if, and to the extent
that, such uses are permitted under and in compliance with all federal, state
and municipal laws, ordinances, rules and regulations (including without
limitation all zoning laws, ordinances, rules and regulations) applicable to
the Building, and Landlord makes no representation that any such Specific
Authorized Uses are permitted thereunder or in compliance therewith. Tenant
shall, at its own cost and expense, comply with all federal, state and
municipal laws, ordinances, rules and regulations issued by any governmental
authority which relate to the condition, use or occupancy of the Premises and
all covenants, conditions and restrictions of record as of the date of this
Lease and those covenants, conditions and restrictions which are created after
the date of this Lease to the extent the Tenant is given written notice of same
and to the extent same do not unreasonably increase Tenant's cost to comply
therewith, materially impair any rights of Tenant hereunder, or unreasonably
interfere with the Tenant's access to or use of the Premises which relate to
the condition, use or occupancy of the Premises. Without limiting the
foregoing, Tenant shall not cause, nor permit, any hazardous or toxic
substances to be brought upon, produced, stored, used, discharged or disposed
of in, on or about the Premises without the prior written consent of Landlord
and then only in compliance with all
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applicable environmental laws, except that Tenant shall be permitted to use and
keep in the Premises such cleaning, copier and other supplies as are reasonable
and customary for office use, provided that Tenant uses, stores and disposes of
same in accordance with all applicable environmental laws. Tenant shall not
commit waste or use the Premises in any way as to constitute a nuisance. All
common areas within the Building shall be designated as "non-smoking" and
Tenant shall cooperate with Landlord in enforcing such non-smoking rule. To
the extent Tenant desires to allow people to smoke within the Premises Tenant
shall designate specific smoking areas within the Premises provided however
that such areas must be properly ventilated and Tenant shall cause any smokers
in the Premises to use such smoking areas. Except as may otherwise be provided
in this Lease, Tenant shall not be required to make any alteration outside of
the Premises or to any base Building systems to comply with any federal, state
and municipal laws, ordinances, rules and regulations issued by any
governmental authority except that Tenant shall be responsible for the cost of
any alteration made by Landlord in or to any part of the Building to the extent
such alteration is required: (i) to comply with the requirement of any federal,
state and municipal laws, ordinances, rules and regulations issued by any
governmental authority and such requirement is a result of Tenant's particular
business or its particular use of the Premises, or (ii) as a result of any
damage caused by Tenant in the Building or any alteration made by Tenant.
Notwithstanding the foregoing, Tenant shall not be required to modify any
sprinkler heads required by any applicable legal requirement to be modified,
but shall be required to relocate such sprinkler heads if required by any
applicable legal requirement. For purposes of this Section 3, the base
Building HVAC ducts, VAV boxes, central air handlers, that portion of the
electrical system the supplies power to the main electrical closet serving the
Premises, and that portion of the plumbing system that supplies water and
sewage service to the existing bathrooms and wet stacks serving the Premises
shall be part of the base Building systems in the Premises. All other
electrical, mechanical, plumbing and any other systems within the Premises or
exclusively servicing the Premises, including without limitation, any
supplemental HVAC systems exclusively servicing the Premises and the sprinkler
system (including without limitation any Halon system that may be installed for
the Premises) for the Premises (the "Premises Systems") shall not be part of
the base Building systems and shall be the sole responsibility of Tenant;
provided, however if any such system is located outside the Premises it shall
be considered a part of the Premises Systems only if it exclusively services
the Premises and is not a base Building system, such as any telecommunications
cabling and any generators used in connection with any supplemental HVAC or
other equipment of Tenant.
4. CONDITION OF PREMISES. No agreement of Landlord to alter, remodel,
decorate, clean or improve the Premises or the Building (or to provide Tenant
with any credit or allowance for the same), and no representation regarding the
condition of the Premises or the Building, have been made by or on behalf of
Landlord or relied upon by Tenant, except as expressly stated in this Lease
(including any exhibits hereto).
5. BUILDING SERVICES.
A. BASIC SERVICES. Landlord shall furnish the following services
in a manner reasonably comparable with other first-class office buildings in
Herndon and Reston, Virginia of similar size, location and age: (i) heating,
ventilating and air conditioning to provide a temperature condition required,
in Landlord's reasonable judgment, for comfortable occupancy of the Premises
under normal business operations, daily from 8:00 A.M. to 6:00 P.M. (Saturday
from 9:00 A.M. to 1:00 P.M.), Sundays and holidays excepted; (ii) water for
drinking and for any restrooms and office kitchens requested by Tenant; (iii)
men's and women's restrooms at locations designated by Landlord, in common with
other tenants of the Building; (iv) janitor service in the Premises and common
areas of the Building, weekends and holidays excepted, including periodic
outside window washing of the perimeter windows in the Premises not less than
twice per year; (v) maintenance of interior and exterior common areas of the
Building, including snow removal as necessary and maintenance of the landscaped
areas; (vi) passenger elevator service in common with Landlord and other
tenants of the Building, 24 hours a day, 7 days a week; provided, however, that
Landlord shall have the right to remove passenger and freight elevators from
service as the same shall be required for moving freight or for servicing or
maintaining the elevators and/or the Building; and (vii) freight elevator
service daily, subject to scheduling with Landlord. Tenant shall have access
to the Premises 24 hours per day, 365 days per year. The base Building
heating, ventilating and air conditioning ("HVAC") system is designed to comply
with the HVAC specifications set forth on EXHIBIT E attached hereto.
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B. ELECTRICITY. The Building shall be metered or submetered for
electrical use. Electricity shall be distributed to the Premises and the
remainder of the Building either by the electric utility company serving the
Building or, at Landlord's option, by Landlord; and Landlord shall permit
Landlord's wire and conduits, to the extent available, suitable and safely
capable, to be used for such distribution. If and so long as Landlord is
distributing electricity to the Premises, Tenant shall obtain all of its
electricity from Landlord and shall pay all of Landlord's charges, which
charges shall be based on meter readings, provided such charges are competitive
with charges of third party vendors, including, without limitation, the
Virginia Electric Power Company. If, pursuant to Section 5.F hereof, Tenant
elects to provide its own electricity, then Tenant shall make all necessary
arrangements with the electric utility company for providing, metering and
paying for electric current furnished to the Building and Landlord shall have
no liability or obligations with respect thereto. All electricity used during
the performance of repairs in the Premises, or the operation of any special air
conditioning systems serving the Premises shall be included in Expenses.
C. TELEPHONES. Tenant shall arrange for telephone service
directly and shall be solely responsible for paying for such telephone service.
If Landlord acquires ownership of the telephone cables in the Building, at any
time, Landlord shall permit Tenant to connect to such cables on such terms and
conditions as Landlord may prescribe. In no event does Landlord make any
representation or warranty with respect to the provision of telephone service
in the Building and Landlord shall have no liability with respect thereto.
D. ADDITIONAL SERVICES. Landlord shall not be obligated to
furnish any services other than those stated above. If Landlord elects to
furnish services requested by Tenant in addition to those stated above
(including, without limitation, services at times other than those stated
above), Tenant shall pay Landlord's actual cost to furnish such services. If
Tenant shall fail to make any such payment, Landlord may, without notice to
Tenant and in addition to all other remedies available to Landlord, discontinue
any additional services. No discontinuance of any such service shall result in
any liability of Landlord to Tenant or be considered as an eviction or a
disturbance of Tenant's use of the Premises. In addition, if Tenant's
concentration of personnel or equipment materially and adversely affects the
temperature or humidity in the Premises or the Building, Landlord may install
supplementary air conditioning units in the Premises, and Tenant shall pay one
hundred fifteen percent (115%) of the cost of such air conditioning units and
of the installation, operation and maintenance thereof; provided, however,
that, except in the case of the risk of immediate harm to any person or the
Building or any other emergency, Landlord shall give Tenant written notice of
the problem and an opportunity to cure the problem within ten (10) days after
receipt of such notice, and if Tenant is the only tenant of the Building and
such problem cannot be reasonably cured within such ten (10) day period, Tenant
shall have such additional time (not to exceed thirty (30) days) as may be
reasonably necessary to cure such problem, provided that Tenant commences such
cure within such ten (10) day period and diligently and continuously pursues
such cure.
E. FAILURE OR DELAY IN FURNISHING SERVICES. Except as set forth
in Section 11.B hereof, Tenant agrees that Landlord shall not be liable for
damages for failure or delay in furnishing any service stated above if such
failure or delay is caused, in whole or in part, by any one or more of the
events stated in Section 26.I. below, nor shall any such failure or delay be
considered to be an eviction or disturbance of Tenant's use of the Premises,
or, except as set forth in this Section 5.E, relieve Tenant from its obligation
to pay any Rent when due or from any other obligations of Tenant under this
Lease. Landlord agrees to use its reasonable efforts to promptly cure such
failure or delay after Tenant has notified Landlord thereof. Notwithstanding
the forgoing, if for reasons within the control of Landlord and not caused by
Tenant, or any of its employees or agents, or caused by any one or more of the
events stated in Section 26.I, any interruption or stoppage of any services
Landlord is required hereunder to provide to the Building shall occur and such
interruption or stoppage shall continue for more than three (3) consecutive
business days and shall render a substantial portion of the Premises
untenantable and Tenant shall actually cease to conduct business in such
portion of the Premises, then, provided that Tenant provides Landlord with
written notice thereof promptly upon the occurrence thereof, the Base Rent
payable hereunder for such untenantable portion of the Premises shall be abated
for the period beginning on the fourth (4th) consecutive business day of such
failure and shall continue until the earlier of the date that (i) Tenant again
uses such portion of the Premises, or (ii)
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such portion of the Premises is again tenantable.
F. TENANT'S OPTION TO PROVIDE ELECTRICITY AND CHAR SERVICE.
Tenant shall have the option to provide, at its sole cost, its own char service
and/or electrical service to the Building, provided that Tenant exercises such
option by delivering to Landlord notice thereof (i) ninety (90) days prior to
the Commencement Date if the exercise of such option is to be effective on the
Commencement Date, or (ii) ninety (90) days prior to the commencement of any
calendar year if such option is to be effective on the first day of such
calendar year, it being understood that if such option is not effective as of
the Commencement Date then such option can become effective only on the first
day of a calendar year. If such election is made, Landlord shall have no further
obligation hereunder to provide such services after the effective date of such
election. In the event Tenant does in fact exercise such option to provide its
own char service and/or electrical service, then (i) Expenses for the Base Year
shall be adjusted to exclude the amount of char service and/or electricity
expenses (as the case may be) otherwise included in the Base Year, and (ii) the
Base Rent payable by Tenant for each Lease Year during the initial Term
(excluding any Extension Terms) as shown in ITEM 6 of the Schedule shall be
adjusted as follows to take into account the fact that Landlord is not required
to provide such services to Tenant and the calculation of Expenses shall take
into account the fact that Tenant is providing such services. For each month
during the initial Term (excluding any Extension Terms) commencing on the date
that Tenant's election to provide the foregoing services becomes effective, the
monthly installment of Base Rent otherwise payable hereunder (as set forth in
ITEM 6 of the Schedule) shall be adjusted by reducing such monthly amount by the
following: (i) in the event Tenant elects to provide only its own electricity
service, an amount equal to (a) One and 53/100 Dollars ($1.53), times (b) the
number of square feet in the Premises, divided by (c) twelve (12), (ii) in the
event Tenant elects to provide only its own contract char service, an amount
equal to (a) Eighty-four Cents ($ .84), times (b) the number of square feet in
the Premises, divided by (c) twelve (12), and (iii) in the event Tenant elects
to provide both its own electricity service and contract char service, an amount
equal to (a) Two Dollars and 37/100 ($2.37), times (b) the number of square feet
in the Premises, divided by (c) twelve (12). In the event Tenant does in fact
exercise such option to provide its own char service and/or electrical service,
Tenant shall be responsible for (i) providing such services to the entire
Building (including without limitation the Premises and the common areas of the
Building) in a first-class manner, (ii) contracting with the appropriate vendor
or utility company to provide such services and (iii) paying the appropriate
vendor or utility company for such services. In addition, if Tenant reasonably
requests that it be permitted to provide other service otherwise provided by
Landlord, Landlord shall consider permitting (without in any way being obligated
to so permit) Tenant to provide such services; in which case, Expenses for the
Base Year and the Base Rent shall be adjusted by Landlord for such items in
manner similar to the forgoing adjustment as reasonably determined by Landlord.
Tenant acknowledges and agrees that it may be appropriate for Landlord to
control any such other services for various reasons and Landlord shall have sole
discretion to withhold its consent to permitting Tenant to provide any such
services otherwise provided by Landlord. If Tenant exercises its option to
provide any services otherwise provided by Landlord hereunder, Tenant shall be
entitled to cancel such option, provided that Tenant exercises its right to
cancel such option by delivering to Landlord notice thereof at least ninety (90)
days prior to the commencement of the calendar year for which such cancellation
is to be effective, it being understood that such cancellation can become
effective only on the first day of a calendar year. If such cancellation is
made, then as of the effective date of such cancellation (i) Tenant shall no
longer be required to provide such services and Landlord shall provide such
services in the manner otherwise required hereunder, (ii) Expenses for the Base
Year shall be calculated in the manner set forth herein as if Tenant had not
exercised its option to provide the services that have been cancelled, (iii) the
Base Rent payable by Tenant for each Lease Year during the Term shall be as
shown in ITEM 6 of the Schedule (without any reduction for the services that
have been cancelled) as if Tenant had not exercised its option to provide the
services that have been cancelled, and (iv) the calculation of Expenses shall
take into account the fact that Landlord is providing such services.
G. EXCESS USE OF UTILITIES. If the quantity or kind of utilities
(including without limitation electricity) or services furnished by Landlord to
the Premises to meet Tenant's requirements is in excess of the utilities and
services typically and customarily consumed by other office tenants of first
class office buildings in Reston and Herndon, Virginia, then Tenant shall
directly reimburse Landlord upon demand for the additional cost resulting from
such excessive consumption; provided, however, for purposes of this
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provision Tenant's electricity consumption shall be deemed to be excessive if
the cost of electricity provided to the Building exceeds an amount equal to One
and 53/100 Dollars ($1.53) times the number of rentable square feet in the
Building, and all costs in excess of such amount shall be excessive consumption
and shall be directly reimburse by Tenant to Landlord.
6. RULES AND REGULATIONS. Tenant shall observe and comply, and shall
cause its subtenants, assignees, invitees, employees, contractors and agents to
observe and comply, with the Rules and Regulations listed on EXHIBIT C attached
hereto and with such reasonable modifications and additions thereto as Landlord
may make from time to time of which Landlord notifies Tenant. Landlord shall
not be liable for failure of any person to obey the Rules and Regulations.
Landlord shall not be obligated to enforce the Rules and Regulations against
any person, and the failure of Landlord to enforce any such Rules and
Regulations shall not constitute a waiver thereof or relieve Tenant from
compliance therewith, provided, however, that Landlord shall not discriminate
against Tenant in the enforcement of such Rules and Regulations. To the extent
the terms of this Lease conflict with the Rules and Regulations the terms of
this Lease shall prevail.
7. CERTAIN RIGHTS RESERVED TO LANDLORD. Landlord reserves the following
rights, each of which Landlord may exercise without notice to Tenant and
without liability to Tenant, and the exercise of any such rights shall not be
deemed to constitute an eviction or disturbance of Tenant's use or possession
of the Premises and shall not give rise to any claim for set-off or abatement
of Rent or any other claim: (a) to change the name or street address of the
Building or the suite number of the Premises, provided that unless such change
is required by law or any governmental or quasi-governmental authority,
Landlord shall use reasonable efforts to provide Tenant with notice thereof (if
possible) at least six (6) months prior to such change; (b) to install, affix
and maintain any and all signs on the exterior or interior of the Building,
subject to the restrictions set forth in Section 9.D hereof; (c) to make
repairs, decorations, alterations, additions or improvements, whether
structural or otherwise, in and about the Building (without materially
diminishing the first class nature of the Building unless such repairs,
decorations, alterations, additions or improvements are necessary for the
operation of the Building, are required by law or any governmental or
quasi-governmental authority or are requested by Tenant), including, without
limitation, reconfiguring parking areas, driveways, walkways and other exterior
common areas, and for such purposes to enter upon the Premises (upon reasonable
notice except in the case of emergencies), temporarily close doors, corridors
and other areas of the Building and interrupt or temporarily suspend services
or use of common areas, provided however that Landlord shall use reasonable
efforts not to interfere with the operation of Tenant's business in the
Premises; provided, further, that Tenant agrees to pay Landlord for overtime
and similar expenses incurred if such work is done other than during ordinary
business hours at Tenant's request; (d) to retain at all times, and to use in
appropriate instances and with reasonable notice (except in the case of
emergencies), keys to all doors within and into the Premises; (e) to grant to
any person or to reserve unto itself the exclusive right to conduct any
business or render any service in the Building, to the extent such grant of
exclusivity does not restrict Tenant's right hereunder to use the Premises for
the purposes permitted hereunder; (f) to inspect the Premises at reasonable
times and upon reasonable notice (except in the case of emergencies) and, if
vacated or abandoned and Tenant indicates in writing that it does not intend to
reoccupy the Premises, to prepare the Premises for reoccupancy; (g) to install,
use and maintain in and through the Premises pipes, conduits, wires and ducts
serving the Building, provided that such installation, use and maintenance does
not unreasonably interfere with Tenant's use of the Premises; (h) to take any
other action which Landlord reasonably deems necessary in connection with the
operation, maintenance, marketing, improvement or preservation of the Building;
and (i) to reasonably approve the weight, size and location of safes or other
heavy equipment or articles, which articles may be moved in, about or out of
the Building or Premises only at such times and in such manner as Landlord
shall reasonably direct, at Tenant's sole risk and responsibility.
8. MAINTENANCE AND REPAIRS.
A. GENERAL OBLIGATIONS. Tenant, at its expense, shall maintain
and keep the Premises in clean, safe, sanitary and good order, condition and
repair at all times during the Term, normal wear and tear excepted and subject
to the casualty and condemnation provisions of this Lease as specifically
provided in Sections 12 and 13 hereof. Except as otherwise provided in this
Lease (including without limitation the
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immediately preceding sentence) and except for ordinary wear and tear, Landlord
shall maintain and repair the common areas of the Building, the base Building
structure, the base Building systems (but not the Premises Systems, as
heretofore defined) and the exterior of the Building (including the Building's
roof) in a manner that is reasonably comparable to other similar first class
office buildings in the Herndon and Reston, Virginia area of a similar
location, size and age and shall maintain, repair, replace and paint, as
necessary, all building-standard common area elements installed by Landlord.
Notwithstanding the foregoing, except as provided in Section 12 hereof,
Landlord shall have no obligation to make any repairs brought about by any act
or omission of Tenant, its agents, employees or invitees. All building
standard bulbs, tubes and lighting fixtures for the Premises shall be provided
and installed by Landlord, which cost shall be part of Expenses.
B. NOISE AND VIBRATION. Business machines and mechanical
equipment belonging to Tenant which cause noise or vibration that may be
transmitted to the structure of the Building or to any space therein to such a
degree as to be objectionable to Landlord or to any tenant in the Building
shall be installed and maintained by Tenant, at Tenant's expense, on vibration
eliminators or vibration reducers or other devices sufficient to eliminate such
noise and vibration or reduce the same to a level acceptable to Landlord in
Landlord's sole judgment, and if such noise and/or vibration is not so
eliminated or reduced to a level acceptable to Landlord in its sole judgment,
Landlord shall have the right to require Tenant to remove such machines and/or
equipment from the Premises.
9. ALTERATIONS; SIGNS.
A. REQUIREMENTS. Tenant shall not make any replacement,
alteration, improvement or addition to or removal from the Premises
(collectively an "alteration") without the prior written consent of Landlord,
which consent shall not be unreasonably withheld. In the event Tenant proposes
to make any alteration requiring Landlord's consent, Tenant shall, prior to
commencing such alteration, submit to Landlord for prior written approval: (i)
detailed plans and specifications; (ii) the names, addresses and copies of
contracts for all contractors on alterations which will cost $100,000 or more
and the name, address and a copy of the contract for the general contractor
only on alterations costing less than $100,000; (iii) all necessary permits
evidencing compliance with all applicable governmental rules, regulations and
requirements; (iv) certificates of insurance in form and amounts required by
Landlord, naming Landlord, its managing agent and any other parties designated
by Landlord (that have any insurable interest in the Building or any part
thereof) as additional insureds; and (v) all other documents and information as
Landlord may reasonably request in connection with such alteration. Tenant
agrees to pay Landlord's reasonable charges for review of all such items, such
charges not to exceed one hundred ten percent (110%) of Landlord's actual costs
for such review. Notwithstanding anything contained in this Section 9.A,
Tenant shall have the right to make Permitted Alterations (hereinafter defined)
in the Premises, without Landlord's consent (but with fifteen (15) days prior
written notice (the "Permitted Alteration Notice"), which notice shall contain
a description of the Permitted Alterations proposed to be undertaken by Tenant
and state that the alterations are Permitted Alterations). A Permitted
Alteration shall mean any of the following Alterations in the Premises,
provided that such Alterations are not visible from outside the Premises, do
not require a permit or any government approval to install or construct, are
consistent with the design standards of the Building, cost less than Ten
Thousand Dollars ($10,000.00), and do not affect the structure of, or any of
the systems in, the Building: (i) paint and install wall coverings and other
Alterations that are purely cosmetic irrespective of the aggregate cost thereof
(i.e., the $10,000.00 limitation shall not apply to this item (i)); (ii)
install and remove office furniture; (iii) install normal and customary office
equipment that are not affixed to the Premises and are designed to be
free-standing (i.e., not "built-in"), subject to the other provisions of this
Lease, (iv) relocate 120 volt electrical outlets; (v) install and remove
Tenant's computer and telecommunication equipment and perform cable pulls in
connection therewith; (vi) install and remove carpeting and other floor
coverings. In the event that, within ten (10) days after receiving the
Permitted Alterations Notice, Landlord determines, in its reasonable
discretion, that the proposed Alterations are not Permitted Alterations, and so
notifies Tenant, Tenant shall apply for Landlord's consent for such Alterations
in accordance with the provisions of this Section 9.A. Neither approval of the
plans and specifications nor supervision of the alteration by Landlord shall
constitute a representation or warranty by Landlord as to the accuracy,
adequacy, sufficiency or propriety of such plans and specifications or the
quality of workmanship or the compliance of such alteration with applicable
law. Tenant shall pay the entire cost of the alteration and, if requested by
Landlord, shall
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deposit with Landlord, prior to the commencement of any alteration costing
Fifty Thousand Dollars ($50,000) or more, payment and completion bonds payable
to Landlord in the full amount of the cost of the alteration, including both
labor and materials. Each alteration shall be performed in a good and
workmanlike manner, in accordance with the plans and specifications approved by
Landlord where Landlord approval is required, and shall meet or exceed the
standards for construction and quality of materials for a first-class office
building in Fairfax County, Virginia. In addition, each alteration shall be
performed in compliance with all applicable governmental and insurance company
laws, regulations and requirements. Each alteration shall be performed by
Landlord or under Landlord's supervision, and in harmony with Landlord's
employees, contractors and other tenants. Each alteration, whether temporary
or permanent in character, made by Landlord or Tenant in or upon the Premises
(excepting only Tenant's furniture, equipment and trade fixtures) shall become
Landlord's property and shall remain upon the Premises at the expiration or
termination of this Lease without compensation to Tenant; provided, however,
that Tenant shall have the right to remove at Tenant's expense, prior to the
expiration or termination of the Term, or any Extension Term if Tenant
exercises its options under Section 1 D. hereof, all movable furniture,
furnishings or equipment if such items (i) are not affixed to or in the
Premises, or (ii) temporarily affixed to or in the Premises by bolts or screws,
but only to the extent such items can be removed without any damage to the
Premises or the Building. With respect to all other alterations, whether
temporary or permanent in nature, Landlord shall have the right to require
Tenant to remove such alteration at Tenant's sole cost and expense in
accordance with the provisions of Section 15 of this Lease, which required
removal shall be specified by Landlord when Landlord consents to Tenant's
requested alterations. If Tenant installs any alterations without the consent
of Landlord as set forth above (if such consent is required) then Landlord
shall have the right to remove such alterations and Tenant shall reimburse
Landlord therefor as additional Rent.
B. LIENS. Upon completion of any alteration, Tenant shall
promptly furnish Landlord with sworn owner's and contractors' statements and
full and final waivers of lien from the general contractor and all
subcontractors providing $5,000 or more in labor or material costs, covering
all labor and materials included in such alteration. Tenant shall use best
efforts not to permit any mechanic's lien to be filed against the Building, or
any part thereof, arising out of any alteration performed, or alleged to have
been performed, by or on behalf of Tenant. If any such lien is filed, Tenant
shall within ten (10) days after notice of such lien, have such lien released
of record or deliver to Landlord a bond in form, amount, and issued by a surety
satisfactory to Landlord, indemnifying Landlord against all costs and
liabilities resulting from such lien and the foreclosure or attempted
foreclosure thereof. If Tenant fails to have such lien so released or to
deliver such bond to Landlord, Landlord, without investigating the validity of
such lien, may pay or discharge the same, and Tenant shall reimburse Landlord
upon demand for the amount so paid by Landlord, including Landlord's expenses
and reasonable attorneys' fees.
C. SIGNS. Except as set forth in Section 9.D hereof, no sign,
advertisement or notice shall be inscribed, painted, affixed or otherwise
displayed on any part of the exterior or interior of the Building except on the
interior of the Premises so long as the same is not visible from outside the
Premises, on the directories and the doors of offices, and then only in such
place, number, size, color and style as is harmonious with the design of the
Building and its furnishings and is approved by Landlord in writing, such
approval not to be unreasonably withheld, conditioned or delayed. All signs
approved by Landlord as aforesaid shall be provided by Landlord at Tenant's
expense, except that Landlord shall bear the cost of placing Tenant's name in
the directory. If any sign, advertisement or notice which does not conform to
the foregoing is nevertheless exhibited by Tenant, Landlord shall have the
right to remove the same and Tenant shall be liable as additional Rent for any
and all expenses incurred by Landlord in said removal.
D. BUILDING SIGNAGE. Tenant shall have the right to install
signage at multiple locations on the interior and exterior of the Building (the
"Building Signage") identifying the Tenant as a tenant of the Building,
provided that (i) such Building Signage is permitted under the laws, rules and
regulations of the Fairfax County, Virginia and any other governmental or
quasi-governmental authorities having appropriate jurisdiction over the
Building and under any covenants affecting the Building, (ii) such Building
Signage conforms to all such laws, rules, regulations and covenants, and to the
terms and conditions hereinafter set forth, and (iii) Tenant has obtained all
permits, licenses and approvals that may be required in order to install such
Building Signage. The exact number, style, dimensions, design and location of
the Building Signage
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shall be subject to Landlord's prior review and prior written approval, which
shall not be unreasonably withheld, conditioned or delayed, provided that the
foregoing conditions have been met and Landlord determines that such Building
Signage and the amount thereof is appropriate for first-class office buildings
in Herndon, Virginia and in Fairfax County, Virginia. In order to obtain
Landlord's approval, Tenant must submit to Landlord for Landlord's approval
samples of materials to be used for the Building Signage (showing, among other
things, the thickness thereof), samples of any colors used for the Building
Signage, complete shop drawings of the Building Signage and plans and
specifications for the actual construction and attachment of the Building
Signage. Any such Building Signage shall be installed by a contractor
reasonably approved by Landlord and maintained by a contractor reasonably
acceptable to Landlord. On or before the end of the Term, Tenant shall, at its
expense, have a contractor selected by Landlord remove the Building Signage and
repair the Building affected thereby to the condition such part of the Building
was in at the time such Building Signage was installed. Tenant hereby agrees
to indemnify and hold Landlord and its agents, officers, directors and
employees harmless from and against any cost, damage, claim, liability or
expense (including reasonable attorneys' fees) incurred by or claimed against
Landlord and its agents, officers, directors and employees, directly or
indirectly, as a result of or in any way arising from the installation and
maintenance of such Building Signage. Tenant shall obtain insurance coverage
for such Building Signage which coverage shall be included in Tenant's
comprehensive liability insurance required pursuant to Section 10 of this
Lease. Tenant's rights under this Section 9.D are personal to Tenant and to
any assignee of the Lease (including any subtenant of the entire Premises for
the entire remaining Term), but no sublessee of less than the entire Building
for the entire remaining Term shall have any signage rights hereunder;
provided, however, Tenant shall be entitled to assign all or a portion of its
signage rights hereunder to any subtenant for the term of its sublease if such
subtenant subleases more than fifty thousand (50,000) rentable square feet of
space in the Building from Tenant, but in no event shall Tenant be entitled to
assign such rights to more than one (1) subtenant exercising such rights at the
same time (i.e., in no event shall more than one (1) subtenant of Tenant have
such signage rights). During the Term, provided that Tenant is not in default
of any provision of this Lease and is leasing one hundred percent (100%) of the
Building, Landlord shall not place on the exterior of the Building any signage,
unless such signage is required by law or relates to parking, directions,
safety or other operations and/or maintenance concerns of the Building or
relates to the sale or leasing of any part of the Building. Tenant
acknowledges and agrees that any and all rights that Tenant may have to install
on or around, affix to, or otherwise affect the outside of the Building or
landscaping or outside common areas thereof (including without limitation,
signs, antennas, generators and fuel tanks) shall be subject to architectural
and design review and approval pursuant to certain covenants, conditions and
restrictions affecting the Building.
10. INSURANCE. Landlord and Tenant agree to provide insurance and
allocate the risks of loss as follows:
A. TENANT'S INSURANCE
(i) Tenant, at its sole cost and expense but for the
mutual benefit of Landlord (when used in this Section 10.A. the term
"Landlord" shall include Landlord's managing agent, partners,
beneficiaries, officers, agents, servants and employees and the term
"Tenant" shall include Tenant's partners, beneficiaries, officers,
agents, servants and employees), agrees to purchase and keep in force
and effect during the Term hereof, insurance under an "all risk" fire
and extended coverage policy on all alterations, additions, and
improvements in the Premises and on all personal property located in
the Premises and any Antenna Equipment (hereinafter defined),
protecting Tenant from damage or other loss caused by fire or other
casualty, including but not limited to vandalism and malicious
mischief, perils covered by extended coverage, theft, sprinkler
leakage, water damage (however caused), explosion malfunction or
failure of heating, and cooling or other apparatus, and other similar
risks in amounts not less than the full insurable replacement value of
such property. Such property insurance (except that which insures
only Tenant's moveable personal property located in, on or about the
Premises and not including any alterations) shall name Landlord as a
"loss payee" (to the extent of Landlord's interest in such property)
and shall provide that it is specific and non-contributory and shall
contain a replacement cost endorsement. Such insurance shall also
contain a clause pursuant to which the insurance carriers waive all
rights of subrogation against
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Landlord with respect to losses payable under such policies.
(ii) Tenant also agrees to maintain commercial general
liability insurance covering Tenant as the insured party against
claims for bodily injury and death and property damage occurring in or
about the Premises, with limits of not less than One Million Dollars
($1,000,000.00) per occurrence and Three Million Dollars
($3,000,000.00) general aggregate. Such insurance shall include
contractual liability insurance.
(iii) All policies required to be carried by Tenant under
this Lease shall be issued by insurers of recognized responsibility
licensed to do business in the Commonwealth of Virginia with a Best's
rating of A-/VIII or better and shall name Landlord as an additional
insured. Tenant shall, prior to commencement of the Term, furnish to
Landlord certificates evidencing such coverage, which certificates
shall state that such insurance coverage may not be changed or
canceled without at least thirty (30) days' prior written notice to
Landlord and Tenant. In the event Tenant shall fail to procure such
insurance, Landlord may at its option after giving, Tenant no less
than ten (10) days' prior written notice of its election to do so
procure the same for the account of Tenant and the cost thereof shall
be paid to Landlord as additional Rent upon receipt by Tenant of bills
therefor.
B. LANDLORD'S INSURANCE. Landlord agrees to purchase and keep in
force and effect commercial general liability insurance in an amount not less
than Three Million Dollars ($3,000,000.00) and "all risk" fire and extended
insurance on the Building improvements (not including, however, any
improvements, alterations or additions in the Tenant's Premises or other
tenants' premises) against fire or other casualty, including but not limited to
vandalism and malicious mischief, perils covered by extended coverage, theft,
sprinkler leakage, water damage (however caused), explosion, malfunction or
failure of heating and cooling or other apparatus, and other similar risks in a
commercially reasonable amount, but in no event less than the amount required
by Landlord's insurance company to prevent the application of any coinsurance
provision. Such property insurance shall also contain a clause pursuant to
which the insurance carriers waive all rights of subrogation against Tenant
with respect to losses payable under such policies and losses which would have
been payable if Landlord had carried such all risk insurance at one hundred
percent of the replacement cost of the Building improvements exclusive of any
improvements, alterations or additions in the Tenant's Premises or other
tenants' premises.
C. RISK OF LOSS. By this Section 10, Landlord and Tenant intend
that the risk of loss or damage as described above be borne by responsible
insurance carriers to the extent above provided, and Landlord and Tenant hereby
agree to look solely to, and to seek recovery only from, their respective
insurance carriers in the event of a loss of a type described above to the
extent that such coverage is agreed to be provided hereunder. For this
purpose, any applicable deductible amount shall be treated as though it were
recoverable under such policies. Landlord and Tenant agree that applicable
portions of all monies collected from such insurance shall be used toward the
full compliance with the obligations of Landlord and Tenant under this Lease in
connection with damage resulting from fire or other casualty.
11. TENANT'S AND LANDLORD'S RESPONSIBILITIES.
A. TENANT'S RESPONSIBILITIES. Subject to the provisions of
Section 10.C hereof and to the extent permitted by law, Tenant shall assume the
risk of responsibility for, have the obligation to insure against, and
indemnify Landlord, its members, partners, and their officers, directors,
agents and employees (collectively, the "Landlord Indemnified Parties") and
hold the Indemnified Parties harmless from, any and all liability for any loss,
damage, injury, cost or expense incurred by the Indemnified Parties and
occasioned by or in any way related to or connected with (i) the use and
occupancy of the Premises or the Building by Tenant, its agents, employees,
invitees, and any other persons who gain access to the Premises including,
without limitation, any violation of the Americans with Disabilities Act and
any zoning, health, environmental or other law, ordinance, order, rule or
regulation of any governmental body or agency, (ii) the negligence or the
intentionally wrongful acts or omissions of Tenant, its agents, employees and
invitees, and (iii) injury or death to individuals or damage to property
sustained in or about the Premises, except, with respect to the above, to the
extent such loss, damage or injury results from the negligence or willful
misconduct of such Landlord
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Indemnified Parties. Tenant's obligation to indemnify Landlord hereunder shall
include the duty to defend against any claims asserted by reason of such loss,
damage or injury and to pay any judgments, settlements, costs, fees and
expenses, including attorneys' fees, incurred in connection therewith. Tenant
shall not be responsible to Landlord for any consequential damages except in
connection with Tenant's breach of any provision of Section 17 which continues
in excess of thirty successive calendar days, or breach of any provision of
Sections 20 or 21 hereof.
B. LANDLORD'S RESPONSIBILITIES. Subject to the provisions of
Section 10.C hereof and to the extent permitted by law, Landlord shall assume
the risk of responsibility for, have the obligation to insure against, and
indemnify, Tenant, its members, partners, and their officers, directors, agents
and employees (collectively, the "Tenant Indemnified Parties") and hold the
Tenant Indemnified Parties harmless from, any and all liability for any loss,
damage, injury to persons (including, without limitation, death resulting
therefrom), injury to property, cost or expense incurred by Tenant Indemnified
Parties to the extent resulting directly from any negligence or willful
misconduct of Landlord or any agent or employee of Landlord in connection with
the management, repair, maintenance or use of the common areas of the Building,
except to the extent any such loss, damage injury results from the negligence
or willful misconduct of such Tenant Indemnified Parties. Landlord's
obligation to indemnify Tenant hereunder shall include the duty to defend
against any claims asserted by reason of such loss, damage or injury and to pay
any judgments, settlements, costs, fees and expenses, including attorneys'
fees, incurred in connection therewith.
12. FIRE OR OTHER CASUALTY
A. DESTRUCTION OF THE BUILDING. If the Building should be
substantially destroyed (which, as used herein, means destruction or damage to
at least 75% of the Building) by fire or other casualty, either party hereto
may, at its option, terminate this Lease by giving written notice thereof to
the other party within (30) days after such casualty. In such event, the Rent
shall be apportioned to and shall cease to accrue as of the date of such
casualty. In the event neither party exercises this option, then the Premises
shall be reconstructed and restored, at Landlord's expense, to substantially
the same condition as they were prior to the casualty.
B. DESTRUCTION OF THE PREMISES. If the Premises are damaged, in
whole or in part, by fire or other casualty, but the Building is not
substantially destroyed as provided above or if neither Landlord nor Tenant
terminates this Lease in accordance with Section 12.A, then the parties hereto
shall have the following options:
(i) If, in Landlord's reasonable judgment, the Premises
cannot be reconstructed or restored within one hundred twenty (120)
days after such casualty to substantially the same condition as they
were in prior to such casualty, Landlord may terminate this Lease by
written notice given to Tenant within thirty (30) days after the
casualty. If, in Landlord's reasonable judgement, the Premises cannot
be reconstructed or restored within one hundred twenty (120) days
after such casualty to substantially the same condition as they were
in prior to such casualty, but nonetheless Landlord does not so elect
to terminate this Lease, then Landlord shall notify Tenant, within
thirty (30) days after the casualty, of the amount of time necessary,
as reasonably estimated by Landlord, to reconstruct or restore the
Premises. After receipt of such notice from Landlord, Tenant may
elect to terminate this Lease. This election shall be made by Tenant
by giving written notice to Landlord within fifteen (15) business days
after the date of Landlord's notice. If neither party terminates this
Lease pursuant to the foregoing, Landlord shall proceed to reconstruct
and restore the Premises to substantially the same condition as they
were in prior to the casualty. In such event this Lease shall
continue in full force and effect to the balance of the Term, upon the
same terms, conditions and covenants as are contained herein;
provided, however, that the Rent shall be abated in the proportion
which the approximate area of the portion of the Premises that is
untenantable (as a result of such casualty) bears to the total area in
the Premises, from the date of the casualty until substantial
completion of the reconstruction of the Premises.
(ii) Notwithstanding the above, if the casualty occurs
during the last twelve (12) months
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of the Term, either party hereto shall have the right to terminate
this Lease as of the date of the casualty, which right shall be
exercised by written notice to be given by either party to the other
party within thirty (30) days therefrom. If this right is exercised,
Rent shall be apportionedto and shall cease as of the date of the
casualty. If a casualty occurs during the last twelve (12) months of
the Term and after the expiration of the thirty (30) day period set
forth above, Tenant shall have no right to exercise any previously
unexercised renewal options without first obtaining Landlord's written
consent. Notwithstanding the foregoing sentence, nothing stated
herein, however, shall impair or impede the Landlord's right to
terminate this Lease under Section 12. B. (i) above.
(iii) If, in Landlord's reasonable judgment, the Premises
are able to be restored within one hundred twenty (120) days after
such casualty to substantially the same condition as they were prior
to such casualty, Landlord shall so notify Tenant within thirty (30)
days after the casualty, and Landlord shall then proceed to
reconstruct and restore the damaged portion of the Premises, at
Landlord's expense, to substantially the same condition as it was
prior to the casualty, Rent shall be abated in the proportion which
the approximate area of the portion of the Premises that is
untenantable (as a result of such casualty) bears to the total area in
the Premises from the date of the casualty until substantial
completion of the reconstruction repairs, and this Lease shall
continue in full force and effect for the balance of the Term, upon
the same terms, conditions and covenants as are contained herein.
(iv) In the event Landlord undertakes reconstruction or
restoration of the Premises pursuant to subsections (i), (ii) or (iii)
above, Landlord shall use reasonable diligence in completing such
reconstruction repairs, but in the event Landlord fails to
substantially complete the same within one hundred eighty (180) days
after the date of the casualty (except however if under subsection (i)
above Landlord notified Tenant that it would take longer than one
hundred twenty (120) days to reconstruct or restore the Premises, but
Tenant nonetheless elected not to terminate the Lease but required
Landlord to reconstruct or restore the Premises, then the foregoing
one hundred and eighty (180) day period shall be extended to the time
period set forth in Landlord's notice plus sixty (60) days), except as
a result of any of the occurrences set forth in Section 26.J. below,
Tenant may, at its option, terminate this Lease as of a date ten (10)
days after receipt of its notice by Landlord upon giving Landlord
written notice to that effect, whereupon both parties shall be
released from all further obligations and liability hereunder, except
if in such ten (10) day period Landlord substantially completes such
reconstruction or restoration then such termination shall be deemed
null and void.
(v) Notwithstanding anything contained herein to the
contrary, Landlord shall have no duty to repair or restore the
Premises or Building if the damage is due to an uninsurable casualty
or if insurance proceeds are insufficient to pay for such repair or
restoration or if the holder of any mortgage, deed of trust or similar
instrument applies proceeds of insurance to reduce its loan balance
and the remaining proceeds, if any, available to Landlord are not
sufficient to pay for such repair or restoration (not taking into
consideration any deductible). If Landlord notifies Tenant within
ninety (90) days after the casualty that Landlord elects not to repair
or restore the Premises or Building due to any of the foregoing
circumstances, each of the parties shall have a right to terminate
this Lease as of the date of the casualty, which right shall be
exercised by written notice to be given by either party to the other
party within thirty (30) days of receipt by Tenant of Landlord's
notice set forth in this subsection. If this right is exercised, Rent
shall be apportioned to and shall cease as of the date of the
casualty.
13. CONDEMNATION. If the Building (or more than fifty percent (50%) of
the rentable square footage thereof) or the Premises (or any portion of the
Premises located on the first or second floor of the Building) is rendered
untenantable by reason of a condemnation (or by a deed given in lieu thereof)
and Landlord does not restore or replace such untenantable portion within one
hundred twenty days of such condemnation or deed given in lieu thereof, then
either party may terminate this Lease by giving, written notice of termination
to the other party within thirty (30) days after such condemnation, in which
event this Lease shall terminate effective as of the date of such condemnation.
If this Lease so terminates, Rent shall be paid through and apportioned as of
the date on which Tenant is legally obligated to vacate the Premises. If such
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condemnation does not render the Premises or the Building untenantable, this
Lease shall continue in effect and Landlord shall promptly restore the portion
not condemned to the extent reasonably possible to the condition in which they
were delivered to Tenant. In such event, however, Landlord shall not be
required to expend an amount in excess of the proceeds received by Landlord
from the condemning authority less any amounts applied by a holder of any
mortgage, deed of trust or similar instrument against its loan balance. If
only a portion of the Premises are so taken and cannot be restored, then this
Lease shall terminate as to the portion of the Premises actually taken by the
condemning authority as of the date when title vests in such governmental or
quasi-governmental authority, and Base Rent shall be ratably reduced as of such
date. Landlord reserves all rights to compensation for any condemnation.
Tenant hereby assigns to Landlord any right Tenant may have to such
compensation, and Tenant shall make no claim against Landlord or the condemning
authority for compensation for termination of Tenant's leasehold interest under
this Lease or interference with Tenant's business. The foregoing
notwithstanding, as long as Landlord's award is not thereby reduced, Tenant
shall be entitled to claim, prove and receive in the condemnation proceedings,
such awards as may be allowed by statute for its relocation expenses, but only
if such awards shall be made by the condemning authority in addition to, and
stated separately from, the award made by it for the Building or the part
thereof so taken. In no event shall Tenant be entitled to any award for the
unexpired portion of the Term.
14. ASSIGNMENT AND SUBLETTING
A. LANDLORD'S CONSENT. Tenant shall not, without the prior
written consent of Landlord: (i) assign, convey, mortgage, sublease or
otherwise transfer, directly or indirectly, this Lease or any interest
hereunder, or sublease the Premises, or any part thereof, whether voluntarily
or by operation of law; or (ii) permit the use or occupancy of the Premises by
any person other than Tenant and its employees or consultants, business
partners and clients of Tenant provided that as to such consultants, business
partners or clients such use or occupancy is for a period not in excess of
twelve (12) continuous months. Any such assignment, conveyance, mortgage,
sublease or other transfer or use described in the preceding, sentence (a
"Transfer") occurring without the prior written consent of Landlord shall be
void and of no effect and shall constitute a Default. Landlord's consent to
any Transfer shall not constitute a waiver of Landlord's right to withhold its
consent to any future Transfer. Landlord's consent to any Transfer or
acceptance of rent from any party other than Tenant shall not release Tenant
from any covenant or obligation under this Lease. Landlord may require as a
condition to its consent to any assignment of this Lease that the assignee
execute an instrument in which such assignee assumes the obligations of Tenant
hereunder arising after the date of such assignment.
B. STANDARDS FOR CONSENT. If Tenant desires the consent of
Landlord to a Transfer, Tenant shall submit to Landlord, at least fifteen (15)
days (or 10 days in the case of a subletting during the first Lease Year) prior
to the proposed effective date of the Transfer, a written notice ("Tenant's
Transfer Notice") which includes the business terms of the assignment or
subletting, financial information and statements concerning the proposed
transferee and such other information as Landlord may reasonably require about
the proposed Transfer and the transferee, together with a non-refundable
processing fee in the amount of five hundred dollars ($500.00), which fee shall
be waived in the case of a subletting during the first Lease Year. If Landlord
does not terminate this Lease, in whole or in part, pursuant to Section 14.C,
Landlord shall not unreasonably withhold, condition or delay its consent to any
assignment or sublease. Landlord shall not be deemed to have unreasonably
withheld its consent if, in the reasonable judgment of Landlord: (i) the
transferee is of a character or engaged in a business which is not consistent
with the first-class nature of the Building; (ii) the transferee is a tenant of
the Building or any building in the Worldgate Office Park (i.e., the area of
Herndon, Virginia commonly known as Worldgate Office Park) which is owned by
Landlord or an affiliate of Landlord, (iii) the transferee is negotiating
(i.e., Landlord has at least executed a letter of intent with such transferee)
for any space in the Building or any building in the Worldgate Office Park
which is owned by Landlord or an affiliate of Landlord; provided, however, that
this item (iii) shall not apply to any Transfer that is a sublease for an
aggregate period of four (4) years or less (including any possible renewal or
extension periods pursuant to any renewal or extension options or other similar
rights provided to the subtenant); (iv) the transferee is a governmental
agency, entity or unit; or (v) Tenant is in Default under this Lease. The
immediately preceding sentence shall not be deemed to be a limitation of the
bases upon which Landlord
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may withhold its consent to a proposed transfer. If Landlord wrongfully
withholds its consent to any Transfer, Tenant's sole and exclusive remedy
therefor shall be to seek specific performance of Landlord's obligation to
consent to such Transfer. Landlord shall have fifteen (15) days (or 10 days in
the case of a subletting during the first Lease Year) from the receipt of
Tenant's Transfer Notice (together with the current financial statements of the
proposed assignee or subtenant and other information required hereunder) to
review Tenant's request and to notify Tenant (by certified mail, return receipt
requested) whether it will consent to such proposed assignee or subtenant. If
(i) Landlord fails to notify Tenant whether or not it will consent to such
proposed assignee or subtenant within such fifteen (15) day period (or 10 day
period in the case of a subletting during the first Lease Year), and,
thereafter, Tenant delivers notice ("Transfer Response Failure Notice") to
Landlord by certified mail, return receipt requested, of such failure and (ii)
Landlord fails to respond to such request within 5 business days after
Landlord's receipt of the Transfer Response Failure Notice, then Landlord's
consent to the proposed assignee or subtenant shall be deemed given.
C. RECAPTURE. Except with respect to a proposed subletting or
assignment to a Qualified Tenant Affiliate, Landlord shall have the right to
terminate this Lease upon a proposed assignment of this Lease or a subletting
of all or substantially all of the Premises; provided, that in the event of a
subletting for less than the entire remaining Term, Landlord shall be entitled
to terminate this Lease with respect to the portion of the Premises proposed to
be sublet only for the period of the proposed sublease. Landlord may exercise
such right to terminate by giving notice to Tenant at any time within thirty
(30) days after the date on which Tenant has furnished to Landlord all of the
items required under Section 14.B. If Landlord exercises such right to
terminate, Landlord shall be entitled to recover possession of, and Tenant
shall surrender to Landlord the Premises on the later of (i) the effective date
of the proposed Transfer, or (ii) sixty (60) days after the date of Landlord's
notice of termination. In the event Landlord exercises such right to
terminate, Landlord shall have the right to enter into a lease with the
proposed transferee without incurring any liability to Tenant on account
thereof.
D. ASSIGNMENT OR SUBLETTING TO AFFILIATES. Notwithstanding
anything to the contrary contained in Section 14.A hereof, Tenant may upon at
least twenty-one (21) days prior written notice to Landlord (the "Affiliate
Assignment Notice"), but without Landlord's prior written consent, assign this
Lease, or sublet all or a portion of the Premises to a Qualified Tenant
Affiliate (hereinafter defined), provided, that the business operations of the
proposed assignee or subtenant (which shall be disclosed in the Affiliate
Assignment Notice") does not conflict with any exclusivity or other limitation
that may be imposed upon Landlord, and no default exists hereunder and no event
exists which event with notice and/or the passage of time would constitute a
default hereunder if not cured within the applicable cure period. A "Qualified
Tenant Affiliate" shall mean a corporation or other entity which (i) shall
control, be controlled by or be under common control with Tenant or which
results from a merger or consolidation with Tenant or succeeds to all or
substantially all of the business and assets of Tenant, (ii) is of a type and
quality consistent with the first-class nature of the Building, (iii) is not a
party by whom any suit or action could be defended on the ground of sovereign
immunity. For purposes of the immediately preceding sentence, "control" shall
be deemed to be ownership of more than fifty percent (50%) of the legal and
equitable interest of the controlled corporation or other business entity. In
the event of any assignment to a Qualified Tenant Affiliate, Tenant shall
remain fully liable to perform the obligations of the Tenant under this Lease,
such obligations to be joint and several with the obligations of the Qualified
Tenant Affiliate as tenant under this Lease. Notwithstanding any provision
contained in this Lease to the contrary, Landlord's prior written consent shall
be required to (a) any merger, consolidation or acquisition involving Tenant or
the assets or ownership interest of Tenant if in connection therewith, any of
the assets of Tenant are transferred, granted or pledged as security for the
purchase price (or other consideration) for such merger, consolidation or
acquisition, and (b) any sale, conveyance or transfer of all or substantially
all of Tenant's assets to an entity that does not assume all of the obligations
of Tenant under this Lease.
E. MISCELLANEOUS.
(i) In the event Tenant fails to execute and deliver the
assignment or sublease to which Landlord consented within ninety (90)
days after the giving of such consent, then Tenant shall again comply
with all of the provisions and conditions of this Section 14 before
assigning its interest in this
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Lease or subletting any portion of the Premises.
(ii) Tenant shall remain fully liable for the performance
of all of Tenant's obligations hereunder jointly and severally with
any assignee or subtenant (as a primary obligor) notwithstanding any
subletting or assignment provided for herein.
(iii) In addition to the processing fee described in
Section 16.B, Tenant shall pay to Landlord any third party reasonable
attorneys' or other fees and expenses incurred by Landlord in
connection with any proposed Transfer, whether or not Landlord
consents to such Transfer, such payment to Landlord not to exceed
$1,500 for each such consent request.
15. SURRENDER. Upon termination of the Term or Tenant's right to
possession of the Premises, Tenant shall return the Premises to Landlord in
good order and condition, ordinary wear and tear and damage by fire or other
casualty excepted; provided, however, that if Tenant is insured (or required
pursuant to this Lease to be insured) for any such damage, Tenant shall, at the
election of Landlord, either (i) apply the insurance proceeds (or the amount
Tenant would have received as insurance proceeds had Tenant maintained the
insurance required pursuant to this Lease) to repair such damage or (ii)
surrender such insurance proceeds (or the amount Tenant would have received as
insurance proceeds had Tenant maintained the insurance required by this Lease)
to Landlord upon surrender of the Premises. If Landlord requires Tenant to
remove any alterations pursuant to Section 9, then such removal shall be done
in a good and workmanlike manner, and upon such removal Tenant shall restore
the Premises to its condition prior to the installation of such alterations.
If Tenant does not remove such alterations after request to do so by Landlord,
Landlord may remove the same and restore the Premises, and Tenant shall pay the
cost of such removal and restoration to Landlord upon demand. Tenant shall
also remove its furniture, equipment, trade fixtures and all other items of
personal property from the Premises prior to termination of the Term or
Tenant's right to possession of the Premises. If Tenant does not remove such
items, Tenant shall be conclusively presumed to have conveyed the same to
Landlord without further payment or credit by Landlord to Tenant, or at
Landlord's sole option such items shall be deemed abandoned, in which event
Landlord may cause such items to be removed and disposed of at Tenant's
expense, which shall be one hundred fifteen percent (115%) of Landlord's actual
cost of removal, without notice to Tenant and without obligation to compensate
Tenant except as otherwise required by law.
16. DEFAULTS AND REMEDIES.
A. DEFAULT. The occurrence of any of the following shall
constitute a default (a "Default") by Tenant under this Lease: (i) Tenant
fails to pay any Rent when due and such failure is not cured within five (5)
business days after Landlord delivers to Tenant written notice thereof,
although no legal or formal demand has been made therefor; (ii) Tenant fails to
perform any other provision of this Lease and such failure is not cured within
thirty (30) days (or immediately if the failure involves a hazardous condition)
after notice from Landlord; provided that no such notice shall be required if
Tenant has received two similar notices within three hundred sixty-five (365)
days prior to such failure; provided that if such failure will take longer than
this thirty (30)-day period to cure, Tenant shall have such longer period (not
to exceed sixty (60) days), as may be reasonably required to effectuate such
cure, as long as such cure is commenced within such thirty (30)-day period, and
such cure is prosecuted diligently to completion,; (iii) the leasehold interest
of Tenant is levied upon or attached under process of law; (iv) INTENTIONALLY
DELETED; or (v) any voluntary or involuntary proceedings are filed by or
against Tenant or any Guarantor of this Lease under any bankruptcy, insolvency
or similar laws and, in the case of any involuntary proceedings, are not
dismissed within thirty (30) days after filing.
B. RIGHT OF RE-ENTRY. Upon the occurrence of a Default, Landlord
may elect to terminate this Lease or, without terminating this Lease, terminate
Tenant's right to possession of the Premises. Upon any such termination,
Tenant shall immediately surrender and vacate the Premises and deliver
possession thereof to Landlord. Tenant grants to Landlord the right to enter
and repossess the Premises and to expel Tenant and any others who may be
occupying the Premises and to remove any and all property therefrom without
being deemed in any manner guilty of trespass and without relinquishing
Landlord's rights to Rent or
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any other right given to Landlord hereunder or by operation of law.
C. TERMINATION OF RIGHT TO POSSESSION. If Landlord terminates
Tenant's right to possession of the Premises without terminating this Lease,
Landlord shall use commercially reasonable efforts to relet the Premises to
another tenant (a "Substitute Tenant") on then market terms which Landlord is
then quoting for comparable space in other buildings owned by Landlord in
Worldgate Office Park or which Landlord would quote if comparable space is not
then available in Worldgate Office Park; provided, however, (i) Landlord may
first lease Landlord's other available space and shall not be required to
accept any tenant offered by Tenant or to observe any instructions given by
Tenant about such reletting, (ii) Landlord shall have no obligation to solicit
or entertain negotiations with any other prospective tenants for the Premises
until Landlord obtains full and complete possession of the Premises; (iii)
Landlord shall not be obligated to lease the Premises to a Substitute Tenant
for a rental less than the current fair market rental then prevailing for
similar office uses in comparable buildings in the same market area as the
Building, nor shall Landlord be obligated to enter into a new lease under other
terms and conditions that are unacceptable to Landlord under Landlord's then
current leasing policies for comparable space in the Building; (iv) Landlord
shall not be obligated to enter into a lease with any proposed tenant whose
use would: (1) violate any restriction, covenant or requirement contained in
the lease of another tenant of the Building; (2) adversely affect the
reputation of the Building; or (3) be incompatible with the operation of the
Building as a first class building; and (v) Landlord shall not be obligated to
enter into a lease with any proposed Substitute Tenant which does not have, in
Landlord's reasonable opinion, sufficient financial resources or operating
experience to operate the Premises in a first class manner. Tenant shall
reimburse Landlord for the actual costs and expenses (or reasonable estimate
thereof) of reletting the Premises, including, but not limited to, all
brokerage, advertising, legal, alteration, redecorating, repairing and other
expenses reasonably incurred to secure a new tenant for the Premises or portion
thereof. In addition, if the consideration collected by Landlord upon any such
reletting or sale, after payment of the expenses of reletting, the Premises or
sale of the Building which have not been reimbursed by Tenant, is insufficient
to pay monthly the full amount of the Rent, Tenant shall pay to Landlord the
amount of each monthly deficiency as it becomes due. If such consideration is
greater than the amount necessary to pay the full amount of the Rent and pay
Landlord for the expenses of reletting, then the full amount of such excess
shall be retained by Landlord and shall in no event be payable to Tenant.
D. TERMINATION OF LEASE. If Landlord terminates this Lease,
Landlord may recover from Tenant and Tenant shall pay to Landlord, on demand,
as and for liquidated and final damages, an accelerated lump sum amount equal
to the amount by which Landlord's estimate of the aggregate amount of Rent
owing, from the date of such termination through the Expiration Date plus
Landlord's estimate of the aggregate expenses (incurred in good faith) of
reletting the Premises, exceeds Landlord's estimate of the fair rental value of
the Premises for the same period (after deducting from such fair rental value
the time needed to relet the Premises and the amount of concessions which would
normally be given to a new tenant) both discounted to present value at the rate
of six percent (6%) per annum.
E. OTHER REMEDIES. Upon a default by Tenant under this Lease,
Landlord may, but shall not be obligated to, perform any obligation of Tenant
under this Lease, and, if Landlord so elects, all reasonable costs and expenses
paid by Landlord in performing such obligation, together with interest at the
Default Rate, shall be reimbursed by Tenant to Landlord on demand. Any and all
remedies set forth in this Lease: (i) shall be in addition to any and all other
remedies Landlord may have at law or in equity; (ii) shall be cumulative; and
(iii) may be pursued successively or concurrently as Landlord may elect. The
exercise of any remedy by Landlord shall not be deemed an election of remedies
or preclude Landlord from exercising any other remedies in the future. Tenant
hereby expressly waives any and all rights of redemption, reentry or
repossession granted by or under any present or future laws or in equity and
any notice to quit or notice of Landlord's intention to re-enter the Premises.
F. BANKRUPTCY. If Tenant becomes bankrupt, the bankruptcy
trustee shall not have the right to assume or assign this Lease unless the
trustee complies with all requirements of the United States Bankruptcy Code,
and Landlord expressly reserves all of its rights, claims and remedies
thereunder.
G. WAIVER OF TRIAL BY JURY. LANDLORD AND TENANT WAIVE TRIAL BY JURY IN
THE
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EVENT OF ANY ACTION, PROCEEDING OR COUNTERCLAIM IN BROUGHT BY EITHER LANDLORD
OR TENANT AGAINST THE OTHER IN CONNECTION WITH THIS LEASE AND EACH PARTY
ACKNOWLEDGES THAT IT HAS HAD AN OPPORTUNITY TO CONSULT THEIR COUNSEL IN
CONNECTION WITH THIS WAIVER.
H. VENUE. If either Landlord or Tenant, desires to bring an
action against the other in connection with this Lease, such action shall be
brought in the federal courts located in the Commonwealth of Virginia, or state
or local courts located in Fairfax County, Virginia. Landlord and Tenant
consent to the jurisdiction of such courts and waive any right to have such
action transferred from such courts on the grounds of improper venue or
inconvenient forum.
17. HOLDING OVER. If Tenant retains possession of the Premises after the
expiration or termination of the Term or Tenant's right to possession of the
Premises, Tenant shall be deemed a tenant by the month. Tenant shall pay Rent
during such holding over at one hundred fifty percent (150%) of the Rent in
effect immediately preceding such holding over computed on a monthly basis for
each month or partial month that Tenant remains in possession. Except as
otherwise provided above with respect to the payment of Rent, Tenant shall, as
a monthly tenant, be subject to all of the terms, conditions, covenants and
agreements of this Lease. Tenant shall give Landlord at least thirty (30)
days' written notice of any intention to quit the Premises, and Tenant shall be
entitled to thirty (30) days' written notice to quit the Premises; provided,
however, that if Tenant is in default hereunder, Tenant shall not be entitled
to any notice to quit, the usual thirty (30) days' notice to quit being hereby
expressly waived. Tenant shall also pay, indemnify and defend Landlord from
and against all claims and damages, consequential as well as direct, sustained
by reason of Tenant's holding over. Notwithstanding the foregoing provisions of
this Section, in the event that Tenant shall hold over as set forth in the
first sentence of this Section and if Landlord shall desire to regain
possession of the Premises, then at any time prior to Landlord's acceptance of
Rent from Tenant as a monthly tenant hereunder, Landlord, at its option, may
forthwith reenter and take possession of the Premises by any legal process in
force in the Commonwealth of Virginia.
18. SECURITY DEPOSIT.
A. AMOUNT. Simultaneously with the execution of this Lease,
Tenant shall deposit with Landlord the amount set forth in ITEM 8 of the
Schedule, as a security deposit (the "Security Deposit").
B. SECURITY. Such Security Deposit shall be considered as
security for the payment and performance by Tenant of all of Tenant's
obligations, covenants, conditions and agreements under this Lease except as
hereinafter provided.
C. FORM. Such Security Deposit may, at Tenant's option, be
deposited by Tenant with Landlord in the form of cash or Tenant shall deliver
to Landlord one or two (2) irrevocable letter(s) of credit (collectively, the
"Letter of Credit"), in the aggregate amount set forth in ITEM 8 of the
Schedule. If Tenant elects to provide the Letter of Credit as such Security
Deposit, Tenant shall maintain the Letter of Credit in full force and effect
throughout the entire term of this Lease and until thirty (30) days after the
end of the Term, and shall cause the Letter of Credit to be renewed or replaced
not less than sixty (60) days prior to its expiry date. The Letter of Credit
shall (i) be unconditional, irrevocable, transferable, payable to Landlord on
sight at a metropolitan Washington, D.C. area financial institution, in partial
or full draws, (ii) be substantially in the form attached hereto and
incorporated herein as EXHIBIT G, and otherwise be in form and content
acceptable to Landlord, (iii) shall be issued by a financial institution
reasonably acceptable to Tenant and Landlord, and (iv) contain an "evergreen"
provision which provides that it is automatically renewed on an annual basis
unless the issuer delivers sixty (60) days' prior written notice of
cancellation to Landlord and Tenant. Any and all fees or costs charged by the
issuer in connection with the Letter of Credit shall be paid by Tenant. In the
event that the Security Deposit is made in the form of cash, then Landlord
agrees that such amount shall be held by Landlord in an interest bearing
account in a financial institution whose deposits are insured by the Federal
Deposit Insurance Corporation as security for Tenant's performance of its
obligations, covenants, conditions and agreements under this Lease. Landlord
may commingle the Security Deposit with Landlord's other funds. The interest
rate payable on such Security Deposit shall be two and one-quarter percent
(2.25%)
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per annum compounded.
D. RIGHT TO DRAW.
(i) If the Security Deposit is in the form of cash, in
the event of any default by Tenant hereunder, Landlord shall have the
right, but shall not be obligated, to apply all or any portion of the
Security Deposit to compensate Landlord (whether in whole or in part)
for such default, in which event, within fifteen (15) days thereafter,
Tenant shall be obligated to deposit with Landlord the amount
necessary to restore the balance of the Security Deposit to its
original amount; provided, however, neither the application of the
Security Deposit as set forth above nor the payment by Tenant to
restore such Security Deposit shall operate to cure such default or to
estop Landlord from pursuing any remedy to which Landlord would
otherwise be entitled.
(ii) If the Security Deposit is in the form of a Letter of
Credit, Landlord shall have the right to draw upon the Letter of
Credit in whole or in part and apply the proceeds thereof as may be
necessary to compensate Landlord for any default under this Lease on
the part of Tenant, and Tenant, within fifteen (15) days after
Landlord delivers written demand therefor to Tenant, shall forthwith
restore the Letter of Credit to its original amount; provided,
however, neither the application of the Security Deposit as set forth
above nor the restoration by Tenant of such Security Deposit shall
operate to cure such default or to estop Landlord from pursuing any
remedy to which Landlord would otherwise be entitled unless the amount
of the Security Deposit applied by Landlord is sufficient in
Landlord's judgment to completely cure the default and Tenant has
restored the Security Deposit to its original amount within five (5)
days of the date of the draw down by Landlord of the Letter of Credit,
then Landlord shall not be entitled to pursue any additional remedies
with respect to the particular default which Landlord has determined
was fully cured by the application of the Security Deposit. Should
Landlord elect to draw the full amount of the Letter of Credit upon a
default by Tenant, Tenant expressly waives any right it might
otherwise have to prevent Landlord from drawing on the Letter of
Credit and agrees that an action for damages and not injunctive or
other equitable relief shall be Tenant's sole remedy in the event
Tenant disputes Landlord's claim to any such amounts.
(iii) Landlord shall have the right to draw upon the Letter
of Credit in any of the following circumstances: (i), if the total
assets of the issuer of the Letter of Credit are at anytime less than
Three Billion Dollars ($3,000,000,000.00), or such issuer has a
Standard & Poor's commercial paper rating of less than A-1 (provided
if at anytime the current Standard & Poor's commercial paper rating
system is no longer in existence, a comparable rating of a comparable
commercial paper rating system from a comparable company shall be
selected by Landlord, in its reasonable discretion, for purposes of
this Section 18) and Tenant fails to deliver to Landlord a replacement
Letter of Credit complying with the terms of this Lease within thirty
(30) days of request therefor from Landlord, (ii) if the credit rating
of the issuer of the Letter of Credit is downgraded from the credit
rating of such issuer at the time of the issuance of the Letter of
Credit, the issuer of the Letter of Credit shall enter into any
supervisory agreement with any governmental authority, or the issuer
of the Letter of Credit shall fail to meet any capital requirements
imposed by applicable law, and Tenant fails to deliver to Landlord a
replacement Letter of Credit complying with the terms of this Lease
within thirty (30) days of request therefor from Landlord, and (ii) if
Tenant fails to provide Landlord with any renewal or replacement
Letter of Credit complying with the terms of this Lease at least
thirty (30) days prior to expiration of the then-current Letter of
Credit, where the issuer of such Letter of Credit has advised Landlord
of its intention not to renew the Letter of Credit. In the event the
Letter of Credit is drawn upon due solely to the circumstances
described in the foregoing clauses (i), (ii) or (iii), the amount
drawn shall be held by Landlord without interest as a Security Deposit
to be otherwise retained, expended or disbursed by Landlord for any
amounts or sums due under this Lease to which the proceeds of the
Letter of Credit could have been applied pursuant to this Lease, and
Tenant shall be liable to Landlord for restoration, in cash or Letter
of Credit complying with the terms of this Lease, of any amount so
expended to the same extent as set forth in this Section 18.
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E. RIGHT TO PLEDGE OR ASSIGN. Landlord shall have the right to
pledge or assign its interest in the Security Deposit and proceeds thereof to
any lender holding a security interest in the Premises. In the event of any
sale or transfer of Landlord's interest in the Building, Landlord shall
transfer the Security Deposit to such purchaser or transferee, in which event
Tenant shall look solely to the new landlord for the return of the Security
Deposit and Landlord shall thereupon be released from all liability to Tenant
for the return of such Security Deposit. No mortgagee or other purchaser of
any or all of the Building at any foreclosure proceeding brought under the
provisions of any mortgage shall (regardless of whether the Lease is at the
time in question subordinated to the lien of any mortgage) be liable to Tenant
or any other person for any or all of such sums or the return of any Security
Deposit (or any other or additional Security Deposit or other payment made by
Tenant under the provisions of this Lease), unless Landlord has actually
delivered the Security Deposit, or proceeds thereof, to such mortgagee or
purchaser. If the Security Deposit is in the form of a Letter of Credit and if
requested by any such mortgagee or other purchaser, Tenant shall obtain an
amendment to the Letter of Credit which names such mortgagee or other purchaser
as the beneficiary thereof in lieu of Landlord. This Security Deposit shall
not be transferable by Tenant to any assignee or subtenant, but shall be held
and returned directly to Tenant.
F. RESERVATION OF RIGHTS. No right or remedy available to
Landlord as provided in this Section 18 shall preclude or extinguish any other
right to which Landlord may be entitled. In furtherance of the foregoing, it
is understood that in the event Tenant fails to perform its obligations under
this Lease, any amounts recovered from the Security Deposit shall not be deemed
liquidated damages. Landlord may apply such sums to reduce Landlord's damages
and such application of funds shall not in any way limit or impair Landlord's
right to seek or enforce any and all other remedies available to Landlord to
the extent allowed hereunder, at law or in equity. Landlord shall not be
required to keep, and Tenant hereby waives the benefit of any provision of law
requiring Landlord to keep, the Security Deposit separate from its general
funds, on deposit in the Commonwealth of Virginia or in escrow or otherwise in
trust for Tenant. In no event shall the Security Deposit be considered an
advanced payment of Rent, and in no event shall Tenant be entitled to use the
Security Deposit for the payment of Rent.
G. REDUCTION OF SECURITY DEPOSIT. As of the date that Tenant
pays to Landlord the first full month of Base Rent due under this Lease (i.e.,
in the amount of $395,629.03), if no default hereunder has occurred that
remains uncured, then the security deposit then required hereunder to be
maintained by Tenant with Landlord shall be reduced to an amount equal to Three
Hundred Ninety-five Thousand Six Hundred Twenty-nine and Three/100 Dollars
($395,629.03). If the security deposit is in the form of cash, the foregoing
reduction shall be effectuated by Landlord applying to the monthly installment
of Base Rent coming due after the effective date of such reduction the amount
by which the security deposit is reduced pursuant to the foregoing provisions.
If the security deposit is in the form of a Letter of Credit, then the
foregoing reduction shall be effectuated by Tenant replacing the Letter of
Credit then being held by Landlord with a new Letter of Credit (complying with
the terms of this Lease) delivered to Landlord in the amount of Three Hundred
Ninety-five Thousand Six Hundred Twenty-nine and Three/100 Dollars
($395,629.03); provided, however, if Tenant provides to Landlord the Letter of
Credit in two (2) letters of credit, one of which being in the amount of Three
Hundred Ninety-five Thousand Six Hundred Twenty-nine and Three/100 Dollars
($395,629.03), then the reduction shall be effectuated by Landlord retaining
the Letter of Credit in the amount of Three Hundred Ninety-five Thousand Six
Hundred Twenty-nine and Three/100 Dollars ($395,629.03) and returning to Tenant
the other Letter of Credit.
H. RETURN OF SECURITY DEPOSIT. Within thirty (30) days after the
expiration of the Term and vacation of the Premises by Tenant, Landlord shall
(provided that Tenant is not in default under the terms hereof) return and pay
back any Security Deposit to Tenant, less such portion thereof as Landlord
shall have retained to make good any default by Tenant with respect to any of
Tenant's aforesaid obligations, covenants, conditions or agreements, and if the
Security Deposit is in the form of cash, less the costs of maintaining the
Security Deposit in an interest bearing account charged by the financial
institution or depository holding such Security Deposit.
19. INTENTIONALLY OMITTED.
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20. ESTOPPEL CERTIFICATE. Tenant agrees that, from time to time upon not
less than ten (10) business days' prior request by Landlord, Tenant shall
execute and deliver to Landlord an estoppel certificate in the form attached
hereto as EXHIBIT D or such other certificate as reasonably requested by
Landlord, it being agreed that such certificate may be relied upon by any
prospective purchaser, mortgagee or other person having or acquiring an
interest in the Building. If Tenant fails to execute and deliver any such
certificate within ten (10) business days after request, Tenant shall be deemed
to have irrevocably appointed Landlord and Landlord's beneficiaries as Tenant's
attorneys-in-fact, coupled with an interest, solely to execute and deliver such
certificate in Tenant's name.
21. FINANCING.
A. SUBORDINATION. This Lease is and shall be expressly subject
and subordinate at all times to (i) any ground or underlying lease of the
Building, now or hereafter existing, and all amendments, renewals and
modifications to any such lease, and (ii) the lien of any mortgage or deed of
trust now or hereafter encumbering fee title to the Building or the leasehold
estate, or both, under any such lease, and all amendments, renewals and
modifications to any such mortgage or deed of trust, unless such ground lease
or ground lessor, or mortgage or mortgagee, expressly provides or elects that
the Lease shall be superior to such lease or mortgage. If any such mortgage or
trust deed is foreclosed, or if any such lease is terminated, upon request of
the mortgagee, holder or lessor, as the case may be, Tenant will attorn to the
purchaser at the foreclosure sale or to the lessor under such lease, as the
case may be, and at the request of such purchaser enter into a new lease with
such purchaser or lessor with the identical terms and conditions of this Lease.
The foregoing provisions are declared to be self-operative and no further
instruments shall be required to effect such subordination or attornment, or
both; provided, however, that Tenant agrees upon request by any such mortgagee,
holder, lessor or purchaser at foreclosure, to execute and deliver such
subordination or attornment, or both, instruments as may be required by such
person to confirm such subordination or attornment, or both, or any other
documents required to evidence superiority of the ground lease or mortgage,
should ground lessor or mortgagee elect such superiority. If Tenant fails to
execute and deliver any such instrument or document within ten (10) business
days after request, Tenant shall be deemed to have irrevocably appointed
Landlord and Landlord's beneficiaries as Tenant's attorneys-in-fact, coupled
with an interest, to execute and deliver such instrument or document in
Tenant's name. Landlord agrees that within fifteen (15) days of execution of
this Lease, Landlord shall obtain a subordination, non-disturbance and
attornment agreement for Tenant from NationsBank in its customary form.
Landlord hereby represents and warrants that as of the date of this Lease,
NationsBank is the only mortgagee that currently has a security interest in the
Land and Building and that there is no ground lease currently affecting the
Land and Building. Notwithstanding the foregoing provisions of this Section
21, Tenant's subordination and attornment to any mortgage or ground lease, as
set forth in this Section 21, shall be conditioned upon Landlord obtaining a
subordination, non-disturbance and attornment agreement for Tenant from the
holder of such mortgage ("mortgagee") or the ground lessor under such ground
lease; provided that (i) if such mortgagee or ground lessor is a Qualified
Lender (hereinafter defined), then the form of such subordination, attornment
and non-disturbance agreement shall be in such mortgagee's or such ground
lessor's customary form, and (ii) if such mortgagee or ground lessor is not a
Qualified Lender, then the form of such subordination, attornment and
non-disturbance agreement shall either be in a form that such mortgagee or
ground lessor has in the past provided to a tenant leasing comparably sized
office space, or in a form otherwise commercially reasonable. For purposes
hereof, the term "Qualified Lender" shall mean any entity that is in the
business of, or regularly engages in, underwriting or originating commercial
real estate loans, including without limitation, any life insurance company,
bank, financial institution, savings and loan institution, pension fund, real
estate investment trust, conduit, correspondent loan originator, investment
banking company or real estate investment trust. Tenant shall reimburse
Landlord for any fee paid by Landlord to any mortgagee or ground lessor for
providing such agreement
B. MORTGAGEE REQUIREMENTS. Tenant agrees to give any beneficiary
of a mortgage or lessor under a ground lease, by certified mail, return receipt
requested, a copy of any notice of default served upon Landlord, provided that
prior to such notice Tenant has been notified in writing by Landlord (or such
beneficiary or lessor) of the address of such beneficiary or lessor. Tenant
further agrees that if Landlord shall have failed to cure such default within
the time provided for in this Lease, then such mortgagees and/or
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lessor shall have a reasonable period of time thereafter (which shall be
limited to 120 days if such default materially adversely affects Tenant's
occupancy or use of the Premises) to commence and diligently pursue the
remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings, if necessary, to effect such cure), in
which event Tenant shall not take any action to remedy such default, abate any
Rent and or to terminate this Lease (in each such case only to the extent it
has a right to do so) while such remedies are being so diligently pursued. In
the event of the sale of the Building, by foreclosure or deed in lieu thereof,
or the termination of any ground lease, the purchaser at such sale or lessor
shall only be responsible for the return of any Security Deposit to the extent
that such purchaser or lessor actually receives such Security Deposit. Tenant
further agrees that any such purchaser or lessor shall not be bound by (i) any
payment of Rent for more than one (1) month in advance, (ii) any amendment or
modification of this Lease made without the consent of Landlord's mortgagee or
such purchaser or lessor or (iii) any acts, omissions, events or conditions
arising prior to the time any such successor becomes the record owner of the
Building except for those acts, omissions, events, conditions which (a)
continue after the time such purchaser or lessor becomes the record owner of
the Land and Building; (b) which materially and adversely affect Tenant's use
and occupancy of the Premises and (c) are of a nature which are reasonably
capable of cure by such purchaser or lessor.
22. QUIET ENJOYMENT. As long as no Default exists, Tenant shall
peacefully and quietly have and enjoy the Premises for the Term, free from
interference by Landlord or any person claiming by through or under Landlord,
subject, however, to the provisions of this Lease. The loss or reduction of
Tenant's light, air or view will not be deemed a disturbance of Tenant's
occupancy of the Premises nor will it affect Tenant's obligations under this
Lease or create any liability of Landlord to Tenant. Additionally, no
disturbance of Tenant's occupancy of the Premises by other occupants or tenants
of the Building, including any noise or odors, will affect Tenant's obligations
under this Lease or create any liability of Landlord to Tenant, although
Landlord agrees to use its reasonable efforts to alleviate such disturbance
upon notice from Tenant to Landlord thereof.
23. BROKER. Tenant represents to Landlord that Tenant has dealt only with
the broker(s) set forth in ITEM 9 of the Schedule (collectively the "Broker")
in connection with this Lease and that, insofar as Tenant knows, no other
broker negotiated this Lease or is entitled to any commission in connection
herewith. Tenant agrees to indemnify, defend and hold Landlord and Landlord's
beneficiaries and agents harmless from and against any claims for a fee or
commission made by any broker, other than the Broker, claiming to have acted by
or on behalf of Tenant in connection with this Lease. Landlord agrees to
indemnify, defend and hold Tenant harmless from and against any claims for a
fee or commission made by any broker claiming to have acted by or on behalf of
Landlord in connection with this Lease. Landlord agrees to pay the Broker, or
to cause Landlord's Broker to pay Tenant's Broker, a commission in accordance
with separate agreements to which it or its Broker is a party.
24. NOTICES. All notices and demands to be given by one party to the
other party under this Lease shall be given in writing, mailed or delivered to
Landlord or Tenant, as the case may be, at the following addresses:
IF TO LANDLORD: Monument One LLC
c/o The John Akridge Company
601 Thirteenth Street, N.W., Suite 300 North
Washington, D.C. 20005
Attention: Mr. Michael J. Darby
WITH COURTESY COPY TO: Holland & Knight, LLP
2100 Pennsylvania Avenue, N.W.
Suite 400
Washington, D.C. 20037
Attention: David C. Silver, Esquire
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IF TO TENANT: e.spire Communications, Inc.
133 National Business Parkway,
Suite 200
Annapolis Junction, Maryland 21701
Attention: Ms. Riley Murphy, Esquire
WITH COURTESY COPY TO: e.spire Communications, Inc.
133 National Business Parkway,
Suite 200
Annapolis Junction, Maryland 21701
Attention: Real Estate Department
or at such other address as either party may hereafter designate in accordance
with this Section. Notices shall be delivered by hand or by United States
certified or registered mail, postage prepaid, return receipt requested, or by
a nationally recognized overnight air courier service that provides receipts.
Notices shall be considered to have been given upon the earliest to occur of
actual receipt, three (3) business days after posting in the United States mail
in the manner specified above or one (1) business day following delivery to
such air courier service or on the date of delivery if delivered by hand and a
receipt for such delivery signed by the recipient or the recipient's authorized
agent has been obtained. In the event that Tenant requests that more than one
(1) person or address receive notices on its behalf hereunder, Landlord shall
use commercially reasonable efforts to send notices to all requested parties;
however, it shall not be a condition to the effectiveness of any notice that
more than one (1) person or address receive such notices.
25. PARKING. Tenant shall have the right to use 3.7 unreserved parking
spaces per 1,000 rentable square feet in the Premises made available to it by
Landlord and/or the parking operator (as Landlord may determine), at no charge
to Tenant. Such parking spaces may be in the parking areas under or adjacent
to the Building, as surface parking, in a parking garage under the Building or
in a parking garage under an adjacent building, as Landlord shall determine.
Tenant shall have access to the parking area servicing the Building twenty-four
(24) hours per day, seven (7) days per week. Tenant agrees that it and its
employees shall observe reasonable safety precautions in the use of the parking
areas to which the parking spaces apply, and shall at all times abide by all
rules and regulations promulgated by Landlord, the owner of the adjacent
building or the applicable parking garage operator governing the use of the
parking area to which the parking spaces apply. It is understood and agreed
that Landlord has no responsibility to provide security to the parking area and
shall not be responsible for any theft of any property. It is also understood
and agreed that Landlord does not assume any responsibility for any damage or
loss to any automobiles parked in any such parking areas or to any personal
property located therein, or for any injury sustained by any person in or about
such parking areas.
26. MISCELLANEOUS.
A. SUCCESSORS AND ASSIGNS. Subject to Section 14 of this Lease,
each provision of this Lease shall extend to, bind and inure to the benefit of
Landlord and Tenant and their respective legal representatives, successors and
assigns, and all references herein to Landlord and Tenant shall be deemed to
include all such parties.
B. ENTIRE AGREEMENT. This Lease, and the riders and exhibits, if
any, attached hereto which are hereby made a part of this Lease including those
described in ITEM 10 of the Schedule, represent the complete agreement between
Landlord and Tenant, and Landlord has made no representations or warranties
except as expressly set forth in this Lease. No modification or amendment of
or waiver under this Lease shall be binding upon Landlord or Tenant unless in
writing signed by Landlord and Tenant.
C. TIME OF ESSENCE. Time is of the essence of this Lease and each
and all of its provision.
D. EXECUTION, DELIVERY AND AUTHORITY. Submission of this
instrument for examination or signature by Tenant does not constitute a
reservation of space or an option for lease, and it is not effective until
execution and delivery by both Landlord and Tenant. Execution and delivery of
this Lease by Tenant to Landlord shall constitute an irrevocable offer by
Tenant to lease the Premises on the terms and conditions
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set forth herein which offer may not be revoked for ten (10) days after such
delivery. Tenant hereby represents and warrants that the individual signing
this Lease is duly authorized to execute and deliver this Lease on behalf of
Tenant and that Tenant is a duly organized entity under the laws of the state
of its formation, is qualified to do business in the Commonwealth of Virginia,
is in good standing under the laws of the state of its formation and the laws
of the Commonwealth of Virginia, and has the power and authority to enter into
this Lease, and that all action requisite to authorize Tenant to enter into
this Lease has been duly taken.
E. SEVERABILITY. The invalidity or unenforceability of any
provision of this Lease shall not affect or impair any other provisions.
F. GOVERNING LAW. This Lease shall be governed by and construed
in accordance with the law of the Commonwealth of Virginia.
G. ATTORNEYS' FEES. In the event suit shall be brought by either
party hereto against the other to enforce any of the provisions of this Lease,
the prevailing party in any such action shall be entitled to recover from the
other party all of its expenses incurred in connection with such action,
including reasonable attorneys' fees, disbursements and actual costs.
H. JOINT AND SEVERAL LIABILITY. If Tenant is comprised of more
than one party, each such party shall be jointly and severally liable for
Tenant's obligations under this Lease.
I. FORCE MAJEURE. Landlord shall not be in default hereunder and
Tenant shall not be excused from performing any of its obligations hereunder if
Landlord is prevented from performing any of its obligations hereunder due to
any accident, breakage, strike, shortage of materials, acts of God or other
causes beyond Landlord's reasonable control.
J. CAPTIONS. The headings and titles in this Lease are for
convenience only, and shall have no effect upon the construction o
interpretation of this Lease.
K. NO WAIVER. No receipt of money by Landlord from Tenant after
termination of this Lease or after the service of any notice or after the
commencing of any suit or after final judgment for possession of the Premises
shall renew, reinstate, continue or extend the Term or affect any such notice
or suit. No waiver of any default of Tenant shall be implied from any omission
by Landlord to take any action on account of such default if such default
persists or is repeated, and no express waiver shall affect any default other
than the default specified in the express waiver and then only for the time and
to the extent therein stated.
L. LIMITATION OF LIABILITY; EFFECT OF SALE. Any liability of
Landlord in the event of any claim against Landlord arising out of or in
connection with this Lease, the relationship of Landlord and Tenant or Tenant's
use of the Premises shall be limited solely to its interest in the Building;
provided, however, if Tenant has delivered to Landlord written notice of a
claim against Landlord under this Lease and the Building is subsequently sold
and Tenant files a law suit for such claim with a court with jurisdiction over
such claim within ninety (90) days after the sale of the Building and
diligently prosecutes such claim, then Tenant shall also be entitled to look to
the net proceeds of the sale (i.e., after all commissions, closing costs and
other costs associated with the sale have been satisfied) for the satisfaction
of such claim. In no event shall any personal liability be asserted against
Landlord in connection with any such claim nor shall any recourse be had to any
other property or assets of Landlord. No property owned by any member or
partner of Landlord, or any of their employees, officers, directors,
shareholders, members or partners, shall be subject to levy, execution or other
enforcement procedures for the satisfaction of any judgment (or other judicial
process) or for the satisfaction of any other remedy of Tenant in connection
with any such claim. Landlord and any successor will be relieved of its
obligations accruing after any sale of the Building or Premises and Tenant will
look solely to the successor for performance of those obligations, provided
such purchaser assumes or is deemed to have assumed all of the obligations of
Landlord under this Lease. Notwithstanding anything contained in this Lease to
the contrary, in no event shall Landlord be liable to Tenant on account of any
claims for lost business or profits or any indirect or consequential losses or
damages or any punitive
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damages. Except in connection with a breach of any provision of Sections 17, 20
or 21 hereof, in no event shall Tenant be liable to Landlord on account of any
claims for any indirect or consequential losses or damages or any punitive
damages.
M. NO PARTNERSHIP. Nothing contained in this Lease shall be
deemed or construed to create a partnership or joint venture of or between
Landlord and Tenant or to create any other relationship between the parties
hereto other than that of Landlord and Tenant.
N. TENANT'S DUTY TO MITIGATE. Tenant agrees to use commercially
reasonable efforts to mitigate any damages that Tenant may suffer as a result
of any default by Landlord hereunder.
O. COMPLIANCE WITH LAWS AS OF COMMENCEMENT DATE. If (i) as of
the date the Commencement Date, the common areas of the Building are in
violation of any applicable federal or state law, rule or regulation, the
violation of which would have a material adverse affect on Tenant's use thereof
or expose Tenant to any unreasonable health or safety risk, and (ii) an order
(after all final appeals have been exhausted) of any court or governmental
entity requires that such violation be cured, then Landlord shall promptly cure
such violation, and Landlord shall be responsible for the cost of curing such
violation (without including such expenditure as an "Expense").
Notwithstanding the foregoing, if the requirement that is violated results from
Tenant's business or particular use of the Premises or any alteration made by
Tenant in the Premises or Tenant or any of its agents or employees otherwise
caused such violation or was responsible for maintaining the item in violation
pursuant to the terms hereof, then Tenant shall pay for or reimburse Landlord
for the cost to cure such violation.
P. ENVIRONMENTAL REPRESENTATION. Landlord represents and
warrants that, to the best of Landlord's actual knowledge (without inquiry or
investigation), as of the date hereof and as of the Commencement Date, no
hazardous materials are or will be located in the Premises or on the Land or
the Building in violation of any federal or applicable state law or any
regulations promulgated thereunder, the violation of which would have a
material adverse affect on Tenant's use thereof or expose Tenant to any health
or safety risk. Tenant acknowledges that it has received a copy of Landlord's
Phase I Environmental Assessment, dated June 27, 1997, prepared by SCS
Engineers (the "Environmental Report") and that it is familiar therewith.
Tenant further acknowledges that Landlord makes no representation or warranty
as to the accuracy or completeness of such Environmental Report.
27. ACCESS RIGHTS TO ADDITIONAL MONUMENT BUILDINGS. As of the date hereof
Monument Fund, L.L.C. (the "Monument Fund") owns a controlling interest and is
the managing member of Landlord. Monument Fund also owns a controlling
interest and is the managing member of each of the entities that own the
properties commonly known as Monument II, Monument III and Monument IV, located
in Worldgate, Fairfax County, Virginia, on which may be built additional office
buildings (each such additional office building, so long as the owning entity
is controlled by the Monument Fund, shall be referred to herein as an
"Additional Monument Building"). If any tenant of an Additional Monument
Building requests in writing that Landlord permit e.spire Communications, Inc.
or its permitted successors and assigns to provide to such tenant
telecommunications access services through optic fiber wiring, then, Landlord
shall cause such entity owning such Additional Monument Building to provide
e.spire Communications, Inc. or its permitted successors and assigns with
non-exclusive access to such Additional Monument Building to install such optic
fiber wiring through the telephone closets therein as may be necessary to
provide such services to such tenant (subject to such rules and regulations as
may be promulgated, and in such exact locations as may be determined, by the
owner of such Additional Monument Building); provided, however, that the
material terms and conditions upon which such access to such Additional
Monument Building shall be granted by such owner ("Owner") to Tenant shall be
as follows: (i) in the event that Owner has then granted to any other
telecommunications service provider ("TSP"), other than to any Major Tenant TSP
(hereinafter defined), access to such Additional Monument Building for a
purpose similar to the purpose for which Tenant is granted access to such
Additional Monument Building, then the material terms and conditions upon which
such access shall be granted by Owner to Tenant shall be no less favorable than
the most favorable material terms and conditions (including price, if any) upon
which Owner has then granted to said TSP access to such Additional Monument
Building for a purpose similar to the purpose for which Tenant is granted
access to such
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Additional Monument Building, (ii) in the event that Owner has
granted to a Major Tenant TSP, access to such Additional Monument Building for
a purpose similar to the purpose for which Tenant is granted access to such
Additional Monument Building, then the material terms and conditions upon which
such access shall be granted by Owner to Tenant shall be reasonably comparable
to the material terms and conditions (including price, if any) upon which Owner
has then granted to said Major Tenant TSP access to such Additional Monument
Building for a purpose similar to the purpose for which Tenant is granted
access to such Additional Monument Building, or (iii) in the event there has
not then been granted to any other TSP access to such Additional Monument
Building for a purpose similar to the purpose for which Tenant is granted
access to such Additional Monument Building, then the material terms and
conditions upon which such access shall be granted by Owner to Tenant shall be
reasonably comparable to the material terms and conditions then generally being
granted by owners of first-class office buildings in Herndon and Reston,
Virginia to other TSPs that are provided access to such buildings by such
owners for purposes similar to the purpose for which Tenant is granted access
to such Additional Monument Building. For purposes hereof, the term "Major
Tenant TSP" shall mean any telecommunications service provider providing its
own telecommunications service that has entered into a lease for at least
twenty-five thousand (25,000) square feet of space in a single Additional
Monument Building. The rights set forth in this Section 27 are personal to
e.spire Communications, Inc. and shall not be transferable to any other third
party, tenant, subtenant or assignee other than to an entity that is an
assignee of this Lease and succeeds to all or substantially all of the business
and assets of e.spire Communications, Inc. For purposes of this Section 27 and
Section 28, "control" shall be deemed to be ownership of more than fifty
percent (50%) of the legal and equitable interest of the controlled corporation
or other business entity.
28. AVAILABLE SPACE IN ADDITIONAL MONUMENT BUILDINGS. Landlord shall
deliver to Tenant a space availability report showing the space then available
in each of the Additional Monument Buildings. Such space availability report
shall be delivered by Landlord to Tenant for each Additional Monument Building
during the month after the month in which the Commencement Date occurs and
during each month thereafter until at least ninety percent (90%) of the
rentable space in such Additional Monument Building has been initially leased
(the "Initial Lease-up Period"). After the Initial Lease-up Period for any
Additional Monument Building, Landlord shall only be required to deliver to
Tenant a space availability report for such Additional Monument Building only
during any month after which there has been (or there anticipates to
immediately be) a material change in the status of available space in such
Additional Monument Building. During the Term of this Lease, the terms of any
lease of any space by Tenant in any Additional Monument Buildings shall be
negotiated on the then market terms.
29. ANTENNA RIGHTS.
A. SCOPE OF RIGHTS. Subject to the terms and conditions of this
Lease (including without limitations, the terms of this Section 29 and provided
Tenant is not in Default under this Lease, Landlord hereby grants Tenant the
non-exclusive right to install, maintain and operate during the Term the radio
antennae, satellite dish and related equipment ("Antenna Equipment") on a
portion of the roof of the Building in the location (i.e., the two (2) areas of
approximately 500 square feet each) indicated on EXHIBIT H (such location being
referred to as (the "Site"), provided, the Antenna Equipment (i) does not
affect the structure of the Building, the roof of the Building, the warranty
for the roof of the Building or the safety of the Building; (ii) does not
affect the electrical, mechanical or any other system of the Building or the
functioning thereof; (iii) does not interfere with the operation of the
Building or the provision of services or utilities to other tenants in the
Building, and (iv) is otherwise approved by Landlord in writing (which approval
shall not be unreasonably, withheld, conditioned or delayed).
B. COMPLIANCE WITH LAW. Tenant shall install, maintain and
operate the Antenna Equipment in compliance with all present and future rules
and regulations of any local, State or Federal authority having jurisdiction
with respect thereto, including, without limitation, the rules and regulations
of the Federal Communications Commission ("FCC"), the Federal Aviation
Administration ("FAA") the Antenna Equipment being permitted under the laws,
rules and regulations of Fairfax County, Virginia, the City of Herndon,
Virginia and any other governmental and quasi-governmental authorities having
appropriate jurisdiction over the Building or Tenant's use of the Antenna
Equipment. Tenant shall deliver to Landlord written proof of
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compliance within twenty (20) days of Landlord's written request. Tenant shall
obtain all permits, licenses, variances, authorizations and approvals that may
be required in order to install the Antenna Equipment, subject to Section 11.B
hereof.
C. INSTALLATION PROCEDURES.
(i) Prior to installation of the Antenna Equipment and
any modifications or changes thereto, Tenant shall submit in writing
all plans for Landlord's approval to Landlord, Attention: Vice
President, Network and Facilities, at 10 Woodbridge Center Drive,
Woodbridge, New Jersey 07095 and shall commence work only after having
obtained Landlord's written approval. The style, color, materials,
exact location and method of installation of the Antenna Equipment are
subject to the prior written approved of Landlord.
(ii) All of such installations, modifications or changes
shall conform to Landlord's reasonable technical requirements,
including but not limited to, design and installation specifications,
interference control devices and weight and windload requirements.
(iii) The Antenna Equipment shall be clearly marked to show
Tenant's name, address, telephone number, the name of the person to
contact in case of emergency, FCC call sign, frequency and location;
the transmissions lines shall be identified at the bottom and top of
each line.
(iv) In the event Tenant requires an electric power supply
and/or usage different from that currently provided by Landlord and
included within the Base Fee, Tenant shall, at its sole cost and
expense, obtain such power supply. Any work performed in connection
therewith shall comply with the provisions of subsections 5(a) and
5(b). Any power lines installed by Tenant shall run within Landlord's
current easements. Any deviation from such easement rights shall be
corrected at Tenant's expense, payable as an additional fee hereunder
within ten (10) days of Tenant's receipt of an invoice therefor.
(v) In the event a zoning variance is required in
connection with the installation or modification of the Antenna
Equipment, Landlord shall have the right, at its discretion, to allow
Tenant to obtain such variance at Tenant's sole cost and expense,
provided however, that such variance and/or the conditions under which
such variance would be granted shall in no way impair or affect the
zoning otherwise affecting the Land and/or the Building. Landlord
shall, at Tenant's request and expense, reasonably cooperate with
Tenant in obtaining such variance.
(vi) In all matters where Landlord's approval is required
and where Landlord makes a reasonable determination that interference
or other disruption with the business of Landlord or other existing
licensees is likely to result from Tenant's contemplated action,
Landlord shall have the right to withhold such approval by written
notice to Tenant, setting forth in reasonable detail the basis for
Landlord's disapproval.
(vii) All work performed at the Building in connection with
the installation and modification of the Antenna Equipment shall be
performed at Tenant's expense by Tenant's employees or by contractors
approved by Landlord in its good faith judgement; provided, however,
at Landlord's sole election, Landlord shall be entitled to designate a
contractor (which contractor has been selected by Tenant from a list
of at least three contractors prepared by Landlord) to perform any
such installation or modification that in Landlord's judgement may (i)
affect the structure of the Building, the roof of the Building, the
warranty for the roof of the Building or the safety of the Building;
(ii) affect the electrical, mechanical or any other system of the
Building or the functioning thereof; or (iii) interfere with the
operation of the Building or the provision of services or utilities to
Tenant or other tenants in the Building.
(viii) Landlord shall provide to Tenant sufficient access to
the Site during specified business hours (Monday through Friday 8:30
a.m. - 5:00 p.m.) for the maintenance and operation of
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the Antenna Equipment. Access to the Site at other times will be
available only on an emergency basis, by telephoning the property
manager for the Building (currently Bonnie Howard of The John Akridge
Companies) at (202) 638-3000. Tenant shall reimburse Landlord for all
out-of-pocket costs and expenses reasonably incurred by Landlord as a
result of such emergency access. All access to the Site shall be
subject to the continuing control of, and reasonable security and
safety procedures established by, Landlord.
(ix) Tenant shall pay Landlord (within 30 days after
receipt of an invoice therefor) an amount equal to all cost incurred
by Landlord to have an engineer review the plans and specifications
for the Antenna Equipment and specifications and method for attaching
the Antenna Equipment to the Building, such payment not to exceed
$5,000.
(x) Tenant shall install any screen or other covering for
the Antenna Equipment that Landlord in its reasonable discretion may
require (the size, type and style of which shall be subject to
Landlord's prior written approval) in order to camouflage or conceal
the Antenna Equipment.
(xi) The Antenna Equipment shall not be more than
thirty-six inches (36") in height (without Landlord's written
approval, which shall not be unreasonably withheld, conditioned or
delayed) and not more than the weight that Landlord shall determine is
appropriate for the roof (which Landlord shall specify to Tenant upon
Tenant's written request).
D. INTERFERENCE.
(i) The installation, maintenance and operation of the
Antenna Equipment shall not interfere electronically or otherwise,
with (i) the equipment, facilities, site use and marketability or
operations of Landlord, or (ii) the equipment, facilities or
operations of Landlord's present licensees or tenants at the Building.
If any interference is caused by the installation, maintenance and
operation of the Antenna Equipment, Tenant shall, upon written or oral
request, suspend its operations until such time as the interference
has been eliminated, except for intermittent testing after performing
such repair, modification, replacement or other action for the purpose
of correcting the interference. If Tenant is unable to rectify the
interference, then upon Landlord's request, Tenant shall (at Tenant's
cost) remove the Antenna Equipment from the Building (and restore the
Site and the Building area affected to the condition existing prior to
installation of the Antenna Equipment) and comply with the provisions
of Section 29.E hereof governing removal of the Antenna Equipment.
All transmitters and/or repeater systems at the Site shall be equipped
with, at a minimum, a single stage isolator and a bandpass filter or
bandpass/reject type duplexer. No notch type duplexers will be
allowed. Complete technical characteristics for required equipment
(including response curves) shall be furnished to Landlord and
approved for use prior to Tenant's installation of the Antenna
Equipment.
(ii) Tenant waives any and all claims against Landlord for
any interference caused to or with Tenant's Antenna Equipment by the
present or future equipment or facilities of Landlord or any of its
tenants or licensees.
E. MAINTENANCE AND REMOVAL OF THE ANTENNA EQUIPMENT.
(i) Tenant shall, at its sole cost and expense, be
responsible for the maintenance of the Antenna Equipment in accordance
with all applicable laws and regulations and this Lease. All
maintenance work shall be performed by Tenant's employees or by
certified contractors, previously approved in writing by Landlord,
such approval not to be unreasonably withheld, conditioned or delayed,
provided, however that Landlord's approval shall only be required for
work which affects the roof structure or the method or mechanics of
the attachment of the Antenna Equipment to the roof and to or through
the Building.
(ii) At the expiration or earlier termination of this
Lease, Tenant shall remove the
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Antenna Equipment from the Building (and restore the Site and the
Building area affected to the condition existing prior to installation
of the Antenna Equipment) at Tenant's sole cost and expense. The
removal shall be performed by a certified contractor previously
approved in writing by Landlord (such approval not to be unreasonably
withheld, conditioned or delayed), in a workmanlike manner in
accordance with a previously approved removal plan (such approval not
to be unreasonably withheld, conditioned or delayed) and without
causing any damage or material and continuous interference to the
structures, equipment, or operations of Landlord or any of its
licensees or tenants at the Building. Should any interference, damage
or destruction occur, remedy thereof shall be immediately commenced
and diligently pursued by Tenant at Tenant's sole cost and expense.
IfTenant fails to eliminate any such interference or to make any such
repair within seven (7) days of receiving written or oral notice of
the occurrence of interference or damage, Landlord may perform the
necessary work at Tenant's cost and expense and such amount shall be
paid by Tenant, as Additional Rent hereunder, within thirty (30) days
of Tenant's receipt of an invoice therefor.
F. INDEMNIFICATION.
(i) Tenant shall indemnify and save Landlord harmless
from and against any and all loss, costs, liabilities, damages,
judgements, and expenses, including reasonable attorney's fees, in
connection with claims resulting from bodily injury or death of any
person, or from damage to any property sustained by any person,
including Tenant, arising from the installation, removal and
maintenance of the Antenna Equipment, except to the extent resulting
from Landlord's negligence or willful misconduct.
(ii) Tenant covenants and agrees that the installation,
operation and removal of the Antenna will be at its sole risk.
Landlord shall not be liable to Tenant for any loss, damage or expense
arising from any damage to the Antenna Equipment that may be
occasioned by, through, or in connection with any acts or omissions of
Landlord or Landlord's agents or employees except for Landlord's or
Landlord's agents' or employees' gross negligence or wilful
misconduct. Tenant agrees to indemnify and hold Landlord and all other
persons or entities having facilities located at the Site harmless,
from all costs of any damage done to Landlord's or other persons
facilities or equipment located at the Building, that occur as a
result of the installation, operation or maintenance of Tenant's
Antenna Equipment. Tenant hereby assumes the risk of the inability to
operate Tenant's Antenna Equipment as a result of any structural or
power failure at the Building or failure of Tenant's Antenna Equipment
for any reason whatsoever other than the Landlord's gross negligence
or wilful misconduct and agrees to indemnify and hold Landlord
harmless from all damages and costs of defending any claim or suit for
damages of any kind including business interruption (and attorney's'
fees) asserted against Landlord by reason of such failure.
G. TAXES. Tenant hereby acknowledges that the existence of the
Antenna Equipment and Tenant's other improvements may result in an increase in
the assessed valuation of the Building. Upon receipt of documentation showing
that the Antenna Equipment or Tenant's other improvements caused such increase
Tenant shall reimburse Landlord for any increase in the real estate taxes
payable by Landlord as a consequence of the increase in assessed valuations,
subject to Tenant's right to obtain an exemption therefor on Landlord's behalf.
Landlord shall, at Tenant's sole cost and expense, cooperate with Tenant to
obtain an abatement of any such increase assessment. In the event any sales,
use or other tax shall be payable by Landlord in connection with this Lease,
Tenant shall reimburse Landlord on demand for such payments or shall furnish
necessary documentation to the appropriate government authorities to show that
fee payments hereunder are exempt from such sales, use or other tax.
H. MISCELLANEOUS. The rights set forth in this Section 29 are
personal to e.spire Communications, Inc. and shall be for the benefit (subject
to the terms and conditions hereof) of any assignee of this Lease or subtenant
of the Premises, but shall not be transferable to any other third party.
Landlord shall be entitled to grant to other persons or entities the right to
use certain portions of the roof; provided, however, that (i) Landlord shall
not grant to another user the right to erect an antenna (a) in front of
Tenant's signage on the side of the Building facing the Dulles Toll Road in a
manner that obstructs the
37
<PAGE> 42
visibility of such sign from the Dulles Toll Road, (b) in the two (2)
restricted area identified on EXHIBIT H (the area of each being approximately
500 square feet), (c) on the parapet of the Building or in a manner that the
antenna extends away from the Building over the edge of the parapet, or (d)
within three (3) feet of the outside edge of the Building, (ii) Landlord shall
use reasonable efforts to locate any antenna of any other user of the roof in a
location that in Landlord's reasonable judgement would not be likely to
materially interfere with the operation of any Antenna of Tenant then on the
roof of the Building, and (iii) if any other user of the roof of the Building
places an antenna in an area on the roof of the Building that materially
interferes with the operation of an Antenna of Tenant then on the roof,
Landlord shall cause such other user to move its antenna to a location that in
Landlord's reasonable judgement would not materially interfere with the
operation of any Antenna of Tenant then on the roof of the Building.
30. ACCESS RIGHTS FOR CABLING COMMUNICATIONS EQUIPMENT. Landlord shall
grant to Tenant non-exclusive access to the risers in the Building to install
such optic fiber wiring (the "Telecom Cabling") therein as may be necessary for
Tenant to provide telecommunications access services to the Premises (subject
to such rules and regulations as may be promulgated by Landlord from time to
time), provided that such Telecom Cabling (i) does not affect the structure or
safety of the Building; (ii) does not affect the electrical, mechanical or any
other system of the Building or the functioning thereof; and (iii) does not
interfere with the operation of the Building or the provision of services or
utilities to Tenant or any other tenant of the Building. Tenant shall install
and maintain the Telecom Cabling in compliance with all present and future
rules and regulations of any local, State or Federal authority having
jurisdiction with respect thereto, including, without limitation, the laws,
rules and regulations of the FCC, Fairfax County, Virginia, the City of
Herndon, Virginia and any other governmental and quasi-governmental authorities
having appropriate jurisdiction over the Building or Tenant's use of the
Telecom Cabling. Tenant shall obtain all permits, licenses, variances,
authorizations and approvals that may be required in order to install and
maintain such Telecom Cabling. Tenant shall, at its sole cost and expense, be
responsible for the insurance and maintenance of the Telecom Cabling and its
compliance with all applicable laws, rules and regulations. Tenant shall
indemnify and save Landlord harmless from and against any and all loss, costs,
liabilities, damages, judgements, and expenses (including reasonable attorney's
fees) arising in connection with the installation, removal and maintenance of
the Telecom Cabling.
IN WITNESS WHEREOF, the parties hereto have executed this deed of
Lease under seal in manner sufficient to bind them as of the day and year first
above written.
LANDLORD:
MONUMENT ONE LLC, a Delaware limited liability company
By: The Monument Fund, LLC, its Sole Member
By: Monument Akridge, L.L.C., its Managing Member
By: JACo Manager, L.L.C., its Managing Member
By: JACo Manager, Inc., its WITNESS:
Managing Member
By: seal
_______________ _____________________
Name:
Title:
TENANT:
E.SPIRE COMMUNICATIONS, INC.
38
<PAGE> 43
By: seal
-------------------------------------
Name:
Its: WITNESS/ATTEST:
---------------------------------
[corporate seal]
39
<PAGE> 44
EXHIBIT A
FLOOR PLAN - FIRST FLOOR
<PAGE> 45
FLOOR PLAN- SECOND FLOOR
<PAGE> 46
FLOOR PLAN - THIRD FLOOR
<PAGE> 47
FLOOR PLAN- FOURTH FLOOR
<PAGE> 48
FLOOR PLAN - FIFTH FLOOR
<PAGE> 49
FLOOR PLAN - SIXTH FLOOR
<PAGE> 50
FLOOR PLAN - SEVENTH FLOOR
<PAGE> 51
EXHIBIT A-1
DESCRIPTION OF LAND
<PAGE> 52
<PAGE> 53
EXHIBIT B
WORK AGREEMENT
This Work Agreement is attached to and made a part of that certain Lease
Agreement dated _______________ 1998 (the "Lease"), between Monument One
LLC ("Landlord"), and e.spire Communications, Inc. ("Tenant"). The terms
used in this Exhibit that are defined in the Lease shall have the same
meanings as provided in the Lease.
1. GENERAL.
1.1. PURPOSE. This Agreement sets forth the terms and conditions
governing the design, permitting and construction of the Tenant
Work (hereinafter defined) to be installed in the Premises. As set
forth in Section 1.A of the Lease, the Tenant Work (as hereinafter
defined) to be constructed in the Premises may be constructed in
two (2) phases: Phase I (as hereinafter defined) and Phase II (as
hereinafter defined). References herein to "any phase" shall refer
to either Phase I or Phase II, and references herein to "each
phase" shall refer to Phase I and Phase II.
1.2. TENANT'S REPRESENTATIVE. Tenant acknowledges that Tenant has
appointed Michael Knouse as its authorized representative
("Tenant's Representative") with full power and authority
to bind Tenant for all actions taken with regard to the Tenant
Work. Landlord shall not be obligated to respond to
or act upon any plan, drawing, change order or approval or other
matter relating to the Tenant Work until it has been executed by
Tenant's Representative. Neither Tenant nor Tenant's
Representative shall be authorized to direct Landlord's general
contractor with respect to the Tenant Work. Tenant shall cause
Tenant's Representative to attend all of Landlord's weekly
progress meetings in order to expedite and facilitate any and all
approval necessary in connection with the construction process. In
the event that the Landlord's general contractor performs any such
work under the direction of Tenant or Tenant's Representative,
then Landlord shall have no liability for the cost of such work,
the cost of corrective work required as a result of such work, any
delay that may result from such work, or any other problem in
connection with such work.
2. WORK AND MATERIALS.
2.1. STANDARD SHELL WORK. The Standard Shell Work (hereinafter defined)
will be performed by Landlord at Landlord's sole cost and expense.
The term "Standard Shell Work" means and refers to the following
elements of the Premises: concrete floor (without floor covering);
unfinished perimeter walls; unfinished ceilings (without
acoustical ceilings, ceiling tiles, suspension system, insulation
or light fixtures); closets for telephone and electrical systems
(but not the systems themselves); building systems within the
building core only as follows: mechanical (including heating,
ventilating and air conditioning systems, but excluding any
supplemental HVAC required by the Tenant Plans), electrical and
plumbing systems, the design of which building systems shall be
consistent with the specification set forth on EXHIBIT B-1 hereof
and primary fire sprinkler distribution loop connected to core and
secondary branch distribution to the Premises with upturned
sprinkler heads in a ratio of one (1) sprinkler head per 130
rentable square feet in the Premises.
2.2. TENANT IMPROVEMENTS; IMPROVEMENT ALLOWANCE. Landlord, at Tenant's
expense, shall construct the Premises in accordance with the
Tenant Plans. Tenant Plans shall be conclusive as to the entire
scope of work to be performed by Landlord ("Tenant Work").
Landlord agrees to provide Tenant with a maximum contribution not
to exceed Twenty-six Dollars ($26.00) per rentable square foot
which is equal to a total of Four Million Three Hundred Forty-nine
Thousand Four Hundred Ten Dollars ($4,349,410.00) for the Tenant
<PAGE> 54
Work ("Improvement Allowance"). The Improvement Allowance may be
applied only against work, services and materials which are
incurred in connection with Landlord's construction of the Tenant
Work (including Landlord's Construction Management Fee,
hereinafter defined). Tenant shall pay an administrative fee
("Landlord's Construction Management Fee") to compensate Landlord
for reviewing the Tenant Plans and managing the Tenant Work in an
amount equal to One Hundred Thousand Dollars ($100,000.00).
Landlord's Construction Management Fee shall first be deducted
from the Improvement Allowance and Landlord shall pay the
remaining Improvement Allowance directly to the contractor(s)
performing the Tenant Work. To the extent the full Improvement
Allowance is not used by the Tenant for the purposes set forth
herein, then, provided that Tenant is not then in default under
the Lease (including without limitation, any provision of this
Work Agreement), the balance thereof shall be paid to Tenant upon
the occurrence of the Phase II Commencement Date and Tenant
taking possession of the entire Premises.
3. ARCHITECT AND ENGINEERS FOR TENANT WORK. Tenant shall employ an architect
reasonably acceptable to Landlord (the "Leasehold Architect") to prepare
all plans for the Tenant Work. Tenant shall employ the engineers (the
"Leasehold Engineers") designated by Landlord to prepare the base
building engineering drawings relating to the Tenant Work.
4. PLANS FOR THE TENANT WORK. Tenant shall be entitled to deliver to
Landlord the Tenant Plans (including the programming and space plans,
design development drawings and construction documents) for the Phase I
Tenant Work separately from Tenant's delivery of such plans for the Phase
II Tenant Work; in which case, the approval process, and pricing and
construction process and time requirements of this Work Agreement shall
apply to each phase separately.
4.1. Tenant shall promptly cause the Leasehold Architect to prepare
programming and space plans for each phase (i.e., Phase I and
Phase II) of the Tenant Work, in form approved by Tenant, for
submissions to Landlord. If Landlord has any comments with respect
to the programming and space plans, Landlord shall make such
comments known to Tenant in writing within five (5) business days
following submission of the programming and space plans to
Landlord. If Landlord desires that the programming and space plans
be modified in any reasonable manner, then Tenant shall promptly
revise the programming and space plans to address Landlord's
concerns.
4.2. Tenant shall promptly cause the Leasehold Architect to prepare
design development drawings for each phase of the Tenant Work, in
form approved by Tenant, for submission to Landlord, which
drawings shall be based upon the programming and space plans
approved by Landlord. If Landlord has any comments with respect to
the design development drawings, Landlord shall make such comment
known to Tenant in writing within five (5) business days following
submission of the design development drawings to Landlord. If
Landlord desires that the design development drawings be modified
in any reasonable manner, then Tenant shall revise such drawing to
address Landlord's concerns.
4.3. Tenant shall cause the Leasehold Architect and the Leasehold
Engineers to prepare final construction documents (including
without limitation, all mechanical, electrical, telephone,
finishes selections and fire/life safety plans and specifications)
for each phase of the Tenant Work (the "construction documents"),
in form approved by Tenant, for submission to Landlord no later
than the date that is forty-five (45) days after Landlord approves
the design development drawings for such phase of the Tenant Work,
which construction documents shall be based upon the programming
and space plans and the design development drawings for such phase
approved by Landlord. If Landlord has any comment with respect to
the construction documents, Landlord shall make such comments
known to Tenant in writing within ten (10) business days following
submission of the construction documents to Landlord, or if the
nature of the required revisions is such that they cannot be
revised within
<PAGE> 55
such ten (10) day period, Tenant shall have such longer period as
may be reasonably required to make such revisions, as long as
Tenant promptly commences such revisions and diligently pursues
completion thereof. If Landlord desires that the construction
documents be modified in any reasonable manner, then Tenant
shall, within three (3) business days after Landlord indicates
the revisions required to the construction documents, make such
revisions and resubmit the construction documents to Landlord for
its approval. The construction documents for the Tenant Work that
have been submitted by Tenant and approved by Landlord shall be
referred to herein as the "Tenant Plans."
4.4. All Tenant Plans for the Tenant Work shall be subject to
Landlord's prior written approval, which shall not be unreasonably
withheld, conditioned or delayed, except that Landlord shall have
complete discretion with regard to granting or withholding
approval of Tenant Plans to the extent they impact the Building's
structure or systems; provided, however, in determining whether to
consent or condition its consent to any particular item of Tenant
Work, Landlord shall be able to take into consideration, among
other things, the appearance of any item of Tenant Work visible
from the exterior of the Building and Landlord's interest in the
uniformity of the window coverings and maintaining an appearance
consistent with the first-class nature of the Building.
Notwithstanding the forgoing, Tenant shall be entitled to cover
the windows (from the inside) on the first and second floors of
the Building, subject to Landlord's reasonable approval of all
window coverings to be used as set forth above. Any changes,
additions or modifications that Tenant desires to make to the
Tenant Plans also shall be subject to Landlord's prior written
approval, which shall not be unreasonably withheld, conditioned or
delayed except as provided above for Building structures or
systems. Notwithstanding the foregoing, Tenant shall be solely
responsible for the content of the Tenant Plans and coordination
of the Tenant Plans with base building design. In addition,
Landlord's approval of the Tenant Plans shall not constitute a
warranty, covenant or assurance by Landlord that (i) any equipment
or system shown thereon will have the features or perform the
functions for which such equipment or system was designed, (ii)
the Tenant Plans satisfy applicable code requirements, (iii) the
Tenant Plans are sufficient to enable the Landlord's contractor to
obtain a building permit for the Tenant Work, or (iv) the Tenant
Work described thereon will not interfere with, and/or otherwise
adversely affect, base Building systems. Tenant shall be solely
responsible for the Tenant Plans' compliance with all applicable
laws, rules and regulations of any governmental entity having
jurisdiction over the Building and the Premises.
4.5. Promptly after the construction documents for each phase have been
approved by Landlord, Tenant shall provide to Landlord a CAD
diskette of such construction documents and, upon any revisions to
such construction documents pursuant to this Work Agreement,
provide to Landlord a CAD diskette of the revised construction
documents.
4.6. If Landlord requests any additional information or clarifications
from Tenant regarding the Tenant Work or the Tenant Plans, Tenant
shall provide such information or respond to such inquiries, as
requested, within three (3) business days after such request.
4.7. Once the Lease has been fully executed, Landlord and Tenant intend
for each deadline expressed in this Work Agreement to bind the
parties even if any such deadline is before the date the Lease is
executed.
4.8. Tenant shall pay the cost of preparing the Tenant Plans, subject
to application of the Planning Allowance (hereinafter defined).
Landlord shall provide the Tenant with an allowance of Two Dollars
($2.00) per rentable square foot of the Premises to provide space
programming and planning, and design and construction document
preparation for the Premises (the "Planning Allowance"). Such
Planning Allowance shall be paid to third parties by Landlord at
the direction of the Tenant within thirty(30) days of receipt by
Landlord of
<PAGE> 56
invoices substantiating the costs incurred by Tenant and lien waivers (if
required by Landlord), in a form reasonably acceptable to Landlord. To
the extent the full Planning Allowance is not used by the Tenant for the
purposes set forth herein, then, provided that Tenant is not then in
default under the Lease (including without limitation, any provision of
this Work Agreement), the balance thereof shall be paid to Tenant by good
check upon the occurrence of the Phase II Commencement Date and Tenant
taking possession of the entire Premises. In addition, Landlord shall
reimburse Tenant for the actual out-of-pocket costs incurred by Tenant
for a preliminary test fit of the Premises, a space plan and three (3)
revisions thereto. Tenant shall pay all additional costs incurred if
Tenant requires more than three (3) revision to the space plan or if
Tenant makes any revision to the space plan after it has been approved by
Landlord.
5. PRICING AND CONSTRUCTION.
5.1. COST ESTIMATE. Within ten (10) business days after approval of the
construction documents for any phase by Landlord, Landlord shall
submit (or cause to be submitted) to Tenant a written estimate of
the total cost of the Tenant Work (the "Cost Estimate") for such
phase, which Cost Estimate shall be based upon fixed price bids
solicited from at least three (3) general contractors (two (2) of
which shall be selected by Tenant from among Landlord's list of
approved contractors to be delivered to Tenant, and at least one
of which shall be selected by Landlord). The Cost Estimate shall
include all amounts charged by Landlord's contractor for
performing all work and providing all materials in connection with
the Tenant Work (including the Landlord's general contractor's
general conditions, overhead and profit, as well as permit fees,
and Landlord's Construction Management Fee). Landlord shall enter
into a guaranteed maximum price contract with the general
contractor based upon the Cost Estimate accepted by Tenant
pursuant to Section 5.2 below. The amount, if any, by which the
Cost Estimate for any phase exceeds the Improvement Allowance (as
hereinafter defined) applicable to such phase shall be referred to
herein as "Excess Cost" for such phase. For purposes of
determining Excess Cost for each phase, the portion of the
Improvement Allowance applicable to each phase shall be determined
on a pro rata basis, based upon the relative rentable square feet
contained in each phase.
5.2. ACCEPTANCE OF COST ESTIMATE; VALUE ENGINEERING. Tenant, within ten
(10) days after receipt of the Cost Estimate for each phase, shall
notify Landlord as to whether Tenant (i) accepts such Cost
Estimate and wishes Landlord to commence the Tenant Work for such
phase; or (ii) wishes to redesign such phase of the Premises so as
to reduce such Excess Cost, if any. In the event Tenant wishes to
redesign such phase of the Premises so as to reduce such Excess
Cost:
(a) said redesign shall be preformed at Tenant's sole expense,
subject to application of any available Improvement
Allowance;
(b) said redesign (including revisions to the Tenant Plans)
shall be completed and submitted to Landlord for approval
within ten (10) days after Tenant's notice to Landlord that
it wishes to redesign such phase of the Premises so as to
reduce such Excess Cost; and
(c) said redesign shall be conclusive and binding on Tenant.
In the event Tenant elects not to redesign such phase of the Premises or
to partially redesign such phase of the Premises, any remaining Excess
Cost relating to such phase shall be paid for in full by Tenant within
five (5) business days after Tenant's receipt of the Cost Estimate (or
within 5 business days after Tenant's receipt of a revised Cost Estimate,
if Tenant redesigns the Premises) for such phase. Landlord shall not be
obligated to commence any work until such Excess Cost is paid, and any
delay in such payment shall be deemed a Tenant Delay. The term "Award
Date," with respect to any phase, shall mean the date on which all of the
following have occurred (i) Tenant has notify
<PAGE> 57
Landlord of Tenant's accepts of the Cost Estimate (after any redesign has
occurred pursuant to Section 5.2 hereof) for such phase and of Tenant's
wish that Landlord commence the Tenant Work for such phase, and (ii)
Tenant has paid to Landlord any Excess Cost for such phase pursuant to
this EXHIBIT B.
5.3. CONSTRUCTION. After approval of the construction documents and the
Cost Estimate for any phase, Landlord shall administer the
construction of the Tenant Work for such phase in a good and
workmanlike manner in substantial compliance with the approved
construction documents and any change orders approved by Landlord
for such phase. All Tenant Work shall be constructed by Landlord's
general contractor with the exception of those items constructed
by Tenant's contractor or vendor which shall be limited to
telephone equipment, computer equipment, specialized office
equipment, wiring, systems furniture, audio/visual equipment,
Tenant's Network Operation Center Equipment and Tenant's Cyber
Cafe equipment (collectively, "Tenant Special Equipment").
Landlord's prior written approval shall be required of any Tenant
Special Equipment and any other equipment installed by Tenant or
any vendor or contractor of Tenant and any equipment required to
be installed by Landlord pursuant to the Tenant Plans (other than
normal and customary office equipment), which approval shall not
be unreasonably withheld, conditioned or delayed unless they
affect the Building's structure or systems. Tenant shall be
solely responsible for the work of its contractors and vendors.
6. CHANGE ORDERS. If Tenant request any change or addition to the work or
materials to be provided by Landlord with respect to any phase pursuant
to this Exhibit after Landlord's approval of the construction documents
for such phase, Tenant shall submit with such request revised
construction documents for such phase for Landlord's approval, which
approval shall not be unreasonably withheld, conditioned or delayed
unless the proposed change or addition affects the Building's structure
or systems. Landlord shall respond to Tenant's request for consent no
event later than five (5) business days after it being made. If Landlord
approves such a request, Landlord shall as soon as practicable after such
approval notify Tenant of the cost of such change order and the delay in
substantial completion of the Tenant Work in the Premises, if any, due to
the change order which would be Tenant's sole responsibility. All
additional expenses attributable to any change order requested by Tenant
and approved by Landlord, whether or not such change order relates to
improvements paid for under the Tenant Work, shall be payable by Tenant,
along with an additional construction management fee equal to five
percent (5%) of the costs relating to such change order, upon approval by
Tenant of the change order cost and/or delay, if any. Any delay in
substantial completion of the Tenant Work in the Premises resulting from
such change order shall be deemed a Tenant Delay.
7. SUBSTANTIAL COMPLETION.
7.1. SUBSTANTIAL COMPLETION. For purposes of this Lease (including all
provisions of this Work Agreement), the Premises (or any
particular floor thereof), and the Tenant Work therein, shall
conclusively be deemed to be "substantially complete" as soon as
(i) the Tenant Work (specifically excluding any of Tenant's
telephone equipment, special office equipment, computer
equipment, audio/visual equipment, cabling and wiring,
supplemental HVAC equipment, systems furniture, other furniture
and personal property, Tenant Special Equipment and any items to
be installed or constructed by Tenant or Tenant's contractor or
vendor) to be installed in the Premises (or such particular floor
thereof) by Landlord pursuant to this Work Agreement has been
constructed in accordance with the Tenant Plans approved by
Landlord and any change orders approved by Landlord, as certified
by Landlord's construction manager, subject to Landlord's
completion of any punch list items of work which do not
materially interfere with Tenant's permitted and intended use of
the Premises (or such particular floor thereof), (ii) the
Building's parking area is available for Tenant's use in
accordance with the Lease, (iii) reasonable access to the
Premises (or such
<PAGE> 58
particular floor thereof) is available for Tenant, (iv) the base
Building systems necessary to provide the services required
hereunder to be provided by Landlord to the Premises (or such
particular floor thereof) are functional and (v) a temporary or
permanent certificate of occupancy has been obtained for the
Premises (or such particular floor thereof); provided, however
that no such certificate of occupancy shall be required for the
Premises (or such particular floor thereof) to be substantially
complete if Landlord is unable to obtain such certificate of
occupancy as a result of any act or omission of Tenant or
Tenant's contractors or vendors, including without limitation, as
a result of any systems furniture, Tenant Special Equipment or
any work to be installed or constructed by Tenant or Tenant's
contractors or vendors not being complete at the time that the
Premises would otherwise be substantially complete. Tenant shall
cooperate with Landlord in connection with Landlord obtaining
certificate(s) of occupancy for the Premises. Notwithstanding the
above, (a) the Premises (or such particular floor thereof) shall
be considered substantially complete even though there remain to
be completed in the Premises punch list items, including but not
limited to minor or insubstantial details of construction,
decoration or mechanical adjustment, the lack of completion of
which will not materially interfere with Tenant's permitted and
intended use of the Premises (or such particular floor thereof).
In addition, notwithstanding the foregoing, upon the occupancy by
Tenant of any portion of any floor of the Premises for the
purpose of conducting business therein (as opposed to preparing
the Premises for Tenant's use) such floor shall be deemed to be
substantially complete, whether or not any of the other
conditions to substantial completion have then occurred.
7.2. TENANT DELAYS. Any delay resulting from any of the following items
shall be referred to individually as a "Tenant Delay":
(a) Tenant failure to comply with any of the deadlines
specified in this Work Agreement; or
(b) Any changes or additions to the Tenant Work or to the
Tenant Plans (including without limitation, any changes or
additions requested or required by Tenant or by any
governmental authority or required in order to comply with
any legal or base Building requirements or otherwise) with
respect to any phase subsequent to the date of Landlord's
approval of the construction documents for such phase; or
(c) Tenant's failure to pay when due any amounts required
pursuant to this Work Agreement; or
(d) The performance of any work by any person or firm employed
or retained by Tenant; or
(e) Tenant's request for materials, finishes or installations
which are not available as needed to meet the general
contractor's schedule for substantial completion ("Long
Leadtime Items"); or
(f) Tenant's or Tenant's agent, including Tenant's contractors,
vendors, and Tenant's Representative's interference with
the general contractor's schedule;
(g) Any default under the Lease (including without limitation
any provisions of this Work Agreement); or
(h) Any other Tenant-caused delay in completing construction of
the Tenant Work.
On or before the date that Landlord submits to Tenant written
estimates of the cost of the Tenant Work for any phase pursuant to
Section 5.1 of this Work Agreement, Landlord shall identify the
Long Leadtime Items for such phase shown on the construction
documents of which Landlord is then aware. If Landlord's general
contractor provides Landlord with notice (written or oral) of a
Tenant Delay, Landlord shall provide Tenant notice thereof within
five (5) days of Landlord's receipt of such written notice from
Landlord's general contractor.
7.3. LANDLORD DELAY. The following items shall be referred to
individually as a "Landlord Delay":
<PAGE> 59
(i) Landlord's failure to substantially complete the Tenant
Work to be built by Landlord in the Premises (or any
particular floor thereof, in the case of a Landlord Delay
applicable to such particular floor) pursuant to this
EXHIBIT B within the applicable Allocated Construction
Period (hereinafter defined); and
(ii) Landlord's failure to comply with any of the deadlines
specified in Sections 4.1, 4.2 and 4.3 (or of the deadlines
applicable to the plans for any particular floor thereof,
in the case of a Landlord Delay applicable to any such
particular floor) of this Work Agreement.
The "Allocated Construction Period" applicable to the Premises (or
any floor thereof) shall mean the one hundred sixty-eight (168)
calendar day period after the Award Date for the Premises (or in
the case of any particular floor, the Award Date applicable to the
phase in which such floor is located), which period shall be
extended one (1) day for each day of delay caused by an event of
Tenant Delay or event of Construction Force Majeure. The term
"Construction Force Majeure" shall mean acts of God, strikes,
sabotage, accidents, acts of war, fire and casualty, moratoriums
affecting construction, insurance reimbursement problems or
delays, emergencies, energy shortage, the failure of the
applicable governmental authority to issue building permits for
the Tenant Work within twenty-one (21) days after Landlord has
submitted to the appropriate authority an application for such
building permit with the required documentation, the failure of
the applicable governmental authority to conduct inspections
required in connection with the Tenant Work (and issue its
approval or disapproval thereof) within three (3) business days
after Landlord has submitted to the appropriate authority a
request for such inspection or the failure of the applicable
governmental authority to issue a certificate of occupancy for the
Premises within five (5) business days after Landlord has
submitted to the appropriate authority an application (which
application shall have been submitted after receipt of the
approvals from all inspections that are required as a condition
precedent to submitting such application) for such certificate of
occupancy. Landlord shall provide to Tenant notice of the
occurrence of an event of Construction Force Majeure within five
(5) business days of Landlord becoming aware that such event of
Construction Force Majeure has occurred.
7.4. PUNCH LIST. Prior to delivery of possession of the each phase of
the Premises to Tenant, Landlord, Landlord's construction manager,
the Leasehold Engineer and the Leasehold Architect shall prepare a
preliminary punch list in writing for Landlord and Tenant's review
and Landlord and Tenant shall examine the applicable phase of the
Premises and shall agree on a final "punch list" for such phase
which shall specify the items of work that require correction,
repair or replacement. Tenant shall approve such punch list in
writing within two (2) working days of the walk-through.
8. MOVING ALLOWANCE. Landlord shall provide the Tenant with an allowance of
Two Dollars ($2.00) per rentable square foot of the Premises to cover the
cost of the Tenant's relocation to the Premises, including, without
limitation, expenses for movers, move consultants, furniture and
equipment take-down and set-up (the "Moving Allowance"). Such Moving
Allowance will be paid to third parties by Landlord at the direction of
the Tenant within thirty (30) days of receipt by Landlord of invoices (in
a form reasonably acceptable to Landlord) substantiating the costs
thereof incurred by Tenant. To the extent the full Moving Allowance is
not used by the Tenant for the purposes set forth herein, then, provided
that Tenant is not then in default under the Lease (including without
limitation, any provision of this Work Agreement), the balance thereof
shall be paid to Tenant by good check upon the occurrence of the Phase II
Commencement Date and Tenant taking possession of the entire Premises.
9. POSSESSION BY TENANT. The taking of possession of each phase of the
Premises by Tenant shall constitute an acknowledgment by Tenant that such
phase of the Premises is in good condition and that all work and
materials provided by Landlord with respect to such phase are
satisfactory and
<PAGE> 60
Landlord has satisfactorily performed all work with respect to such phase
to be performed by it pursuant hereto, subject to certain punch list
items described in Paragraph 7.3, above and subject to Landlord's
obligation to correct any Latent Defects (hereinafter defined) in such
phase of the Premises as hereinafter provided. Landlord shall correct any
Latent Defects in any phase of the Premises which materially impair
Tenant's use of such phase of the Premises, provided that Tenant delivers
to Landlord written notice thereof within twelve (12) months after the
applicable commencement date for such phase. Landlord agrees to use
reasonable efforts to complete all items of Tenant Work on the punch list
for each phase within thirty (30) days after such punchlist is prepared,
or as soon thereafter as is reasonably practicable. As used herein, the
term "Latent Defect," with respect to any phase, shall mean a defect in
the physical condition of the such phase of the Premises existing as of
the date such phase of the Premises is delivered to Tenant that could not
have reasonably been discovered prior to Tenant taking possession of such
phase of the Premises by a commercially reasonable visual inspection of
such phase of the Premises; provided, however, that it is understood that
a Latent Defect shall not include a defect in the design of the Tenant
Work.
<PAGE> 61
EXHIBIT B-1
MODIFIED SHELL DEFINITION
STRUCTURE: Post-Tensioned Reinforced Concrete Frame, 100 lbs/sq.
ft. minimum load capacity. (Meets GSA requirements)
EXTERIOR: Precast concrete frames with reflective insulated
windows and curtainwall.
COLUMN SPACING: 28' X 42'
ROOF: Ballasted IRMA roofing with a 10 year warranty.
FINISHED CEILING
HEIGHT: 9' 6" on first floor, 9' on floors 2 through 7.
HVAC SYSTEM:Central plant on rooftop penthouse with centrifugal chillers and
cooling towers. Two air handling units on each floor
serving all VAV zones. Trunk ducts, all VAV boxes and
perimeter slot diffusers will be installed with the
base building. Interior diffusers and flex duct will be
paid from the Improvement Allowance.
Building HVAC design criteria shall be:
Summer: 76 degrees F db +- 2 degrees and
50% +- 5%.
Up to 95 degrees F db outside air
temperatures.
Winter: 70 degrees F db +- 2 degrees and
30% +- 5%.
Down to 0 degrees F db outside air
temperatures.
Outside air for ventilation will be provided at the rate
of 20 CFM per person consistent with current ASHRAE
Guidelines for acceptable indoor air quality.
Mechanical system will permit two zones of operation
per floor. Medium and low pressure duct work will be
installed from each floor's air handling unit to the
VAV's. 18 exterior VAV boxes with electric resistance
heaters averaging 1200 CFM in size and 10 interior VAV
boxes averaging 1400 CFM in size will be installed with
thermostats and 20' of cable with the base building.
Each floor will be equipped with 87 tons of HVAC
capacity, or the equivalent ratio of one ton of HVAC for
each 266 square feet of floor area.
A supplemental cooling tower with condenser water riser
serving each floor will be installed with the base
building use by the tenants for 24 hour operation of
tenant supplied air handling units.
ELECTRICAL SYSTEM: 5.2 watts/sq. ft. on Tenant's floor and 2.5 watts/sq.
ft. available for lighting on tenant floor. Single
electrical service entrance with single-pad mounted
transformer outside of the Building. 480V plug-in bus
riser with step-down dry type transformers with K factor
for 120/208V for Tenant's power distribution at each
floor.
Location for additional emergency generator and conduit
to main electrical room will be installed with base
building.
LIFE SAFETY: Fire standpipe and base building fire alarm system will
be installed per building
<PAGE> 62
code. Vertical sprinkler riser distribution to each
floor and sprinkler loop with upturned heads at the
ratio of one head per 130 sq. ft. will be installed with
the base building.
WET COLUMNS: 4 wet columns per floor for use by Tenant.
WINDOW COVERINGS: 1" slat Venetian blinds, to be paid for from Tenant's
Improvement Allowance.
ENERGY MANAGEMENT: Automated base building energy management system with
remote monitoring.
ELEVATORS: 4 traction passenger elevators, 350 feet per minute,
with 3,500 lb. capacity.
SECURITY SYSTEM: Building perimeter and elevators.
REST ROOMS: 1 set of women's and men's restrooms will be fully
finished on each floor with base building.
TYPICAL FLOOR LOBBIES: Typical floor lobby finishes and finishes to corridors
connecting stairs will be paid for from Tenant's
Improvement Allowance.
FIBER OPTICS: Vertical risers to accommodate T-1 lines for connection
to the Internet are provided to each floor of the
Building.
PARKING: Underground parking with finished garage elevator lobby.
ADDITIONAL ITEMS: - Perimeter diffusers and bulkheads on each floor
as per base building drawings.
- Sprinkler heads are a ratio of one head per 130
sq. ft. as installed within the Building (as set
forth above).
- An allowance of $5,000.00 per floor to provide
construction of lobby areas on each floor. This
is in addition to Landlord provided restrooms on
each floor.
- Two (2) sets of 4" conduits will be made
available for the sole use of Tenant to install
their own fiber optic service from street to the
Building telephone riser.
<PAGE> 63
EXHIBIT C
RULES AND REGULATIONS
Definitions of terms are set forth in the Lease to which these Rules and
Regulations are attached by reference.
The following rules and regulations have been formulated for the safety
and well-being of all tenants of the Building and to ensure compliance with all
municipal and other requirements. Strict adherence to these rules and
regulations is necessary to guarantee that each and every tenant will enjoy a
safe and unannoyed occupancy in the Building in accordance with the Lease. Any
violation of these rules and regulations by Tenant that continues ten (10) days
or more after notice thereof from Landlord, shall be deemed to be a Default
under the Lease.
Landlord may, upon request by any tenant, waive the compliance by such
tenant to any of these rules and regulations, provided that (i) no waiver shall
be effective unless signed by Landlord or Landlord's authorized agent, (ii) any
such waiver shall not relieve such tenant from the obligation to comply with
such rule and regulation in the future unless expressly consented to by
Landlord, (iii) no waiver granted to any tenant shall relieve any other tenant
from the obligation of complying with the rules and regulations unless such
other tenant has received a similar waiver in writing from the Landlord, and
(iv) any such waiver by Landlord shall not relieve Tenant from any obligation or
liability of Tenant to Landlord pursuant to the Lease for any loss or damage
occasioned as a result of Tenant's failure to comply with any such rule or
regulation.
1. The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, corridors, halls or other parts of the Building not occupied
by any tenant shall not be obstructed or encumbered by any tenant or used
for any purpose other than ingress and egress to and from the Premises.
Landlord shall have the right to control and operate the public portions
of the Building and the facilities furnished for common use of the
tenants in such manner as Landlord deems best for the benefit of the
tenants generally. No tenant shall permit the visit to the Premises of
persons in such numbers or under such conditions as to interfere with the
use and enjoyment by other tenants of the entrances, corridors, elevators
and other public portions or facilities of the Building.
2. No awnings or other projections shall be attached to the exterior of any
wall of the Building or visible from outside the Building without the
prior written consent of Landlord. No drapes, blinds, shades or screens
visible from outside the Premises shall be attached to or hung in, or
used in connection with, any window or door of the Premises, without the
prior written consent of Landlord. Such awnings, projections, curtains,
blinds, shades, screens or other fixtures must be of a quality, type,
design and color, and attached in the manner, reasonably approved by
Landlord.
3. No showcases or other articles shall be put in front of or affixed to any
part of the exterior of the Building, nor placed in the halls, corridors
or vestibules without the prior written consent of Landlord.
4. The water and wash closets and other plumbing fixtures shall not be used
for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags, chemicals, paints, cleaning fluids or other
substances shall be thrown therein. All damages resulting from any misuse
of the fixtures shall be borne by the tenant who, or whose servants,
employees, agents, visitors or licensees, shall have caused the same.
5. Except as otherwise provided herein, there shall be no marking, painting,
drilling into or in any way defacing the Building or any part of the
Premises visible from public areas of the Building. Tenant shall not
construct, maintain, use or operate within the Premises any electrical
device, wiring or apparatus in connection with a loud speaker system or
other sound system, except as reasonably required for its communication
system and approved prior to the installation thereof by Landlord. No
<PAGE> 64
such loudspeaker or sound system shall be constructed, maintained, used
or operated outside of the Premises.
6. No vehicles or animals, birds or pets of any kind (other than seeing-eye
dogs assisting disabled persons) shall be brought into or kept in or
about the Premises, and no cooking (except for hot-plate or microwave
cooking by Tenant's employees for their own consumption, the equipment
for and location of which are first approved by Landlord) shall be done
or permitted by any tenant on the Premises. No tenant shall cause or
permit any unusual or objectionable odors to be produced upon or permeate
from the Premises.
7. Except as specifically set forth in the Lease (and then only to the
extent permitted under all applicable laws and regulations, including all
zoning laws and regulations), No space in the Building shall be used for
manufacturing of goods for sale in the ordinary course of business, for
the storage of merchandise for sale in the ordinary course of business,
or for the sale at auction of merchandise, goods or property of any kind.
Furthermore, the use of the Premises by each tenant was approved by
Landlord prior to execution of the Lease and such use may not be changed
without the prior approval of Landlord.
8. No tenant shall make any unseemly or disturbing noises or disturb or
interfere with occupants of the Building or neighboring buildings or
Premises or those having business with them whether by the use of any
musical instrument, radio, talking machine, unmusical noise, whistling,
singing or in any other way. No tenant shall throw anything out of the
doors or windows or down the corridors or stairs.
9. No flammable, combustible or explosive fluid, chemical, asbestos or other
hazardous substance or any other material harmful to tenants of the
Building shall be brought, installed in or kept upon the Premises; except
that Tenant shall be permitted to use and keep in the Premises such
cleaning, copier and other supplies as are reasonable and customary for
office use, provided that Tenant uses, stores and disposes of same in
accordance with all applicable laws. No space heaters, fans or individual
air conditioning units may be used in the Premises, without Landlord's
prior written consent in accordance with EXHIBIT B of the Lease. Any
electrical or extension cords deemed to be a fire hazard by Landlord in
Landlord's sole discretion shall be removed.
10. No additional locks or bolts of any kind shall be placed upon any of the
doors or windows by any tenant, nor shall any changes be made in existing
locks or the mechanism thereof. The doors leading to the corridors or
main halls shall be kept closed during business hours except as they may
be used for ingress or egress. Each tenant shall, upon the termination of
his tenancy, restore to the Landlord all keys of stores, offices, storage
and toilet rooms either furnished to, or otherwise procured by, such
tenant, and in the event of the loss of any keys so furnished, such
tenant shall pay to Landlord the cost thereof.
11. Landlord reserves the right to make reasonable inspections of all freight
to be brought into the Building and to exclude from the Building all
freight which violates any of these rules and regulations or the Lease.
12. No tenant shall pay any employees on the Premises, except those actually
working for such tenant on the Premises.
13. Landlord reserves the right to exclude from the Building at all times any
person who is not known or does not properly identify himself to the
Building management, security guard on duty or security system monitor.
Landlord may, at its option, require all persons admitted to or leaving
the Building between the hours of 6:00 p.m. and 8:00 a.m., Monday through
Friday, and at any hour, Saturdays, Sundays and legal holidays, to
register. Each tenant shall be responsible for all persons from whom he
authorizes entry into or exit out of the Building, and shall be liable to
Landlord for all acts or
<PAGE> 65
omissions of such persons.
14. The Premises shall not, at any time, be used for lodging or sleeping or
for any immoral or illegal purpose.
15. Each tenant, before closing and leaving the Premises at any time, shall
see that all windows are closed.
16. Landlord's employees shall not perform any work or do anything outside of
their regular duties, unless under special instruction from the
management of the Building. The requirements of tenants will be attended
to only upon application to Landlord and any such special requirements
shall be billed to Tenant (and paid with the next installment of Rent
due) at the schedule of charges maintained by Landlord from time to time
or at such charge as is agreed upon in advance by Landlord and Tenant.
17. Canvassing, soliciting and peddling in the Building is prohibited and
each tenant shall cooperate to prevent the same.
18. There shall not be used in any space, or in the public halls of the
Building, either by any tenant or by jobbers or others, in the delivery
or receipt of merchandise, any hand trucks except those equipped with
rubber tires and side guards, and Tenant shall be responsible to Landlord
for any loss or damage resulting from any deliveries of Tenant to the
Building.
19. Mats, trash or other objects shall not be placed in the public corridors.
20. Landlord does not maintain finishes within the Premises which are
non-standard, such as kitchens, bathrooms, wallpaper, special lights,
etc. However, should the need for repairs of items not maintained by
Landlord arise, Landlord will arrange for the work to be done at Tenant's
expense.
21. Drapes installed by Landlord for the use of Tenant or drapes installed by
Tenant, which are visible from the exterior of the Building, must be
cleaned by Tenant at least once a year, without notice, at Tenant's own
expense.
22. No minors shall be allowed to congregate or play in the common areas of
the Building. It shall be the responsibility of all tenants to see that
the minor children of their employees who visit the Building (whether
during the normal hours of operation of the Building, or after-hours, on
Saturdays, Sunday or legal holidays) are adequately supervised by an
adult and do not assemble or play in the common areas of the Building.
<PAGE> 66
EXHIBIT D
ESTOPPEL CERTIFICATE
[Date]
- ------------------------
- ------------------------
- ------------------------
- ------------------------
Re: ______________________________________
To Whom It May Concern:
It is our understanding that you have placed or committed to place a
mortgage upon the subject premises and have required this certification by the
undersigned.
The undersigned, as Tenant, under that certain Agreement of Lease dated
________ __, 199_ ("Lease") made with ____________________ ("Landlord"), hereby
ratifies the Lease and certifies as follows:
1. The undersigned has entered into occupancy of the "Premises" described in
the Lease on ______________ __, 199_;
2. [The undersigned is presently preparing the Premises for use by the
undersigned][[The undersigned is presently open and conducting business
with the public in the Premises]];
3. The operation and use of the Premises do not involve the generation,
treatment, storage, disposal or release of hazardous substance or a solid
waste into the environment and that the Premises are being operated in
accordance with all applicable environmental laws, zoning ordinances and
building codes;
4. Base Rent in the annual amount of $___________ is payable from the
Commencement Date, i.e., ____________________________;
5. The Lease is in full force and effect and has not been assigned,
modified, supplemented or amended;
6. The Lease represents the entire agreement between the parties as to the
leasing of the Premises;
7. The Term of the Lease expires on ____________ __, ____;
8. To the best of the undersigned's knowledge (after due investigation and
inquiry), all conditions under the Lease to be performed by the Landlord
[other than payment of the allowance set forth in the Work letter, being
EXHIBIT B to the Lease] have been satisfied, including but without
limitation, all co-tenancy requirements thereunder, except as followed
__________________;
9. [Intentionally omitted][[All required contributions by Landlord to Tenant
on account of Tenant's improvements have been received]];
10. To the best of Tenant's knowledge, on this date, there are no existing
defenses or offsets which the undersigned has against the enforcement of
the Lease by the Landlord.
11. No rental has been paid in advance, except that the first month's rent in
the amount of $__________ and the Security Deposit in the amount of
$___________ have been deposited with Landlord.
------------------------
By: ____________________
Name: __________________
<PAGE> 67
Its: ____________________
<PAGE> 68
EXHIBIT E
INTENTIONALLY OMITTED
<PAGE> 69
EXHIBIT F
HVAC SPECIFICATIONS
A. SUMMER:
Room conditions not in excess of 76 degrees F dry bulb and 55% relative
humidity when outside conditions do not exceed 95 degrees F dry bulb and
78 degrees F wet bulb, provided that Tenant complies with the following
conditions:
1. Light-colored blinds, fully drawn, with slats at 45 degrees angle
coincident with peak sun load;
2. Electric load does not exceed 5 watts per square foot; and
3. People load does not exceed an average one person per 100 square
feet for office space.
B. WINTER:
Room conditions of not less than 68 degrees F and 30% relative humidity
when the outside dry bulb temperature is not less than 0 degrees F.
NOTE: The foregoing HVAC Specifications shall not apply to any kitchen,
conference room, computer room, copy room or other areas of the
Premises in which excessive heat is produced, which areas may
require supplemental air-conditioning in order to comply with the
foregoing specification.
<PAGE> 70
EXHIBIT G
FORM OF LETTER OF CREDIT
[Lending Institution Name]
[Address of Lending Institution] Date: __________, 199__
IRREVOCABLE STANDBY LETTER OF CREDIT NO. ____________
Account Party
[Account Party's Name]
[Account Party Address]
In favor of: Beneficiary
[Beneficiary Name], its successors and assigns
[Beneficiary Address]
AMOUNT EXPIRY DATE:
USD _____________ [Expiry Date]
[Dollar Amount] U.S. Dollars Only
Gentlemen:
We hereby open our irrevocable letter of credit in your favor for an amount of
USD [Numeric Dollar Amount] ([Alphabetic Dollar Amount] U.S. Dollars Only)
available by your draft at sight drawn on the [Lending Institution Name, Lending
Institution Address], bearing the clause "Drawn under [Lending Institution Name]
Letter of Credit No. _______ dated ________, 199__," and accompanied by the
following document:
Beneficiary's signed statement stating that: "[Beneficiary Name] is
entitled to draw upon this Letter of Credit pursuant to the terms of that
Lease dated [Lease Date] for premises at [Premises Address] between
[Account Party Name] and [Beneficiary Name]. [Beneficiary Name] hereby
makes demand for the payment of the entire amount of the Letter of
Credit" Such statement shall be conclusive as to such matters.
This Letter of Credit is transferable to a transferee of Beneficiary's entire
interest as landlord in that Lease dated [Lease Date] for premises at [Premises
Address] between [Account Party Name] and [Beneficiary Name], as the same may be
amended or modified from time to time.
This Letter of Credit sets forth in full the terms of our undertaking and such
undertaking shall not in any way be modified, amended, or amplified by reference
to any document(s), instrument(s), contract(s), or agreement(s) referred to
herein or in which this Letter of Credit relates, and any such reference shall
not be deemed to incorporate herein by reference any document(s), instrument(s),
contract(s), or agreement(s).
It is a condition of this Letter of Credit that it shall be deemed automatically
extended without amendment for one year from the present or any future
expiration date of this Letter of Credit unless at least sixty (60) days prior
to the then current expiration date we notify the Beneficiary by registered
letter that we elect not to consider this Letter of Credit renewed for such
additional period. If such notice is given, then during such notice period
(i.e., the at least sixty (60) day period commencing on the date of such notice
and ending with the then applicable expiration date of this Letter of Credit),
this Letter of Credit shall remain in full force and effect and Beneficiary may
draw up to the full amount of the sum when accompanied by a statement described
above in the first paragraph of this Letter of Credit.
Partial draws shall be permitted under this Letter of Credit.
We hereby engage with you that drafts drawn and presented in compliance with the
terms of this credit will be immediately honored by us if presented at any of
our offices on or before [Expiry Date], as such date may be extended pursuant to
the terms hereof.
This Letter of Credit is subject to The Uniform Customs and Practice for
Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500, which is incorporated by reference herein.
Very truly yours,
- ------------------------------
Authorized Signature
<PAGE> 71
EXHIBIT H
LOCATION OF TENANT'S ANTENNA EQUIPMENT
<PAGE> 1
EXHIBIT NO. 10.44
e.spire
COMMUNICATIONS, INC.
NONQUALIFIED
DEFERRED COMPENSATION PLAN
EFFECTIVE AS OF OCTOBER 1, 1998
<PAGE> 2
TABLE OF CONTENTS
PAGE
I. DEFINITIONS..............................................1
II. ELIGIBILITY AND PARTICIPATION............................3
2.01 Eligible Persons.........................................3
2.02 Participation............................................3
2.03 Date of Participation....................................3
2.04 Application for Participation............................4
2.05 Limitation on Participants...............................4
2.06 Removal from Participation...............................4
III. EMPLOYEE DEFERRALS & EMPLOYER CONTRIBUTIONS..............4
3.01 Employee Deferrals.......................................4
3.02 Employer Contributions...................................6
IV. INVESTMENT OF DEFERRAL ACCOUNT...........................7
4.01 Participant Election.....................................7
4.02 Change of Investment Election............................7
4.03 Investment Options.......................................7
4.04 Investment Earnings......................................7
V. VESTING AND FORFEITURE OF BENEFITS.......................8
5.01 Employee Deferrals and Employer Bonus Contributions......8
5.02 Employer Discretionary Contributions.....................8
5.03 Forfeiture of Employer Discretionary Contributions.......8
VI. DEFERRED COMPENSATION ACCOUNTS...........................9
6.01 Deferred Compensation Accounts...........................9
6.02 Quarterly Benefit Statements.............................9
6.03 Title to Assets..........................................9
6.04 Unfunded Arrangement.....................................9
6.05 Return or Diversion of Assets............................9
6.06 Annual Expenses..........................................9
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<PAGE> 3
VII. BENEFIT DISTRIBUTIONS...................................10
7.01 In General..............................................10
7.02 Termination of Employment...............................10
7.03 In-Service Withdrawals..................................10
7.04 Death Benefits..........................................11
7.05 Tax Liability...........................................13
VIII. ADMINISTRATION..........................................13
8.01 Administration and Interpretation of Plan...............13
IX. APPLICATION FOR BENEFITS AND CLAIMS PROCEDURE...........13
9.01 Notice of Denial of Benefit.............................13
9.02 Appeals Procedure.......................................13
X. GENERAL PROVISIONS......................................14
10.01 No Alienation or Assignment of Benefits.................14
10.02 No Contract of Employment...............................14
10.03 Other Retirement Plans..................................14
10.04 Heirs, Assigns and Successors...........................14
10.05 Amendment or Termination................................15
10.06 Severability of Provisions..............................15
10.07 Controlling Law.........................................15
10.08 Grammatical Construction................................15
10.09 Unauthorized Representations............................15
10.10 Designation of Death Benefit Beneficiary................15
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<PAGE> 4
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<PAGE> 5
e.spire
COMMUNICATIONS, INC.
NONQUALIFIED
DEFERRED COMPENSATION PLAN
EFFECTIVE: OCTOBER 1, 1998
WHEREAS, e.spire Communications, Inc. has decided to establish an
unfunded deferred compensation plan for a select group of its senior management
employees; and
WHEREAS, the purpose of this Plan is to provide eligible executives with
a tax-deferred capital accumulation program under which Participants can defer
all or a portion of their current compensation on a pre-tax basis.
NOW, THEREFORE, the e.spire Communications, Inc. Nonqualified Deferred
Compensation Plan is hereby adopted in accordance with the following terms and
conditions:
ARTICLE I
DEFINITIONS
Unless the context or subject matter otherwise requires, the following
definitions shall govern the Plan:
1.01 AFFILIATE - any corporation which is a member of a controlled group of
corporations (as defined in Section 414(b) of the Internal Revenue Code)
which includes the Company; any trade or business (whether or not
incorporated) which is under common control (as defined in Section 414(c)
of the Internal Revenue Code) with the Company; any organization (whether
or not incorporated) which is a member of an affiliated service group (as
defined in Section 414(m) of the Internal Revenue Code) which includes
the Company; and any other entity required to be aggregated with the
Company pursuant to regulations under Section 414(o) of the Internal
Revenue Code.
1.02 ANNUAL INCENTIVE COMPENSATION - incentive compensation provided to a
Participant by the Employer in respect of a calendar year.
1.03 BASE SALARY - the actual salary earned by a Participant during a calendar
year. The actual salary is determined before any pre-tax contributions to
an Employer's 401(k) plan but after any pre-tax contributions to an
Employer's cafeteria plan..
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<PAGE> 6
1.04 BENEFICIARY - a person (other than a Participant) who is entitled to
receive benefits under the Plan.
1.05 BOARD - the Board of Directors of the Company.
1.06 CHANGE IN CONTROL - the (i) sale (other than a sale by the Company) of
securities entitled to more than fifty percent (50%) of the voting power
of the Company in a single transaction or a related series of
transactions; or (ii) sale of substantially all of the assets of the
Company; or (iii) approval by the stockholders of the Company of a
reorganization, merger or consolidation of the Company, as a result of
which the persons who were the stockholders of the Company immediately
prior to such reorganization, merger or consolidation do not own
securities immediately after the reorganization, merger or consolidation
which would entitle them to more than fifty (50%) percent of the
reorganized, merged or consolidated company.
1.07 COMMITTEE - the Compensation Committee appointed by the Board to
administer the Plan.
1.08 COMPANY - e.spire Communications, Inc. and its successors.
1.09 DEFERRED COMPENSATION ACCOUNT - the separate account established for each
Participant pursuant to the provisions of Article VI of the Plan, which
is credited with Employer Discretionary Contributions, Employer Bonus
Contributions and Employee Deferrals. To the extent necessary to reflect
different investment options, vesting schedules and/or distribution
dates, a Participant's Deferred Compensation Account can include multiple
subaccounts.
1.10 DEFERRED COMPENSATION ELECTION FORM - the form(s) designated by the
Company for Participants to use to contribute Employee Deferrals to the
Plan, designate the investment of the Deferred Compensation Account, and
select the timing and form of the distribution. The execution and filing
of this Form with the Committee is subject to Board approval. The Form
may be changed at any time by the Board.
1.11 EFFECTIVE DATE - October 1, 1998.
1.12 EMPLOYEE DEFERRALS - the portion of a Participant's Annual Incentive
Compensation and Base Salary which is deferred and contributed to the
Rabbi Trust pursuant to the provisions of Article III of the Plan.
1.13 EMPLOYER - the Company, its Affiliates and their successors.
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<PAGE> 7
1.14 EMPLOYER BONUS CONTRIBUTIONS - the bonus payments made by the Employer to
a Participant but which are required to be deferred in accordance with
the terms of this Plan.
1.15 EMPLOYER DISCRETIONARY CONTRIBUTIONS - the contributions made by the
Employer to the Rabbi Trust which are based on individual or overall
corporate performance.
1.16 PARTICIPANT - an employee of the Employer who has been designated by the
Committee for participation in the Plan and who has completed the
appropriate forms.
1.17 PLAN - the e.spire Communications, Inc. Nonqualified Deferred
Compensation Plan and any modification or amendment thereof.
1.18 PLAN YEAR - the twelve (12) month period beginning January 1st through
December 31st. Notwithstanding the foregoing, the initial Plan
Year shall be a short period beginning October 1, 1998 and ending
December 31, 1998.
1.19 RABBI TRUST - the grantor trust within the meaning of Section 671 of the
Internal Revenue Code established pursuant to the Trust Agreement
effective as of October 30, 1998, between the Company and FMB Trust
Company, N.A.
1.20 TRUSTEE - FMB Trust Company, N.A. unless the Company delegates another
person or entity to act as the trustee pursuant to the Trust
Agreement.
ARTICLE II
ELIGIBILITY AND PARTICIPATION
2.01 ELIGIBLE PERSONS.
Consistent with the Plan's purpose, eligibility for participation in this
Plan shall be limited to key employees selected by the Chief Executive Officer.
2.02 PARTICIPATION.
The Chief Executive Officer of the Company may designate additional
management employees who may participate in the Plan.
2.03 DATE OF PARTICIPATION.
Each employee designated by the Chief Executive Officer as eligible to
participate in this Plan on the Plan's Effective Date shall be eligible to
participate as of October 1, 1998. Those
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<PAGE> 8
employees who become eligible to participate in the Plan on or after the
Effective Date shall be eligible to become a Participant thirty (30) days after
they receive a written notification of their eligibility.
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<PAGE> 9
2.04 APPLICATION FOR PARTICIPATION.
In order to participate in this Plan, an eligible employee must complete
a Deferred Compensation Election Form, a Life Insurance Application Worksheet
and an Application for Flexible Premium Variable Life Insurance, it being
understood that an owner of such life insurance will be the Employer or the
Rabbi Trust. If an employee fails to submit the three documents in a timely
manner, he or she will not be a Participant and will be ineligible to make
Employee Deferrals and receive an allocation of the Employer Discretionary
Contributions and/or the Employer Bonus Contributions.
2.05 LIMITATION ON PARTICIPANTS.
The Chief Executive Officer, in his or her sole discretion, may determine
who is eligible to participate in the Plan and may change the criteria at any
time. The effective date of any such change shall be determined by the Chief
Executive Officer.
2.06 REMOVAL FROM PARTICIPATION.
The Chief Executive Officer may terminate a Participant's participation
for any reason. A Participant who is prospectively terminated from participating
in this Plan is ineligible to make Employee Deferrals or receive an allocation
of the Employer Discretionary Contributions and/or the Employer Bonus
Contributions.
ARTICLE III
EMPLOYEE DEFERRALS AND EMPLOYER CONTRIBUTIONS
3.01 EMPLOYEE DEFERRALS.
A Participant may defer a portion of his or her annual Base Salary and/or
Annual Incentive Compensation which would otherwise be earned and payable for
each Plan Year by executing a Deferred Compensation Election Form. The minimum
Employee Deferral is five thousand dollars ($5,000) (two thousand ($2,000) in
the 1998 Plan Year) and the maximum Employee Deferral is one hundred percent
(100%) of the Participant's Base Salary and Annual Incentive Compensation.
Notwithstanding the foregoing, a Participant may not defer any portion of his or
her Annual Incentive Compensation earning during 1998. No deferral election
shall reduce a Participant's compensation below the amount necessary to satisfy
the following obligations: applicable employment taxes (e.g., FICA/Medicare) on
amounts deferred; withholding requirements of an employer-sponsored benefit
plan; or income tax withholding for compensation that cannot be deferred.
-5-
<PAGE> 10
A. BASE SALARY DEFERRAL.
(1) Submission of Deferred Compensation Election Form.
(a) Each employee who is eligible to participate in the
Plan as of the Plan's Effective Date and who wishes to defer a portion of his or
her Base Salary must submit a Deferred Compensation Election Form to the
Committee prior to the Plan's Effective Date. Any employee who becomes eligible
to participate in the Plan on or after the Effective Date may defer a portion of
his or her Base Salary earned in the initial Plan Year of eligibility by
submitting a Deferred Compensation Election Form with the Committee within
thirty (30) days of the date the employee becomes eligible to participate. The
Deferred Compensation Election Form shall apply only to Base Salary earned after
the election is made. Elections for subsequent Plan Years are governed by
subparagraphs (b) and (c).
(b) If a Participant completes a Deferred Compensation
Election Form and elects to contribute a portion of his or her Base Salary t
the Plan, the election (with respect to Base Salary only) shall remain in effect
until it is modified or terminated in accordance with Section 3.01A (1)(c). If a
Participant does not complete a Deferred Compensation Election Form, a
Participant can make an election effective as of the first day of any subsequent
Plan Year by completing a Deferred Compensation Election Form by the preceding
December 1st.
(c) An election under Section 3.01A may be modified or
terminated, effective as of the first day of any Plan Year by filing a new
Deferred Compensation Election Form by the preceding December 1st.
(2) Deferral Period. The Deferred Compensation Election Form will
establish the deferral period for the Base Salary. The deferral period shall
begin on the first day that a Participant defers his or her Base Salary and
shall end on the earlier of a Participant's termination of employment or the
scheduled in-service withdrawal date specified on the Deferred Compensation
Election Form. Any scheduled in-service withdrawal dates shall be a minimum of
two (2) years from the end of the Plan Year for which the deferral election is
made. A Participant may designate different deferral periods for the Base Salary
contributed in each different Plan Year by filing a separate Deferred
Compensation Election Form each Plan Year.
B. ANNUAL INCENTIVE COMPENSATION DEFERRAL.
(1) Submission of Deferral Election Form.
(a) Each employee who is eligible to participate in the
Plan as of the Plan's Effective Date cannot defer a portion of his or her 1998
Annual Incentive Compensation. Any employee who becomes eligible to participate
in the Plan on or after the Effective Date may defer a portion of his or her
Annual Incentive Compensation earned in the initial Plan Year of eligibility by
submitting a Deferred Compensation Election Form with the Committee within
thirty
-6-
<PAGE> 11
(30) days of the date the employee becomes eligible to participate. Elections
for subsequent Plan Years are governed by subparagraph (b).
(b) The Deferred Compensation Election Form with respect
to Annual Incentive Compensation is effective for one Plan Year only. A
Participant must file a new Deferred Compensation Election Form by June 30th of
each Plan Year in order to defer the Annual Incentive Compensation earned during
the Plan Year.
(2) Deferral Period. The Deferred Compensation Election Form will
establish the deferral period for the Annual Incentive Compensation. The
deferral period shall begin on the first day that a Participant defers his or
her Annual Incentive Compensation and shall end on the earlier of a
Participant's termination of employment or the scheduled in-service withdrawal
date specified on the Deferred Compensation Election Form. Any such scheduled
in-service withdrawal dates shall be a minimum of two (2) years from the end of
the Plan Year in which the deferral period started.
(3) Mode of Contribution. The Company, in its sole and
absolute discretion, shall determine whether any Annual Incentive Compensation
which is paid in stock can be deferred under this Plan. In the event the Company
decides to allow stock to be deferred under this Plan, it will comply with the
various federal securities law disclosure requirements and make any necessary
amendments to the Plan or related Trust documents.
3.02 EMPLOYER CONTRIBUTIONS.
The Employer, in its sole and absolute discretion, may make contributions
to the Plan. The Employer shall determine the amount of the contribution, the
type of the contribution, whether the contribution will be made in cash or
stock, the Participants who are eligible to share in the contribution and the
allocation among the Participants.
A. EMPLOYER DISCRETIONARY CONTRIBUTIONS.
The Employer may make discretionary contributions to the Plan at any
time. The contributions will be based on individual or overall corporate
performance and will be subject to the vesting schedule set forth in Section
5.02.
B. EMPLOYER BONUS CONTRIBUTION.
The Board, in its sole and absolute discretion, may award bonuses to
Participants. Any such cash bonuses awarded to a Participant must be deferred
under this Plan.
-7-
<PAGE> 12
ARTICLE IV
INVESTMENT OF DEFERRAL ACCOUNT
4.01 PARTICIPANT ELECTION.
The Committee may (but is not required to) invest the funds reflected in
the Deferred Compensation Account of a Participant in accordance with the
Participant's direction. The Participant may elect to have a specified
percentage deemed invested in one or more investment fund(s) provided that the
specified percentage is in whole numbers and the sum of the percentages
allocated does not exceed one hundred percent (100%). The Participant agrees on
behalf of the Participant and his or her Beneficiary to assume all risks in
connection with any decrease in the value of funds which are invested or which
continue to be invested in accordance with the provisions of the Plan.
4.02 CHANGE OF INVESTMENT ELECTION.
Subject to any restrictions imposed by the underlying investment, a
Participant may transfer all or a portion of his or her Deferred Compensation
Account among the allowable Plan investments by providing the Committee with
such completed forms as the Committee may require. Any such election shall be
effective as soon as administratively feasible after receipt of such completed
forms and in accordance with any rules set forth by the Committee.
4.03 INVESTMENT OPTIONS.
The funds credited to the Deferred Compensation Account may be kept in
cash or invested and reinvested in mutual funds, stocks, bonds, securities,
insurance contracts, or any other assets as may be selected by the Committee.
The Company may add, delete or otherwise alter the investments allowed under
this Plan at any time without the necessity of a Plan amendment.
4.04 INVESTMENT EARNINGS.
Earnings on a Participant's Deferred Compensation Account are credited
monthly as of the last day of the month. Such earnings are determined by
multiplying the prior month's Deferred Compensation Account plus Deferrals
during the current month commencing on the date they are credited in accordance
with Section 6.01 by the net investment return in such Account for the month.
-8-
<PAGE> 13
ARTICLE V
VESTING AND FORFEITURE OF BENEFITS
5.01 EMPLOYEE DEFERRALS AND EMPLOYER BONUS CONTRIBUTIONS.
Each Participant will be immediately 100% vested in the amounts in his or
her Deferred Compensation Account attributable to the deferrals of his or her
Base Salary, Annual Incentive Compensation and the Employer Bonus Contributions.
5.02 EMPLOYER DISCRETIONARY CONTRIBUTIONS.
A Participant will become 100% vested in any Employer Discretionary
Contribution in accordance with the following schedule as long as the
Participant remains employed by the Employer.
YEAR VESTED PERCENTAGE
Prior to the end of the Plan Year 0%
following the Plan Year of the Award
December 31st of the first Plan Year 33 alpha %
following the Plan Year of the Award
December 31st of the second Plan Year 66 beta %
following the Plan Year of the Award
December 31st of the third Plan Year 1 100%
following the Plan Year of the Award
The Employer Discretionary Contribution made for each different Plan Year will
be subject to a separate vesting schedule. A Participant must be employed by an
Employer on December 31st of the third Plan Year following the date of the
Employer Discretionary Contribution in order to become 100% vested in that
Employer Discretionary Contribution. The Company reserves the right to modify
this vesting schedule at any time. Notwithstanding the foregoing, any
Participant who is employed on the date of a Change in Control shall
automatically become 100% vested in the amount in his or her Employer
Discretionary Contribution Account.
5.03 FORFEITURE OF EMPLOYER DISCRETIONARY CONTRIBUTION.
If a Participant terminates employment prior to becoming 100% vested in
the Employer Discretionary Contributions, any non-vested amounts shall be
immediately forfeited. The forfeited
-9-
<PAGE> 14
amounts shall remain in the Rabbi Trust and be used to offset Plan expenses or
used as an Employer Contribution in future PlanYears, subject to Section 6.05.
ARTICLE VI
DEFERRED COMPENSATION ACCOUNTS
------------------------------
6.01 DEFERRED COMPENSATION ACCOUNTS.
The Committee shall establish and maintain a Deferred Compensation
Account for each Participant under the Plan. Deferrals contributed by a
Participant after the Company establishes a Rabbi Trust shall be credited to a
Participant's Deferred Compensation Account five (5) business days after they
are deducted from the Participant's compensation. Deferrals contributed by a
Participant before the investment insurance policies are approved and issued by
insurance companies will earn money market interest. Each Participant's Deferred
Compensation Account may be further divided into separate subaccounts, as
necessary to reflect separate investment options, vesting schedules and/or
distribution dates.
6.02 QUARTERLY BENEFIT STATEMENTS.
The Committee shall advise each Participant of his or her Deferred
Compensation Account after the end of each calendar quarter.
6.03 TITLE TO ASSETS.
Title to and beneficial ownership of any assets which the Employer has
designated to pay the deferred compensation benefits hereunder shall at all
times be subject to the general creditors of the Employer, and a Participant
shall have no property rights in those assets.
6.04 UNFUNDED ARRANGEMENT.
In conjunction with the establishment of this Plan, the Company may
establish a Rabbi Trust in respect of its obligations under the Plan. To the
extent that a Participant or Beneficiary acquires a right to receive benefits
under this Plan, such right, while undischarged, shall be no greater than the
right of any unsecured general creditor of the Employer.
6.05 RETURN OR DIVERSION OF ASSETS.
Except as permitted by the terms of the Trust Agreement, the Company has
no right to direct the Trustee to return or divert trust assets before payment
of all Plan benefits to all Participants or Beneficiaries except if necessary to
discharge the claims of creditors.
6.06 ANNUAL EXPENSES.
-10-
<PAGE> 15
The Employer intends initially to be responsible for paying the annual
expenses of operating this Plan which will include, but not be limited to,
funding the Plan benefits, the administrative fees, separately stated fees for
investment allocations and fees based on the amount of assets in the Plan. The
Employer reserves the right, however, to pass along to Participants all or part
of such fees.
ARTICLE VII
BENEFIT DISTRIBUTIONS
7.01 IN GENERAL.
A Participant who is eligible to receive benefits under the Plan, unless
they are forfeited in accordance with Article V, may have the obligation
satisfied by the assets of a Rabbi Trust. The terms and conditions of such
benefit payments are set forth in this Article.
7.02 TERMINATION OF EMPLOYMENT.
If a Participant's employment terminates (for any reason), the
Participant is entitled to receive a distribution of the vested benefits in his
or her Deferred Compensation Account. Distributions that are made as a result of
a Participant's termination of employment will commence as soon as
administratively feasible after the end of the calendar quarter containing the
termination date.
A. DISTRIBUTION OPTIONS.
Subject to Section 7.02B, a Participant can elect the payout
method on the Deferred Compensation Election Form when amounts are initially
contributed to the Plan. A Participant can change the elected payout method by
completing a new Deferred Compensation Election Form at least one year in
advance of the distribution date.
(1) Normal Form. The normal form of distribution is forty (40)
quarterly installments.
(2) Optional Forms. Participants may elect to receive their
distribution of benefits in one (1) lump sum payment or in twenty (20) or sixty
(60) quarterly installments.
B. DISTRIBUTION OF SMALL BENEFITS.
If the Participant's vested Deferred Compensation Account is
twenty-five thousand dollars ($25,000) or less, a distribution shall be made in
the form of a lump-sum payment.
7.03 IN-SERVICE WITHDRAWALS.
-11-
<PAGE> 16
FIRST AMENDMENT
TO THE
e.spire COMMUNICATIONS, INC.
NONQUALIFIED DEFERRED COMPENSATION PLAN
- --------------------------------------------------------------------------------
Pursuant to the rights reserved in Section 10.05 of the e.spire
Communications, Inc. Nonqualified Deferred Compensation Plan, heretofore
effective as of October 1, 1998, the Plan is hereby amended, effective as of
October 1, 1998 as follows:
1. Section 3.01B(3) is deleted and replaced with the following:
(3) Mode of Contribution. The Company, in its sole and
absolute discretion, shall determine whether any Annual Incentive
Compensation which is paid in stock can be deferred under this
Plan. In the event the Company decides to allow stock to be
deferred under this Plan, it will comply with the various federal
securities law disclosure requirements and make any necessary
amendments to the Plan or related Trust documents.
2. Section 7.03(A)(i) is amended by the addition of the phrase Aas
amended~ to the end of the last sentence.
3. Section 7.04A(2)(b) is deleted and replaced with the following:
(b) Deferral of Annual Incentive Compensation Only. If a
Participant elects to defer Annual Incentive Compensation only
during his or her initial twelve months of Plan participation
(whether or not such election occurs during more than one Plan
Year), such Participant=s death benefit during the first twelve
months of Plan Participation shall be $0. At the end of the
initial twelve month period, the amount of the Participant=s
deferral of Annual Incentive Compensation shall be aggregated and
multiplied by fifteen, which amount shall constitute the
Participant=s death benefit for the remainder of his or her
participation in this Plan, except as set forth in the next
sentence. If the Participant=s initial twelve months of
participation spans more than one Plan Year or if the Participant
will not earn any Annual Incentive Compensation during his or her
initial twelve months of Plan participation, the life insurance
benefit will be based on the Annual Incentive Compensation earned
in the Plan Year which starts after the date the employee becomes
a Participant and the death benefit during that Plan Year shall be
$0. At the end of the
<PAGE> 17
subsequent Plan Year, the amount of the Participant=s deferral of
Annual Compensation shall be aggregated and multiplied by fifteen,
which amount shall constitute the Participant=s death benefit for
the remainder of his or her participation in this Plan.
IN WITNESS WHEREOF, the parties hereto have executed these presents this
___ day of November, 1998.
ATTEST: e.spire Communications, Inc.
______________________By: ______________________
<PAGE> 1
EXHIBIT 11
E.SPIRE COMMUNICATIONS, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (LOSS)
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the years ended
=========================== For the six
months ended For the
December 31, December 31, December 31, year ended
NET LOSS 1998 1997 1996 June 30,
1996
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1 Net Loss $(163,079) $(115,016) $ (34,917) $ (26,782)
2 Less: Preferred Stock Accretion 36,080 11,630 2,004 3,871
------------ ------------ ------------ ------------
3 Net Loss to Common Stockholders (199,159) (126,646) (36,921) (30,653)
4 Add: Convertible Preferred Dividends Saved 0 0 2,004 3,871
------------ ------------ ------------ ------------
5 Net Loss to Common Stockholders, Dilutive Basis $(199,159) $(126,646) $ (34,917) $ (26,782)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
AVERAGE SHARES OUTSTANDING
--------------------------
<S> <C> <C> <C> <C>
6 Weighted Average Number of
Common Shares Outstanding 44,751,690 27,233,642 6,733,759 6,185,459
7 Net additional shares assuming stock
options and warrants exercised and
proceeds used to purchase treasury stock 10,040,034 7,147,462 7,391,964 6,317,067
Additional shares assuming conversion
of preferred shares 0 0 17,377,275 17,377,275
------------ ------------ ------------ ------------
8 Weighted average number of common and
common equivalent shares outstanding 54,791,724 34,381,104 31,502,998 29,879,801
============ ============ ============ ============
PER SHARE AMOUNTS
-----------------
9 Basic Earnings per Share (3/6) $ (4.45) $ (4.65) $ (5.48) $ (4.96)
============ ============ ============ ============
10 Diluted Earnings per Share -
Antidilutive (5/8) $ (3.63) $ (3.68) $ (1.11) $ (0.90)
============ ============ ============ ============
</TABLE>
<PAGE> 1
Exhibit 23.1
ACCOUNTANTS' CONSENT WITH REPORT ON SCHEDULE
The Board of Directors
e.spire Communications, Inc.:
The audits referred to in our report dated February 16, 1999, except for note 2
which is as of February 26, 1999, included the related financial statement
schedule for the year ended June 30, 1996, the six months ended December 31,
1996 and the years ended December 31, 1997 and 1998, included in the December
31, 1998 annual report on Form 10-K of e.spire Communications, Inc. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to incorporation by reference in the registration statements (No.
333-35925, No. 333-40037, No. 333-41653 and No. 333-47155) on Form S-3, (No.
33-99964, No. 333-19089, No. 333-43069, No. 333-47869, No. 333-51511, No.
333-58457, No. 333-60003 and No. 333-71387) on Form S-8 and (No. 333-64079) on
Form S-4 of e.spire Communications, Inc. of our report dated February 16, 1999,
except for note 2 which is as of February 26, 1999, relating to the consolidated
balance sheets of e.spire Communications and subsidiaries as of December 31,
1997, and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the year ended June 30, 1996,
the six months ended December 31, 1996, and the years ended December 31, 1997
and 1998, which report appears in the December 31, 1998 annual report on Form
10-K of e.spire Communications, Inc.
/s/ KPMG LLP
Washington, D.C.
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM e.spire
COMMUNICATIONS, INC. FORM 10-K FOR THE TWELVE MONTHS ENDED 12/31/98 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 359,527
<SECURITIES> 0
<RECEIVABLES> 59,928
<ALLOWANCES> (5,581)
<INVENTORY> 8,742
<CURRENT-ASSETS> 422,616
<PP&E> 561,954
<DEPRECIATION> (76,020)
<TOTAL-ASSETS> 982,957
<CURRENT-LIABILITIES> 96,882
<BONDS> 723,105
0
241,044
<COMMON> 484
<OTHER-SE> (102,218)
<TOTAL-LIABILITY-AND-EQUITY> 982,957
<SALES> 0
<TOTAL-REVENUES> 156,759
<CGS> 106,813
<TOTAL-COSTS> 160,899
<OTHER-EXPENSES> (23,348)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75,474
<INCOME-PRETAX> (163,079)
<INCOME-TAX> 0
<INCOME-CONTINUING> (163,079)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (163,079)
<EPS-PRIMARY> (4.45)
<EPS-DILUTED> (4.45)
</TABLE>
<PAGE> 1
<TABLE>
<CAPTION>
EXHIBIT 99.1
e.spire COMMUNICATIONS, INC.
SUPPLEMENTAL FINANCIAL INFORMATION
YEAR ENDED - DECEMBER 31, 1998
($'S IN THOUSANDS)
Networks Placed Networks Placed Networks Placed Networks Placed
in Service in Service in Service in Service
Prior to 12/31/95 During 1996 During 1997 During 1998
--------------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Property, Plant & Equipment $ 172,853 $ 123,051 $ 156,765 $ 32,237
Revenues $ 49,409 $ 28,300 $ 27,993 $ 3,849
EBITDA $ (3,119) $ (6,590) $ (13,818) $ (6,420)
EBIT $ (12,212) $ (13,651) $ (12,226) $ (6,907)
Network Statistics (cumulative)
Access Lines Installed 40,672 22,683 55,166 8,958
Fiber Miles 44,153 38,810 46,565 20,697
Route Miles 730 442 401 140
Buildings Connected 1,474 612 797 9
Voice Grade Equivalents 592,944 351,448 277,842 1,633
</TABLE>
