SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NO. 0 - 26728
Tel-Save Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2827736
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6805 Route 202
New Hope, Pennsylvania 18938
(215) 862-1500
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all
documents and 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 is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant as of March 13, 1997 was approximately $681,467,000 based on the
average of the high and low prices of the
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Common Stock on March 13, 1997 of $17.19 per share as reported on the Nasdaq
National Market.
As of March 13, 1997, the Registrant had outstanding 62,887,998 shares
of its Common Stock, par value $.01 per share.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Tel-Save Holdings, Inc. definitive proxy statement for
the 1997 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Form 10-K.
TEL-SAVE HOLDINGS, INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
ITEM PAGE
NO. NO.
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Part I
1 Business.............................................. 1
2 Properties............................................ 27
3 Legal Proceedings..................................... 27
4 Submission of Matters to a Vote of Security Holders... 27
Part II
5 Market for the Registrant's Common Equity and
Related Stockholder Matters........................... 29
6 Selected Financial Data............................... 30
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 31
8 Financial Statements and Supplementary Data........... 39
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 57
Part III
10 Directors and Executive Officers of the Registrant.... 57
11 Executive Compensation................................ 57
12 Security Ownership of Certain Beneficial Owners
and Management........................................ 57
13 Certain Relationships and Related Transactions........ 57
Part IV
14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................... 58
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PART I
ITEM 1. BUSINESS
For the definition of certain terms used in this Form 10-K, see
"Glossary."
OVERVIEW
Tel-Save Holdings, Inc. ("Company") provides long distance services
primarily to small and medium-sized businesses located throughout the United
States. The Company's long distance service offerings include outbound service;
inbound toll-free 800 service; and dedicated private line services for data.
Prior to the fourth quarter of 1996, the Company operated solely as a
switchless, nonfacilities-based reseller of AT&T long distance services. By
purchasing large usage volumes from AT&T pursuant to contract tariffs, the
Company has been able to procure substantial discounts and offer low cost, high
quality long distance services to its customers at rates generally more
favorable than those offered directly by AT&T.
In order to reduce its dependence on AT&T contract tariffs and increase
its growth opportunities, the Company in 1996 deployed its own nationwide
telecommunications network, One Better Net ("OBN"). OBN features five
Company-owned, AT&T (now Lucent Technologies, Inc. hereinafter "Lucent")
manufactured 5ESS-2000 switches connected with AT&T digital transmission
facilities. OBN's reduced cost structure allows the Company to offer rates
competitive with those of non-AT&T resellers while continuing to provide the
quality of AT&T (now Lucent) manufactured switches and AT&T-provided
transmission facilities and billing services. OBN allows the Company to pursue
the non-AT&T based switchless resale market, which represents the majority of
the switchless resale long distance market.
The Company's strategy for expanding its business is to market services
directly to business and residential end users, to continue to support existing
partitions and to attract additional partitions (including those now in the
non-AT&T resale market). The Company intends to attract new partitions and
support existing partitions by, among other things, continuing its current
practice of offering advances to new partitions to enable such partitions to pay
outstanding balances due to their existing long distance providers in order for
such partitions to transfer their end users to the Company's service, and to
existing partitions to support their marketing efforts. The Company also intends
to approach residential customers through its telemarketing operations as well
as new marketing and advertising media, such as the Company's recently announced
arrangement with America Online, Inc. ("AOL") pursuant to
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which the Company will be the exclusive provider of long distance
telecommunications services to AOL subscribers.
Tel-Save, Inc., the Company's predecessor ("Predecessor Corporation")
and now its operating subsidiary, was incorporated in Pennsylvania in May 1989.
The Company was incorporated in Delaware in June 1995. The address of the
Company's principal executive offices is 6805 Route 202, New Hope, Pennsylvania
18938, and its telephone number is (215) 862-1500. Unless the context otherwise
requires, "Company" includes the Predecessor Corporation and the Company's other
subsidiaries.
DEVELOPMENT OF THE COMPANY
The Company, originally incorporated in 1989 as Tel-Save, Inc., was
formed to capitalize on the FCC mandate allowing the resale of AT&T services.
The Company initially marketed AT&T's multi-location calling plan ("MLCP"),
which provided incremental discounts earned by inclusion of the usage volume of
diverse end user locations under a single service plan. The Company was
successful in marketing MLCP, but realized that there were significant barriers
to growth associated with the product, primarily the lack of reporting from
AT&T, product inflexibility and the lack of control over end user accounts.
In late 1989, the Company successfully obtained an additional AT&T
service plan developed by AT&T and marketed as Software Defined Network Service
("SDN"), an AT&T product designed for larger business customers. SDN provided
the Company with higher margins, network controls, advanced features and the
ability to rebill its end users through AT&T and AT&T's College and University
Systems ("ACUS"), thus enabling the Company to have more control over the end
user account. As a result of SDN, the Company began to offer services on a
wholesale basis through partitions. The Company thereby outsourced its marketing
and end user service expenses to partitions, allowing it to focus on managing
the AT&T relationship and to further develop its billing and information
systems.
In December 1992, the Company obtained the first contract tariff
created by AT&T specifically for the Company. The contract tariff provided the
Company with significant additional price advantages at stabilized rates and the
ability to absorb the traffic of competitors' plans into the contract tariff.
The Company subsequently obtained other contract tariffs, which also provide
AT&T inbound 800 services and AT&T private line services, in order to diversify
its service offerings. This in turn has further enabled the Company to increase
the number of its partitions and end users.
To date, the Company has primarily operated as a "switchless" and
nonfacilities-based provider of long distance services by reselling AT&T
services. The Company offers its partitions and end
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users nationwide access to AT&T long distance network services through contract
tariffs, including outbound long distance, 800 service and private line service.
Outbound long distance service accommodates voice, data and video transmissions.
The Company's 800 service is currently provided by reselling AT&T's 800 Service
(Readyline, Megacom 800, etc.), which is AT&T's inbound, toll-free (recipient of
the call pays the charges) long distance service. The Company's private line
service is currently provided by reselling AT&T Private Line Service, which
includes dedicated transmission lines connecting pairs of sites.
The Company successfully established its position as a switchless
reseller of AT&T long distance services as a result of its ability to negotiate
with and obtain favorable contract tariffs from AT&T, manage and distribute
data, bill accurately and provide partition support. Contract tariff
subscriptions do not impose restrictions on the rates the Company may charge its
partitions and end users. By purchasing large usage volumes from AT&T pursuant
to such contract tariffs, the Company is able to procure substantial volume
discounts and offer long distance services to its partitions and end users at
rates generally more favorable than those offered directly by AT&T. With its
information systems, the Company is able to manage and distribute to partitions
information such as data about end user usage and payment history.
Prior to 1995, substantially all of the Company's services consisted of
reselling AT&T outbound or SDN long distance services. In 1994, the Company
began to offer 800 services, which accounted for 30.9% of 1995 sales, and
private line service, which accounted for 10.2% of 1995 sales. The Company's 800
services and private line service accounted for 32.4% and 7.9%, respectively, of
1996 sales.
In order to reduce its dependence on the AT&T contract tariffs and
increase its growth opportunities, the Company began to develop its own network,
OBN, in late 1995. In 1996, the Company deployed five 5ESS-2000 switches in
Chicago, Dallas, Jacksonville, New York and San Francisco and installed new 5E11
software. The Company began testing new customer calls over its network in the
third quarter of 1996. In the fourth quarter of 1996, the Company began
provisioning on a test basis new customer orders on OBN. To date, the Company
has provisioned approximately 50,000 end users to OBN. OBN enables the Company
to offer its end users and partitions more competitive rates than in the past
and to improve customer provisioning, as well as to improve reporting to
existing and new partitions. Currently the Company is continuing to provision
new customers on OBN while completing the final testing of OBN. The Company
expects final testing of OBN to be completed in April 1997, and at that time
there will be a general release of OBN. Thereafter, the Company expects to
provision a large majority of its new customer orders on OBN.
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STRATEGY
The Company has historically expanded its business primarily through
the addition of partitions and by providing new and existing partitions with
operational, financing, marketing and management support. The Company's strategy
for future business growth is to market its services directly to business end
users, broaden the Company's target market to include residential customers,
continue to support existing partitions, attract additional partitions and
introduce new services.
Increase Direct Marketing Efforts. By marketing its services directly
to end users, the Company expects to increase its profit margins by
taking advantage of the difference between the reduced costs of
offering services on OBN and the rates charged directly to end users.
Broaden Target Market to Include Residential Customers. The Company
intends to expand its service offerings to attract the residential
segment of the long distance market. New services may include new
features relating to customers reporting and billing as well as
improved rates. The Company will use direct marketing and new
marketing and advertising media, such as online services, to attract
the end users in this customer segment. Recently, the Company
announced its arrangement with AOL pursuant to which the Company will
be the exclusive provider of long distance telecommunications services
to AOL's subscribers. See "SALES AND MARKETING -- Residential."
Provide Operational, Financing, Marketing and Management Support to
Partitions. The Company will continue to sell its services through
partitions. To do so, the Company will continue to provide existing
and new partitions with low rates and operational, marketing and
management support. The operational, marketing and management support
includes financing, training in customer service and use of the data
base, collection services, lists of prospective end users and a
business management system designed and developed by the Company
exclusively for its use and its partitions' use.
The Company's basic strategy for business growth is based on the
deployment of OBN. OBN is expected to lower the Company's costs, to maintain its
access to AT&T services and AT&T (now Lucent) equipment, to improve provisioning
of new accounts, and to provide a network that can be expanded to add new
products and services.
Provide Low Cost, High Quality Alternative to Other Carriers. The
Company's deployment of OBN will reduce its costs and allow it to offer
pricing to its partitions and end users competitive with or below that
typically offered by major long distance carriers and their resellers.
OBN's cost structure is expected
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to allow the Company to expand its target market beyond the current
AT&T resale market to include the balance of the switchless long
distance market (i.e., the non-AT&T long distance resale market), which
currently represents the majority of the long distance resale market.
The Company also intends to market to AT&T's end users, as well as
other end users including residential and larger commercial accounts.
Emphasize Quality and Functionality of AT&T (now Lucent) Manufactured
Switches, and AT&T-Provided Transmission Facilities and Billing. The
Company offers products and services on OBN similar to those that it
offers as a switchless reseller of AT&T services. OBN has been built
using AT&T (now Lucent) manufactured switches in conjunction with
leased AT&T transmission facilities. The 5ESS-2000 switch is generally
considered the most reliable switch in the telecommunications industry.
In addition to offering services using AT&T as the underlying
facilities-based carrier, the Company will continue to use the billing
services of AT&T and ACUS.
Improve Provisioning of End User Accounts. OBN allows the Company to
establish service directly for or activate end user accounts. The
Company will provide new end user account data directly to the local
exchange carrier ("LEC"), which will then change the end user account
to the service provided by the Company or its partition. This is
expected to increase the timeliness and the acceptance rate of the
establishment of service, or provisioning, and will allow lists of end
users to be maintained confidentially.
Expandable Network With Capability to Support New Products and
Services. The AT&T (now Lucent) 5ESS-2000 switches can be expanded to
increase capacity significantly and can at the same time accommodate
local, long distance, private line and wireless services. OBN thus
enables the Company to provide new products and services beyond those
currently possible as a switchless reseller.
The Company also intends to continue to explore strategic alliances
with other channels of distribution, partitions and nonfacilities-based and
other providers of long distance services.
SALES AND MARKETING
Partitions
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To date, the Company has primarily marketed its services to small and
medium-sized business end users (i.e., generally businesses with fewer than 200
employees) throughout the United States through independent long distance and
marketing companies known as "partitions." Partitions resell and market the
Company's products,
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allowing the Company to minimize its marketing and end user overhead. Partitions
offer end users a variety of services and rates. As compensation for their
services, partitions generally receive the difference between the amount
received by the Company from end users and the amount charged by the Company to
the partition for providing such services. One partition, The Furst Group, Inc.,
accounted for approximately 11% of the Company's sales in 1996; however, the
Company does not expect that any partition will account for 10% or more of the
Company's sales in 1997.
A substantial number of the Company's partitions have executed
partition agreements with the Company pursuant to which the Company agrees to
provide services utilizing the AT&T network service and end user billing
services at agreed upon prices or discounts. The Company requires that the
partitions adhere to certain Company established guidelines in marketing the
Company's services and comply with federal and state regulations. These
requirements include certain representations by each organization that it is
acting as an independent contractor with regard to the sale of the Company's
services, and not as a joint venture partner, agent or employee of the Company,
along with provisions for the proper completion of forms and other sales
procedures. In addition, most of the payments made by end users are paid
directly into a lock-box controlled by the Company. The Company's partition
agreements typically run for three years or for the term of the applicable
tariffs, whichever is less. The partitions generally make no minimum use or
revenue commitments to the Company under these agreements with respect to the
resale of AT&T services. The agreements also are generally non-exclusive. If the
Company were to lose access to services on the AT&T network or AT&T billing
services or experience difficulties with OBN, the Company's agreements with
partitions could be adversely affected.
The Company believes that the discounts it will be able to offer
partitions and end users using OBN, together with the functionality and quality
of OBN operating in conjunction with AT&T-provided transmission facilities and
the accuracy of billing services obtained from AT&T and ACUS, will enable it to
attract current and future partitions to OBN. The Company will continue its
policy of advancing funds to most partitions to support their marketing efforts.
Historically, partitions of the Company have continued to do business under
their partition agreements following changes in the Company's service offerings.
The Company intends to continue to promote increased marketing
activities of certain of its partitions through advances collateralized by
assets of such partitions. In return for providing such marketing advances, the
Company seeks long-term arrangements with such partitions. In 1996, the Company
entered into long term arrangements with several existing and new partitions.
Current marketing practices, including the methods and means to convert
a customer's long distance telephone service from one carrier to another, have
recently been subject to increased regulatory review at both the federal and
state levels. This increased regulatory
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review could affect possible future acquisition of new business from new
partitions or other resellers. Provisions in the Company's partition agreements
mandate compliance by the partitions with applicable state and federal
regulations. Because the Company's partitions are independent carriers and
marketing companies, the Company is unable to control such partitions'
activities. The Company is also unable to predict the extent of its partitions'
compliance with applicable regulations or the effect of such increased
regulatory review.
Direct Marketing
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The Company began to actively market its telecommunication services
directly to end users in 1996. Through its direct marketing efforts, the Company
expects to increase its profit margins by taking advantage of the difference
between the reduced costs of providing services over OBN and the rates charged
to end users. The Company began its direct marketing in the first quarter of
1996 with a telemarketing operation based in Clearwater, Florida. In December
1996, in connection with the settlement of certain disagreements among the
Company, American Business Alliance, Inc. ("ABA"), a switchless reseller of long
distance telecommunications services and a partition of the Company, and ABA's
shareholders, the Company acquired substantially all of ABA's assets and hired
substantially all of ABA's employees. These actions significantly increased the
Company's capabilities for direct marketing of telecommunication services. The
Company expects that in 1997 a large majority of the Company's new orders will
be generated from direct marketing. The Company currently has 260 employees
involved in its direct marketing operations. Direct marketing efforts have
focused initially on inbound and outbound services to small and medium-sized
businesses and may expand to include residential customers.
Operation of its own direct marketing will require the Company to incur
additional costs above levels historically experienced by the Company. There can
be no assurance that any cost savings will be realized utilizing direct
marketing. Direct marketing by the Company also may adversely affect the
Company's relationships with its partitions as both the Company and the
partitions will be competing to provide similar services. The Company is
required to comply with additional regulatory standards for direct marketing of
telecommunications services, and is subject to increased risk of customer
complaints or federal or state enforcement actions with respect to its marketing
and order verification practices. Actions have been brought against many
carriers based on allegations of "slamming" or the unauthorized conversion of a
customer's chosen long distance carrier.
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Residential
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On February 25, 1997, the Company announced that it had entered into a
Telecommunications Marketing Agreement (the "AOL Agreement"), dated as of
February 22, 1997 and effective as of February 25, 1997, with AOL, under which
the Company will be the exclusive provider of long-distance telecommunications
services under a distinctive brand name to be used exclusively for the Company's
services. The services will include provision for online sign-up, call detail
and reports and credit card payment. Under the AOL Agreement, AOL will provide
millions of dollars of online advertising and promotion of the services and
provide all of its subscribers with access to a dedicated service area online
for the Company. AOL subscribers who sign-up for the telecommunications services
will be customers of the Company, as the carrier providing such services. The
Company also has certain rights under the AOL Agreement to offer, on a
comparably exclusive basis, local and wireless telecommunications services when
such services become available to the Company through a contract for resale or
otherwise.
It is anticipated that the services will be tested in the early summer
and offered generally to AOL subscribers in the fall of 1997. The AOL Agreement
has an initial term of three years and can be extended by AOL on an annual basis
thereafter.
Under the AOL Agreement, the Company made an initial payment of $100
million to AOL at signing and agreed to provide marketing payments to AOL based
on a percentage of the Company's profits from the services (between 50% and 70%,
depending on the number of subscribers to the services). The AOL Agreement
provides that $43 million of the initial payment will be offset and recoverable
by the Company through reduction of such profit-based marketing payments during
the initial term of the AOL Agreement or, subject to certain monthly reductions
by offset of the amount thereof, directly by AOL upon certain earlier
terminations of the AOL Agreement. The $57 million balance of the initial
payment will be offset and is recoverable through a percentage of such
profit-based marketing payments made after the first five years of the AOL
Agreement (when extended beyond the initial term) and by offset against a
percentage of AOL's share of the profits from the services after termination or
expiration of the AOL Agreement. Any portion of the $43 million not previously
recovered or reduced in amount would be added to the $57 million and would be
recoverable similarly.
Also under the AOL Agreement, the Company issued to AOL at signing two
warrants to purchase shares of the Company's common stock at a premium over the
market value of such stock on the issuance date. One warrant is for 5 million
shares, at an exercise price of $15.50 per share, one-half of which shares will
vest at the time the service is first made generally available to AOL online
network subscribers in accordance with the AOL Agreement or the first
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anniversary of the warrant issuance, whichever is earlier, and the balance of
which will vest on the first anniversary of issuance if the AOL Agreement has
not terminated. The other warrant is for up to 7 million shares, at an exercise
price of $14.00 per share, which will vest, commencing December 31, 1997, based
on the number of subscribers to the services and would vest fully if there are
at least 3.5 million such subscribers at any one time. The Company also agreed
to issue to AOL an additional warrant to purchase 1 million shares of its common
stock, at market value at the time of issuance, upon each of the first two
annual extensions by AOL of the term of the AOL Agreement, which warrants also
will vest based on the number of subscribers to the services.
In connection with the AOL Agreement, the Company and AOL will jointly
develop the online marketing and advertising for the services. The Company will
provide online customer service as well as inbound calling customer service to
the AOL subscriber base in connection with the services. While the Company
expects to utilize its Clearwater, Florida facility to provide customer service
support to AOL subscribers, the Company may need to increase staffing and
purchase equipment to support this activity. The Company anticipates that it
will incur expenses for the start-up and development of the services
contemplated in the AOL Agreement during 1997, including expenses for the
expansion of the Clearwater operation, for software programming and for software
and hardware additions to the Company's network, OBN, to expand its capacity for
the traffic. The Company believes that the increased revenues to the Company
resulting from the AOL Agreement and the services offered pursuant thereto will
be limited in 1997, but could be significant in 1998, although there can be no
assurance that these results can be achieved in light of a number of
uncertainties, including the following: the Company's ability to timely develop
the online ordering, call detail, billing and customer services for the AOL
subscribers, which will require, among other things, being able to identify and
employ sufficient personnel qualified to provide necessary programming; the
Company's and AOL's ability to work effectively together to jointly develop the
online marketing contemplated by the AOL Agreement; the response rate to online
promotions of AOL's online subscribers, most of whom are expected to be
residential rather than businesses, which have historically been the Company's
customer base; the Company's ability to expand OBN to accommodate increased
traffic levels; and AOL's ability to successfully execute its publicly stated
business plan and implement its announced network changes to improve subscriber
access to its online service.
SERVICES
Partitions
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The Company offers operational, financing, marketing and management
support to partitions, which provides the partitions with
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the ability to operate and manage their businesses and attract and maintain end
users. Such support includes financial resources, low long distance rates,
collection services, prospective customer lists and a management information
system designed and developed by the Company exclusively for use by the Company
and its partitions ("Business Management System" or "BMS"). The Company offers
start-up financing as well as financing to its existing partitions and expects
to increase such financing in the future. The Company's Business Management
System provides a link between the Company's operations center and each
partition, including information relating to billing, collections, provisioning,
network usage and other end user information. The Company also compiles,
evaluates and distributes prospective customer lists.
Service on a long distance network is activated by a process called
provisioning. On a daily basis, through the Business Management System provided
by the Company, the Company's partitions transmit required end user information
to the Company. Orders for AT&T network services resold by the Company as a
switchless reseller are formatted by the Company in the manner required by AT&T
and transmitted to AT&T's information management system, where AT&T processes
the information and sends status updates on orders to the Company which, in
turn, reports such status to the partitions. Orders for OBN services are
processed and controlled by the Company. By controlling the provisioning process
with OBN, the Company believes it can increase acceptance rates of new end users
and reduce the time required to initiate service provided through the Company.
The Company promotes increased marketing activities by certain of its
partitions and attracts new partitions through advances. Such advances are made
in installments subject to the success of marketing efforts by the applicable
partition. As a condition to such advances, the Company generally requires a
partition to agree to utilize the Company's Business Management System, to
accept the Company's billing services and lock-box procedures pursuant to which
sales generated by a partition are paid directly to the Company's lock-box
account and to grant the Company a security interest in such sales. In return
for providing such marketing advances, the Company seeks long-term arrangements
with such partitions. The Company believes that such long-term arrangements
benefit the Company and its partitions as such arrangements foster increases in
the Company's end user base resulting in increases in minutes of traffic.
End Users
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The Company offers customer service to end users marketed by its
telemarketing operations as well as to end users of certain partitions. Customer
service representatives are located in the Company's facilities in Clearwater,
Florida and New Hope and
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Kingston, Pennsylvania. The Company plans to provide online customer service as
well as inbound calling customer service in connection with the services offered
to AOL subscribers.
INFORMATION AND BILLING SERVICES
The Company utilizes the billing services of AT&T and ACUS, a wholly
owned strategic business unit of AT&T. As a result, the Company's end users
benefit from the reliability and accuracy associated with AT&T billing. Detailed
call information on the usage of each end user is produced by AT&T (in the case
the of switchless resale business) and by the Company (in the case of OBN
business). In both cases, AT&T then processes the information and provides
billing information to the Company. ACUS bills the end users pursuant to a
custom billing format bearing the names of either the Company or the applicable
partition in the bill heading.
AT&T has removed the "AT&T" name from the heading of the bills,
although the text of the bills or bill inserts may still refer to the fact that
an AT&T unit provides billing services. AT&T could further obscure its role in
providing billing services altogether, which could have an adverse impact on the
Company. The Company is developing its own information systems in order to have
its own billing capacity, although the Company has not provided such direct
billing services to end users in the past.
BMS is provided to each partition. BMS resides at the partitions'
locations and communicates with the Network Management System ("NMS") located at
the Company's headquarters. NMS allows direct interface with the LECs and the
Company's network to perform functions historically handled by AT&T. These
computerized management systems control order processing, accounts receivable,
billing and status information in a streamlined fashion between the Company and
its partitions. Furthermore, when applicable, the systems interface with the
AT&T Provisioning System and ACUS for order processing and billing services,
respectively. Enhancements and additional features are provided as needed.
Electronic processing and feature activation are designed to maintain the
Company's goal of minimizing overhead.
The Company has developed its own new information systems through the
use of client/server technology. The Company purchased symmetrical
multi-processing ("SMP") hardware in conjunction with SQL Database software from
Informix Corporation. This system is now operational and has the capacity to
process the Company's current volume of information services and exceeds the
Company's needs for the foreseeable future, except with respect to the
information and billing systems that the Company will need to develop in
connection with the AOL Agreement, including online sign-up, call detail and
billing reports and credit card billing.
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The information functions of the system are designed to provide easy
access to all information about an end user, including volume and patterns of
use, which will help the Company and partitions identify value-added services
that might be well suited for that end user. The Company also expects to use
such information to identify emerging end user trends and respond with services
to meet end users' changing needs. Such information should also allow the
Company and its partitions to identify unusual or declining use by an individual
end user, which frequently indicates that an end user is switching its service
to a competitor.
In addition, in connection with the AOL Agreement, the Company will
need to develop systems for online sign-up, call detail and billing reports and
credit card payments. Any delay or difficulties in developing systems or hiring
personnel could adversely affect the timing of the implementation of this
service offering to AOL subscribers and, in turn, the success of this service
offering.
ONE BETTER NET
In order to reduce its dependence on AT&T contract tariffs and to
increase its growth opportunities, the Company developed its own
telecommunications network, OBN, which utilizes AT&T (now Lucent) manufactured
switches owned by the Company in conjunction with AT&T-provided lines and
digital cross-connect equipment (herein referred to as "transmission
facilities") and AT&T-provided billing systems that the Company uses pursuant to
agreements with AT&T and ACUS. OBN includes five AT&T (now Lucent) 5ESS-2000
switches, which are generally considered the most reliable switches in the
telecommunications industry. The Company was one of the first installation site
for AT&T's 5ESS-2000 switching equipment featuring the new Digital Networking
Unit -- SONET technology, a switching interface designed to increase the
reliability of the 5ESS-2000 and to provide much greater capacity in a
significantly smaller footprint. The five switches -- in Jacksonville, New York,
Chicago, Dallas and San Francisco -- were initially deployed with AT&T 5E10
software and were recently upgraded to 5E11 software, increasing the Company's
trunk capacity by approximately 33%.
OBN allows the Company to offer long distance services directly to its
end users and partitions throughout the continental United States at rates that
are competitive with or below those offered by the major long distance
providers. OBN also allows the Company to control provisioning of end user
accounts.
The Company's current contract tariffs under which it resells AT&T
services require the Company to pay one all-inclusive "bundled" charge to AT&T
for the delivery of services, including switching and transmission services and
the payment of LEC access fees. As a result of the deployment of OBN, the
Company will pay "unbundled" charges consisting of charges paid directly to the
LECs for access
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charges and, under AT&T contract tariffs, charges paid to AT&T for use of its
network transmission facilities. The Company will pay AT&T "bundled" charges for
use of its international facilities to handle the international portion of a
call on OBN. The total cost per call to the Company for the LEC access fees, the
charges for use of AT&T's transmission facilities and the overhead cost for
calls using OBN is expected to be less than the "bundled" charge currently paid
under AT&T contract tariffs. LEC access fees represent a substantial portion of
the total cost of providing long distance services. As a result of the
Telecommunications Act, it is generally expected that the entry over time of
competitors into LEC markets will result in lowering of access fees, but there
is no assurance that this will occur. To the extent it does occur, the Company,
by using OBN, will receive the benefit of any future reduction in LEC access
fees, which it would not automatically receive under contract tariffs.
In October 1996, the Company subscribed to a new AT&T contract tariff,
which permits the Company to continue to resell through mid- 1998 AT&T long
distance services, including AT&T SDN service and other services, at rates which
are more favorable to the Company than prior tariffs. As a result, the Company
decided only to provision new end users on OBN and to leave existing end users
on AT&T service. The new AT&T contract has enabled the Company to earn higher
margins on existing traffic, minimize possible attrition that might result from
moving existing end users from the AT&T network to OBN. This has permitted a
more gradual introduction of OBN, which has reduced the expense of providing the
capacity required in a more rapid phase-in of OBN and lessened the impact of any
technical difficulties during the phase-in of OBN.
In 1997, the Company will continue to offer private line service
through contract tariffs with AT&T. Although the Company will continue to
provide such private line service through AT&T, the Company also will begin to
offer private line service using OBN to new and existing customers.
In order for the Company to provide service over OBN, the Company has
installed and operates, and is responsible for the maintenance of, its own
switching equipment. The Company also has installed lines to connect its OBN
switches to LEC switches and is responsible for maintaining these lines. The
Company entered into a contract with GTE with respect to the monitoring,
servicing and maintenance of the switching equipment purchased from AT&T. There
can be no assurance that the Company will be successful in operating as a
switch-based carrier. Additional management personnel and information systems
are required to support OBN, the costs of which have increased the Company's
overhead. Moreover, operation as a switch-based provider subjects the Company to
risk of significant interruption in the provision of services on OBN in the
event of
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damage to the Company's facilities (switching equipment or connections to AT&T
transmission facilities) such as could be caused by fire or natural disaster.
Such interruption could have a material adverse impact on the Company's
financial condition and results of operations.
The Company began testing new customer calls over OBN in the third
quarter of 1996. In the fourth quarter of 1996, the Company began provisioning
on a test basis new customer orders on OBN. To date, the Company has provisioned
approximately 50,000 end users to OBN. Currently the Company is continuing to
provision new customers on OBN while completing the final testing of OBN. The
Company expects final testing of OBN to be completed in April 1997, and at that
time there will be a general release of OBN. Thereafter, the Company expects to
provision a large majority of its new customer orders on OBN.
The 5ESS-2000 switches make it possible for the Company in the future
to offer a number of additional or enhanced services. For example, the Company's
5ESS-2000 switches could support the offering of Centrex features, such as call
waiting, conference calling, distinctive ringing and least cost routing, that
traditionally were available only to end users with their own equipment or
through purchase from the end users' local exchange carrier ("LEC"). The
5ESS-2000 switches could support Advanced Intelligent Network ("AIN"), which
provides an open network architecture allowing for interconnections of
inexpensive peripheral equipment and databases and the deployment of such
services as calling cards, debit cards, voice recognition and caller
identification, without the involvement of switch manufacturers. The 5ESS-2000
switches could help the Company to provide competitive telecommunications
services to tenants of multi-tenant office and residential buildings and
complexes. The 5ESS-2000 switch also has the capacity to direct local service as
well as long distance service.
AT&T CONTRACT TARIFFS
The Company historically has obtained services from AT&T through
contract tariffs and has been able to obtain the services it seeks and to do so
at increasingly favorable contract tariff rates. The deployment of OBN decreases
the Company's dependence on AT&T contract tariffs. To the extent the Company
will need future contract tariffs, there is no guarantee the Company will be
able to obtain favorable contract tariffs, although the Company has been
successful in the past in obtaining such contract tariffs.
On October 1996, the Company subscribed to a new AT&T contract tariff,
which was further revised in December 1996 and permits the Company to continue
to resell AT&T long distance services, including AT&T-SDN service, through
mid-1998. The new AT&T contract tariff also includes other AT&T services (such
as international long
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distance, inbound and outbound services) that will be used in the Company's new
nationwide telecommunications network, OBN. The rates that the Company will pay
under the new AT&T contract tariff are more favorable to the Company than under
previous tariffs. During its term, the new AT&T contract tariff will enable the
Company to minimize possible attrition that might result from moving exiting end
users from the AT&T network to OBN. The new AT&T contract tariff also permits a
more gradual introduction of OBN, which should reduce the expense of providing
the capacity required in a more rapid phase-in of OBN and lessen the impact of
any technical difficulties during the phase-in of OBN. The more gradual
introduction of OBN, however, will postpone the Company's realization of the
anticipated benefit of the more favorable margins for OBN service, and the new
AT&T contract tariff requires the Company to commit to purchase $300 million of
service from AT&T over the next 4 years, including at least $1 million per month
of international service. If minimum usage requirements are not met, the Company
is obligated to pay shortfall fees to AT&T based on a percentage of the
difference between the minimum requirement and the actual billed usage. In
addition, if the contract tariffs with AT&T are terminated prior to the end of
the contract tariff term, either by the Company or by AT&T for non-payment, the
Company may be liable for "termination with liability" or "termination charges"
and subject to material monetary penalties. This commitment is larger than any
previous commitment that the Company has made, but the Company believes that it
can be met based on its current purchases of long distance service from AT&T
which are in execess of $10 million per month. Further the Company can terminate
the new contract tariff without liability to AT&T at the end of 18 months if the
Company has generated at least $120 million in usage charges, including at least
$15 million in international usage charges. The Company also may discontinue the
new contract tariff without liability prior to the 18th month if the Company and
AT&T enter into a new contract tariff or another contract with a revenue
commitment of at least $7.5 million per month and a term of at least the
difference between 18 months and the number of months that the Company
subscribed to the contract tariff, provided that the Company must purchase or
pay for AT&T services under the contract tariff of at least $6.7 million per
month for the months prior to such termination, including $1 million per month
of international usage.
COMPETITION
The long distance telecommunications industry is highly competitive and
affected by the introduction of new services by, and the market activities of,
major industry participants. Competition in the long distance business is based
upon pricing, customer service, billing services and perceived quality. The
Company competes against various national and regional long distance carriers
composed of both facilities-based providers and switchless resellers offering
essentially the same services as the Company.
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Several of the Company's competitors are substantially larger and have greater
financial, technical and marketing resources. Although the Company believes it
has the human and technical resources to pursue its strategy and compete
effectively in this competitive environment, its success will depend upon its
continued ability to provide profitably high quality, high value services at
prices generally competitive with, or lower than, those charged by its
competitors.
End users are not obligated to purchase any minimum usage amount and
can discontinue service, without penalty, at any time. There can be no assurance
that end users will continue to buy their long distance telephone service
through the Company or through partitions that purchase service from the
Company. In the event that a significant portion of the Company's end users
decides to purchase long distance service from another long distance service
provider, there can be no assurance that the Company will be able to replace its
end user base from other sources.
A high level of attrition is inherent in the long distance industry,
and the Company's revenues are affected by such attrition. Attrition is
attributable to a variety of factors, including termination of customers by the
Company for non-payment and the initiatives of existing and new competitors as
they engage in, among other things, national advertising campaigns,
telemarketing programs and cash payments and other incentives.
Although the basic rates of the three largest long distance carriers
- -- AT&T, MCI Communications Corp. and Sprint Corporation -- have consistently
increased over the past three years and remained generally unchanged through the
third quarter of 1996, AT&T and other carriers have announced new price plans
aimed at residential customers (the Company's primary target audience under he
AOL Contract) with significantly simplified rate structures, which may have the
impact of lowering overall long distance prices. There can be no assurance that
AT&T or other carriers will not make similar offerings available to the small to
medium-sized businesses that the Company serves. Although OBN makes the Company
more price competitive, a reduction in long distance prices still may have a
material adverse impact on the Company's profitability.
AT&T has split itself into three separate and independently-owned and
operated companies ("AT&T breakup"). One company, which retains the AT&T name
provides, among other services, long distance, wireless and other
telecommunications services. Another, Lucent, manufactures and sells
communications equipment. A third, NCR, includes AT&T's computer operations and
will focus on the financial, retail and communications industries. AT&T has
stated that the breakup will allow it to compete more effectively with providers
of telecommunications services.
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The Company will link its switching equipment with transmission
facilities and services purchased or leased from AT&T and will continue to
resell services obtained from AT&T, which will remain a competitor of the
Company for the provision of telecommunications services. The Company also
utilizes AT&T and ACUS to provide billing services. There can be no assurance
that either AT&T or ACUS will continue to offer billing services to the Company
at competitive rates or attractive terms.
In October, 1995, the FCC reclassified AT&T as a nondominant
interexchange carrier. The FCC stated that AT&T would have greater incentives to
cut its prices and offer innovative new services. Nondominant carriers are not
subject to price cap regulation and could file tariffs (and tariff changes)
under streamlined procedures that will be presumed lawful on one day's notice.
The Company will therefore no longer be able to file Petitions to Reject or to
Suspend and Investigate AT&T tariff proposals with the FCC before those
offerings take effect. The FCC's reclassification of AT&T as a nondominant
carrier eliminated certain pricing restrictions and regulatory oversight and may
allow AT&T to compete more aggressively with the Company.
As a nondominant carrier, AT&T will be subject to the same regulations
as other long distance service providers. AT&T remains subject to Title II of
the Communications Act (47 U.S.C. Section 151, et seq.) and is required to offer
service under rates, terms and conditions that are just, reasonable and not
unreasonably discriminatory. AT&T is also subject to the FCC's complaint process
and was required to file tariffs, though under streamlined procedures. In
addition, AT&T is also required to give notice to the FCC and to affected
customers prior to discontinuing, reducing, or impairing any services.
In seeking FCC approval of its motion, AT&T made a series of "voluntary
commitments" to the FCC as a transitional mechanism to govern its conduct. With
respect to business term plans and long-term contracts with customers, including
resellers, AT&T agreed for a 12 month period to provide advance notice to the
customer of proposed changes that might affect a customer's reliance on its
contract with AT&T and to file any such changes with advance notice and time for
action by the FCC. AT&T also stated that it was willing to enter into mutually
agreeable private party arbitration agreements with its reseller customers and
was willing to develop a model agreement in negotiations with the
Telecommunications Resellers Association Executive Board. The FCC accepted all
of the "voluntary commitments" offered by AT&T and ordered AT&T's compliance
with those commitments.
The Telecommunications Act of 1996 was intended to introduce more
competition to U.S. telecommunications markets. The legislation opens the local
services market by requiring LECs to permit interconnection to their networks
and establishing, among other
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things, LEC obligations with respect to access, resale, number portability,
dialing parity, access to rights-of-way, and mutual compensation. The
legislation also codifies the LECs' equal access and nondiscrimination
obligations and preempts most inconsistent state regulation. The legislation
also contains special provisions that eliminate restrictions on the RBOCs
providing long distance services, which means that the Company will face
competition for providing long distance services from well-capitalized,
well-known companies that prior to this time could not compete in long distance
service.
The RBOCs have been prohibited from providing interLATA interexchange
telecommunications services under the terms of the AT&T decree. The
Telecommunications Act authorizes the RBOCs to provide certain interLATA
interexchange telecommunications services immediately and others upon the
satisfaction of certain conditions. Such legislation includes certain safeguards
against anticompetitive conduct by the RBOCs in the provision of interLATA
service. Anticompetitive conduct could result, among other things, from a RBOC's
access to all subscribers on its existing network as well as its potentially
lower costs related to the termination and origination of calls within its
territory. It is impossible to predict whether such safeguards will be adequate
to protect against anticompetitive conduct by the RBOCs and the impact that any
anticompetitive conduct would have on the Company's business and prospects.
Because of the name recognition that the RBOCs have in their existing markets
and the established relationships that they have with their existing local
service customers, and their ability to take advantage of those relationships,
as well as the possibility of favorable interpretations of the
Telecommunications Act by the RBOCs, it may be more difficult for other
providers of long distance services, such as the Company, to compete to provide
long distance services to RBOC customers. At the same time, as a result of the
Telecommunications Act, RBOCs have become potential customers for the Company's
long distance services.
Consolidation and alliances across geographic regions (e.g., Bell
Atlantic/Nynex and SBC Communications Inc./Pacific Telesis Group domestically
and BT/MCI and France Telecom/Deutsche Telekom/Sprint internationally) and
across industry segments (e.g., WorldCom/MFS/UUNet) may also intensify
competition in the telecommunications market from significantly larger,
well-capitalized carriers and materially adversely affect the position of the
Company.
INDUSTRY BACKGROUND
The $72.5 billion U.S. long distance industry is dominated by the
nation's three largest long distance providers, AT&T, MCI and Sprint, which
together generated approximately 80.9% of the aggregate revenues of all U.S.
long distance interexchange carriers in 1995. Other long distance companies,
some with national capabilities, accounted for the remainder of the market.
Based on published
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Federal Communications Commission ("FCC") estimates, toll service revenues of
U.S. long distance interexchange carriers have grown from $38.8 billion in 1984
to $72.5 billion in 1995. The aggregate market share of all interexchange
carriers other than AT&T, MCI and Sprint has grown from 2.6% in 1984 to 17.13%
in 1995. During the same period, the market share of AT&T declined from 90.1% to
53%.
Prior to the Telecommunications Act, the long distance
telecommunications industry had been principally shaped by a court decree
between AT&T and the United States Department of Justice, known as the
Modification of Final Judgment (the "Consent Decree") that in 1984 required the
divestiture by AT&T of its 22 Bell operating companies and divided the country
into some 200 Local Access and Transport Areas ("LATAs"). The 22 operating
companies, which were combined into the RBOCs, were given the right to provide
local telephone service, local access service to long distance carriers and
intraLATA toll service (service within LATAs), but were prohibited from
providing interLATA service (service between LATAs). The right to provide
interLATA service was maintained by AT&T and other carriers.
To encourage the development of competition in the long distance
market, the Consent Decree and the FCC require most LECs to provide all carriers
with access to local exchange services that is "equal in type, quality and
price" to that provided to AT&T and with the opportunity to be selected by
customers as their preferred long distance carrier. These so-called "equal
access" and related provisions are intended to prevent preferential treatment of
AT&T.
Regulatory, judicial and technological factors have helped to create
the foundation for smaller companies to emerge as competitive alternatives to
AT&T, MCI, and Sprint for long distance telecommunication services. The FCC
requires that AT&T not restrict the resale of its services, and the Consent
Decree and regulatory proceedings have ensured that access to LEC networks is,
in most cases, available to all long distance carriers.
Long distance companies that have their own transmission facilities and
switches, such as AT&T, are referred to as facilities-based carriers.
Facilities-based carriers are switch-based carriers, meaning that they have at
least one switch to direct their long distance traffic. Nonfacilities-based
carriers either (i) depend upon facilities-based carriers for switching and
transmission facilities ("switchless resellers") or (ii) install and operate
their own switches but depend on facilities-based carriers for transmission
facilities ("switch-based resellers").
The relationship between resellers and the major long distance carriers
is predicated primarily upon the fact that the pricing strategies and cost
structures of the major long distance carriers have resulted historically in
their charging higher rates to the
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small to medium business customer. Small to medium business customers typically
are not able to make the volume commitments necessary to negotiate reduced rates
under individualized contracts. By committing to large volumes of traffic, the
reseller is guaranteeing traffic to the major long distance carrier but the
major long distance carrier is relieved of the administrative burden of
qualifying and servicing large numbers of medium to small accounts. The
successful reseller has lower overhead costs and is able to market efficiently
the long distance product, process orders, verify credit and provide customer
service to large numbers of accounts.
With its own switches, the Company will be significantly less dependent
on AT&T for switching services, although it will continue to be dependent on
AT&T for transmission services. In recent years, national and regional network
providers have substantially upgraded the quality and capacity of their domestic
long distance networks, resulting in significant excess transmission capacity
for voice and data communications. Due to anticipated advances in the technology
involved in digital fiber optic transmission, excess capacity is expected to
persist and may result in decreasing prices for use of transmission facilities.
By deploying its own switches, the Company expects to be able to continue to
provide long distance services using the quality of AT&T transmission facilities
but at lower rates than it has historically charged, with the Company in control
of establishing service or activating new end user accounts ("provisioning") and
maintaining confidential end user lists
REGULATION
The Company's provision of communications services is subject to
government regulation. Federal law regulates interstate and international
telecommunications, while states have jurisdiction over telecommunications that
originate and terminate within the same state. Changes in existing policies or
regulations in any state or by the FCC could materially adversely affect the
Company's financial condition or results of operations, particularly if those
policies make it more difficult for the Company to obtain service from AT&T or
other long distance companies at competitive rates, or otherwise increase the
cost and regulatory burdens of marketing and providing service. There can be no
assurance that the regulatory authorities in one or more states or the FCC will
not take action having an adverse effect on the business or financial condition
or results of operations of the Company. Regulatory action by the FCC or the
states also could adversely affect the partitions, or otherwise increase the
partitions' cost and regulatory burdens of marketing and providing long distance
services.
The Company is classified by the FCC as a nondominant carrier. After
the recent reclassification of AT&T as nondominant, only the LECs are classified
as dominant carriers among domestic carriers. As a consequence, the FCC
regulates many of the rates, charges, and
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services of the LECs to a greater degree than the Company's. Because AT&T is no
longer classified as a dominant carrier, certain pricing restrictions that
formerly applied to AT&T have been eliminated, which could make it easier for
AT&T to compete with the Company for low volume long distance subscribers.
The FCC generally does not exercise direct oversight over charges for
service of nondominant carriers, although it has the statutory power to do so.
Nondominant carriers are required by statute to offer interstate services under
rates, terms, and conditions that are just, reasonable and not unreasonably
discriminatory. The FCC has the jurisdiction to act upon complaints filed by
third parties, or brought on the FCC's own motion, against any common carrier,
including nondominant carriers, for failure to comply with its statutory
obligations. Nondominant carriers have been required to file tariffs listing the
rates, terms and conditions of service, which were filed pursuant to streamlined
tariffing procedures. The FCC also has the authority to impose more stringent
regulatory requirements on the Company and change its regulatory classification
from nondominant to dominant. In the current regulatory atmosphere, the Company
believes, however, that the FCC is unlikely to do so.
The FCC imposes only minimal reporting, accounting and record-keeping
obligations. International nondominant carriers, including the Company, must
maintain international tariffs on file with the FCC. The FCC has issued an order
requiring non-dominant carriers to withdraw their domestic tariffs, but as of
the date hereof, a court has stayed the FCC's order. The Company currently has
two tariffs on file with the FCC. Although the tariffs of nondominant carriers,
and the rates and charges they specify, are subject to FCC review, they are
presumed to be lawful and are seldom contested. The Company is permitted to make
tariff filings on a single day's notice and without cost support to justify
specific rates. IXCs are also subject to a variety of miscellaneous regulations
that, for instance, govern the documentation and verifications necessary to
change a subscriber's long distance carrier, limit the use of 800 numbers for
pay-per-call services, require disclosure of certain information if operator
assisted services are provided and govern interlocking directors and management.
The Telecommunications Act grants explicit authority to the FCC to "forbear"
from regulating any telecommunications services provider in response to a
petition and if the agency determines that enforcement is unnecessary and the
public interest will be served.
At present, the FCC exercises its regulatory authority to set rates
primarily with respect to the rates of dominant carriers, and it has
increasingly relaxed its control in this area. Even when AT&T was classified as
a dominant carrier, the FCC most recently employed a "price cap" system, which
essentially exempted most of AT&T's services, including virtually all of its
commercial and 800 services, from traditional rate of return regulation because
the FCC believes
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that these services were subject to adequate competition. Similarly, the FCC is
in the process of changing the regulation and pricing of the local transport
component of access charges (i.e., the fee for use of the LEC transmission
facilities connecting the LEC's central offices and the IXC's access points). In
addition, the LECs have been afforded a degree of pricing flexibility in setting
interstate access charges where adequate competition exists. The impact of such
repricing and pricing flexibility on IXCs, such as the Company, cannot be
determined at this time.
The Company is subject to varying levels of regulation in the states in
which it is currently authorized to provide intrastate telecommunications
services. The vast majority of the states require the Company to apply for
certification to provide intrastate telecommunications services, or at least to
register or to be found exempt from regulation, before commencing intrastate
service. The vast majority of states also require the Company to file and
maintain detailed tariffs listing its rates for intrastate service. Many states
also impose various reporting requirements and/or require prior approval for
transfers of control of certified carriers, corporate reorganizations,
acquisitions of telecommunications operations, assignments of carrier assets,
including subscriber bases, carrier stock offerings and incurrence by carriers
of significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and the rules, regulations and
policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state, may be imposed for such violations. In certain states,
prior regulatory approval may be required for acquisitions of telecommunications
operations. Currently, the Company is certificated and tariffed to provide
intrastate interLATA service in substantially all states where such
authorization can be obtained.
The Company's expansion of its direct marketing efforts, makes the
Company subject to and requires compliance with relevant federal and state
regulations that govern direct sales of telecommunications services. FCC rules
prohibit switching a customer from one long distance carrier to another without
the customer's consent and specify how that consent can be obtained. Most states
have consumer protection laws that further define the framework within which the
Company's marketing activities must be conducted. The constraints of federal and
state restrictions could impact the success of the Company's direct marketing
efforts.
To the extent that the Company makes additional telecommunications
service offerings, the Company may encounter additional regulatory constraints.
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EMPLOYEES
As of December 31, 1996, the Company employed 313 persons, of whom 260
were engaged in marketing and sales, 26 were engaged in partition and end user
support, and 27 were engaged in systems development, finance, administration and
management. None of the Company's employees is covered by collective bargaining
agreements. The Company considers relations with its employees to be good.
PRINCIPAL STOCKHOLDER
Daniel Borislow, the Company's Chairman and Chief Executive Officer,
owns beneficially approximately 38.4% of the Company's outstanding Common Stock,
as of the date hereof. Accordingly, Mr. Borislow effectively has the ability to
control the election of all of the members of the Company's Board of Directors
and the outcome of corporate actions requiring majority stockholder approval.
Even as to corporate actions for which super-majority approval may be required,
such as certain fundamental corporate transactions, Mr. Borislow effectively
will control the outcome.
Future sales of substantial amounts of the Company's Common Stock by
Mr. Borislow or others could adversely affect the market price of the Common
Stock. Of the Company's 62,887,998 shares of Common Stock, 35,737,998 shares are
freely tradeable by persons other than "affiliates" of the Company. Of the
remaining 27,150,000 shares of Common Stock, none are eligible for public resale
until after the expiration of the holding period pursuant to Rule 144 under the
Securities Act.
On March 10, 1997, Mr. Borislow sold 3,911,000 shares of Common Stock
in a private sale (the "Private Sale"), and placed an additional 1,546,400
shares in escrow to be held for the benefit of the purchasers in the Private
Sale and for distribution thereto (in part or in full), if the average current
market price of the Common Stock in the 20 days prior to the fifth business day
after the date on which the Company announces its financial results for the
third quarter of 1997 shall be lower than $16.50 per share. In connection with
the Private Sale. Mr. Borislow agreed that, except for a contribution of up to
2,000,000 shares of Common Stock to a charitable foundation, he will not sell,
assign, transfer or otherwise dispose of any shares of Common Stock for a period
of 12 months from March 10, 1997 (the "Lock-up Period"); provided, however, that
if the current market price of the Common Stock shall increase by an amount
greater than 20% from $16.50 per share for a period of 20 consecutive trading
days, the Lock-up Period shall be reduced to 90 days. Also on March 10, 1997,
Mr. Borislow donated 1,200,000 shares of Common Stock to the Daniel Borislow
Charitable Foundation.
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GLOSSARY
ACUS: AT&T College and University Systems, a wholly owned strategic
business unit of AT&T.
AIN: Advanced Intelligent Network.
AOL: America Online, Inc.
AT&T: AT&T Corp.
BMS: The Company's database, which it provides to each of its
partitions.
Consent Decree: A 1984 U.S. Department of Justice decree that, among
other things, ordered AT&T to divest its wholly-owned local Bell
operating subsidiaries.
End Users: Customers that utilize long distance telephone services.
Equal Access: Connection provided by a LEC permitting a customer to be
automatically connected to the IXC of the customer's choice when the
customer dials "1."
Facilities-based provider: Long distance service providers who own
transmission facilities.
5ESS-2000: The switching equipment manufactured by AT&T, which the
Company acquired from AT&T.
5E10 Software: AT&T software that enables switches to combine
simultaneously wireline and wireless, local, long distance, voice,
video and data services.
FCC: Federal Communications Commission.
Inbound "800" Service: A service that bills long distance telephone
charges to the called party.
IXC: Interexchange carrier, a long distance carrier providing services
between local exchanges.
LATA: Local Access and Transport Areas, the approximately 200
geographic areas defined pursuant to the AT&T Consent Decree between
which the RBOCs are generally prohibited from providing long distance
service.
LEC: Local Exchange Carrier, a company providing local telephone
services.
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MEGACOM: An outbound long distance service offering by AT&T that
requires dedicated access.
MEGACOM 800: An inbound 800 service offering provided by AT&T that
requires dedicated access.
MCI: MCI Communications Corporation.
MLCP: AT&T's multi-location calling plan (a discounted long distance
program).
Network: An integrated system composed of switching equipment and
transmission facilities designed to provide for the direction,
transport and recording of telecommunications traffic.
NMS: The Company's computerized internal management information system.
Nonfacilities-based provider: Long distance service providers that do
not own transmission facilities.
OBN: One Better Net, the Company's nationwide long distance network.
Partition: An independent long distance and marketing company that
contracts with the Company to purchase or otherwise provide to end
users the long distance services provided by the Company.
Private Line: A full-time leased line directly connecting two points.
Provisioning: The process of initiating a carrier's service to an end
user.
PUC: A state regulatory body empowered to establish and enforce rules
and regulations governing public utility companies and others, such as
the Company in many of its state jurisdictions.
RBOC: Regional Bell Operating Company -- Any of seven regional Bell
holding companies that the Consent Decree established to serve as
parent companies for the Bell operating companies.
Readyline: An Inbound 800 service offering provided by AT&T.
SDN: The AT&T Software Defined Network.
Sprint: Sprint Corporation.
25
<PAGE>
Switching Equipment: A computer that directs telecommunication traffic
in accordance with programmed instructions.
Tariff: The schedule of rates and regulations set by communications
common carriers and filed with the appropriate Federal and state
regulatory agencies; the published official list of charges, terms and
conditions governing provision of a specific communication service or
facility, which functions in lieu of a contract between the user and
the supplier or carrier.
26
<PAGE>
ITEM 2. PROPERTIES
The Company owns the 24,000 square foot facility in New Hope,
Pennsylvania which serves as the Company's headquarters. The Company leases
properties in the cities in which OBN switches have been installed.
With respect to the Company's retail telemarketing operations, the
Company owns the 32,000 square foot facility located in Clearwater, Florida and
leases the 11,725 square foot facility in Kingston, Pennsylvania.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to certain legal actions arising in the ordinary
course of business. The Company believes that the ultimate outcome of these
actions will not result in any liability that would have a material adverse
effect on the Company's financial condition or results of operations.
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, 1996.
27
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Daniel Borislow 35 Chairman of the Board, Chief Executive
Officer and Director
Gary W. McCulla 37 President and Director of Sales and
Marketing and Director
Emanuel J. DeMaio 38 Chief Operations Officer and Director
Joseph A. Schenk 38 Chief Financial Officer, Treasurer and
Director of Investor Relations
and Director
Edward B. Meyercord, III 31 Executive Vice President, Marketing
and Corporate Development
Mary Kennon 38 Director of Customer Care and Human
Resources
Aloysius T. Lawn, IV 38 General Counsel and Secretary
Kevin R. Kelly 32 Controller
Daniel Borislow. Mr. Borislow founded the Company and has served as a
director and as Chief Executive Officer of the Company since its inception in
1989. Prior to founding the Company, Mr. Borislow formed and managed a cable
construction company.
Gary W. McCulla. Mr. McCulla currently serves as President and Director
of Sales and Marketing. In 1991, Mr. McCulla founded GNC and was its President.
Until March 1994, GNC was a privately-held independent marketing company and one
of the Company's partitions. At that time, the Company acquired certain assets
of GNC.
Emanuel J. DeMaio. Mr. DeMaio joined the Company in February 1992 and
currently serves as Chief Operations Officer. Prior to joining the Company, from
1981 through 1992, Mr. DeMaio held various technical and managerial positions
with AT&T.
Joseph A. Schenk. Mr. Schenk joined the Company in January 1996 and
currently serves as Chief Financial Officer and Treasurer. He is a certified
public accountant. From September 1993 to January 1996, Mr. Schenk was Vice
President, Capital Markets Group, with Jefferies & Co. Previously, Mr. Schenk
was Vice President of Transcap Associates, a venture capital firm, and held
various roles with Price Waterhouse and Deloitte & Touche.
Edward B. Meyercord, III. Mr. Meyercord joined the Company in September
1996 and currently serves as Executive Vice President, Marketing and Corporate
Development. From 1993 until joining the Company, Mr. Meyercord worked in the
corporate finance department of Salomon Brothers, where he held various
positions, the most recent of which was Vice President. Prior to joining Salomon
Brothers, Mr. Meyercord worked in the corporate finance department at Paine
Webber Incorporated.
Mary Kennon. Ms. Kennon joined the Company in October 1994 and
currently serves as Director of Customer Care and Human Resources. Prior to
joining the Company, from 1984 through 1994, Ms. Kennon held various managerial
positions with AT&T.
Aloysius T. Lawn, IV. Mr. Lawn joined the Company in January 1996 and
currently serves as General Counsel and Secretary of the Company. Prior to
joining the Company, from 1985 through 1995, Mr. Lawn was an attorney in private
practice.
Kevin R. Kelly. Mr. Kelly joined the Company in April 1994 and
currently serves as Controller. From 1987 to 1994, Mr. Kelly held various
managerial positions with a major public accounting firm. Mr. Kelly is a
certified public accountant.
28
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $.01 par value per share ("Common Stock"),
is traded on the Nasdaq National Market, and high and low quotations listed
below are actual sales prices as quoted in the Nasdaq National Market under the
symbol "TALK." All of the following quotations have been adjusted to reflect the
two-for-one stock split of the Common Stock in the form of a 100% stock dividend
that occurred on January 31, 1997.
PRICE RANGE OF COMMON STOCK
------------------------------
HIGH LOW
---- ---
1995
----
Fourth Quarter (from September 20, 1995) $ 5 1/2 $ 4
1996
----
First Quarter 8 1/2 4
Second Quarter 12 8 1/4
Third Quarter 15 1/16 8 1/8
Fourth Quarter 14 3/4 10 1/8
1997
----
First Quarter through (March 13, 1997) 21 1/2 12 1/4
As of March 6, 1997, there were approximately 57 record holders of
Common Stock.
The Company currently intends to retain all future earnings for use in
the operation of its business and, therefore, does not anticipate paying any
cash dividends in the foreseeable future. The declaration and payment in the
future of any cash dividends will be at the election of the Company's Board of
Directors and will depend upon, among other things, the earnings, capital
requirements and financial position of the Company, existing and/or future loan
covenants and general economic conditions.
29
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction
with, and are qualified in their entirety by, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ------------ ------------- ------------ ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Income Data:
Sales $232,424 $180,102 $ 82,835 $ 31,940 $ 17,668
Cost of sales 200,597 156,121 70,104 26,715 14,803
-------- -------- -------- -------- --------
Gross profit 31,827 23,981 12,731 5,225 2,865
Selling, general and administrative expenses 10,039 6,280 3,442 2,060 1,476
-------- -------- -------- -------- --------
Operating income 21,788 17,701 9,289 3,165 1,389
Investment and other income, net 10,585 331 66 108 32
-------- -------- -------- -------- --------
Income before income taxes 32,373 18,032 9,355 3,273 1,421
Provision for income taxes(1) 12,205 7,213 3,742 1,309 568
-------- -------- -------- -------- --------
Net income(1) $ 20,168 $ 10,819 $ 5,613 $ 1,964 $ 853
======== ======== ======== ======== ========
Net income per share - Primary (1) $ 0.35 $ 0.32 $ 0.18 $ 0.07 $ 0.03
======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding - Primary 57,002 33,605 30,663 29,452 28,750
======== ======== ======== ======== ========
Net income per share - Fully Diluted(1) $ 0.35 $ 0.32 $ 0.18 $ 0.07 $ 0.03
======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding - Fully Diluted 58,027 33,605 30,663 29,452 28,750
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------- ------------ -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheets Data:
Working capital $175,597 $38,171 $12,265 $4,502 $1,312
Total assets 257,008 71,388 21,435 6,694 2,178
Long-term debt -- -- -- -- --
Total stockholders' equity 230,720 41,314 14,042 4,687 1,414
</TABLE>
- ----------
(1) For the years and period ended December 31, 1992, 1993, 1994 and
September 19, 1995, the Predecessor Corporation elected to report as an
S corporation for federal and state income tax purposes. Accordingly,
the Predecessor Corporation's stockholders included their respective
shares of the Company's taxable income in their individual income tax
returns. The pro forma income taxes reflect the taxes that would have
been accrued if the Company had elected to report as a C corporation.
See Note 10 to the Consolidated Financial Statements.
30
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements included elsewhere in this Form 10-K.
INTRODUCTION
The Company was founded in 1989 as a switchless reseller of AT&T long
distance services to small and medium sized businesses and currently has over
500,000 end users. The Company is currently in the process of completing the
deployment of its own nationwide telecommunications network, OBN consisting of
five Company-owned, AT&T (now Lucent) manufactured 5ESS-2000 switches connected
by AT&T transmission facilities. As more fully described below, the Company
believes that gross margins for OBN long distance service will be higher than
those for AT&T long distance service. The majority of the Company's new orders
are now being placed on OBN which now has over 50,000 end users.
Historically, the Company has marketed the majority of its services
through independent carriers and marketing companies known as "partitions",
which allowed the Company to minimize overhead expenses. The Company expanded
its business by adding partitions and providing existing and new partitions with
operational, financing, marketing and management support. Beginning in 1996, the
Company initiated and subsequently expanded through an acquisition in December
1996, a direct marketing effort. Direct marketing requires the Company to incur
costs of marketing, including personnel, occupancy, marketing support and
additional customer service - costs which were historically borne by partitions.
Currently, a large majority of the Company's new sales are generated via direct
marketing.
The Company believes that gross margins for OBN long distance service
will be higher than those for AT&T long distance service. AT&T long distance
service is "bundled," which means that the Company pays a single, all-inclusive
price to AT&T for switching, transmission, and LEC access. OBN long distance
service is "unbundled," which means that the Company provides its own switching,
pays AT&T for transmission, and pays access fees directly to LECs. The
"unbundled" charges per call on OBN are expected to be less than the "bundled"
charge paid to AT&T.
In February 1997 the Company announced a multi-year agreement with
America Online, Inc. ("AOL") under which the Company will be the exclusive
provider of long distance services to be marketed by AOL to all of its
approximate 8 million online subscribers (the "AOL Agreement"). See "RECENT
DEVELOPMENTS."
-31-
<PAGE>
The following table presents the Company's sales, operating
income and net income by quarter since the first quarter of 1994.
Operating Net
Quarter Ended Sales Income Income
- ------------- ------- ------------- ----------
(In thousands)
1996:
March 31 $ 51,065 $ 4,546 $ 3,377
June 30 57,015 4,882 4,058
September 30 60,079 5,871 7,032
December 31 64,265 6,489 5,701
-------- -------- ---------
Total $232,424 $ 21,788 $ 20,168
======== ======== ========
1995:
March 31 (A) $ 36,617 $ 4,213 $ 2,555
June 30 (A) 44,728 4,855 2,897
September 30 (A) 48,366 4,008 2,519
December 31 50,391 4,625 2,848
-------- -------- ---------
Total (A) $180,102 $ 17,701 $ 10,819
======== ======== ========
1994:
March 31 (A) $ 14,413 $ 1,806 $ 1,092
June 30 (A) 14,705 1,846 1,102
September 30 (A) 22,521 2,608 1,573
December 31 (A) 31,196 3,029 1,846
-------- -------- ---------
Total (A) $ 82,835 $ 9,289 $ 5,613
======== ======== ========
(A) Pro forma tax provisions have been calculated as if the Company's results
of operations were taxable as a C corporation (the Company's current tax
status) for this period. Prior to September 20, 1995, the Company was an S
Corporation with all earnings taxed directly to its shareholders.
-32-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of sales:
<TABLE>
<CAPTION>
Percentage of Sales, Year Ended December 31,
---------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 86.3 86.7 84.6
----------- ----------- -----------
Gross profits 13.7 13.3 15.4
Selling, general and administrative expenses 4.3 3.5 4.2
----------- ----------- -----------
Operating income 9.4 9.8 11.2
Investment and other income, net 4.5 0.2 0.1
----------- ----------- -----------
Income before income taxes 13.9 10.0 11.3
Provision for income taxes 5.2 4.0(A) 4.5(A)
----------- ----------- -----------
Net income 8.7% 6.0% 6.8%
=========== =========== ===========
</TABLE>
(A) Pro forma tax provisions have been calculated as if the Company's results of
operations were taxable as a C corporation (the Company's current tax status)
for the years ended December 31, 1995 and 1994. Prior to September 20, 1995, the
Company was an S Corporation with all earnings taxed directly to its
shareholders.
-33-
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Sales. Sales increased by 29.1% to $232.4 million in 1996 from $180.1
million in 1995. The increase in sales related primarily to the continued
expansion of the Company's distribution network of partitions, as well as
increases in the number of orders submitted by the Company's existing
partitions. One partition, The Furst Group, Inc. accounted for approximately 11%
of the Company's sales in 1996 versus zero in 1995. In addition, significant
partition marketing efforts focused on inbound 800 service resulted in sales of
$75.3 million for the year ended December 31, 1996 versus $55.6 million for the
year ended December 31, 1995.
Although the Company expects sales to increase through the Company's
direct marketing efforts, the AOL Agreement, the addition of new partitions, the
growth of end user business through existing partitions and possible future
acquisitions, there can be no assurance that the Company will continue to
increase sales on a quarter-to-quarter or year-to-year basis.
Cost of Sales. The Company's cost of sales, consisting primarily of
network usage charges for AT&T long distance services, increased by 28.5% to
$200.6 million in 1996 from $156.1 million in 1995 and is directly related to
the 29.1% increase in sales.
As a switchless reseller of AT&T long distance services and in order to
provide its OBN services, the Company subscribes to contract tariffs. The
ability of the Company to negotiate competitive terms of these tariffs has been
an important reason for the Company's success. In October 1996, the Company
subscribed to a new AT&T contract tariff, which was further revised in December
1996 and permits the Company to continue to resell AT&T long distance services,
including AT&T-SDN service, through mid-1998. The new AT&T contract tariff also
includes other AT&T services (such as international long distance, inbound and
outbound services) that will be used in the Company's nationwide
telecommunications network, OBN. The rates that the Company will pay under the
new AT&T contract tariff are more favorable to the Company than under previous
tariffs. During its term, the new AT&T contract tariff will enable the Company
to minimize possible attrition that might result from moving existing end users
from the AT&T network to OBN. The new AT&T contact tariff also permits a more
gradual introduction of OBN, which should reduce the expense of providing the
capacity required in a more rapid phase-in of OBN and lessen the impact of any
technical difficulties during the phase-in of OBN. The more gradual introduction
of OBN, however, will postpone the Company's realization of the anticipated
benefit of the more favorable margins for OBN service, and the new AT&T contract
tariff requires the Company to commit to purchase $300 million of service from
A&T over the next 4 years, including at least $1 million per month of
international service. This commitment is larger than any previous commitment
that the Company has made, but the Company believes that it can be met based on
its current purchases of long distance service from AT&T which are in excess of
$10 million per month. Further, the Company can terminate the new contract
tariff without liability to AT&T at the end of 18 months if the Company has
generated at least $120 million in usage charges, including at least $15 million
in international usage charges. The Company also may discontinue the new
contract tariff without liability prior to the 18th month if the Company and
AT&T enter into a new contract tariff or another contract with a revenue
commitment of at least $7.5 million per month and a term of at least the
difference between 18 months and the number of months that the Company
subscribed to the contract tariff, provided that the Company must purchase or
pay for AT&T services under the contract tariff of at least $6.7 million per
month for the months prior to such termination, including $1 million per month
of international usage.
OBN and the operation of the Company's own switches and network will
require the Company to incur systems and equipment maintenance, lease, and
network personnel expenses significantly above the levels historically
experienced by the Company as a switchless reseller of AT&T services. However,
these per call costs, in combination with "unbundled" charges paid to LECs and
AT&T, are expected to be less than the per call cost currently incurred by the
Company as a switchless reseller paying "bundled" charges to AT&T.
In December 1996, the Company, in connection with the settlement of
certain disagreements among the Company, America Business Alliance, Inc.
("ABA"), an independent long distance and marketing company, and the
shareholders of ABA, acquired substantially all of the assets of ABA. Operations
of its own direct marketing will require the Company to incur additional costs
including personnel, occupancy, and marketing support, which may be
significantly above levels historically experienced by the Company. There can be
no assurance that any cost savings will be realized utilizing direct marketing
when compared to the costs historically incurred by the Company utilizing its
partitions.
-34-
<PAGE>
The AOL Agreement will initially require the Company to provide
competitively priced residential long distance service along with various
on-line capabilities including on-line sign-up, call detail and reports and
credit card payment. The Company may incur significant expenses for the start-up
and development of the services contemplated in the agreement particularly
during the second and third quarters of 1997. These costs may result in higher
costs of sales in 1997 than historically experienced by the Company.
Gross Margin. Gross margin, the gross profit as a percentage of sales,
increased to 13.7% for the year ended December 31, 1996 from 13.3% for the year
ended December 31, 1995. The increase in gross margin was due to greater
discounts obtained from AT&T on network usage partially offset by direct
marketing expenses and higher volume discounts granted to certain partitions. To
the extent that the Company may incur additional costs associated with OBN,
direct marketing and the AOL Agreement (see Cost of Sales above) gross margin
may decline in 1997.
The Company believes that gross margins for OBN long distance service
will be higher than those for AT&T long distance service. AT&T long distance
service is "bundled," which means that the Company pays a single, all-inclusive
price to AT&T for switching, transmission, and LEC access. OBN long distance
service is "unbundled," which means that the Company provides its own switching,
pays AT&T for transmission, and pays access fees directly to LECs. The
"unbundled" charges per call on OBN are expected to be less than the "bundled"
charge paid to AT&T .
Although the basic rates of the three largest long distance carriers-
AT&T, MCI and Sprint-have consistently increased over the past three years, AT&T
and other carriers have announced new price plans and significantly simplified
rate structures aimed at residential customers, the Company's primary target
audience under the AOL Agreement, which may have the impact of lowering overall
long distance prices. There can be no assurance that AT&T or other carriers will
not make similar offerings available to the small to medium sized businesses
that the Company currently serves. Although OBN is expected to make the Company
more price competitive, further reductions in long distance prices charged by
competitors still may have a material adverse impact on the Company's gross
margin in future periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 59.9% to $10.0 million in 1996 from $6.3
million in 1995. The increase in selling, general and administrative expenses
was due primarily to the costs associated with hiring additional management
personnel to support the Company's continuing growth and increased fees for
professional services.
The Company expects selling, general and administrative expenses to
increase as it implements, operates and maintains OBN, its direct marketing
efforts and the rollout of the AOL service offering. These efforts will require
additional personnel, equipment and support. The additional selling, general and
administrative expenses may be offset by the increased sales and profit gained
as a result of the implementation of the components of the Company's strategic
plan, but increased costs may have an adverse impact on results of operations.
Investment and Other Income. Investment and other income was $10.6
million in 1996 versus $331,000 in 1995. Investment and other income for the
year ended December 31, 1996 includes two nonrecurring gains : a $1.4 million
gain on the sale of securities of another long distance company and a $1.5
million gain on the sale of short term U.S. Treasury securities. The remainder
of investment and other income consists primarily of interest income earned on
the Company's cash balances resulting primarily from the unapplied proceeds of
the Company's public offering in April and May 1996 and excess cash from
operations.
As a result of the Company's purchase of ABA for approximately $21.4
million in total consideration and the $100 million initial payment to AOL,
interest income for future periods is expected to be significantly less than
amounts realized in 1996.
Provision for income taxes. The Company's effective tax rate declined
to 37.7% in 1996 from the pro forma effective tax rate of 40.0% in 1995 due to
the lower effective state tax rate in 1996.
-35-
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Sales. Sales increased by 117.4% to $180.1 million in 1995 from $82.8
million in 1994. The increase in sales related primarily to the continued
expansion of the Company's distribution network of partitions, as well as
increases in the number of end users obtained by the Company's existing
partitions. As a result of the favorable contract tariffs obtained from AT&T,
which took effect in July 1994, revenue from marketing inbound 800 service
increased significantly in 1995, totaling $55.6 million for the year ended
December 31, 1995 and accounting for approximately 30.9% of 1995 sales compared
to $7.9 million, or 9.5% of sales, for the year ended December 31, 1994. The
Company's revenues for private line services represented approximately 10.2% of
1995 sales compared to an insignificant amount from such services in 1994.
Cost of Sales. The Company's cost of sales increased by 122.7% to
$156.1 million in 1995 from $70.1 million in 1994, primarily as a result of the
increase in sales by 117.4%. Cost of sales as a percentage of revenues increased
at a higher rate than sales because the Company offered higher volume discounts
to certain partitions.
Gross Margin. Gross margin decreased to 13.3% for the year ended
December 31, 1995 from 15.4% for the year ended December 31, 1994. The decrease
in gross margin was attributable primarily to the addition of new partitions who
received higher volume discounts. Billing costs remained relatively constant as
a percentage of sales during both of these periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 82.5%, to $6.3 million in 1995 from $3.4
million in 1994, but decreased as a percentage of sales to 3.5% from 4.2%.
Selling, general and administrative expenses decreased as a percentage of sales
due to the Company's ability to spread its overhead expenses over a larger sales
base. The increase in selling, general and administrative expenses was due
primarily to the increase in personnel from 27 to 37 employees, resulting from
the increased administrative and management demands on the Company as it has
grown, and an increase in fees for professional services.
Pro Forma Income Taxes. On June 1, 1991, the Company, with the consent
of its stockholders, elected to be taxed as an S Corporation. As a result of the
election, all earnings of the Predecessor Corporation were taxed directly to the
stockholders. Accordingly, the statements of income, prior to the termination of
the S Corporation status on September 19, 1995, did not include provisions for
income taxes. Pro forma income tax provisions have been calculated as if the
Company's results of operations were taxable as a C Corporation under the
Internal Revenue Code for all periods presented. See Note 10 to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company consummated its initial public offering of 10,350,000
shares of Common Stock in September and October of 1995. The Company received
net proceeds from such offering of $42.8 million, of which $4.5 million was used
to pay the minority stockholder. The Company consummated a public offering of
17,068,000 shares of Common Stock in April and May, 1996. The Company received
net proceeds from such offering of approximately $139.1 million. In addition,
during 1996, certain options and warrants to purchase shares of the Company's
Common Stock were exercised and the Company received net proceeds of
approximately $4.9 million and $7.4 million, respectively. The tax benefit
realized from the exercise of options and warrants was approximately $21.3
million and is reflected as an adjustment to additional paid-in capital and
taxes payable. At December 31, 1996, the Company had cash, cash equivalents and
marketable securities of approximately $157.3 million.
-36-
<PAGE>
Since its inception, the Company has funded its operations primarily
from cash generated by operations and, to a lesser extent, advances from
stockholders and bank borrowings. The Company's net cash flow provided by
operations was $10.7 million, $24.5 million and $1.6 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Cash provided was $43.9 million,
$10.5 million and $10.2 million for the years ended December 31, 1996, 1995 and
1994, respectively, resulting from net income plus reconciling items. The
primary reconciling item for the year ended December 31, 1996 was the tax
benefit associated with the exercise of stock options and warrants. Cash was
used for accounts receivable, advances to partitions and note receivables
increases. Increases in advances to partitions and note receivables are due to
the Company's increased assistance to new and existing partitions to support
their marketing efforts.
The Company's working capital was $175.6 million and $38.2 million at
December 31, 1996 and 1995, respectively. The significant increase in working
capital is primarily a result of the completion of the Company's public offering
in April and May, 1996.
The Company invested $27.7 million in capital equipment during the year
ended December 31, 1996, of which $22.7 million was used for the acquisition of
capital equipment and installation costs relating to the deployment of OBN. To
date, through December 31, 1996, the Company has invested $24.9 million for the
acquisition of capital equipment and installation costs relating to the
deployment of OBN . In June 1996, the Company purchased a new headquarters
building in New Hope, Pennsylvania for approximately $1.5 million. In July 1996,
the Company also purchased a building in Clearwater, Florida which is used for
direct marketing and customer service for approximately $900,000.
In March 1996, the Company negotiated an unsecured, committed line of
credit with PNC Bank, N.A. ("Credit Facility") under which borrowings of up to
$50.0 million are available. The Company is required to pay an availability fee
of $62,500 per annum, or 0.125% of the total available borrowings. Interest on
borrowings is payable monthly at PNC Bank's prime rate less 0.5% or LIBOR plus
0.875%, at the Company's option. Principal is payable upon demand by PNC Bank.
Under the terms of the Credit Facility, the Company must maintain certain
financial covenants and adhere to certain restrictions. At December 31, 1996,
the Company had no borrowings outstanding under the Credit Facility. During
February 1997, the bank provided a temporary increase in the amount available
under the agreement to $60.0 million under similar terms to the existing credit
facility. See "RECENT DEVELOPMENTS".
The Company has used a portion of the proceeds from its 1996 stock
offering for: (i) advances to new and existing partitions to support their
marketing efforts, (ii) procurement of additional hardware and software for OBN,
(iii) direct marketing efforts, including the ABA transaction, and a direct
marketing center in Clearwater, Florida, and (iv) the purchase of a new
headquarters building in New Hope, Pennsylvania. In February 1997, the Company
made an initial payment of $100 million to AOL in conjunction with the AOL
Agreement more fully described in Recent Developments. The Company intends to
use the remaining proceeds: (i) to further fund new and existing partitions,
(ii) to expand direct marketing efforts, and (iii) to take advantage of growth
opportunities, including but not limited to, possible acquisitions. At December
31, 1996, excess cash was invested primarily in a U.S. Treasury Bill. Generally,
excess cash is invested primarily in short term government securities and cash
equivalents consisting of money market accounts with major international
brokerage firms. The Company has had to spend less of the proceeds of the 1996
stock offering to start up OBN than originally planned because of the new AT&T
contract tariff, which allows the Company to avoid some of the costs associated
with moving existing end users to OBN and permits the Company to phase in OBN
more cost effectively by not leasing transmission facilities before traffic
levels are sufficient to fill them.
The Company does not have a significant concentration of credit risk
with respect to accounts receivable due to the large number of partitions and
end users comprising the Company's customer base and their dispersion across
different geographic regions. The Company maintains reserves for potential
credit losses and, to date, such losses have been within the Company's
expectations.
The Company believes that its current cash position, marketable
securities, the Credit Facility and the cash flow expected to be generated from
operations, will be sufficient to fund its capital expenditures, working capital
and other cash requirements for at least the next twelve months.
RECENT DEVELOPMENTS
On February 25, 1997, the Company announced that it had entered into a
Telecommunications Marketing Agreement (the "AOL Agreement"), dated as of
February 22, 1997 and effective as of February 25, 1997, with America Online,
Inc. ("AOL"), under which the Company will be the exclusive provider of
long-distance telecommunications services to be marketed by AOL to all of the
subscribers to AOL's online network under a distinctive brand name to be used
exclusively for the Company's services. The services will include provision for
online sign-up, call detail and reports and credit card payment. Under the AOL
Agreement, AOL will provide millions of dollars of online advertising and
promotion of the services and provide
-37-
<PAGE>
all of its subscribers with access to a dedicated service area online for the
Company. AOL subscribers who sign-up for the telecommunications services will be
customers of the Company, as the carrier providing such services. The Company
also has certain rights under the AOL Agreement to offer, on a comparably
exclusive basis, local and wireless telecommunications services when available.
It is anticipated that the services will be tested in the early summer
and offered generally to AOL subscribers in the fall of 1997. The AOL Agreement
has an initial term of three years and can be extended by AOL on an annual basis
thereafter.
Under the AOL Agreement, the Company made an initial payment of $100
million to AOL at signing and agreed to provide marketing payments to AOL based
on a percentage of the Company's profits from the services (between 50% and 70%,
depending on the number of subscribers to the services). The AOL Agreement
provides that $43 million of the initial payment will be offset and recoverable
by the Company through reduction of such profit-based marketing payments during
the initial term of the AOL Agreement or, subject to certain monthly reductions
by offset of the amount thereof, directly by AOL upon certain earlier
terminations of the AOL Agreement. The $57 million balance of the initial
payment will be offset and is recoverable through a percentage of such
profit-based marketing payments made after the first five years of the AOL
Agreement (when extended beyond the initial term) and by offset against a
percentage of AOL's share of the profits from the services after termination or
expiration of the AOL Agreement. Any portion of the $43 million not previously
recovered or reduced in amount would be added to the $57 million and would be
recoverable similarly.
Also under the AOL Agreement, the Company issued to AOL at signing two
warrants to purchase shares of the Company's common stock at a premium over the
market value of such stock on the issuance date. One warrant is for 5 million
shares, at an exercise price of $15.50 per share, one-half of which shares will
vest at the time the service is first made generally available to AOL online
network subscribers in accordance with the AOL Agreement or the first
anniversary of the warrant issuance, whichever is earlier, and the balance of
which will vest on the first anniversary of issuance if the AOL Agreement has
not terminated. The other warrant is for up to 7 million shares, at an exercise
price of $14.00 per share, which will vest, commencing December 31, 1997, based
on the number of subscribers to the services and would vest fully if there are
at least 3.5 million such subscribers at any one time. The Company also agreed
to issue to AOL an additional warrant to purchase 1 million shares of its common
stock, at market value at the time of issuance, upon each of the first two
annual extensions by AOL of the term of the AOL Agreement, which warrants also
will vest based on the number of subscribers to the services.
In connection with the AOL Agreement, the Company and AOL will jointly
develop the online marketing and advertising for the services. The Company will
provide online customer service as well as inbound calling customer service to
the AOL subscribers in connection with the services. While the Company expects
to utilize its Clearwater, Florida facility to provide customer service support
to AOL subscribers, the Company may need to increase staffing and purchase
equipment to support this activity. The Company anticipates that it will incur
expenses for the start-up and development of the services contemplated in the
AOL Agreement during 1997, including expenses for the expansion of the
Clearwater operation, for software programming and for software and hardware
additions to the Company's network, OBN, to expand its capacity for the traffic.
The Company believes that the increased revenues to the Company resulting from
the AOL Agreement and the services offered pursuant thereto will be limited in
1997, but could be significant in 1998, although there can be no assurance that
these results can be achieved in light of a number of uncertainties, including
the following: the Company's ability to timely develop the online ordering, call
detail, billing and customer services for the AOL subscribers, which will
require, among other things, being able to identify and employ sufficient
personnel qualified to provide necessary programming; the Company's and AOL's
ability to work effectively together to jointly develop the online marketing
contemplated by the AOL Agreement; the response rate to online promotions of
AOL's online subscribers, most of whom are expected to be residential rather
than businesses, which have historically been the Company's customer base; the
Company's ability to expand OBN to accommodate increased traffic levels; and
AOL's ability to successfully execute its publicly stated business plan and
implement its announced network changes to improve subscriber access to its
online service.
The Company funded the $100 million initial payment by borrowing $50
million under its Credit Facility under a temporary increase in the facility to
$60 million, and an additional $50 million as a margin advance from one of its
brokers. Currently, the Company holds a U.S. Treasury Bill with a face value of
$150 million, which matures in November 1997, as security for the advance.
-38-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants 40
Consolidated balance sheets as of December 31, 1996 and 1995 41
Consolidated statements of income for the years ended
December 31, 1996, 1995, and 1994 42
Consolidated statements of stockholders' equity for the years
ended December 31, 1996, 1995 and 1994 43
Consolidated statements of cash flows for the years ended
December 31, 1996, 1995 and 1994 44
Notes to consolidated financial statements 45
-39-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of Tel-Save Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
Tel-Save Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Tel-Save
Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
January 29, 1997
-40-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1996 1995
---------------------------------------------------------------------------- --------------------- -----------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 8,023 $41,211
Marketable securities 149,237 -
Accounts receivable, trade net of allowance for 19,971 19,088
uncollectible accounts of $987 and $804, respectively
Advances to partitions and note receivables 13,410 3,563
Due from broker 867 1,100
Prepaid expenses and other current assets 10,377 194
---------------------------------------------------------------------------- --------------------- -----------------
TOTAL CURRENT ASSETS 201,885 65,156
Property and equipment, net 30,097 2,667
Intangibles, net 21,102 1,490
Note receivable from stockholder - 2,075
Other assets 3,924 -
---------------------------------------------------------------------------- --------------------- -----------------
TOTAL ASSETS $257,008 $71,388
---------------------------------------------------------------------------- --------------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Accounts payable and accrued expenses:
Trade and other $ 17,812 $12,622
Partitions 4,398 3,047
Sales and excise taxes payable 1,592 1,406
Other 1,619 514
Securities sold short, at cost to purchase 867 1,100
Income taxes payable - 2,375
Note payable to stockholder - 5,921
---------------------------------------------------------------------------- --------------------- -----------------
TOTAL CURRENT LIABILITIES 26,288 26,985
Deferred credits - 280
Deferred income taxes payable - 2,809
---------------------------------------------------------------------------- --------------------- -----------------
TOTAL LIABILITIES 26,288 30,074
---------------------------------------------------------------------------- --------------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares - -
authorized; no shares outstanding
Common stock - $.01 par value, 100,000,000 shares 622 195
authorized; 62,237,998 and 19,500,000 issued and
outstanding, respectively
Additional paid-in capital 210,616 37,245
Retained earnings 24,042 3,874
Treasury stock (4,560) -
---------------------------------------------------------------------------- --------------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 230,720 41,314
---------------------------------------------------------------------------- --------------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $257,008 $71,388
---------------------------------------------------------------------------- --------------------- -----------------
See accompanying notes to consolidated financial statements.
</TABLE>
-41-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales $232,424 $180,102 $ 82,835
Cost of sales 200,597 156,121 70,104
- -------------------------------------------- ------------------ -------------------- -----------------
Gross profit 31,827 23,981 12,731
Selling, general and administrative
expenses 10,039 6,280 3,442
- -------------------------------------------- ------------------ -------------------- -----------------
Operating income 21,788 17,701 9,289
Investment and other income, net 10,585 331 66
- -------------------------------------------- ------------------ -------------------- -----------------
Income before provision for income taxes 32,373 18,032 9,355
Provision for income taxes 12,205 8,997 -
- -------------------------------------------- ------------------ -------------------- -----------------
Net income $ 20,168 $ 9,035 $ 9,355
============================================ ================== ==================== ==================
Pro forma:
Income before provision for income taxes $ 18,032 $ 9,355
Pro forma provision for income taxes 7,213 3,742
- -------------------------------------------- ------------------ -------------------- -----------------
Pro forma net income $ 10,819 $ 5,613
- -------------------------------------------- ------------------ -------------------- -----------------
Net income per share - Primary $ .35 $ .32 $ .18
- -------------------------------------------- ------------------ -------------------- -----------------
Weighted average common and common
equivalent
shares outstanding - Primary 57,002 33,605 30,663
- -------------------------------------------- ------------------ -------------------- -----------------
Net income per share - Fully Diluted $ .35 $ .32 $ .18
- -------------------------------------------- ------------------ -------------------- -----------------
Weighted average common and
common equivalent
shares outstanding - Fully Diluted 58,027 33, 605 30,663
- -------------------------------------------- ------------------ -------------------- -----------------
See accompanying notes to consolidated financial statements.
</TABLE>
-42-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 9,550 $ 95 $ -- $ 4,592 $ -- $ 4,687
Net income -- -- -- 9,355 -- 9,355
------- -------- -------- -------- -------- ---------
Balance, December 31, 1994 9,550 95 -- 13,947 -- 14,042
Net income -- -- -- 9,035 -- 9,035
Cash distributions -- -- -- (13,200) -- (13,200)
Stock redemption -- -- -- (11,400) -- (11,400)
Reclassification of S Corporation deficit -- -- (5,492) 5,492 -- --
Sale of common stock 3,450 35 42,802 -- -- 42,837
Three-for-two stock split 6,500 65 (65) -- -- --
------- -------- -------- -------- -------- ---------
Balance, December 31, 1995 19,500 195 37,245 3,874 -- 41,314
Net income -- -- -- 20,168 -- 20,168
Issuance of warrants to partitions -- -- 1,077 -- -- 1,077
Sale of common stock 8,534 85 138,984 -- -- 139,069
Exercise of common stock options 1,079 11 4,927 -- -- 4,938
Exercise of warrants 2,006 20 7,383 -- -- 7,403
Income tax benefit related to
exercise of common stock options
and warrants -- -- 21,311 -- -- 21,311
Acquisition of treasury stock -- -- -- -- (4,560) (4,560)
Two-for-one stock split 31,119 311 (311) -- -- --
------- -------- -------- -------- -------- ---------
Balance, December 31, 1996 62,238 $ 622 $ 210,616 $ 24,042 $(4,560) $ 230,720
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
-43-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 20,168 $ 9,035 $ 9,355
Adjustment to reconcile net income to net
cash provided by operating
activities:
Unrealized loss on securities 179 234 --
Provision for bad debts 38 (28) 52
Depreciation and amortization 2,462 1,287 477
Deferred credits (280) -- 280
Income tax benefit related to exercise of options and warrants 21,311 -- --
(Increase) decrease in:
Accounts receivable, trade (1,065) (2,996) (10,899)
Advances to partitions and note receivables (20,797) (1,700) (1,862)
Prepaid expenses and other current assets (10,183) 1,400 (804)
Other assets (3,924) -- --
Increase (decrease) in:
Accounts and partition payables and accrued expenses 7,978 12,047 5,023
Income taxes payable (5,184) 5,184 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,703 24,463 1,622
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of intangibles (9,800) (1,057) (2,007)
Capital expenditures, net (27,679) (2,330) (343)
Securities sold short (411) 866 --
Due from broker 233 (1,100) --
Loans to stockholder (3,034) (2,075) --
Repayments of stockholder loan 5,109 -- --
Purchase of marketable securities (149,238) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (184,820) (5,696) (2,350)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from related party transactions -- -- 7,767
Payments to related parties -- (1,725) (7,038)
Payment of note payable to stockholder (5,921) (979) --
Proceeds from sale of common stock 139,069 42,837 --
Proceeds from exercise of options and warrants 12,341 -- --
Acquisition of treasury stock (4,560) -- --
Distributions to stockholders -- (13,200) --
Stock redemption -- (4,500) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 140,929 22,433 729
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (33,188) 41,200 1
Cash and cash equivalents, at beginning of period 41,211 11 10
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of period $ 8,023 $ 41,211 $ 11
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
-44-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
(a) Business
Tel-Save Holdings, Inc. (the "Company"), which is incorporated in
Delaware, provides long distance services to small and medium-sized businesses
located throughout the United States. The Company's long distance service
offerings include outbound service, inbound toll-free 800 service and dedicated
private line services for data. The Company markets these services nationally
primarily through direct marketing and an established distribution network of
independent long distance and marketing companies known as "partitions".
(b) Reorganization
On September 21, 1995, the Company consummated its initial public
offering ("IPO") (Note 8(b)). The shares of Tel-Save, Inc., a Pennsylvania
corporation (the "Predecessor Corporation"), owned by the two founding
stockholders were contributed to the Company as of the date of the IPO. The
majority stockholder exchanged all of his shares of the Predecessor Corporation
for 21,060,000 shares of the common stock of the Company plus loans of up to
$5,000,000. The majority stockholder repaid his outstanding indebtedness,
including interest, using a portion of his proceeds from the sale of 1,500,000
shares of common stock in connection with the Company's public offering in April
1996 (Note 8(a)).
The minority stockholder exchanged all his shares of the Predecessor
Corporation for 7,590,000 shares of the common stock of the Company, $4,500,000
in cash plus a note (the "Cash Flow Note") in the original principal amount of
$6,900,000 bearing interest at 10% per annum which was guaranteed by the
majority stockholder. The payment and the issuance of the Cash Flow Note to the
minority stockholder are accounted for as a distribution of capital. In January
1996, the Company paid the remaining balance of $5,921,000 due under the Cash
Flow Note. The transactions described above are collectively referred to as the
"Reorganization."
(c) Basis of financial statements presentation
The consolidated financial statements include the accounts of Tel-Save
Holdings, Inc. and its two wholly-owned subsidiaries and have been prepared as
if the entities had operated as a single consolidated group since their
respective dates of incorporation. All intercompany balances and transactions
have been eliminated.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(d) Recognition of revenue
The Company recognizes revenue upon completion of telephone calls by
end users. Allowances are provided for estimated uncollectible usage.
(e) Cash and cash equivalents
The Company considers all temporary cash investments purchased with a
maturity of three months or less to be cash equivalents.
-45-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(f) Marketable securities
The Company buys and holds securities principally for the purpose of
selling them in the near term and therefore, they are classified as trading
securities and carried at market. Unrealized holding gains and losses
(determined by specific identification) on investments classified as trading
securities are included in earnings.
(g) Prepaid marketing costs
Certain costs associated with direct marketing to end users are
amortized over a six month period.
(h) Property and equipment and depreciation
Property and equipment are recorded at cost. Depreciation and
amortization is calculated using the straight-line method over the estimated
useful lives of the assets, which range from three to thirty-nine years.
(i) Intangibles and amortization
Intangibles include the costs to acquire billing bases of customer
accounts, long-distance service contract pricing plans and goodwill arising from
business acquisitions. Amortization is computed on a straight-line basis over
the estimated useful lives of the intangibles which range from 1 to 40 years.
(j) Long-lived assets
The Company adopted SFAS No. 121, "Accounting For the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" as of January 1,
1996 and its implementation did not have a material effect on the consolidated
financial statements.
(k) Income taxes
Deferred tax assets and liabilities are recorded for the estimated
future tax effects attributable to temporary differences between the basis of
assets and liabilities recorded for financial and tax reporting purposes (Note
10).
(l) Net income per share
The computation of net income per share is based on the weighted
average number of common shares outstanding during the period plus the effect of
common shares issuable upon exercise of stock options and warrants. Fully
diluted earnings per share also reflect additional dilution related to stock
options and warrants due to the use of the market price at the end of the period
when this price is higher than the average price for the period. Net income per
share for the years ended December 31, 1995 and 1994 is based on pro forma net
income.
All references in the consolidated financial statements with regard to
average number of common stock and related per share amounts have been
calculated giving retroactive effect to the exchange of shares in the
Reorganization and the stock splits.
-46-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(m) Financial instruments and risk concentration
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash investments and marketable securities. At
December 31, 1996, a large majority of the Company's cash investments and
marketable securities were invested in U.S. government securities and money
market funds. The carrying amount of these cash investments approximates the
fair value due to their short maturity. The Company believes no significant
concentration of credit risk exists with respect to these cash investments and
marketable securities.
(n) Securities sold short/financial investments with off-balance sheet
risk
At December 31, 1996, securities sold short by the Company, which
consist of equity securities valued at market, resulted in an obligation to
purchase such securities at a future date. The short position was closed in
March 1997 and the Company recorded a loss of $54,000.
NOTE 2 -- MAJOR PARTITIONS
Partitions who provided end user accounts, which in the aggregate
account for more than 10% of sales, are as follows:
Number Of Total Percentage
Partitions Of Sales
----------- ---------------
Year ended December 31, 1996 1 11%
Year ended December 31, 1995 -- --
Year ended December 31, 1994 1 13%
NOTE 3 -- PROPERTY AND EQUIPMENT
December 31,
-------------------------
1996 1995
---- ----
(In thousands)
Land $ 220 $ --
Buildings and building improvements 3,398 --
Switching equipment under construction 24,861 2,126
Equipment, vehicles and other 2,117 791
-------- --------
30,596 2,917
Less: Accumulated depreciation (499) (250)
-------- --------
$ 30,097 $ 2,667
======== ========
Switching equipment under construction represents the costs associated
with the purchase of AT&T switching equipment and the related installation costs
incurred through December 31, 1996 for the deployment of the Company's
telecommunications network -- One Better Net ("OBN").
-47-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - INTANGIBLES
Year ended December 31,
--------------------------
1996 1995
---- ----
(In thousands)
Goodwill $18,356 $ -
Other 6,533 3,064
------- -----
24,889 3,064
Less: Accumulated amortization 3,787 1,574
------- -----
$21,102 $1,490
======= ======
Amortization expense was $2,213,000, $1,157,000 and $417,000 for the
years ended December 31, 1996, 1995 and 1994.
NOTE 5 - ACQUISITION
On December 13, 1996, in connection with the settlement of certain
disagreements among the Company, American Business Alliance, Inc. ("ABA") and
the shareholders of ABA, the Company acquired substantially all of the assets of
ABA, an independent long distance and marketing company which was previously a
partition of the Company, for a total purchase price of $21,369,000, comprised
of: (1) cash payment of $9,450,000, (2) assumption of $970,000 of liabilities
and (3) the release of ABA's outstanding obligations to the Company of
$10,949,000.
This transaction was accounted for as a purchase with the results of
ABA included in the consolidated financial statements from the acquisition date.
The cost in excess of the net assets acquired (goodwill) was approximately
$18,356,000 and is being amortized over forty years using the straight-line
method.
The following pro forma consolidated financial information has been
prepared to reflect the acquisition of the assets of ABA. The pro forma
financial information is based on the historical financial statements of the
Company and ABA. The pro forma financial information is unaudited and is not
necessarily indicative of what the actual results of operations of the Company
would have been assuming the transaction had been completed as of January 1,
1995 and neither is it necessarily indicative of the results of operations for
future periods.
Year ended December 31,
----------------------------
1996 1995
------------ -----------
(unaudited) (unaudited)
(In thousands)
Net sales $233,067 $181,220
Net income 13,778 10,269
Net income per share .24 .31
The above pro forma operating results include each company's results of
operations for the indicated years and have been adjusted to adopt the Company's
accounting policy for ABA's marketing costs (amortization of certain direct
marketing costs over a six month period), reflect the amortization of the
goodwill, as generated by the acquisition, over a 40 year period, elimination of
the interest income on the $9,450,000 cash payment in connection with the
acquisition and reduction of provision for income taxes resulting from the
utilization of ABA's net operating losses.
-48-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 -- REVOLVING LOAN AGREEMENT
In March 1996, the Company entered into a revolving loan agreement with
an unsecured, committed line of credit with a bank under which borrowings of $50
million are available through March 18, 1997. The Company is required to pay an
availability fee per annum of 0.125% of the total available borrowings.
Principal is payable upon demand by the bank. Interest is payable monthly at the
bank's prime rate less 0.5% or LIBOR plus 0.875%, at the Company's option. Under
the terms of the agreement, the Company must maintain certain financial
covenants and adhere to certain restrictions. At December 31, 1996, the Company
had no borrowings outstanding under the agreement. During February 1997, the
bank provided a temporary increase in the amount available under the agreement
to $60 million.
NOTE 7 -- RELATED PARTY TRANSACTIONS
In connection with the Reorganization (Note 1(b)), the Company made
distributions of the Company's 1995 taxable income through September 19, 1995 of
approximately $13,200,000 in 1995 to its two founding stockholders.
NOTE 8 -- STOCKHOLDERS' EQUITY
(a) 1996 Public Offering
The Company consummated a public offering (the "1996 Offering") of
18,568,000 shares of common stock (adjusted to reflect the most recent stock
split, Note 8(c)), including the underwriter's over-allotment, at a price of
$8.75 per share in April and May, 1996. Of the 18,568,000 shares offered,
17,068,000 were sold by the Company and 1,500,000 were sold by the majority
stockholder. Proceeds of the 1996 Offering to the Company, less underwriting
discounts of approximately $9,302,000, were approximately $140,043,000. Expenses
for the 1996 Offering were approximately $974,000 resulting in net proceeds to
the Company of approximately $139,069,000. The majority stockholder used a
portion of his proceeds to repay his outstanding indebtedness, including
interest, to the Company.
(b) Initial Public Offering
In September and October, 1995, the Company consummated its IPO of
10,350,000 shares of common stock (adjusted to reflect stock splits, Note 8(c)),
including the underwriter's overallotment option, at a price of $4.59 per share.
Proceeds of the offering less underwriting discounts of approximately $3,151,000
were $44,287,000. Expenses for the IPO totaled approximately $1,450,000,
resulting in net proceeds to the Company of approximately $42,837,000.
In connection with the IPO, the Company issued warrants to purchase
900,000 shares of common stock to the underwriter. The exercise price of the
warrants is $5.73 per share of common stock and such warrants expire on
September 21, 2000.
(c) Stock Splits
On January 3, 1997, the Company's Board of Directors approved a
two-for-one split of the common stock in the form of a 100% stock dividend. The
additional shares resulting from the stock split were distributed on January 31,
1997 to all stockholders of record at the close of business on January 17, 1997.
The consolidated balance sheet as of December 31, 1996 and the consolidated
statement of stockholders' equity for the year ended December 31, 1996 reflect
the recording of the stock split as if it had occurred on December 31, 1996.
-49-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 16, 1996, the Company's Board of Directors approved a
three-for-two split of the common stock in the form of a 50% stock dividend. The
additional shares resulting from the stock split were distributed on March 15,
1996, to all stockholders of record at the close of business on February 29,
1996. The consolidated balance sheet as of December 31, 1995 and the
consolidated statement of stockholders' equity for the year ended December 31,
1995 reflect the recording of the stock split as if it had occurred on December
31, 1995.
Further, all references in the consolidated financial statements to
average number of shares outstanding and related prices, per share amounts,
warrant and stock option data have been restated for all periods to reflect the
stock splits.
(d) Authorized Shares
During 1996, the Board of Directors and stockholders approved the
increase in the number of authorized shares of the Company's $0.01 par value
common stock to 100,000,000 shares.
NOTE 9 - STOCK OPTIONS AND WARRANTS
(a) Stock Options
At December 31, 1996, the Company had option agreements with most of
its key employees and had one stock option plan. The agreements and plan are
more fully described below. The Company applies Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for the agreement and the plan. Under APB No. 25,
when the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
cost is recognized. The following is a summary of the agreements and the option
plan:
Prior to the Company's Initial Public Offering in September, 1995, the
Company granted ten key employees options to purchase shares of the Company's
common stock. The options, which were valued based on the fair market value of
the Company at the date of grant, vest 22 months from the date of issuance and
expire five years from the date of grant. All options were vested as of December
31, 1996.
In September 1995 and March 1996, the Company granted options to
purchase a total of 70,000 shares of common stock to each of the two nonemployee
directors of the Company.
In September 1995, the Company's Board of Directors and stockholders
adopted the Company's 1995 Employee Stock Option Plan (the "Option Plan") which
provided for the granting of up to 1,950,00 shares of common stock. An amendment
to the Option Plan was approved by the Board of Directors and stockholders in
April 1996 increasing the authorized number of options which can be granted
under the Option Plan to 5,000,000 shares of common stock. As of December 31,
1996, 4,985,000 options had been granted under the Option Plan.
In 1996 the Company granted certain employees 3,561,000 non-qualified
options to purchase shares of the Company's common stock.
The exercise price of all stock options granted under the agreements
and Option Plan is at least equal to the fair market value of such shares on the
date of the grant. Options become exercisable from one to three years from the
date of the grant.
-50-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock options had been
determined in accordance with the fair value-based method prescribed in SFAS No.
123. The Company estimates the fair value of each stock option at the grant date
by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1995 and 1996, respectively: no
dividends paid for all years; expected volatility of 40.4% for all years (due to
the Company's limited trading history, average volatility of several similar
telecommunication companies was used); weighted average risk-free interest rates
of 5.8% and 5.7%, respectively; and expected lives of 1 to 4 years.
Under the accounting provisions of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below.
1996 1995
---- ----
Net income (in thousands)
As reported $ 20,168 $ 10,819
Pro forma $ 16,521 $ 10,436
Primary earnings
As reported $ .35 $ .32
Pro forma $ .29 $ .31
Fully diluted earnings per share
As reported $ .35 $ .32
Pro forma $ .28 $ .31
-51-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables contain information on stock options for the three
year period ended December 31, 1996:
<TABLE>
<CAPTION>
Exercise Weighted
price range average
Option Shares per share exercise price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1994 1,515,600 $.32 $.32
Granted 940,200 $.59-$1.57 $.75
- -------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1994 2,455,800 $.32-$1.57 $.48
Granted 1,950,000 $4.58 $4.58
- -------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1995 4,405,800 $.32-$4.58 $2.30
Granted 6,736,000 $4.09-$12.00 $7.96
Exercised (2,158,000) $.32-$5.67 $2.28
- -------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1996 8,983,800 $.32-$12.00 $6.54
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Exercise Weighted
price range average
Exercisable at year-end Option Shares per share exercise price
- -------------------------------------------------------------------------------------------------------------
1994 - - -
1995 1,515,600 $.32 $.32
1996 2,649,800 $.32-$4.58 $2.82
- -------------------------------------------------------------------------------------------------------------
<CAPTION>
Options granted in Weighted-average fair value
- -------------------------------------------------------------------------------------------------------------
1995 $1.14
1996 $2.39
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Range of exercise prices
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.32-$1.57 $4.09-$5.92 $8.25-$9.63 $10.50-$12.00 $.32-$12.00
-------------- -------------- ------------- --------------- -------------
Outstanding Options
Number outstanding
at December 31, 1996 1,114,800 4,308,000 505,000 3,056,000 8,983,800
Weighted-average
remaining contractual
life (years) 1.64 2.07 2.42 2.59 2.21
Weighted-average
exercise price $.38 $4.74 $8.68 $10.98 $6.54
Exercisable options
Number outstanding
at December 31, 1996 1,114,800 1,535,000 - - 2,649,800
Weighted-average
exercise price $.38 $4.58 - - $2.82
</TABLE>
-52-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) Warrants
At December 31, 1996, the Company had warrant agreements with certain
partitions and the underwriter for its IPO (Note 8(b)). All warrants
were issued with exercise prices equal to or above the market price of
the underlying stock at the date of the grant. These warrants are
accounted for based on their fair value. At December 31, 1996,
1,900,000 warrants were outstanding with exercise prices ranging from
$4.67 to $5.73 and an average weighted exercise price of $5.00 and
600,000 which were currently exercisable at a weighted exercise price
of $5.73. The remaining warrants are exercisable over a one to two year
period beginning in January 1997. Further, at December 31, 1996, an
additional 1,812,000 warrants were outstanding although the Company
currently does not believe that the performance criteria associated
with these warrants will be satisfied. In January 1997, 800,000 of the
warrants were purchased by the Company and recorded as a reduction in
additional paid-in capital. See also Note 13.
NOTE 10 -- INCOME TAXES
On June 1, 1991, the Company, with the consent of its stockholders,
elected to be taxed as an S Corporation. As a result of the election, all
earnings of the Predecessor Corporation were taxed directly to the stockholders.
Accordingly, the statements of income prior to September 20, 1995 did not
include provisions for income taxes. In connection with the Company's IPO, as
described in Note 8(b), on September 19, 1995, the Company terminated its S
Corporation status. Pro forma tax provisions have been calculated as if the
Company's results of operations were taxable as a C Corporation under the
Internal Revenue Code for the years ended December 31, 1995 and 1994.
The following summarizes the provision for pro forma income taxes:
Year ended December 31,
-----------------------
1995 1994
---- ----
(In thousands)
Current:
Federal $5,574 $2,892
State and local 1,639 850
----- ---
Pro forma provision for income taxes $7,213 $3,742
====== ======
The provision for pro forma income taxes on adjusted historical income
for the two years in the period December 31, 1995 differs from the amounts
computed by applying the applicable Federal statutory rates due to the
following:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Provision for Federal income taxes at the statutory rate $6,311 $3,274
State and local income taxes, net of Federal benefit 1,082 561
Other (180) (93)
-------- ---------
Pro forma provision for income taxes $7,213 $3,742
======== =========
</TABLE>
-53-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the termination, the Company was required to provide for
taxes on income for the period subsequent to September 19, 1995 and for the
previously earned and untaxed S Corporation income which has been deferred
primarily as a result of reporting on a cash basis. The provision for income
taxes for the years ended December 31, 1996 and 1995 consisted of the following:
Year ended December 31,
-------------------------------
1996 1995
---- ----
(In thousands)
Current:
Federal $10,995 $4,379
State and local 1,817 1,809
--------- -------
Total current 12,812 6,188
Deferred:
Federal (607) 2,201
State and local - 608
--------- -------
Total deferred (607) 2,809
--------- ------
$12,205 $8,997
========= =======
A reconciliation of the Federal statutory rate to the provision for
income taxes is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Federal income taxes computed at the
statutory rate $11,331 35.0% $6,311 35.0%
Increase (decrease):
Federal income taxes at the statutory rate
from January 1, 1995 to September 19, 1995 - - (4,086) (22.7)
Federal and state taxes resulting from cash to
accrual basis for tax reporting - - 6,399 35.5
State income taxes less Federal benefit 1,199 3.7 373 2.1
Other (325) (1.0) - -
------------- -------------- ------------- ---------------
Total provision for income taxes $12,205 37.7% $8,997 49.9%
============= ============== ============= ==============
</TABLE>
Deferred tax (assets) liabilities at December 31, 1996 and 1995 are
comprised of the following elements:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1996 1995
------------- --------------
(In thousands)
<S> <C> <C>
Taxable loss carryforwards $(3,705) $ -
Federal and state taxes resulting from cash
to accrual basis for tax reporting 2,342 3,130
Amortization of certain intangibles (85) (227)
Other (55) (94)
-------------- --------------
Deferred tax (assets) liabilities (included in other assets for 1996) $(1,503) $2,809
============== ==============
</TABLE>
-54-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 -- STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 47 $ 24 $ 55
======== ======== =====
Income taxes $1,090 $3,813 $ --
======== ======== =====
</TABLE>
In connection with the acquisition of the assets of ABA, the Company
released ABA of its outstanding obligations to the Company of $10,949,000 (Note
5). During 1996, the Company recorded an intangible of $1,077,000 in connection
with the issuance of warrants to certain partitions (Note 9(b)).
During 1995, the Company issued the Cash Flow Note in the amount of
$6,900,000 to the minority stockholder of the Predecessor Corporation in
connection with the IPO and Reorganization (Note 1(b)).
NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except for share data)
<S> <C> <C> <C> <C>
1996
Sales $51,065 $57,015 $60,079 $64,265
Gross profit 6,832 7,387 8,323 9,285
Operating income 4,546 4,882 5,871 6,489
Net income 3,377 4,058 7,032 5,701
Net income per share - Primary 0.08 0.07 0.11 0.09
Net income per share - Fully Diluted 0.07 0.07 0.11 0.09
1995
Sales $36,617 $44,728 $48,366 $50,391
Gross profit 5,374 6,113 5,670 6,824
Operating income 4,213 4,855 4,008 4,625
Net income 2,555 2,897 2,519 2,848
Net income per share - Primary 0.08 0.09 0.08 0.07
Net income per share-Fully Diluted 0.08 0.09 0.08 0.07
</TABLE>
-55-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SUBSEQUENT EVENT
On February 25, 1997, the Company announced that it had entered into a
Telecommunications Marketing Agreement (the "AOL Agreement"), dated as of
February 22, 1997 and effective as of February 25, 1997, with America Online,
Inc. ("AOL"), under which the Company will be the exclusive provider of
long-distance telecommunications services to be marketed by AOL to all of the
subscribers to AOL's online network under a distinctive brand name to be used
exclusively for the Company's services. The services will include provision for
online sign-up, call detail and reports and credit card payment. Under the AOL
Agreement, AOL will provide millions of dollars of online advertising and
promotion of the services and provide all of its subscribers with access to a
dedicated service area online for the Company. AOL subscribers who sign-up for
the telecommunications services will be customers of the Company, as the carrier
providing such services. The Company also has certain rights under the AOL
Agreement to offer, on a comparably exclusive basis, local and wireless
telecommunications services when available.
It is anticipated that the services will be tested in the early summer
and offered generally to AOL subscribers in the fall of 1997. The AOL Agreement
has an initial term of three years and can be extended by AOL on an annual basis
thereafter.
Under the AOL Agreement, the Company made an initial payment of
$100,000,000 to AOL at signing and agreed to provide marketing payments to AOL
based on a percentage of the Company's profits from the services (between 50%
and 70%, depending on the number of subscribers to the services). The AOL
Agreement provides that $43 million of the initial payment will be offset and
recoverable by the Company through reduction of such profit-based marketing
payments during the initial term of the AOL Agreement or, subject to certain
monthly reductions by offset of the amount thereof, directly by AOL upon certain
earlier terminations of the AOL Agreement. The $57 million balance of the
initial payment will be offset and is recoverable through a percentage of such
profit-based marketing payments made after the first five years of the AOL
Agreement (when extended beyond the initial term) and by offset against a
percentage of AOL's share of the profits from the services after termination or
expiration of the AOL Agreement. Any portion of the $43 million not previously
recovered or reduced in amount would be added to the $57 million and would be
recoverable similarly.
Also under the AOL Agreement, the Company issued to AOL at signing two
warrants to purchase shares of the Company's common stock at a premium over the
market value of such stock on the issuance date. One warrant is for 5 million
shares, at an exercise price of $15.50 per share, one-half of which shares will
vest at the time the service is first made generally available to AOL online
network subscribers in accordance with the AOL Agreement or the first
anniversary of the warrant issuance, whichever is earlier, and the balance of
which will vest on the first anniversary of issuance if the AOL Agreement has
not terminated. The other warrant is for up to 7 million shares, at an exercise
price of $14.00 per share, which will vest, commencing December 31, 1997, based
on the number of subscribers to the services and would vest fully if there are
at least 3.5 million such subscribers at any one time. The Company also agreed
to issue to AOL an additional warrant to purchase 1 million shares of its common
stock, at market value at the time of issuance, upon each of the first two
annual extensions by AOL of the term of the AOL Agreement, which warrants also
will vest based on the number of subscribers to the services.
The Company funded the $100 million initial payment by borrowing $50
million under its revolving loan agreement under a temporary increase in the
agreement to $60 million (Note 6), and an additional $50 million as a margin
advance from one of its brokers. Currently, the Company holds a U.S. Treasury
Bill with a face value of $150 million, which matures in November 1997, as
security for the advance.
-56-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEMS 10 THROUGH 13.
Information required by Part III (Items 10 through 13) of this Form
10-K is incorporated by reference to the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held in April or May of 1997, which
will be filed with the Securities and Exchange Commission not later than 120
days after the end of the fiscal year to which this Form 10-K relates.
-57-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this annual Report on
Form 10-K.
1. Consolidated Financial Statements:
The Consolidated Financial Statements filed as part of this Form 10-K
are listed in the "Index to Consolidated Financial Statements" in Item 8.
2. Consolidated Financial Statement Schedule:
The Consolidated Financial Statement Schedule filed as part of this
report is listed in the "Index to S-X Schedule."
Schedules other than those listed in the accompanying Index to S-X
Schedule are omitted for the reason that they are either not required, not
applicable, or the required information is included in the Consolidated
Financial Statements or notes thereto.
-58-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO S-X SCHEDULE
PAGE
----
Report of Independent Certified Public Accountants 60
Schedule II -- Valuation & Qualifying Accounts 61
-59-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of Tel-Save Holdings, Inc.
The audits referred to in our report dated January 29, 1997 relating to
the consolidated financial statements of Tel-Save Holdings, Inc. and
subsidiaries, which is contained in Item 8 of this Form 10-K, included the
audits of the financial statement schedule listed in the accompanying index for
each of the three years in the period ended December 31, 1996. This financial
statement schedule is the responsibility of management. Our responsibility is to
express an opinion on this schedule based on our audits.
In our opinion, the financial statement Schedule II -- Valuation and
Qualifying Accounts, presents fairly, in all material respects, the information
set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
January 29, 1997
-60-
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Charged
Balance at to Costs
Beginning of and Other Balance at
Description Period Expenses Changes Deductions End of Period
- ----------- ------ -------- ------- ---------- -------------
Year ended December 31, 1996:
<S> <C> <C> <C> <C> <C>
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible
accounts $804 $38 $145(a) $ -- $987
==== === ======= ==== ====
Year ended December 31, 1995:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts $987 $(13) $(170)(a) $ -- $804
==== ===== ========= ====== ====
Year ended December 31, 1994:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible
accounts $287 $53 $647(a) $ -- $987
==== === ======= ======= ====
(a) Amount represents portion of change in allowance for uncollectible
accounts applied against Accounts Payable - Partitions.
</TABLE>
-61-
<PAGE>
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------- ----------------------------------------------------------------------------------------------
<S> <C>
2.1 Plan of Reorganization Between and among Tel-Save Holdings, Inc., a Delaware Corporation,
Tel-Save, Inc., a Pennsylvania Corporation, Daniel Borislow and Paul Rosenberg, and Exhibits
Thereto (Incorporated by reference to Exhibit 2.1 to the Company's registration statement
on Form S-1 (File No. 33-94940)).
3.1 Amended and Restated Certificate of Incorporation of the Company, as amended (incorporated
by reference to Exhibit 3.1 to the Company's registration statement on Form S-1 (File No.
33-94940)).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
9.1 Voting Trust Agreement between Daniel Borislow and Paul Rosenberg (included as part of
Exhibit 2.1).
10.1* Employment Agreement between the Company and Daniel Borislow and related Agreement
(incorporated by reference to Exhibit 10.1 to the Company's registration statement on Form
S-1 (File No. 33-94940)).
10.2* Employment Agreement between the Company and Emanuel J. DeMaio (incorporated by reference to
Exhibit 10.2 to the Company's registration statement on Form S-1 (File No. 33-94940)).
10.3* Employment Agreement between the Company and Gary W. McCulla (incorporated by reference to
Exhibit 10.3 to the Company's registration statement on Form S-1 (File No. 33-94940)).
10.4* Employment Agreement between the Company and Joseph A. Schenk (incorporated by reference to
Exhibit 10.4 to the Company's registration statement on Form S-1 (File No. 333-2738)).
10.5* Employment Agreement between the Company and Aloysius T. Lawn, IV(incorporated by reference
to Exhibit 10.5 to the Company's registration statement on Form S-1 (File No. 333-2738)).
10.6* Employment Agreement between the Company and Edward B. Meyercord, III.
10.7 Indemnification Agreement between the Company and Daniel Borislow (incorporated by reference
to Exhibit 10.4 to the Company's registration statement on Form S-1 (File No. 33-94940)).
10.8 Indemnification Agreement between the Company and Emanuel J. DeMaio (incorporated by
reference to Exhibit 10.5 to the Company's registration statement on Form S-1 (File No.
33-94940)).
10.9 Indemnification Agreement between the Company and Gary W. McCulla (incorporated by reference
to Exhibit 10.6 to the Company's registration statement on Form S-1 (File No. 33-94940)).
-62-
<PAGE>
10.10 Indemnification Agreement between the Company and Joseph M. Morena (incorporated by
reference to Exhibit 10.7 to the Company's registration statement on Form S-1 (File No.
33-94940)).
10.11 Indemnification Agreement between the Company and Peter K. Morrison (incorporated by
reference to Exhibit 10.8 to the Company's registration statement on Form S-1 (File No.
33-94940)).
10.12 Indemnification Agreement between the Company and Kevin R. Kelly (incorporated by reference
to Exhibit 10.9 to the Company's registration statement on Form S-1 (File No. 33-94940)).
10.13 Indemnification Agreement between the Company and Aloysius T. Lawn, IV (incorporated by
reference to Exhibit 10.12 to the Company's Form 10-K for the Fiscal year ended December 31,
1995).
10.14 Indemnification Agreement between the Company and Edward B. Meyercord, III.
10.15 Agreement dated as of March 15, 1994 between the Company and Global Network Communications
(incorporated by reference to Exhibit 10.10 to the Company's registration statement on Form
S-1 (File No. 33-94940)).
10.16 AT&T Contract Tariff No. 516 (incorporated by reference to Exhibit 10.11 to the Company's
registration statement on Form S-1 (File No. 33-94940)).
10.17 AT&T Contract Tariff No. 1715 (incorporated by reference to Exhibit 10.15 to the Company's
registration statement on Form S-1 (File No. 333-2738)).
10.18 AT&T Contract Tariff No. 2039 (incorporated by reference to Exhibit 10.16 to the Company's
registration statement on Form S-1 (File No. 333-2738)).
10.19 AT&T Contract Tariff No. 2432 (incorporated by reference to Exhibit 10.17 to the Company's
registration statement on Form S-1 (File No. 333-2738)).
10.20 AT&T Contract Tariff No. 3628 (incorporated by reference to Exhibit 10.18 to the Company's
registration statement on Form S-1 (File No. 333-2738)).
10.21 AT&T Contract Tariff No. 5776.
10.22 $50,000,000 line of credit from PNC Bank, N.A., dated March 22, 1996 (incorporated by
reference to Exhibit 10.19 to the Company's registration statement on Form S-1 (File No.
333-2738)).
10.23 Modification Agreement between the Company and PNC Bank, N.A. dated February 24, 1997.
10.24+ General Agreement between Tel-Save, Inc. and AT&T Corp. dated June 26, 1995 (incorporated by
reference to Exhibit 10.14 to the Company's registration statement on Form S-1 (File No.
33-94940)).
10.25* Tel-Save Holdings, Inc. 1995 Employee Stock Option Plan (incorporated by reference to
Exhibit 10.15 to the Company's registration statement on Form S-1 (File No. 33-94940)).
-63-
<PAGE>
10.26* Tel-Save Holdings, Inc. Employee Bonus Plan (incorporated by reference to page 13 of the
Company's Proxy Statement for the Company's 1996 Annual Meeting of Stockholders dated April
3, 1996).
10.27* Non-Qualified Stock Option Agreement between the Company and Daniel Borislow (incorporated
by reference to Exhibit 10.17 to the Company's registration statement on Form S-1 (File No.
33-94940)).
10.28* Non-Qualified Stock Option Agreement between the Company and Emanuel J. DeMaio (incorporated
by reference to Exhibit 10.18 to the Company's registration statement on Form S-1 (File No.
33-94940)).
10.29* Non-Qualified Stock Option Agreement between the Company and Mary Kennon (incorporated by
reference to Exhibit 10.19 to the Company's registration statement on Form S-1 (File No.
33-94940)).
10.30* Non-Qualified Stock Option Agreement between the Company and Gary W. McCulla (incorporated
by reference to Exhibit 10.20 to the Company's registration statement on Form S-1 (File No.
33-94940)).
10.31* Non-Qualified Stock Option Agreement between the Company and Peter K. Morrison (incorporated
by reference to Exhibit 10.22 to the Company's registration statement on Form S-1 (File No.
33-94940)).
10.32++ Telecommunications Marketing Agreement by and among the Company, Tel-Save, Inc. and America
Online, Inc., dated February 22, 1997.
11.1 Net Income Per Share Calculation.
21.1 Subsidiaries of the Company.
23.1 Consent of BDO Seidman, LLP.
27 Financial Data Schedule.
- ----------
* Management contract or compensatory plan or arrangement.
+ Confidential treatment previously has been granted for a portion of this exhibit.
++ Confidential treatment has been requested for a portion of this exhibit.
(b) Reports on Form 8-K.
The following Current Reports on Form 8-K were filed by the Company during
the three months ended December 31, 1996:
1. Current Report on Form 8-K dated December 30, 1996.
2. Current Report on Form 8-K dated November 18, 1996.
</TABLE>
-64-
<PAGE>
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.
Dated: TEL-SAVE HOLDINGS, INC.
March 18, 1997
By: /s/ Daniel Borislow
----------------------------
Daniel Borislow
Chairman of the Board,
Chief Executive Officer
and Director
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.
March 18, 1997 By: /s/ Daniel Borislow
-------------------
Daniel Borislow
Chairman of the Board,
Chief Executive
Officer and Director
By:
-------------------
Gary W. McCulla
President, Director of Sales
and Marketing and Director
March 18, 1997 By: /s/ Emanuel J. DeMaio
---------------------
Emanuel J. DeMaio
Chief Operations
Officer and Director
March 18, 1997 By: /s/ Joseph A. Schenk
--------------------
Joseph A. Schenk
Chief Financial Officer,
Treasurer and Director
March 18, 1997 By: /s/ Kevin R. Kelly
------------------
Kevin R. Kelly
Controller
March 18, 1997 By: /s/ George Farley
-----------------
George Farley
Director
March 18, 1997 By: /s/ Harold First
----------------
Harold First
Director
March 18, 1997 By: /s/ Ronald R. Thoma
-------------------
Ronald R. Thoma
Director
-65-
EMPLOYMENT AGREEMENT
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THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
the 5th day of September, 1996 between Tel-Save, Inc. ("Company"), a
Pennsylvania corporation and a wholly-owned subsidiary of Tel-Save Holdings,
Inc. ("Holdings"), and Edward B. Meyercord, III ("Employee").
Preliminary Statement
----------- ---------
WHEREAS, Company desires to employ Employee, and Employee desires to be
employed by Company; and
WHEREAS, Company and Employee desire to enter into this Agreement which
sets forth the terms and conditions of said employment.
1. Employment. Company agrees to employ Employee, and Employee accepts
such employment and agrees to serve Company, on the terms and conditions set
forth herein. Except as otherwise specifically provided herein, Employee's
employment shall be subject to the employment policies and practices of Company
in effect from time to time during the Term of Employee's employment hereunder
(including without limitation its practices as to reporting and withholding).
2. Term of Agreement. The term of Employee's employment hereunder shall
commence on October 1, 1996 (the "Effective Date") and shall continue in effect
for a period of five years thereafter, except as hereinafter provided ("Term").
3. Position and Duties. Except as may otherwise be agreed upon between
Company and Employee, Employee shall perform such duties and responsibilities of
Executive Vice President-Marketing and Corporate Developments or such duties and
responsibilities as may be reasonably assigned or delegated to him from time to
time, including without limitation service as an employee, officer or director
of Company and affiliates of Company without additional compensation. References
in this Agreement to Employee's employment with Company shall be deemed to refer
to employment with Company or an affiliate. Employee shall perform his duties
and responsibilities to the best of his abilities in a diligent, trustworthy,
businesslike and efficient manner. Employee shall devote substantially all of
his working time and efforts to the business and affairs of Company; provided,
however, that nothing in this Agreement shall preclude the Employee from (i)
engaging in charitable activities and community affairs and (ii) managing his
personal investments and affairs.
4. Compensation and Related Matters.
4.1 Base Salary. During the Term of his employment hereunder,
Company shall pay to Employee an annualized base salary
<PAGE>
of not less than $210,000, subject to review from time to time by Company's
Board of Directors ("Base Salary"). Base Salary shall be paid in accordance with
Company's usual and customary payroll practices.
4.2 Benefit Plans and Arrangements. Employee shall be entitled
to participate in and to receive benefits under Company's employee benefit plans
and arrangements (including bonus plans) as are made available to the Company's
senior executives in effect during the Term of his employment hereunder, which
may be altered from time to time at the discretion of Company.
4.3 Perquisites. During the Term of his employment hereunder,
Employee shall be entitled to receive fringe benefits as are made available to
the Company's senior executives.
4.4 Expenses. Company shall promptly reimburse Employee for
all normal out-of-pocket expenses related to Company's business that are
actually paid or incurred by him in the performance of his services under this
Agreement and that are incurred, reported and documented in accordance with
Company's policies. In addition, during the Term of his employment hereunder,
the Company agrees to provide Employee with an automobile, as the Company shall
determine, and the Company shall keep such automobile fully insured in
accordance with the Company's practices for similarly situated employees.
4.5 Relocation of Employee.
(a) The Company shall pay Employee's reasonable
moving expenses incurred in connection with Employee's move from his current
residence in Ridgewood, New Jersey ("Old Residence") to a new residence in
either the Princeton, New Jersey or New Hope, Pennsylvania areas ("New
Residence"). Employee shall obtain the Company's prior approval for any single
moving expenditure in excess of $1,000.
(b) (i) Subject to the limitation in Section
4.5(b)(iv), upon the consummation of the sale of Employee's Old Residence, the
Company agrees to pay Employee the amount of money equal to the difference
between the purchase price that Employee paid for such residence and the sale
price that Employee received in connection with the sale of such residence.
(ii) Subject to the limitation in Section
4.5(b)(iv), in the event that and so long as the Employee owns both a New
Residence and his Old Residence during the period commencing on the date hereof
and terminating nine months thereafter ("Transition Period"), the Company shall
reimburse the Employee for the greater of (i) his monthly mortgage for his New
Residence and (ii) his monthly mortgage payment for his Old Residence, provided,
however, that the Company shall reimburse the Employee only for one such
mortgage payment each month during the Transition Period.
<PAGE>
(iii) Subject to the limitation of Section
4.5(b)(iv), to the extent that Employee has not purchased the New Residence, the
Company shall provide the Employee with a two-bedroom rental residence, as the
Company shall determine during the Transition Period.
(iv) Notwithstanding the foregoing, the
Company's aggregate liability to Employee pursuant to this Section 4.5(b) shall
not exceed fifty thousand dollars ($50,000.00).
4.6 Stock Options. (a) Employee shall be granted an option to
purchase 400,000 shares of common stock of Holdings (the "Option") in accordance
with the Stock Option Agreement attached hereto as Exhibit A. The Option shall
have an exercise price equal to $22.25 which is equal to the fair market value
of the common stock of Holdings on the date hereof. The Option shall be subject
to and conditional upon the Option receiving (i) the approval of the Board of
Directors of Holdings and (ii) the affirmative vote of a majority of all
outstanding shares of Holdings at the next annual meeting of the stockholders of
Holdings ("Stockholder Approval") and the Option shall be null and void if such
approval is not obtained. The Option shall be exercisable in installments, as
follows: (i) 133,333 shares of common stock may be purchased on the first
anniversary of the date hereof, (ii) 133,333 shares of common stock may be
purchased on the second anniversary of the date hereof and (iii) 133,334 shares
of common stock may be purchased on the third anniversary of the date hereof.
(b) Company agrees to file with the
Securities and Exchange Commission a Registration Statement on Form S-8 (or if
unavailable, a registration statement on Form S-3) to register the shares
issuable upon exercise of the Option under the Securities Act of 1933
("Securities Act") and any applicable state securities or "Blue Sky" laws on or
before the first anniversary of the date hereof. Notwithstanding the foregoing,
the Company shall be entitled to postpone for a reasonable period of time the
filing or the effectiveness of such registration statement if the Board of
Directors of the Company shall determine in good faith that such filing or
effectiveness would be materially detrimental to the Company's business
interest.
4.7 Signing Bonus. In consideration of Employee's Agreement to
become employed by Company, Company shall pay Employee $400,000 at the signing
hereof.
4.8 Change of Control. In the event of a "change in control"
of Holdings occurs, Employer shall pay Employee an amount equal to the
difference between $2,000,000 and the sum of (a) the aggregate "spread" upon the
Employee's prior exercise(s) of the Option, if any, and (b) the amount of the
spread on the Option on the date of the change in control, if any, assuming
Employee exercised the Option. For purposes of this paragraph 4.8: (A)
<PAGE>
"change in control" of Holdings shall have been deemed to occur if (z) Daniel
Borislow ceases for any reason to be Chairman of the Board and Chief Executive
Officer of Holdings and the Company or (y) any of the events listed in paragraph
2(a) of the Option shall have occurred; provided, however, that the foregoing
shall not apply to a change in status of Daniel Borislow in connection with any
transaction or series of transactions currently referred to by the Company as
"Project Vineyard" so long as Daniel Borislow retains the title of either
Chairman of the Board or Chief Executive Officer of Holdings and the Company
thereafter; and (B) "spread" means the difference between the fair market value
(which shall be deemed to be the closing price of the common stock of Holdings
on the relevant date) of the shares with respect to which the Option is
exercised and the aggregate exercise price paid.
5. Termination. The Term of Employee's employment hereunder may be
terminated under the following circumstances:
5.1 Death. The Term of Employee's employment hereunder
shall terminate upon his death.
5.2 Disability. Company may terminate the Term of Employee's
employment hereunder as a result of Employee's physical or mental incapacity in
accordance with Company's disability policy.
5.3 Cause. (a) Upon written notice, Company may terminate the
Term of Employee's employment hereunder for Cause. For purposes of this
Agreement, Company shall have "Cause" to terminate Employee's employment
hereunder upon (i) material breach of any material provision of this Agreement;
(ii) willful misconduct as an employee of Company in connection with
misappropriating any funds or property of Company or attempting to willfully
obtain any personal profit from any transaction in which Employee has an
interest which is adverse to the interests of Company; or (iii) gross neglect or
unreasonable refusal to perform the duties assigned to Employee under or
pursuant to this Agreement.
5.4 By Employee.
(i) Employee may terminate the Term of his
employment hereunder upon sixty days prior written notice to Company, provided
that, upon the giving of such notice by Employee, Company may establish an
earlier date for the termination of the Term and such termination under this
Section 5.4.
(ii) Employee may terminate employment hereunder
for Good Reason immediately and with notice to Company. "Good reason" for
termination by Employee shall include, but is not limited to, the following:
<PAGE>
(a) Material breach of any provision
of this Agreement by Company, which breach shall not have been cured by Company
within thirty (30) days of receipt of written notice of said material breach;
(b) Failure to maintain Employee in
a position commensurate with that referred to in Section 3 of this Agreement; or
(c) The assignment to Employee of any
duties inconsistent with the Employee's position, authority, duties or
responsibilities as contemplated by Section 3 of this Agreement, or any other
action by Company which results in a diminution of such position, authority,
duties or responsibilities.
5.5 Without Cause. Company may otherwise terminate the Term of
Employee's employment at any time upon written notice to Employee.
6. Compensation In the Event of Termination. In the event that the
Employee's employment pursuant to this Agreement terminates prior to the end of
the Term of this Agreement, the Company shall pay the Employee compensation as
set forth below:
6.1 By Employee for Good Reason; By Company Without Cause. In
the event that the Employee's employment hereunder is terminated: (i) by the
Employee for good reason or (ii) by the Company without Cause, then (A) the
Company shall continue to pay and provide Employee his compensation and benefits
as set forth in Section 4 in the same manner as before termination, and for a
period of time ending on the earlier of the date when the Term of this Agreement
would otherwise have expired in accordance with Section 2 of this Agreement and
the second anniversary of the date of such termination and (B) fifty percent
(50%) of the outstanding stock options granted to Employee which are unvested
shall immediately vest and Employee shall have the right to exercise any vested
stock options during the period ending on the second anniversary of the date of
such termination or for the remainder of the exercise period; if less.
6.2 By Company for Cause; By Employee Without Cause. In the
event that the Company shall terminate the Employee's employment hereunder for
Cause pursuant to Section 5.3 hereof or Employee shall terminate his employment
hereunder without Good Reason, all compensation and benefits, as specified in
Section 4 of this Agreement, heretofore payable or provided to the Employee
shall cease to be payable or provided, except for salary and benefits which may
have been earned and are due and payable but which have not been paid as of the
date of termination and reimbursements for expenses which may have been
incurred, reported and documented but which have not been paid as of the date of
termination.
<PAGE>
6.3 Death. In the event of Employee's death the Company shall
not be obligated to pay Employee or his estate or beneficiaries any compensation
except for salary and benefits which may have been earned and are due and
payable but which have not been paid as of the date of termination and
reimbursements for expenses which may have been incurred, reported and
documented but which have not been paid as of the date of termination; provided,
however, that upon termination due to death, all outstanding stock options
granted to the Employee which are unvested shall immediately vest and the
Employee's estate or beneficiaries as the case may be, shall have the right to
exercise any vested stock options during the period ending on the second
anniversary of the date of such termination or, for the remainder of the
exercise period, if less.
6.4 Disability. In the event of Employee's disability, the
Company shall not be obligated to pay Employee or his estate or beneficiaries
any compensation except for: (a) salary and benefits which may have been earned
and are due and payable but which have not been paid as of the date of
termination; (b) reimbursement for expenses which may have been incurred,
reported and documented but which have not been paid as of the date of
termination; and (c) the Company, at its option, either will pay Employee (i)
$36,000 per year until Employee reaches the age of 65 or (ii) a lump sum equal
to the present value of the amount to be paid pursuant to Section 6.4(c)(i)
above. Upon termination due to disability fifty percent (50%) of the outstanding
stock options granted to the Employee which are unvested shall immediately vest
and the Employee or his estate or beneficiaries, as the case may be shall have
the right to exercise any vested stock options during the period ending on the
second anniversary of the date of such termination or for the remainder of the
exercise period, if less.
6.5 No Mitigation. In the event of any termination of
employment under Section 5, the Employee shall be under no obligation to seek
other employment; provided, however, to the extent that Employee does obtain
other employment subsequent to the termination of Employee's employment
hereunder, Company's obligations under this Agreement shall terminate.
7. Unauthorized Disclosure. Employee shall not, without the prior
written consent of Company, disclose or use in any way, either during the
Employee's employment with Company or thereafter, except as required in the
course of such employment, any confidential business or technical information or
trade secret acquired in the course of such employment, whether or not conceived
of or prepared by him, which is related to any service or business of Company or
any Company affiliate; provided, that the foregoing shall not apply to (i)
information which is not unique to the Company or which is generally known to
the industry or the public other than as a result of Employee's breach of this
covenant, (ii) information known to the Employee prior to the Effective Date, or
(iii) information which Employee is required to
<PAGE>
disclose to or by any governmental or judicial authority; provided, however, if
Employee should be required in the course of judicial or administrative
proceedings to disclose any information Employee shall give Company prompt
written notice thereof so that Company may seek an appropriate protective order
and/or waive in writing compliance with the confidentiality provisions of this
Agreement. If, in the absence of a protective order or the receipt of a waiver
by the Company, Employee is nonetheless, in the written opinion of its counsel,
compelled to disclose information to a court or tribunal or otherwise stand
liable for contempt or suffer other serious censure or penalty, Employee may
disclose such information to such court or tribunal without liability to any
other party hereto.
8. Tangible Items. All files, records, documents, manuals, books,
forms, reports, memoranda, studies, data, calculations, recordings,
correspondence, in whatever form they may exist, and all copies, abstracts and
summaries of the foregoing and all physical items related to the business of
Company and its affiliates, other than merely personal items, whether of a
public nature or not, and whether prepared by Employee or not, are and shall
remain the exclusive property of Company and its affiliates and shall not be
removed from their premises, except as required in the course of employment by
Company, without the prior written consent of Company, and the same shall be
promptly returned by Employee on the termination of Employee's employment with
Company or at any time prior thereto upon the request of Company.
9. Inventions and Patents. Employee agrees that all inventions,
innovations, improvements, developments, methods, designs, analyses, drawings,
reports, and all similar or related information which relates to Company's
actual or anticipated business, research and development or existing or future
products or services and which are conceived, developed or made by or at the
direction of Employee while employed by Company will be owned by Company.
Employee also agrees to promptly perform all reasonable actions (whether before,
during or after the Term) necessary to establish and confirm such ownership (to
the extent of such ownership).
10. Certain Restrictive Covenants. For a period ending six (6) months
after the earlier of the Employee's termination of employment hereunder or the
Term Employee agrees that, he will not act either directly or indirectly as a
partner, officer, director, substantial stockholder or employee, or render
advisory or other services for, or in connection with, or become interested in,
or make any substantial financial investment in any firm, corporation, business
entity or business enterprise competitive with the business of Company, except
with the express written consent of the Board of Directors of Company. Employee
further agrees that in the event of the termination of his employment under
Section 5, for a period of one year thereafter, he will not employ or offer to
employ, call on, solicit, actively interfere with Company's or any Company
affiliate's relationship with, or
<PAGE>
attempt to divert or entice away, any employee of Company or any Company
affiliate.
11. Employee Representations. Employee hereby represents and warrants
to Company that (i) the execution, delivery and performance of this Agreement by
Employee does not and will not conflict with, breach, violate or cause a default
under any contract, agreement, instrument, order, judgment or decree to which
Employee is a party or by which he is bound, (ii) except as disclosed to Company
in writing prior to the execution of this Agreement, Employee is not a party to
or bound by any employment agreement, noncompete agreement or confidentiality
agreement with any other person or entity, and (iii) upon the execution and
delivery of this Agreement by Company, this Agreement shall be the valid and
binding obligation of Employee, enforceable in accordance with its terms.
12. Company Representations. The Company represents and warrants (i)
that it is duly authorized and empowered to enter into this Agreement, (ii) that
the performance of its obligations under this Agreement will not violate any
agreement between it and any other person, firm or organization and (iii) upon
the execution and delivery of this Agreement by the Employee, this Agreement
shall be the valid and binding obligation of the Company, enforceable in
accordance in accordance with its terms.
13. Remedies. Employee acknowledges that the restrictions and
agreements contained in this Agreement are reasonable and necessary to protect
that legitimate interests of Company, and that any violation of this Agreement
will cause substantial and irreparable injury to Company that would not be
quantifiable and for which no adequate remedy would exist at law and agrees that
injunctive relief, in addition to all other remedies, shall be available
therefor.
14. Effect of Agreement on Other Benefits. Except as specifically
provided in this Agreement, the existence of this Agreement shall not be
interpreted to preclude, prohibit or restrict the Employee's participation in
any other employee benefit or other plans or programs in which he currently
participates.
15. Rights of Executive's Estate. If the Employee dies prior to the
payment of all amounts due and owing to him under the terms of this Agreement,
such amounts shall be paid to such beneficiary or beneficiaries as the Employee
may have last designated in writing filed with the Secretary of the Company or,
if the Employee has made no beneficiary designation, to the Employee's estate.
Such designated beneficiary or the executor of his estate, as the case my be,
may exercise all of the Employee's rights hereunder. If any beneficiary
designated by the Employee shall predecease the Employee, the designation of
such beneficiary shall be deemed revoked, and any amounts which would have been
payable to such beneficiary shall be paid to the Employee's
<PAGE>
estate. If any designated beneficiary survives the Employee, but dies before
payment of all amounts due hereunder, such payments shall, unless the Employee
has designated otherwise, be made to such beneficiary's estate. In the event of
the Employee's death or judicial determination of his incompetence, reference in
this Agreement to the Employee shall be deemed where appropriate, to refer to
his beneficiary, estate or other legal representative.
16. Severability. It is the intent and understanding of the parties
hereto that if, in any action before any court or agency legally empowered to
enforce this Agreement, any term, restriction, covenant, or promise is found to
be unreasonable and for that reason unenforceable, then such term, restriction,
covenant, or promise shall not thereby be terminated but that it shall be deemed
modified to the extent necessary to make it enforceable by such Court or agency
and, if it cannot be so modified, that it shall be deemed amended to delete
therefrom such provision or portion adjudicated to be invalid or unenforceable,
such modification or amendment in any event to apply only with respect to the
operation of this Agreement in the particular jurisdiction in which such
adjudication is made.
17. Notice. For the purposes of this Agreement, notices, demands and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when received if delivered in person or
by overnight courier or if mailed by United States registered mail, return
receipt requested, postage prepaid, to the following addresses:
If to Employee:
Mr. Edward B. Meyercord, III
202 Mountain Avenue
Ridgewood, New Jersey 07450
If to Company:
Tel-Save, Inc.
6805 Route 202
New Hope, Pennsylvania 18938
Attn: President
Either party may change its address for notices by written notice to the other
party in accordance with this Section 17.
18. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by Employee and Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. The validity, interpretation,
construction and performance of this
<PAGE>
Agreement shall be governed by the laws of Pennsylvania relating to contracts
made and to be performed entirely therein.
19. Headings. The headings in this Agreement are inserted for
convenience only and shall have no significance in the interpretation of this
Agreement.
20. Successors. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their heirs, personal representatives and
successors, including without limitation any affiliate to which Company may
assign this Agreement. Employee may not assign or transfer his rights to
compensation and benefits, except by will or operation of law and, except as
provided in Section 15 above.
21. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement as of the day and year first written above.
Tel-Save, Inc.
By:
------------------------------
Daniel Borislow
Chairman and Chief Executive Officer
- ---------------------------------
Edward B. Meyercord, III
TEL-SAVE HOLDINGS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of
_________, by and between Tel-Save Holdings, Inc., a Delaware corporation (the
"Company"), and Edward B.
Meyercord, III ("Indemnitee").
WHEREAS, Indemnitee is an officer of the Company and performs a
valuable service in such capacity for the Company;
WHEREAS, the Company and Indemnitee recognize the difficulty in
obtaining liability insurance for its directors, officers, employees, agents and
fiduciaries, the significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the
substantial increase in corporate litigation in general, subjecting directors,
officers, employees, agents and fiduciaries to expensive litigation risks at the
same time as the availability and coverage of liability insurance has been
severely limited;
WHEREAS, Indemnitee does not regard the current protection
available as adequate under the present circumstances, and the Indemnitee and
other directors, officers, employees, agents and fiduciaries of the Company may
not be willing to continue to serve in such capacities without additional
protection; and
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve the Company and, in
part, in order to induce Indemnitee to continue to provide services to the
Company, wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Indemnification of Expenses. The Company shall
indemnify Indemnitee to the fullest extent
<PAGE>
- 2 -
permitted by law if Indemnitee was or is or becomes a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, any threatened, pending or completed action, suit, proceeding or
alternative dispute resolution mechanism, or any hearing, inquiry or
investigation that Indemnitee in good faith believes might lead to the
institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other (hereinafter a "Claim") by reason of (or arising in part out of) any event
or occurrence related to the fact that Indemnitee is or was a director, officer,
employee, agent or fiduciary of the Company, or any subsidiary of the Company,
or is or was serving at the request of the Company or any subsidiary of the
Company as a director, officer, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust or other enterprise, or by reason
of any action or inaction on the part of Indemnitee while serving in such
capacity whether or not the basis of the Claim is the alleged action in an
official capacity as a director, officer, employee, agent or fiduciary of the
Company or any subsidiary, or in any other capacity while serving as a director,
officer, employee, agent or fiduciary of the Company or any subsidiary, as
described above (hereinafter an "Indemnifiable Event") against any and all
expenses actually and reasonably incurred or paid (including attorneys' fees and
all other costs, expenses and obligations actually and reasonably incurred in
connection with investigating, defending, being a witness in or participating in
(including on appeal), or preparing to defend, be a witness in or participate
in, any such action, suit, proceeding, alternative dispute resolution mechanism,
hearing, inquiry or investigation, and amounts actually and reasonably incurred
or paid in settlement of any such action, suit, proceeding, alternative dispute
resolution mechanism, hearing, inquiry or investigation), and judgments, fines,
penalties and amounts incurred or paid, in connection with the defense or
settlement of such Claim and any federal, state, local or foreign taxes imposed
on the Indemnitee as a result of the actual or deemed receipt of any payments
under this Agreement (collectively, hereinafter "Expenses"), including all
interest, assessments and other charges paid or payable by the Indemnitee in
connection with or in respect of such Expenses. Such payment of Expenses shall
be made by the Company as soon as practicable but in any event no later than
thirty (30) days after
<PAGE>
-3-
written demand by Indemnitee therefor is presented to the Company.
(b) Reviewing Party. Notwithstanding the foregoing,
(i) the obligations of the Company under Section 1(a) shall be subject to the
condition that the Reviewing Party (as described in Section 10(e) hereof) shall
not have determined (in a written opinion, in any case in which the Independent
Legal Counsel referred to in Section 10(d) hereof is involved) that Indemnitee
would not be permitted to be indemnified under applicable law, and (ii) the
obligation of the Company to make an advance payment of Expenses to Indemnitee
pursuant to Section 2(a) (an "Expense Advance") shall be subject to the
condition that, if, when and to the extent that the Reviewing Party determines
that Indemnitee would not be permitted to be so indemnified under applicable
law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby
agrees to reimburse the Company) for all such amounts theretofore paid;
provided, however, that if Indemnitee has commenced or thereafter commences
legal proceedings in a court of competent jurisdiction to secure a determination
that Indemnitee should be indemnified under applicable law, any determination
made by the Reviewing Party that Indemnitee would not be permitted to be
indemnified under applicable law shall not be binding and Indemnitee shall not
be required to reimburse the Company for any Expense Advance until a final
judicial determination is made with respect thereto (as to which all rights of
appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to
reimburse the Company for any Expense Advance shall be unsecured and no interest
shall be charged thereon. If there has not been a Change in Control (as defined
in Section 10(c) hereof), the Reviewing Party shall be selected by members of
the Board of Directors who are not or were not a party to the Claim in respect
of which indemnification is sought, and if there has been such a Change in
Control (other than a Change in Control which has been approved by a majority of
the Company's Board of Directors who were directors immediately prior to such
Change in Control), the Reviewing Party shall be the Independent Legal Counsel
referred to in Section 1(c) hereof. If there has been no determination by the
Reviewing Party or if the Reviewing Party determines that Indemnitee
substantively would not be permitted to be indemnified in whole or in part under
applicable law, or if Indemnitee shall not have received full indemnification
from the Company within thirty (30) days after the Company's receipt of written
notice by the
<PAGE>
-4-
Indemnitee demanding such indemnification, Indemnitee shall have the right to
commence litigation seeking an initial determination by the court or challenging
any such determination (or lack thereof) by the Reviewing Party or any aspect
thereof, including the legal or factual bases therefor or the failure of the
Company to fully indemnify the Indemnitee, and the Company hereby consents to
service of process and to appear in any such proceeding. Any determination by
the Reviewing Party not otherwise so challenged shall be conclusive and binding
on the Company and Indemnitee.
(c) Change in Control. The Company agrees that if
there is a Change in Control of the Company (other than a Change in Control
which has been approved by a majority of the Company's Board of Directors who
were directors immediately prior to such Change in Control), then with respect
to all matters thereafter arising concerning the rights of Indemnitee to
payments of Expenses and Expense Advances under this Agreement or any other
agreement or under the Company's Articles of Incorporation or Bylaws as now or
hereafter in effect, the Company shall seek legal advice only from Independent
Legal Counsel (as defined in Section 10(d) hereof) selected by the Company and
approved in writing by the Indemnitee (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent Indemnitee would be
permitted to be indemnified under applicable law. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to fully
indemnify such counsel against any and all expenses (including attorneys' fees),
claims, liabilities and damages arising out of or relating to this Agreement or
its engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding
any other provision of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, in connection with any Claim,
Indemnitee shall be indemnified against all Expenses actually and reasonably
incurred by Indemnitee in connection therewith.
2. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall
advance all Expenses incurred by Indemnitee. The
<PAGE>
-5-
advances to be made hereunder shall be paid by the Company to Indemnitee as soon
as practicable but in any event no later than five (5) days after written demand
by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee
shall, as a condition precedent to Indemnitee's right to be indemnified under
this Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement; but the Indemnitee's failure to so notify the Company
shall not relieve the Company from any liability that it may have to Indemnitee
under this Agreement, except to the extent that the Company is able to establish
that its ability to avoid such liability was prejudiced in a material respect by
such failure and except as provided in Section 2(f). Notice to the Company shall
be directed to the Chief Executive Officer of the Company at the address shown
on the signature page of this Agreement (or such other address as the Company
shall designate in writing to Indemnitee). In addition, Indemnitee shall give
the Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's power. Any costs or expenses (including attorneys'
fees and disbursements) actually and reasonably incurred by Indemnitee in so
cooperating shall be borne by the Company (irrespective of the determination as
to Indemnitee's entitlement to indemnification) and the Company hereby
indemnifies and agrees to hold Indemnitee harmless therefrom.
(c) No Presumptions; Burden of Proof. For purposes
of this Agreement, the termination of any claim, action, suit or proceeding, by
judgment, order, settlement (whether with or without court approval) or
conviction, or upon a plea of nolo contendere, or its equivalent, shall not
create a presumption that Indemnitee did not meet any particular standard of
conduct or have any particular belief or that a court has determined that
indemnification is not permitted by applicable law. In addition, neither the
failure of the Reviewing Party to have made a determination as to whether
Indemnitee has met any particular standard of conduct or had any particular
belief, nor an actual determination by the Reviewing Party that Indemnitee has
not met such standard of conduct or did not have such belief, prior to the
commencement of legal proceedings by Indemnitee to secure a judicial
determination that Indemnitee should be indemnified under applicable law, shall
be a defense to Indemnitee's claim or create a
<PAGE>
-6-
presumption that Indemnitee has not met any particular standard of conduct or
did not have any particular belief. In connection with any determination by the
Reviewing Party or otherwise as to whether the Indemnitee is entitled to be
indemnified hereunder, the burden of proof shall be on the Company to establish
that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the
receipt by the Company of a notice of a Claim pursuant to Section 2(b) hereof,
the Company has liability insurance in effect which may cover such Claim, the
Company shall give prompt notice of the commencement of such Claim to the
insurers in accordance with the procedures set forth in the respective policies.
The Company shall thereafter take all necessary or desirable action to cause
such insurers to pay, on behalf of the Indemnitee, all amounts payable as a
result of such action, suit, proceeding, inquiry or investigation in accordance
with the terms of such policies.
(e) Selection of Counsel. In the event the Company
shall be obligated hereunder to pay the Expenses of any action, suit,
proceeding, inquiry or investigation, the Company, except as otherwise provided
below, shall be entitled to assume the defense of such action, suit, proceeding,
inquiry or investigation at its own expense with counsel approved by Indemnitee,
upon the delivery to Indemnitee of written notice of its election so to do.
After delivery of such notice, approval of such counsel by Indemnitee, and the
retention of such counsel by the Company, the Company will not be liable to the
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
the Indemnitee with respect to the same action, suit, proceeding, inquiry or
investigation, other than as provided below. The Company shall not settle any
Proceeding in any manner which would impose any penalty or limitation on the
Indemnitee without the Indemnitee's written consent (which approval shall not be
unreasonably withheld). The Indemnitee shall have the right to employ
Indemnitee's own counsel in any such action, suit, proceeding, inquiry or
investigation, but the fees and expenses of such counsel incurred after written
notice from the Company of its assumption of the defense thereof shall be at the
expense of the Indemnitee, unless (i) the employment of counsel by the
Indemnitee has been previously authorized by the Company, or, following a Change
in Control (other than a Change in Control approved by a majority of the members
<PAGE>
-7-
of the Board of Directors who were directors immediately prior to such Change in
Control), the employment of counsel by the Indemnitee has been approved by the
Independent Legal Counsel, (ii) the Indemnitee shall have reasonably concluded
that there may be a conflict of interest between the Company and the Indemnitee
in the conduct of any such defense, or (iii) the Company shall not in fact have
employed or retained or shall not in fact continue to employ or retain counsel
to assume the defense of such action, suit, proceeding, inquiry or
investigation, in each of which cases the fees and expenses of the Indemnitee's
counsel shall be at the expense of the Company. The Company shall not be
entitled to assume or control the defense of any action, suit, proceeding,
inquiry or investigation brought by or on behalf of the Company or as to which
the Indemnitee has made the conclusion that there may be a conflict of interest
between the Company and the Indemnitee.
(f) Settlement of Claims. The Company shall not be liable to
indemnify Indemnitee under this Agreement for any amounts paid in settlement of
any Claim effected without the Company's written consent, such consent not to be
unreasonably withheld; provided, however, that if a Change in Control has
occurred (other than a Change in Control approved by a majority of the members
of the Board of Directors who were directors immediately prior to such Change in
Control), the Company shall be liable for indemnification of Indemnitee for
amounts paid in settlement if the Independent Legal Counsel has approved the
settlement.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. The Company hereby agrees to indemnify the
Indemnitee to the fullest extent permitted by law, notwithstanding that such
indemnification is not specifically authorized by the other provisions of this
Agreement, the Company's Articles of Incorporation, the Company's Bylaws or by
statute. In the event of any change after the date of this Agreement in any
applicable law, statute or rule which expands the right of the Company to
indemnify the Indemnitee, it is the intent of the parties hereto that Indemnitee
shall enjoy by this Agreement the greater benefits afforded by such change. In
the event of any change in any applicable law, statute or rule which narrows the
right of the Company to indemnify the Indemnitee, such change, to the extent not
otherwise required by such law, statute or rule to be applied to this Agreement,
shall have no
<PAGE>
-8-
effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by
this Agreement shall be in addition to any rights to which Indemnitee may be
entitled under the Company's Articles of Incorporation, its Bylaws, any
agreement, any vote of stockholders or disinterested directors, the General
Corporation Law of the State of Delaware, or otherwise. The indemnification
provided under this Agreement shall continue as to Indemnitee for any action
taken or not taken while serving in an indemnified capacity even though
Indemnitee may have ceased to serve in such capacity.
4. No Duplication of Payments. The Company shall not be
liable under this Agreement to make any payment in connection with any action,
suit, proceeding, inquiry or investigation made against Indemnitee to the extent
Indemnitee has otherwise actually received payment (under any insurance policy,
Articles of Incorporation, Bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under
any provision of this Agreement to indemnification by the Company for some or a
portion of Expenses in the investigation, defense, appeal or settlement of any
civil or criminal action, suit, proceeding, inquiry or investigation, but not,
however, for all of the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion of such Expenses to which Indemnitee is
entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee
acknowledge that in certain instances, Federal law or applicable public policy
may prohibit the Company from indemnifying its directors, officers, employees,
agents or fiduciaries under this Agreement or otherwise. Indemnitee understands
and acknowledges that the Company has undertaken or may be required in the
future to undertake with the Securities and Exchange Commission to submit the
question of indemnification to a court in certain circumstances for a
determination of the Company's right under public policy to indemnify
Indemnitee.
7. Liability Insurance. To the extent the Company maintains
liability insurance applicable to directors, officers, employees, agents or
fiduciaries, Indemnitee shall be covered by such policies in such a
<PAGE>
-9-
manner as to provide Indemnitee the same rights and benefits as are accorded to
the most favorably insured of the Company's directors, if Indemnitee is a
director; or of the Company's officers, if Indemnitee is not a director of the
Company but is an officer; or of the Company's key employees, agents or
fiduciaries, if Indemnitee is not an officer or director but is a key employee,
agent or fiduciary.
8. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee
for any Expenses resulting from acts, omissions or transactions from which
Indemnitee may not be relieved of liability under applicable law, or for any
Expenses resulting from Indemnitee's conduct with is finally adjudged to have
been willful misconduct or knowingly fraudulent;
(b) Claims Initiated by Indemnitee. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, regardless of
whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be, except (i) with respect to proceedings brought to establish or enforce a
right to or for advances of Expenses and/or indemnification under this Agreement
or any other agreement or insurance policy or under the Company's Articles of
Incorporation or Bylaws now or hereafter in effect relating to Claims for
Indemnifiable Events, (ii) in specific cases if the Board of Directors has
approved the initiation or bringing of such suit, or (iii) as otherwise required
under the General Corporation Law of the State of Delaware;
(c) Lack of Good Faith. To indemnify Indemnitee for any
expenses incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for
expenses and the payment of
<PAGE>
-10-
profits arising from the purchase and sale or, sale and purchase, by Indemnitee
of securities in violation of Section 16(b) of the Securities Exchange Act of
1934, as amended, or any similar successor statute.
9. Period of Limitations. No legal action shall be brought
and no cause of action shall be asserted by or in the right of the Company
against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or
legal representatives after the expiration of two years from the date of accrual
of such cause of action, and any claim or cause of action of the Company shall
be extinguished and deemed released unless asserted by the timely filing of a
legal action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the
"Company" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees,
agents or fiduciaries, so that if Indemnitee is or was a director, officer,
employee, agent or fiduciary of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director, officer,
employee, agent or fiduciary of another corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise, Indemnitee shall stand in the
same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee, agent or fiduciary of the
Company which imposes duties on, or involves services by, such director,
officer, employee, agent or fiduciary with respect to an employee benefit plan,
its
<PAGE>
-11-
participants or its beneficiaries; and if Indemnitee acted in good faith and in
a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
(c) For purposes of this Agreement, a "Change in Control"
shall be deemed to have occurred if (i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended),
other than a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing more than 20% of the total voting power represented by
the Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof, or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or (iv) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of transactions) all or substantially all of the
Company's assets.
(d) For purposes of this Agreement, "Independent Legal
Counsel" shall mean an attorney or firm of attorneys, selected in accordance
with the
<PAGE>
-12-
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three years (other than
with respect to matters concerning the rights of Indemnitee under this
Agreement, or of other indemnitees under similar indemnity agreements).
Notwithstanding the foregoing, the term "Independent Legal Counsel" shall not
include any firm or person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing
either the Company or Indemnitee in an action to determine Indemnitee's right to
indemnification under this Agreement.
(e) For purposes of this Agreement, a "Reviewing Party"
shall mean any appropriate person or body consisting of a member or members of
the Company's Board of Directors or any other person or body appointed by the
Board of Directors who is not a party to the particular Claim for which
Indemnitee is seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities"
shall mean any securities of the Company that vote generally in the election of
directors.
11. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director of the Company or of any other enterprise at the Company's request.
<PAGE>
-13-
13. Attorneys' Fees. In the event that any action is
instituted by Indemnitee under this Agreement or under any liability insurance
policies maintained by the Company to enforce or interpret any of the terms
hereof or thereof, Indemnitee shall be entitled to be paid all Expenses actually
and reasonably incurred by Indemnitee with respect to such action, regardless of
whether Indemnitee is ultimately successful in such action, and shall be
entitled to the advancement of Expenses with respect to such action, unless as a
part of such action the court of competent jurisdiction over such action
determines that each of the material assertions made by Indemnitee as a basis
for such action were not made in good faith or were frivolous. In the event of
an action instituted by or in the name of the Company under this Agreement to
enforce or interpret any of the terms of this Agreement, Indemnitee shall be
entitled to be paid all Expenses actually and reasonably incurred by Indemnitee
in defense of such action (including costs and expenses incurred with respect to
Indemnitee's counterclaims and cross-claims made in such action), and shall be
entitled to the advancement Expenses with respect to such action, unless as a
part of such action the court having jurisdiction over such action determines
that each of Indemnitee's material defenses to such action were made in bad
faith or were frivolous.
14. Notice. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed duly
given (i) if delivered by hand and receipted for by the party addressee, on the
date of such receipt, or (ii) if mailed by domestic certified or registered mail
with postage prepaid, on the third business day after the date postmarked.
Addresses for notice to either party are as shown on the signature page of this
Agreement, or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each
hereby irrevocably consent to the jurisdiction of the courts of the Commonwealth
of Pennsylvania for all purposes in connection with any action or proceeding
which arises out of or relates to this Agreement and agree that any action
instituted under this Agreement shall be commenced, prosecuted and continued
only in the court of the Commonwealth of Pennsylvania in and for the County of
Philadelphia, which shall be the exclusive and only proper forum for
adjudicating such a claim.
<PAGE>
-14-
16. Severability. The provisions of this Agreement shall be
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable, and the
remaining provisions shall remain enforceable to the fullest extent permitted by
law. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitations, each portion of this Agreement
containing any provision held to be invalid, void or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and
its provisions construed and enforced in accordance with the laws of the State
of Delaware, without regard to the conflict of laws principles thereof.
18. Subrogation. In the event of payment under this
Agreement, the Company shall be subrogated to the extent of such payment to all
of the rights of recovery of Indemnitee, who shall execute all documents
required and shall do all acts that may be necessary to secure such rights and
to enable the Company effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless it is in
writing signed by both the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver. Except as specifically set forth herein, no failure to
exercise or any delay in exercising any right or remedy hereunder shall
constitute a waiver thereof.
20. Integration and Entire Agreement. This Agreement sets
forth the entire understanding between the parties hereto and supersedes and
merges all previous written and oral negotiations, commitments, understandings
and agreements relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing
contained in this Agreement shall be construed
<PAGE>
-15-
as giving Indemnitee any right to be retained in the employ of the Company or
any of its subsidiaries.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
TEL-SAVE HOLDINGS, INC.
By:
------------------------
Title:
---------------------
22 Village Square
New Hope, Pennsylvania 18938
AGREED TO AND ACCEPTED
INDEMNITEE:
- -----------------------
(indemnitee)
- -----------------------
(address)
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Title Page
Bridgewater, NJ 08807 Cancels Original Title Page
Issued: December 20, 1996 Effective: December 21, 1996
Original Tariff Effective: November 1, 1996
CONTRACT TARIFF NO. 5776
TITLE PAGE
This Contract Tariff applies to AT&T Software Defined Network Services
consisting of: AT&T Custom Software Defined Network Service and Global Software
Defined Network Service; AT&T Distributed Network Service; AT&T MEGACOM Service;
AT&T 800 Services consisting of: AT&T 800 Service-Domestic, AT&T 800
Service-Canada, AT&T MEGACOM 800 Service-Domestic, AT&T MEGACOM 800
Service-Canada, AT&T MEGACOM 800 Service-Mexico, AT&T MEGACOM 800
Service-Overseas, AT&T 800 READYLINE Service-Domestic, AT&T 800 READYLINE
Service-Canada, AT&T 800 READYLINE Service-Mexico, AT&T 800 READYLINE
Service-Overseas, AT&T 800 READYLINE Service-Puerto Rico and the U.S. Virgin
Islands; AT&T ACCUNET T1.5 Service Access Connections; AT&T Primary Rate
Interface Office Functions and AT&T Terrestrial 1.544 Mbps Local Channel
Services for interstate or foreign communications in accordance with the
Communications Act of 1934, as amended.
Telecommunication services provided under this Contract Tariff are furnished by
means of wire, radio, satellite, fiber optics or any suitable technology or
combination of technologies.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 1
Bridgewater, NJ 08807 Cancels Original Page 1
Issued: December 20, 1996 Effective: December 21, 1996
CONTRACT TARIFF NO. 5776
CHECK SHEET
The Title Page and Pages 1 through 26 inclusive of this tariff are effective as
of the date shown. Original and revised pages as named below contain all changes
from the original tariff that are in effect on the date shown.
Number of Revision Number of Revision
Page Except as Indicated Page Except as Indicated
---- ------------------- ---- -------------------
Title 1st* 7 1st*
1 1st* 8 1st*
3 1st* 9 1st*
3.1 Original 10 1st*
4 1st* 11 1st*
5 1st* 11.1 Original*
6 1st* 12 1st*
6.1 Original* 13 1st*
* New or Revised Page
TABLE OF CONTENTS
Page
----
Check Sheet. ........................................... 1
List of Concurring, Connecting and Other Participating
Carriers.............................................. 1
Explanation of Symbols - Coding of Tariff Revisions..... 1
Trademarks and Service Marks............................ 2
Explanation of Abbreviations............................ 2
Contract Summary........................................ 3
LIST OF CONCURRING, CONNECTING AND OTHER PARTICIPATING CARRIERS
Concurring Carriers - NONE
Connecting Carriers - NONE
Other Participating Carriers - NONE
EXPLANATION OF SYMBOLS - CODING OF TARIFF REVISIONS
Revisions to this tariff are coded through the use of symbols.
These symbols appear in the right margin of the page. The
symbols and their meanings are:
R - to signify reduction.
I - to signify increase.
C - to signify changed regulation.
T - to signify a change in text but no change in rate or regulation.
S - to signify reissued matter.
M - to signify matter relocated without change.
N - to signify new rate or regulation.
D - to signify discontinued rate or regulation.
Z - to signify a correction.
Other marginal codes are used to direct the tariff reader to a footnote for
specific information. Codes used for this purpose are lower case letters of the
alphabet, e.g., x, y and z. These codes may appear beside the page revision
number in the page header or in the right margin opposite specific text.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm Rates and Tariffs Original Page 2
Bridgewater, NJ 08807
Issued: October 31, 1996 Effective: November 1, 1996
** All material on this page is new.**
TRADEMARKS AND SERVICE MARKS - The following marks, to the extent, if any, used
throughout this tariff, are trademarks and service marks of AT&T Corp.
Trademarks Service Marks
---------- -------------
None ACCUNET
MEGACOM
READYLINE
EXPLANATION OF ABBREVIATIONS
Adm. - Administrator
Mbps - Megabits per second
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 3
Bridgewater, NJ 08807 Cancels Original Page 3
Issued: December 20, 1996 Effective: December 21, 1996
CONTRACT TARIFF NO. 5776
1. Services Provided:
A. AT&T Software Defined Network (SDN) Services (AT&T Tariff F.C.C. No. 1) con-
sisting of:
1. Custom SDN
2. Global Software Defined Network (GSDN) Service
B. AT&T Distributed Network Service (DNS) (AT&T Tariff F.C.C. No. 1) N
C. AT&T MEGACOM Service (AT&T Tariff F.C.C. No. 1)
D. AT&T 800 Services (AT&T Tariff F.C.C. Nos. 2 and 14) consisting of:
1. AT&T 800 Service-Domestic
2. AT&T 800 Service-Canada
3. AT&T MEGACOM 800 Service-Domestic
4. AT&T MEGACOM 800 Service-Canada
5. AT&T MEGACOM 800 Service-Mexico
6. AT&T MEGACOM 800 Service-Overseas
7. AT&T 800 READYLINE Service-Domestic
8. AT&T 800 READYLINE Service-Canada
9. AT&T 800 READYLINE Service-Mexico
10. AT&T 800 READYLINE Service-Overseas
11. AT&T 800 READYLINE Service-Puerto Rico and the U.S. Virgin Islands
E. AT&T ACCUNET T1.5 Service Access Connections and the AT&T Primary Rate
Interface Office Functions (AT&T Tariff F.C.C. No. 9)
F. AT&T Terrestrial 1.544 Mbps Local Channel Services (AT&T Tariff F.C.C. No.
11)
Printed in U.S.A.
<PAGE>
<TABLE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs Original Page 3.1
Bridgewater, NJ 08807
Issued: December 20, 1996 Effective: December 21, 1996
** All material on this page is reissued except as otherwise noted. **
CONTRACT TARIFF NO. 5776
<S> <C>
2. CONTRACT TERM; RENEWAL OPTIONS - For the AT&T SDN Services and associated
AT&T ACCUNET T1.5 Service Access Connections and AT&T Terrestrial 1.544 Mbps
Local Channel Services, the AT&T DNS Services and associated ACCUNET T1.5 N
Service Access Connections and Terrestrial 1.544 Mbps Local Channel Services,
the AT&T MEGACOM Services and the AT&T 800 Services and associated AT&T ACCUNET
T1.5 Service Access Connections, AT&T Primary Rate Interface Office Functions N
and AT&T Terrestrial 1.544 Mbps Local Channel Services provided under this
Contract Tariff, the date on which the term of this Contract Tariff begins is
referred to as the Customer's Initial Service Date (CISD). For the AT&T SDN
Services and associated AT&T ACCUNET T1.5 Service Access Connections, and AT&T
Terrestrial 1.544 Mbps Local Channel Services and the AT&T DNS Services and
associated ACCUNET T1.5 Service Access Connections and Terrestrial 1.544 Mbps
Local Channel Services provided under this Contract Tariff, the term is 18
months and the CISD is the first day of the Customer's first full billing month
under this Contract Tariff. For the AT&T MEGACOM Services and associated AT&T N
ACCUNET T1.5 Service Access Connections and AT&T Terrestrial 1.544 Mbps Local
Channel Services, the term is 4 years and the CISD is the first day of the
Customer's first full billing month under this Contract Tariff. For the AT&T 800
Services and associated AT&T ACCUNET T1.5 Service Access Connections, the AT&T N
Primary Rate Interface Office Functions and AT&T Terrestrial 1.544 Mbps Local
Channel Services, the term is 4 years and the CISD is the first day of the
Customer's first full billing month under this Contract Tariff. No renewal
option is available for this Contract Tariff.
</TABLE>
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 4
Bridgewater, NJ 08807 Cancels Original Page 4
Issued: December 20, 1996 Effective: December 21, 1996
3. MINIMUM COMMITMENTS/CHARGES
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A. MINIMUM REVENUE COMMITMENTS - The Minimum Revenue Commitments (MRCs) for the
AT&T SDN Services, the AT&T DNS Service, AT&T MEGACOM Service including the
International Calling Capability and the AT&T 800 Services provided under this N
Contract Tariff, after the application of the Discounts as specified in Section
5., following, have been applied, are as follows. The Domestic/International MRC
will be satisfied by the usage charges for the AT&T SDN Services, the AT&T DNS
Service, AT&T MEGACOM Service including the International Calling Capability and
the AT&T 800 Services. Of the Domestic/International MRC, a portion, the
International MRC, must be satisfied by usage charges for the combined total of
AT&T 800 Service-Canada, AT&T MEGACOM 800 Service-Canada, AT&T MEGACOM 800
Service-Mexico, AT&T MEGACOM 800 Service-Overseas, AT&T 800 READYLINE
Service-Canada, AT&T 800 READYLINE Service-Mexico, AT&T 800 READYLINE
Service-Overseas, AT&T 800 READYLINE Service-Puerto Rico and the U.S. Virgin
Islands, AT&T MEGACOM Service International Calling Capability, AT&T DNS
International Calling Capability and AT&T GSDN Service.
1. INTERNATIONAL MRC
Commitment Period MRC N
Each Month $1,000,000
If in any month, the Customer has failed to satisfy the International MRC the
Customer will be billed a shortfall charge equal to the difference of the MRC
and the actual usage charges for that month for the combined total of AT&T 800
Service-Canada, AT&T MEGACOM 800 Service-Canada, AT&T MEGACOM 800
Service-Mexico, AT&T MEGACOM 800 Service-Overseas, AT&T 800 READYLINE
Service-Canada, AT&T 800 READYLINE Service-Mexico, AT&T 800 READYLINE
Service-Overseas, AT&T 800 READYLINE Service-Puerto Rico and the U.S. Virgin
Islands, AT&T MEGACOM Service International Calling Capability, AT&T DNS
International Calling Capability and AT&T GSDN Service after the application of
all discounts as specified in Section 5., following.
2. DOMESTIC/INTERNATIONAL MRC
Commitment Period MRC C
Months 1-18 $120,000,000
Months 19-24 $40,000,000
Months 25-36 $70,000,000
Months 37-48 $70,000,000 C
If, at the end of any Commitment Period, the Customer has failed to satisfy the
Domestic/International MRC applicable for that Commitment Period, the Customer
will be billed a shortfall charge equal to the difference between the
Domestic/International MRC for that Commitment Period and the actual usage
charges, for that Commitment Period, for the combined total of AT&T SDN
Services, AT&T DNS Service, AT&T MEGACOM Service including the International
Calling Capability and the AT&T 800 Services provided under this Contract
Tariff, after the application of the Discounts as specified in Section 5., N
following, including any shortfall charge(s) paid by the Customer pursuant to
Section 3.A.1., preceding during the same months of such Commitment Period. The
shortfall charge shall be calculated after the completion of each Commitment
Period and billed the following month.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 5
Bridgewater, NJ 08807 Cancels Original Page 5
Issued: December 20, 1996 Effective: December 21, 1996
4. Contract Price - AT&T reserves the right to increase from time to time the
rates for the Services Provided under this Contract Tariff, regardless of any
provisions in this Contract Tariff that would otherwise stabilize rates or limit
rate increases, as a result of charges imposed on AT&T stemming from an order,
rule or regulation of the Federal Communications Commission or a court having
competent jurisdiction relating to compensation of payphone service providers.
If necessary, revisions will be filed in this Contract Tariff to reflect the
actual rates.
A. AT&T SDN Services - The Contract Price for the AT&T SDN Services provided
under this Contract Tariff is the same as the undiscounted Recurring and
Nonrecurring Rates and Charges specified in AT&T Tariff F.C.C. No. 1, as amended
from time to time, except for those Usage Rates as specified in Section 7.,
following.
B. AT&T DNS Service - The Contract Price for the AT&T DNS Service provided under N
this Contract Tariff is the same as the undiscounted Recurring and Nonrecurring
Rates and Charges specified in AT&T Tariff F.C.C. No. 1, as amended from time to
time. N
C. AT&T MEGACOM Service - The Contract Price for the AT&T MEGACOM Service
provided under this Contract Tariff is the same as the undiscounted Recurring
and Nonrecurring Rates and Charges specified in AT&T Tariff F.C.C. No. 1, as
amended from time to time, except for those Usage Rates as specified in Section
7., following, which apply for AT&T MEGACOM Service calls that originate at no
more than 15 Customer Switches, and at no more than 2 Customer Premises (not a
Customer Switch) designated by the Customer prior to the CISD. A Customer Switch
is a telecommunications switch (including all remote switching modules under
common control of the same central switch) with the following characteristics:
(a) it is owned and operated by the Customer or an Affiliate of the Customer, or
by an entity in which the Customer or an Affiliate of the Customer holds an
ownership interest of at least 33%, or by an entity that holds an ownership
interest in Customer or Affiliate of the Customer of at least 33%; (b) it is
used for the transmission of calls that are routed by a Local Exchange Carrier
to the Customer Switch using Feature Group D Access or a functional equivalent;
(c) it is capable of interconnecting circuits or transferring calling between
circuits; (d) it has a maximum capacity of at least 100,000 access lines and
16,000 trunk lines; (e) it is predominantly used to provide switched
telecommunications service on a Common Carrier basis; and (f) it has the
capability to provide signaling interfaces at CCITT standards of SS7 signaling.
Provided the Customer Switch meets the foregoing definition, it is not necessary
that all calls routed through the Customer Switch satisfy characteristic (b).
D. AT&T 800 Services - The Contract Price for the AT&T 800 Services provided
under this Contract Tariff is the same as the undiscounted Recurring and
Nonrecurring Rates and Charges specified in AT&T Tariff F.C.C. Nos. 2 and 14, as
amended from time to time, except for those Usage Rates as specified in Section
7., following.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 6
Bridgewater, NJ 08807 Cancels Original Page 6
Issued: December 20, 1996 Effective: December 21, 1996
4. Contract Price (continued)
D. AT&T ACCUNET T1.5 Service Access Connections and the AT&T Primary Rate
Interface - The Contract Price for the AT&T ACCUNET T1.5 Service Access
Connections and the AT&T Primary Rate Interface provided under this Contract
Tariff is the same as the undiscounted Recurring and Nonrecurring Rates and
Charges specified in AT&T Tariff F.C.C. No. 9, as amended from time to time,
except for those Rates for the AT&T Primary Rate Interface as specified in
Section 7., following.
E. AT&T Terrestrial 1.544 Mbps Local Channel Services - The Contract Price for
the AT&T Terrestrial 1.544 Mbps Local Channel Services provided under this
Contract Tariff is the same as the undiscounted Recurring and Nonrecurring Rates
and Charges specified in AT&T Tariff F.C.C. No. 11, as amended from
time to time.
5. Discounts - The following discounts are the only discounts that apply to the
Services Provided under this Contract Tariff. No other discounts apply.
A. AT&T SDN Services
1. Base Discounts - The Customer will receive the following discounts, each
month, in lieu of those specified for the SDN Term and Volume Plan (TVP) in AT&T
Tariff F.C.C. No. 1. These discounts will be applied in the same manner as the
SDN TVP as specified in AT&T Tariff F.C.C. No. 1, as amended from time to time.
For Gross Monthly
Domestic SDN Services
Usage on Amounts: Discount
----------------- --------
Between $0 up to $13,000,000 46.5%
No discount will apply for any Gross Monthly Domestic SDN Services Usage in
excess of $13,000,000. D
2. Additional Discounts - The Customer will receive an additional 32% discount, N
each month, in lieu of the discounts specified for the AT&T SDN International
Term Plan (ITP) in AT&T Tariff F.C.C. No. 1. This discount will be applied in
the same manner as the ITP as specified in AT&T Tariff F.C.C.
No. 1, as amended from time to time.
No discount will apply for any Gross Monthly International SDN Services Usage in
excess of $2,400,000. N
Printed in U.S.A.
</TABLE>
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs Original Page 6.1
Bridgewater, NJ 08807
Issued: December 20, 1996 Effective: December 21, 1996
** All material on this page is new. **
5. Discounts (continued)
B. AT&T DNS Discounts - The following discounts for AT&T DNS are applied to AT&T
DNS usage charges in the billing month in which the AT&T DNS charges are billed.
1. Base Discounts - The following discounts will be applied monthly using the
same method as specified in Section 6.12. of AT&T Tariff F.C.C. No. 1 (Method Of
Determining Discount).
(a) The Customer will receive the following discounts, each month, on all
domestic direct dialed (1+) AT&T DNS monthly usage charges.
0% discount on the amounts over $0 up to $10,000.00
10% discount on the amounts over $10,000.00 up to $20,000.00
9% discount on the amounts over $20,000.00
(b) The Customer will receive the following discounts, each month, on
international direct dialed (1+) AT&T DNS monthly usage charges:
0% discount on the amounts over $0 up to $5,000.00
12% discount on the amounts over $5,000.00 up to $15,000.00
16% discount on the amounts over $15,000.00 up to $60,000.00
18% discount on the amounts over $60,000.00 up to $200,000.00
20% discount on the amounts over $200,000.00
2. Additional Discounts - None.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 7
Bridgewater NJ, 08807 Cancels Original Page 7
Issued: December 20, 1996 Effective: December 21, 1996
5. Discounts (continued)
C. AT&T MEGACOM Service T
1. Base Discounts
(a) The Customer will receive a 35.1% discount, each month, on domestic AT&T
MEGACOM Service usage.
(b) The Customer will receive one of the following discounts, each month, on all
AT&T MEGACOM Service International Calling Capability usage charges for that
month, based on the total Gross Monthly Usage Charges for AT&T MEGACOM Service
International Calling Capability, AT&T 800 Service-Canada, AT&T MEGACOM 800
Service-Canada, AT&T MEGACOM 800 Service-Mexico, AT&T MEGACOM 800
Service-Overseas, AT&T 800 READYLINE Service-Canada, AT&T 800 READYLINE
Service-Mexico, AT&T 800 READYLINE Service-Overseas, AT&T SDN International
Calling Capability, and AT&T GSDN Service.
Gross Monthly Usage Charges Discount
--------------------------- --------
At least $0 up to $1,500,000 5.0%
At least $1,500,000 up to $2,000,000 7.5%
At least $2,000,000 up to $3,000,000 10.0%
No discount will apply to any Gross Monthly Usage Charges in excess of
$3,000,000.
2. Additional Discounts - None.
D. AT&T 800 Services T
1. Base Discounts - The Customer will receive the following discounts as
specified below, each month, in lieu of those specified for the Customer
Specific Term Plan II (CSTP II) and the Revenue Volume Pricing Plan (RVPP) in
AT&T Tariff F.C.C. No. 2. These discounts will be applied in the same manner as
the CSTP II as specified in AT&T Tariff F.C.C. No. 2, as amended from time to
time.
(a) The Customer will receive one of the following discounts, each month, on all
AT&T 800 Services usage charges.
Gross Monthly AT&T MEGACOM 800
Service-Domestic, AT&T 800
READYLINE Service-Domestic,
and AT&T 800 Service-Domestic
Usage Charges Discount
------------- --------
At least $0 up to $2,000,000 0.0%
At least $2,000,000 up to $15,000,000 45.0%
No discount will apply to any Gross Monthly AT&T MEGACOM 800 Service-Domestic,
AT&T 800 READYLINE Service-Domestic and AT&T 800 Service-Domestic Usage Charges
in excess of $15,000,000.
2. Additional Discounts - None.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 8
Bridgewater, NJ 08807 Cancels Original Page 8
Issued: December 20, 1996 Effective: December 21, 1996
6. Classifications, Practices and Regulations
------------------------------------------
A. Except as otherwise provided in this Contract Tariff, the rates and
regulations that apply to the Services Provided specified in Section 1.,
preceding, are as set forth in the AT&T tariffs that are referenced in Section
1., preceding, as such tariffs are amended from time to time.
B. Monitoring Conditions - The Customer must satisfy the following Service
Requirements. The Service Requirement in 6.B.1.(e), 6.B.1.(f) and 6.B.1.(g) will
be monitored on each monthly anniversary of the CISD and the Monitoring Period
is the billing month immediately preceding each monthly anniversary of the CISD.
The Service Requirements in 6.B.1.(a), 6.B.1.(b), 6.B.1.(c) and 6.B.1.(d) will
be monitored at each six-month anniversary of the CISD, and the Monitoring
Period is the six billing months immediately preceding each six-month
anniversary of the CISD. The Service Requirement in 6.B.1.(h) will be monitored
at the six-month anniversary of the CISD, and the Monitoring Period is the first
six months of the Contract Tariff term.
1. AT&T SDN, AT&T DNS, AT&T MEGACOM and AT&T 800 Services N
(a) At least 95% of the total inbound and outbound interLATA services obtained
by the Customer and its Affiliates from common carriers (not including Customer
or its Affiliates) must be obtained by the Customer directly from AT&T,
including any future inbound and outbound interLATA services the Customer
obtains as a result of a merger or acquisition for which the Customer directly
or indirectly controls the choice of Interexchange Carrier. Services under
commitment to another Interexchange Carrier at the time of such merger or
acquisition shall not be subject to this provision for the term of such
commitment, unless the charges the Customer would incur to terminate such
commitment would be less than $10,000.
(b) No more than 40% of the Customer's total AT&T MEGACOM Service-International
Calling Capability minutes of use provided under this Contract Tariff may
terminate in Argentina.
(c) At least 60% of the Customer's AT&T MEGACOM Service minutes of use from
Customer Switches and Customer Premises at which AT&T MEGACOM Service is
provided under this Contract Tariff must be interstate.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 9
Bridgewater, NJ 08807 Cancels Original Page 9
Issued: December 20, 1996 Effective: December 21, 1996
6.B.1. AT&T SDN, AT&T DNS, AT&T MEGACOM and AT&T 800 Services (continued) N
(d) At least 50% of the Customer's AT&T SDN Services minutes of use from
Customer Switches and Customer Premises at which AT&T SDN Service is provided
under this Contract Tariff must be interstate.
(e) No more than 20% of the Customer's total Intrastate AT&T SDN Services
minutes of use from Customer Switches and Customer Premises at which AT&T SDN
Services are provided under this Contract Tariff may be generated in any one
state.
(f) No more than 13% of the Customer's total Intrastate AT&T SDN Services
minutes of use from Customer Switches and Customer Premises at which AT&T SDN
Services are provided under this Contract Tariff may be from the following group
of states: Colorado, Idaho, Maine, Minnesota, Montana, Nebraska, New Mexico,
North Dakota, Rhode Island, South Dakota, Utah and Vermont.
(g) At least 20% of the Customer's total Intrastate AT&T SDN Services minutes of
use from Customer Switches and Customer Premises at which AT&T SDN Services are
provided under this Contract Tariff must be from the following group of states:
California, Illinois, Michigan, Massachusetts and New Jersey.
(h) By the end of the sixth month of the Contract Tariff term, the Customer must
have placed service orders for the installation of service under this Contract
Tariff at locations not currently served by AT&T that the Customer demonstrates
will generate monthly charges under this Contract Tariff of at least $333,333.
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If the Customer, during the Monitoring Period, has failed to satisfy the Service
Requirement in 6.B.1.(a), the Customer will be billed an amount equal to 15% of
the Customer's total billed usage charges for the AT&T SDN, AT&T DNS, AT&T
MEGACOM and AT&T 800 Services, after the application of the Discounts in Section
5., preceding, for that Monitoring Period. If the Customer, during the N
Monitoring Period, has failed to satisfy the Service Requirement in 6.B.1.(b),
the Customer will be billed an amount equal to $0.08 per minute for each minute
of such use above the 40%. If the Customer, during the Monitoring Period, has
failed to satisfy the Service Requirement in 6.B.1.(c), the Customer will be
billed an amount equal to .351 multiplied by the total undiscounted usage
charges for AT&T MEGACOM service for that Monitoring Period in excess of the 60%
threshold. If the Customer, during the Monitoring Period has failed to satisfy
the Service Requirement in 6.B.1.(d), the Customer will be billed an amount
equal to .465 multiplied by the total undiscounted usage charges for AT&T SDN
services for that Monitoring Period in excess of the 50% threshold. If the
Customer has failed to satisfy the Service Requirement in 6.B.1.(e) for any two
consecutive Monitoring Periods, the Customer will be billed, for each state
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 10
Bridgewater, NJ 08807 Cancels Original Page 10
Issued: December 20, 1996 Effective: December 21, 1996
6.B.1. AT&T SDN, AT&T DNS, AT&T MEGACOM and AT&T 800 Services (continued) N
for which the 20% threshold is exceeded, an amount equal to $0.20 multiplied by
the Customer's total Intrastate AT&T SDN Services minutes of use from Customer
Switches and Customer Premises at which AT&T SDN Services are provided under
this Contract Tariff generated in that state in excess of the 20% threshold. If
the Customer has failed to satisfy the Service Requirement in 6.B.1.(f) for any
two consecutive Monitoring Periods, the Customer will be billed an amount equal
to $0.20 multiplied by the Customer's total Intrastate AT&T SDN Services minutes
of use from Customer Switches and Customer Premises at which AT&T SDN Services
are provided under this Contract Tariff from the specified group of states in
excess of the 13% threshold. If the Customer has failed to satisfy the Service
Requirement in 6.B.1.(g) for any two consecutive Monitoring Periods, the
Customer will be billed an amount equal to $0.20 multiplied by the Customer's
total Intrastate AT&T SDN Services minutes of use from Customer Switches and
Customer Premises at which AT&T SDN Services are provided under this Contract
Tariff from the specified group of states by which the Customer failed to meet
the 20% minimum requirement. In calculating any charges due for failure to meet
the Service Requirements 6.B.1.(e), 6.B.1.(f), and 6.B.1.(g), the Customer will
not be required to pay more than once for a failure to meet any one such Service
Requirement in a given Monitoring Period (i.e., it the Customer fails to meet a
Service Requirement for three consecutive Monitoring Periods, the Customer will
be billed only once with respect to the failure to meet the Service Requirement
in the second month). If the Customer, during the Monitoring Period, has failed
to satisfy the Service Requirement in 6.B.1.(h), the AT&T MEGACOM 800 Service
and AT&T 800 READYLINE Service base discount pursuant to section 5.C.1.(a),
preceding, for Gross Monthly AT&T MEGACOM 800 Service-Domestic and AT&T 800
READYLINE Service-Domestic usage on amounts of at least $2,000,000 up to
$15,000,000 will be decreased from 45% to 42% for the remainder of the Contract
Tariff Term. Any charge for amounts billed under this section must be paid by
the Customer within 30 days.
C. Promotions, Credits and Waivers
The Customer is ineligible for any promotions, credits or waivers for the
Services Provided under this Contract Tariff, which are filed or which may be
filed in the AT&T tariffs specified in Section 1., preceding.
The following credits and waivers will be applied to the Customer's bill for the
Services Provided under this Contract Tariff. If the sum of all credits applied
in the final month of service under this Contract Tariff exceeds the amount of
the Customer's final bill, the amount in excess will be refunded to the
Customer. If at the end of the Contract Tariff Term the Customer has not fully
used any or all of the waiver(s) specified in this Section, the residual value
of any such waiver(s) will be set to zero and will not be applied to any other
AT&T services.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 11
Bridgewater, NJ 08807 Cancels Original Page 11
Issued: December 20, 1996 Effective: December 21, 1996
** All material on this page is new. **
6.C. Promotions, Credits and Waivers (continued)
1. AT&T MEGACOM Service, AT&T SDN Service and AT&T 800 Services N
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(a) AT&T will waive the Nonrecurring Installation Charges for AT&T Primary
Rate Interface (PRI) Office Functions; AT&T Terrestrial 1.544 Mbps Local
Channels, associated AT&T ACCUNET T1.5 Service Access Connections, and Access
Coordination Functions (ACF). Also, AT&T will reimburse the Customer for any
other vendor's Nonrecurring Charges for obtaining access comparable to
Terrestrial 1.544 Mbps Local Channels (not to exceed charges specified in AT&T
Tariff F.C.C. No. 11), and waive the Nonrecurring Charge for the ACF and the
AT&T Tariff F.C.C. No. 9 Access Connection Charge. Such Local Channels and AT&T
PRI must: (1) be used with the AT&T MEGACOM Service, AT&T SDN Service and/or the
AT&T MEGACOM 800 Service-Domestic provided under this Contract Tariff (2) for
the Local Channels, not be connected to an Office Function (except for AT&T PRI
Office Functions). If any of these Local Channels are connected to an Office
Function, AT&T will bill the Customer for the amount of the Installation Charges N
that had been waived under this section for each Local Channel connected to an
Office Function (except for AT&T PRI Office Functions). The maximum amount of
waived Nonrecurring Installation Charges shall not exceed $200,000.
(b) AT&T will reimburse the Customer the local exchange company Carrier Change N
Charge up to a maximum of $5.00 for each local exchange service access line
converted, subject to a maximum reimbursement of $750,000 in any billing month;
any excess may not be carried into following months and the Customer must
provide evidence of all charges incurred in order to qualify for the
reimbursement. There is an allowance of two reimbursements per local exchange
company service access line for SDN. The reimbursed charge(s) will be a credit
applied to the Customer's future SDN usage charges.
(c) AT&T will provide a monthly credit in the amount of $200 per AT&T PRI Office
Function utilized by the Customer. The maximum amount of the monthly credit will
be $10,000. N
(d) AT&T will waive the Service Establishment Charge, not to exceed a total of
$10,000 for the Contract Tariff Term for the AT&T MEGACOM Service provided under
this Contract Tariff and AT&T will waive the Service Establishment Charges for
new AT&T MEGACOM 800 Service-Domestic Routing Arrangements.
</TABLE>
2. AT&T MEGACOM Service
(a) For the first through eighteenth months of the term, AT&T will apply a
monthly credit, not to exceed $250,000 per month, equal to: (1) the total billed
usage charges for AT&T MEGACOM Service International Calling Capability which
terminates in Mexico, after the application of the Discounts in Section 5.B.,
preceding, in the month for which the credit is to be applied, minus (2) $0.475
multiplied by the Customer's total minutes of use for AT&T MEGACOM Service
International Calling Capability which terminates in Mexico for that same month.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs Original Page 11.1
Bridgewater, NJ 08807
Issued: December 20, 1996 Effective: December 21, 1996
** All material on this page is new. **
6.C. Promotions, Credits and Waivers (continued)
3. AT&T DNS Service
(a) AT&T will reimburse the Customer the local exchange company Carrier Change
Charge up to a maximum of $5.00 for each local exchange service access line
converted, subject to a maximum reimbursement of $5,000 in any billing month;
any excess may not be carried into following months and the Customer must
provide evidence of all charges incurred in order to qualify for the
reimbursement. There is an allowance of two reimbursements per local exchange
company service access line for SDN. The reimbursed charge(s) will be a credit
applied to the Customer's future SDN or DNS usage charges.
(b) AT&T will apply a credit to the Customer's DNS bill, each month, for all
domestic DNS Direct Dial (1+) usage charges in the billing month following the
initial application of the discounts in Section 5.B.1.(a), preceding, in an
amount, not less than zero, equal to: (a) the Customer's total undiscounted
domestic DNS Direct Dial (1+) usage charges from such locations for the
preceding month multiplied by 43%, minus (b) the previously applied DNS
discounts under Section 5.B.1.(a), preceding, for such usage in that month.
(c) AT&T will apply a credit, each month, in an amount not less than zero, equal
to (a) the Customer?s total billed interstate usage charges during the preceding
month, after the application of the previously applied DNS discounts under
Section 5.B.1.(a), preceding, and the credit specified in Section 6.3.C (b),
preceding, minus (b) the number of minutes for AT&T DNS interstate service usage
during the preceding month multiplied by (c) $0.105.
(d) AT&T will apply a credit, each month, equal to 38% of the Customer's
international direct dial (1+) AT&T DNS billed usage charges, after the discount
specified in Section 5.B.1.(b), preceding. This credit will be applied to the
Customer's DNS bill in the 1st billing month following the month in which the
international direct dial (1+) AT&T DNS usage charges, after the discount
specified in Section 5.B.1.(b), preceding, has been applied, were incurred.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 12
Bridgewater, NJ 08807 Cancels Original Page 12
Issued: December 20, 1996 Effective: December 21, 1996
6. Classifications, Practices and Regulations (continued)
D. Discontinuance - In lieu of any Discontinuance With or Without Liability
provisions that are specified in AT&T Tariff F.C.C. Nos. 1 and 2, the following
provisions shall apply.
1. The Customer may discontinue this Contract Tariff:
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<S> <C>
(a) effective at the end of the 18th month following the CISD, provided the
Customer provides at least 30 days prior written notice of discontinuance; is
current in payment to AT&T for all telecommunication services; and has generated
at least $120,000,000 in usage charges, after the application of the Discounts
as specified in Section 5., preceding, for the AT&T SDN Services, AT&T DNS C
Service, AT&T MEGACOM Service including the International Calling Capability and
the AT&T 800 Services provided under this Contract Tariff (including at least N
$15,000,000 in usage charges for the AT&T 800 Service-Canada, AT&T MEGACOM 800
Service-Canada, AT&T MEGACOM 800 Service-Mexico, AT&T MEGACOM 800
Service-Overseas, AT&T 800 READYLINE Service-Canada, AT&T 800 READYLINE
Service-Mexico, AT&T 800 READYLINE Service-Overseas, AT&T 800 READYLINE
Service-Puerto Rico and the U.S. Virgin Islands, AT&T MEGACOM Service
International Calling Capability, AT&T SDN International Calling Capability, and
AT&T GSDN Service provided under this Contract Tariff); or
(b) prior to the 18th month following the CISD, provided the Customer replaces
the Services Provided under this Contract Tariff:
I. with service under a new AT&T Contract Tariff having all of the following
characteristics: (i) revenue commitment(s) equal to or greater than an average
of at least $7,500,000 per month; (ii) a new term of at least the difference
between 18 months and the number of months the Customer was in this Contract C
Tariff; and (iii) having the same Service Requirement as specified in Section
6.B.1.(a), preceding, or
II. with service under a new contract entered into between AT&T and the
Customer for the provision of telecommunications service by AT&T to the Customer
having all of the following characteristics: (i) revenue commitment(s) equal to
or greater than an average of at least $7,500,000 per month; (ii) a new term of
at least the difference between 18 months and the number of months the Customer
was in this Contract Tariff; and (iii) having the same Service Requirement as C
specified in Section 6.B.1.(a), preceding.
If the Customer discontinues this Contract Tariff pursuant to this Section
6.D.1.(b), the Customer will also be billed an amount equal to the difference
between: (i) the MRC for the Commitment Period in which the Customer
discontinues divided by the number of months in the Commitment Period, times the
number of months the Customer was in this Contract Tariff for that Commitment
Period and (ii) the actual usage charges, after the application of the Discounts
as specified in Section 5., preceding, incurred in that Commitment Period for
the AT&T SDN Services, AT&T DNS Service, AT&T MEGACOM Service including the
International Calling Capability and the AT&T 800 Services, provided the amount
in (ii) is less than the amount in (i). N
N
</TABLE>
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 13
Bridgewater, NJ 08807 Cancels Original Page 13
Issued: December 20, 1996 Effective: December 21, 1996
6.D. Discontinuance (continued)
<TABLE>
<S> <C>
If the Customer discontinues this Contract Tariff for any reason other than
specified above, prior to the expiration of the Contract Tariff Term,
Termination Charges will apply. The Termination Charge for the AT&T SDN
Services, AT&T DNS Service, AT&T MEGACOM Service including the International
Calling Capability and the AT&T 800 Services will be an amount equal to: (1) the
MRC for the Commitment Period in which the Customer discontinues minus the N
actual usage charges, after the application of the Discounts as specified in
Section 5., preceding, incurred in that Commitment Period for the AT&T SDN
Services, AT&T MEGACOM Service including the International Calling Capability
and the AT&T 800 Services, provided the actual usage charges, are less than the
MRC for that Commitment Period and (2) 100% of the MRCs for each remaining year
of the Contract Tariff Term.
</TABLE>
E. Other Requirements
1. Use of Services Provided for Resale or Shared Use - When the Services
Provided under this Contract Tariff are resold or shared, the Customer may
advise its User that a portion of the Customer's service is provided by AT&T.
However, the Customer shall not publish or use any advertising, sales
promotions, press releases or other publicity matters which use AT&T's corporate
or trade names, logos, trademarks, service marks, trade dress, or other symbols
that serve to identify and distinguish AT&T from its competitors (or which use
confusingly similar corporate or trade names, logos, trademarks, service marks,
trade dress or other symbols), and the Customer may not conduct business under
AT&T's corporate or trade names, logos, trademarks, service marks, trade dress,
or other symbols that serve to identify and distinguish AT&T from its
competitors (or under any confusingly similar corporate or trade names, logos,
trademarks, service marks, trade dress or other symbols), except to the limited
extent as is permissible under contract or applicable law.
If AT&T finds that the Customer, in connection with its resale of the Services
Provided under this Contract Tariff, is using AT&T's corporate or trade names,
logos, trademarks, service marks, trade dress or other symbols that serve to
identify and distinguish AT&T from its competitors, in a manner inconsistent
with the provisions specified above, AT&T shall provide reasonable notice of
such inconsistent use to the Customer. If the Customer fails, within 30 days
after the receipt of such notice, to substantiate to AT&T that such inconsistent
use has ended or has been corrected, the Discounts specified in Section 5.,
preceding, will not apply until such time as the inconsistent use has ended or
has been corrected and substantiated to AT&T. Any such suspension of the
Discounts specified in Section 5., preceding, shall not relieve the Customer
from its obligations to comply with any other conditions contained in this
Contract Tariff, including the Minimum Revenue Commitments. If it is finally
determined by adjudication (or, if agreed by AT&T and the Customer, by
arbitration) that AT&T's initial finding of an inconsistent use was in error,
then the Customer shall receive a credit equal to the amount of the discounts
that were not applied as a result of AT&T's initial finding, and AT&T's initial
finding will have no further effect.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs Original Page 14
Bridgewater, NJ 08807
Issued: October 31, 1996 Effective: November 1, 1996
**All material on this page is new**
6.E.1. USE OF SERVICES PROVIDED FOR RESALE OR SHARED USE (CONTINUED)
The Customer shall take such steps as are reasonably possible to ensure that no
other Carrier to which the Customer directly or indirectly resells the Services
Provided under this Contract Tariff, takes any action that, if done directly by
Customer, would violate this Section 6.E.1., and if such other Carrier does take
such actionm the Customer shall take such steps as are reasonbly possible to
cause the inconsistent use by such other Carrier to be ended or corrected, to
AT&T's reasonable satisfaction.
If AT&T finds that the Customer has failed to take such action as is required
pursuant to the preceding paragraph, AT&T shall provide reasonable notice of
such failure to the Customer. If the Customer fails, within 30 days after the
receipt of such notice, to substantiate to AT&T that the inconsistent use by the
other Carrier has ended or has been corrected or the Customer has taken the
steps required under the preceding paragraph. The Discounts specified in Section
5., preceding, will not apply, with respect to the billing partition that
includes such other Carrier, until such time as the Customer has substantiated
to AT&T that it has taken the required steps. Any such suspension of the
Discounts specified in Section 5., preceding, shall not relieve the Customer
from its obligations to comply with any other conditions contained in this
Contract Tariff, including the Minimum Revenue Commitments. If it is finally
determined by adjudication (or, if agreed by AT&T and the Customer, by
arbitration) that AT&T's initial finding of a failure by Customer to take
required steps was in error, then the Customer shall receive a credit equal to
the amount of the discounts that were not applied as a result of AT&T's initial
finding, and AT&T's initial finding will have no further effect.
2. The Vertical Features of AT&T Tariff F.C.C. No. 2, Section 3.3.2.L are not
available for use with the Services Provided under this Contract Tariff when an
entity other than AT&T is the Resp Org.
3. Beginning February 1, 1997, the bills for the Services Provided under
this Contract Tariff will be sent to one Customer Premises designated
by the Customer.
Printed in U.S.A.
<PAGE>
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776
Adm. Rates and Tariffs 1st Revised Page 15
Bridgewater, NJ 08807 Cancels Original Page 15
Issued: December 20, 1996 Effective: December 21, 1996
6. Classifications, Practices and Regulations (continued)
F. Availability - This Contract Tariff was developed pursuant to a contract with
an Interexchange Carrier Customer who: (1) will order this Contract Tariff only
once, either by the Customer or any Affiliate of the Customer, which is any
entity that owns a controlling interest in either the Customer or an Affiliate
of the Customer, or any entity in which a controlling interest is owned by
either the Customer or an Affiliate of the Customer; (2) as of the time the
Customer orders service, has obtained required operating authority in the states
in which it conducts business and files tariffs, when required by law, with
state and federal authorities; (3) as of the time the Customer orders service,
has been assigned its own Carrier Identification Code by the code administrator,
which code is used by one or more Local Exchange Carriers to route calls
originated by an end user on a 1+ basis to each Customer Switch as defined in
Section 4.B., preceding; (4) has incurred at least $10,000,000 in AT&T Private
Line Services, applicable to Contract Tariffs, during the 12-months immediately
preceding the date the Customer orders this Contract Tariff; (5) has incurred at
least $55,000,000 in AT&T SDN Services and AT&T 800 Services, applicable to
Contract Tariffs, during the 12-months immediately preceding the date the
Customer orders this Contract Tariff; and (6) provides service as a Common
Carrier to at least 300,000 locations. This Contract Tariff is available to any
similarly situated Customer who ordered service in a previous availability
period or who orders service within 30 days after December 21, 1996 for initial
installation of the Services Provided under this Contract Tariff within 30 days
after the date ordered.
<TABLE>
<S> <C>
G. Abuse of the Services - Willfully using the Services to carry calls that
originate on the network of a facilities-based Interexchange carrier other than
AT&T or the Customer or an Affiliate of the Customer and terminate
disproportionately to locations for which the incumbent Local Exchange Carrier?s
rate for terminating switched access is higher than $0.049 per minute
constitutes abuse of service. In the event that AT&T believes in good faith that C
such abuse is occurring, AT&T will provide written notice of such abuse to
Customer, including as much detail as is reasonably sufficient to enable
Customer to investigate the matter. If, within five (5) business days after its C
receipt of such notice, the abuse has not ended, or Customer has not
demonstrated to AT&T?s reasonable satisfaction that the abuse is not in fact
occurring, AT&T may terminate, restrict, or suspend Service to the location(s),
and only the location(s) at which such abuse is occurring. This section applies
in addition to any other provision of the tariffs referenced in Section 1.,
preceding, that may apply with respect to abuse of service.
</TABLE>
Printed in U.S.A.
MODIFICATION AGREEMENT
THIS AGREEMENT is made as of the 24TH day of February, 1997, by and among
PNC BANK, NATIONAL ASSOCIATION, a national banking association with offices at
1600 Market Street, Philadelphia, Pennsylvania 19103 (the "Bank") , and TEL-SAVE
HOLDINGS, INC., TS INVESTMENT CORPORATION and TEL-SAVE, INC. (the "Borrower")
BACKGROUND
Bank agreed to make available to Borrower a line of credit in the principal
amount of $50,000,000 (the "Line of Credit") pursuant to a letter loan agreement
dated March 22, 1996 (the "Loan Agreement"). The Line of Credit is evidenced by
Borrower's promissory note dated March 22, 1996 (the "Note") .
Bank and Borrower desire to amend the Note and Loan Agreement to increase
the amount of the Line of Credit and to make certain other modifications
thereto, upon the terms and conditions set forth herein.
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
AGREEMENT
1. Terms. Capitalized terms used herein and not otherwise defined herein
shall have the meanings given to such terms in the Loan Agreement.
2. Restated Note. Concurrently with the execution and delivery of
this Agreement, Borrower shall execute and deliver to Bank a restated note (the
"Restated Note") , evidencing the Line of Credit in the principal amount of
$60,000,000 in the form of Exhibit A attached hereto. Upon receipt by Bank of
the Restated Note, the original Note shall be cancelled and returned to the
Borrower; the Line of Credit and all accrued and unpaid interest on the original
Note shall thereafter be evidenced by the Restated Note; and all references to
the "Note," evidencing the Line of Credit in any documents relating thereto
shall thereafter be deemed to refer to the Restated Note. Without duplication,
the Restated Note shall in no way extinguish the Borrower's unconditional
obligation to repay all indebtedness, including accrued and unpaid interest,
evidenced by the original Note.
3. Amendments to Loan Agreement. The Loan Agreement is hereby amended as
follows:
<PAGE>
(a) Paragraph 1 of the Loan Agreement is hereby amended such that
the maximum amount of the Line of Credit is hereby increased from $50,000,000 to
$60,000,000.
(b) The first sentence of Paragraph 5(b) of the Loan Agreement is
hereby amended and restated to read in full as follows:
(b) Euro-Rate Option. A rate of interest per annum (computed on
the basis of a year of 360 days and the actual number of days elapsed)
equal to the sum of (i) the Euro-Rate plus (ii) (A) eighty-seven and
one-half (87.5) basis points (7/8%) per annum, for Loans up to and
including $50,000,000, and (B) one hundred (100) basis points (1%) per
annum, for Loans over $50,000,000, in each case, for the Euro-Rate
Interest Period in an amount equal to the Loan bearing interest under
the Euro-Rate option and having a comparable maturity as determined at
or about 11 a.m. (eastern time) two (2) Business Days prior to the
commencement of the Euro-Rate Interest Period.
3. Loan Documents. Except where the context clearly requires otherwise, all
references to the Loan Agreement in the Note or any other document delivered to
Bank in connection therewith shall be to the Loan Agreement as amended by this
Agreement.
4. Borrower's Ratification. Borrower agrees that it has no defenses or
set-offs against the Bank, its officers, directors, employees, agents or
attorneys with respect to the Note and the Loan Agreement, all of which are in
full force and effect and shall remain in full force and effect unless and until
modified or amended in writing in accordance with their terms. Borrower hereby
ratifies and confirms its obligations under the Note and the Loan Agreement and
agrees that the execution and the delivery of this Agreement does not in any way
diminish or invalidate any of its obligations thereunder. WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, BORROWER HEREBY RATIFIES AND CONFIRMS THE WARRANT
OF ATTORNEY GIVEN IN THE NOTE.
5. Renresentations and Warranties. Borrower hereby certifies that:
(a) except as otherwise previously disclosed to Bank, the
representations and warranties made in the Note and the Loan Agreement are true
and correct as of the date hereof.
2
<PAGE>
(b) no Event of Default under the Note or the Loan Agreement and no
event which with the passage of time or the giving of notice or both could
become an Event of Default, exists on the date hereof; and
(c) this Agreement has been duly authorized, executed and delivered so as to
constitute the legal, valid and binding obligation of Borrower, enforceable in
accordance with its terms.
All of the above representations and warranties shall survive the making of this
Agreement.
6. No Waiver. This Agreement does not and shall not be deemed to
constitute a waiver by Bank of any Event of Default under the Note or Loan
Agreement, or of any event which with the passage of time or the giving of
notice or both would constitute an Event of Default, nor does it obligate Bank
to agree to any further modifications of the terms of the Note and Loan
Agreement or constitute a waiver of any of Bank's other rights or remedies.
7. Conditions to Effectiveness of Agreement. Bank's willingness to agree to
the increase and modifications contained herein are subject to the prior
satisfaction of the following conditions:
(a) execution of this Agreement, the Restated Note and a Disclosure
of Confession of Judgment, each in form and substance satisfactory to the Bank;
and
(b) delivery of resolutions of Borrowers authorizing execution and
delivery of this Agreement and the Restated Note.
8. Miscellaneous
(a) All terms, conditions, provisions and covenants in the Note, the
Loan Agreement, and all other documents delivered to Bank in connection
therewith shall remain unaltered and in full force and effect except as modified
or amended hereby. To the extent that any term or provision of this Agreement is
or may be deemed expressly inconsistent with any term or provision in the Loan
Agreement, the Note or any other document executed in connection therewith, the
terms and provisions hereof shall control.
(b) This Agreement shall be governed by and construed according to
the laws of the Commonwealth of Pennsylvania.
3
<PAGE>
(c) This Agreement shall inure to the benefit of, and be binding
upon, the parties hereto and their respective successors and assigns and may be
executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
BORROWER
[SEAL] TEL-SAVE HOLDINGS, INC.
Attest: /s/ Aloysius T. Lawn IV By: /s/ Joseph A. Schenk
----------------------------- ------------------------------
Title: Secretary Title: CFO
------------------------------ ---------------------------
[SEAL] TS INVESTMENT CORPORATION
Attest: /s/ Aloysius T. Lawn IV By: /s/ Joseph A. Schenk
----------------------------- ------------------------------
Title: Secretary Title: CFO
------------------------------ ---------------------------
[SEAL] TEL-SAVE, INC.
Attest: /s/ Aloysius T. Lawn IV By: /s/ Joseph A. Schenk
----------------------------- ------------------------------
Title: Secretary Title: CFO
------------------------------ ---------------------------
BANK
PNC BANK, NATIONAL ASSOCIATION
By: /s/ David E. Hopkins
----------------------------
Title: Vice President
-------------------------
4
[" * * * " indicates that material has been deleted pursuant to a confidential
treatment request and filed separately with the Commission]
CONFIDENTIAL
TELECOMMUNICATIONS MARKETING AGREEMENT
by and among
TEL-SAVE, INC.
TEL-SAVE HOLDINGS, INC.
and
AMERICA ONLINE, INC.
February 22, 1997
<PAGE>
CONFIDENTIAL
TELECOMMUNICATIONS MARKETING AGREEMENT
This TELECOMMUNICATIONS MARKETING AGREEMENT, dated as of February 22,
1997, is made by and among: (i) America Online, Inc., a Delaware corporation
("AOL"), on the one hand, and (ii) Tel-Save, Inc., a Pennsylvania corporation
("TS"), and Tel-Save Holdings, Inc., a Delaware corporation ("Holdings"), on the
other hand (each, a "party" and, collectively, the "parties"), with respect to
the following:
WHEREAS, AOL is in the business of providing online services to
consumers in the United States;
WHEREAS, TS is in the business of providing telecommunications services
and is a wholly owned subsidiary of Holdings;
WHEREAS, AOL and TS wish to enter into this Agreement whereby AOL will
market telecommunications services to customers of AOL's online service under
one or more brand names to be owned by it and TS will provide such services on
the terms and subject to the conditions herein set forth; and
WHEREAS, Holdings has agreed to guarantee all of the obligations of TS
hereunder.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
A. Definitions.
For purposes of this Agreement and in addition to the terms defined
elsewhere in this Agreement, the following terms shall have the meanings set
forth below:
1. "Actual Services Costs" for any calendar quarter
means the aggregate of the respective costs set forth in, and calculated in
accordance with, Schedule A hereto in respect of the provision of Services
during such calendar quarter.
<PAGE>
CONFIDENTIAL
2. "Additional Warrant" shall have the meaning set
forth in Section X.B.2 hereof.
3. "Ad Values" at any time shall mean * * *
4. "affiliate" means, with respect to a specified
person, any other person that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such specified person, provided that, for purposes of this Agreement,
"affiliate" shall not include natural persons.
5. "Agreement" means this Telecommunications
Marketing Agreement.
6. "AOL" has the meaning set forth in the preamble to
this Agreement.
7. "AOL Marks" means the service marks to be owned by
AOL under which the Services will be marketed, which are presently contemplated
by the parties to include a reference to AOL's name and shall be as mutually
agreed to in writing by the parties hereto.
8. "AOL Performance List" has the meaning set forth
in Section II.B.1.
9. "AOL Service" means AOL's online service provided
to subscribers (including, without limitation, individuals and businesses) in
the United States under the America Online(R) brand name, including, without
limitation, electronic mail, conferencing, news, sports, weather and stock
quotes, accessed by consumers through computers using AOL's proprietary
software, as it exists on the date hereof and any online service provided by AOL
or any of its affiliates that is a successor thereto or substitute therefor.
10. "Applicable Profit Percentage" for any calendar
quarter means the percentage of Pre-Tax Profit for such calendar quarter equal
to:
(a) for each quarter in which * * *, 50%; and
(b) for each quarter in which * * *, 50% plus
2
<PAGE>
an additional 2% for each * * *;
provided that in no event will the Applicable Profit Percentage exceed 70%.
11. "AT&T" means AT&T Corporation.
12. "Checklist Items" are the items set forth in the
list attached as Schedule B hereto.
13. "Commercial Launch Date" means the date upon
which AOL makes the Services generally available to subscribers of the AOL
Service (i.e., to at least * * * % of the subscribers to the AOL Service).
14. "Commercial Mobile Radio Services" means the
services defined as such, from time to time, by the Federal Communications
Commission, including related features, functions and services.
15. "Dedicated CIC" means the carrier identification
code (CIC) to be made available by TS for use in respect of the Services as
provided herein.
16. "Effective Date" has the meaning set forth in
Section IX.A.1. hereof.
17. "End User" means, during the Term, any customer
of the Services or any part thereof and, after the Term, any such customer as of
the last day of the Term so long as such customer continues as a customer of
such Services.
18. "Extension Period" shall have the meaning set
forth in Section X.B.1 hereof.
19. "Gross Revenues" for any calendar quarter shall
mean * * *.
20. "Holdings" has the meaning set forth in the first
paragraph of this Agreement.
21. "Initial Launch Period" means the period
beginning at the end of the Test Launch Period and ending on the Commercial
Launch Date.
22. "Initial Payment" has the meaning set forth in
Section V.A.1.
3
<PAGE>
23. "Internet Telephony" means voice service provided
or initiated over one or more data networks where the end user initiates a voice
call to, or receives a voice call from, another party over one or more data
networks using a modem or CODEC or over a data network interfacing with the
public switched telephone network using a modem or CODEC.
24. "Introductory Period" means the * * * period
starting a mutually agreed number of days prior to the anticipated Commercial
Launch Date. The parties currently anticipate that the Commercial Launch Date
will be no later than * * * , subject to adjustment from time to time upon the
mutual consent of the parties or as otherwise provided herein.
25. "Local Telecommunications Services" means the
provision of telephone exchange service or exchange access, including related
features, functions and services.
26. "Long Distance Telecommunications Services" means
intrastate telephone toll service, interstate telephone service and
international telephone service, including private line service, and including
related features, functions and services, as well as:
Calling Card calls, meaning those calls billed to the customer account
which has been established to allow for the use of an authorization
code for direct dialed calls using any toll free number, 0+ access, or
operator assisted calls using a service provider's calling card
authorization platform for billing to the customer account at a later
date.
Operator Handled calls, meaning all calls where an operator or
automated mechanized system provides the end user with the ability to
place collect calls, calls billed to a third party, person to person,
conference calling and operator assisted directory assistance, but not
including party lines and off-line chat.
Toll Free services, meaning inbound residential or business telephone
services where the subscriber/recipient pays for all calls placed by
callers dialing their subscribed number, and such calls are billed to
the subscribing customer.
Directory Assistance calls, meaning calls made by the customer to
obtain names, addresses or phone numbers from a long distance directory
assistance service.
27. "Marginable Revenues" means * * * .
4
<PAGE>
28. "Multiplier Adjustment Date" has the meaning set
forth in Section IV.E.1.
29. "OBN" means One Better Net or OBN, TS's long
distance telecommunications network based on telecommunications switches owned
or leased by TS or its affiliates.
30. "Performance Lists" has the meaning set forth in
Section II.B.I.
31. "Pop-Up Ads" means * * * .
32. "Pre-Launch Period" means the period beginning on
the Effective Date and ending on the date AOL and TS begin testing the Services
with approximately * * * testers.
33. "Pre-Tax Profit" for any calendar quarter means
* * * .
34. "Quarterly Payment Amount" as to any calendar
quarter means the Applicable Profit Percentage of the Pre-Tax Profit for such
quarter.
35. "Quarterly Shortfall Amount" has the meaning set
forth in Section V.B.1(b).
36. "Restricted Services" means, collectively, (a)
Long Distance Telecommunications Services, (b) Local Telecommunications Services
and (c) Commercial Mobile Radio Services, and, each, a "Restricted Service".
37. "RMG" means the remote managed gateway between TS
and AOL and related systems (or any similar system agreed to by the parties),
including a high speed dedicated telecommunications line, developed by the
parties pursuant to Section II.B hereof, for the purpose of providing End Users
the ability, through screens and/or other functionality on the AOL Service, to
access monthly and historical billing information and to transmit order
information to TS.
38. * * * .
39. "Services" means the telecommunications services,
including the Restricted Services, provided, from time to time,
5
<PAGE>
pursuant to this Agreement by TS, as the carrier, and marketed by AOL as herein
provided under the AOL Marks; * * * .
40. "Supplemental Warrant" has the meaning set forth
in Section VI.A. hereof.
41. "Term" means the period commencing on the date
hereof and ending on June 30, 2000, unless such period is extended or sooner
terminated pursuant to Article X, in which event such period shall end at the
termination date or the last day of the final extension, as the case may be.
42. "Test Launch Period" means the period beginning
at the end of the Pre-Launch Period and ending on the date AOL begins marketing
the Services to approximately * * * of its subscribers.
43. "TS" has the meaning set forth in the preamble of
this Agreement.
44. "TS Performance List" has the meaning set forth
in Section II.B.1.
45. "Unamortized Amount" as of any date means * *
* .
46. "Warrants" has the meaning set forth in Section
VI.A. hereof.
AI ROLLOUT SCHEDULE; PERFORMANCE LISTS
A. Description of Rollout.
This Article II sets out the process by which the parties will roll out
the Long Distance Telecommunications Services described on Schedule C. With
respect to such Long Distance Telecommunications Services, the parties will
proceed through the following sequence of periods, leading to an anticipated
Commercial Launch Date of * * * :
6
<PAGE>
1. Pre-Launch Period -- completion of initial
Checklist Item tasks and initial development of the Performance Lists (as
further described below).
2. Test Launch Period -- testing of the Long Distance
Telecommunications Services with approximately * * * testers.
3. Initial Launch Period -- marketing of the Long
Distance Telecommunications Services to approximately * * * % of AOL Service
subscribers (with incremental ramp-up to * * * % of AOL Service subscribers).
4. Commercial Launch Date -- general availability of
the Long Distance Telecommunications Services to AOL Service subscribers (i.e.,
to at least * * * % of the subscribers to the AOL Service).
In addition, prior to the Commercial Launch Date, the parties will
mutually establish the date for commencement of AOL's marketing obligations,
(i.e., the beginning of the Introductory Period), which are further described in
Article III.
B. Pre-Launch Period.
1. During the Pre-Launch Period, each of the parties
shall perform all of the Checklist Item tasks designated on Schedule B as being
its responsibility during the Pre-Launch Period with respect to the Long
Distance Telecommunications Services described in Schedule C. With respect to
each task involving the development of a definition, procedure or standard, the
responsible party shall generate a detailed written guideline that will be
applicable to the appropriate party and will be set forth in a list of
standards, procedures and/or obligations to be observed by such party (the "AOL
Performance List" and the "TS Performance List", respectively, and together, the
"Performance Lists"). Each such guideline set forth in the Performance Lists
shall be subject to the mutual agreement of the parties, not to be unreasonably
withheld. With respect to Checklist Item tasks that are designated on Schedule B
as the joint responsibility of TS and AOL during the Pre-Launch Period, TS and
AOL shall work jointly in good faith to develop the appropriate guidelines and
to allocate responsibilities thereunder to the appropriate Performance List.
2. The Pre-Launch Period shall commence promptly
following the Effective Date and shall not end until completion of all of the
Checklist Item tasks designated for completion during the Pre-Launch Period on
Schedule B. If any such Checklist Item task remains uncompleted or if any
guideline has not been agreed to as of * * * , the anticipated date therefor,
the period for such completion may be extended by up to * * * at the request of
either party.
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C. Test Launch Period.
1. During the Test Launch Period, each of the parties
shall perform all of the Checklist Item tasks designated on Schedule B as being
its responsibility during the Test Launch Period with respect to the Long
Distance Telecommunications Services described in Schedule C. With respect to
each task involving the development of a definition, procedure or standard, the
responsible party shall generate a detailed written guideline that will be
applicable to the appropriate party and will be added to its respective
Performance List. Each such guideline shall be subject to the mutual agreement
of the parties, not to be unreasonably withheld. With respect to Checklist Item
tasks that are designated on Schedule B as the joint responsibility of TS and
AOL during the Test Launch Period, TS and AOL shall work jointly in good faith
to develop the appropriate guidelines and to allocate responsibilities
thereunder to the appropriate Performance List.
2. The Test Launch Period shall commence upon
completion of the Pre-Launch Period and shall not end until completion of all of
the Checklist Item tasks designated for completion during the Test Launch Period
on Schedule B. If any such Checklist Item tasks remain uncompleted as of the
date that is * * * after the commencement of the Test Launch Period, the period
for such completion may be extended by up to * * * at the request of either
party.
D. Initial Launch Period.
1. During the Initial Launch Period, the parties will
commence marketing and make the Services available to approximately * * * % of
the AOL Service subscribers (or such higher number as AOL may determine, subject
to TS's reasonable capacity limitations) during * * * of the Initial Launch
Period; approximately * * * % of the AOL Service subscribers (or such higher
number as AOL may determine subject to TS's reasonable capacity limitations)
during * * * of the Initial Launch Period; and approximately * * * % of the AOL
Service subscribers (or such higher number as AOL may determine subject to TS's
reasonable capacity limitations) during the remainder of the Initial Launch
Period. AOL shall determine the specific roll-out plan for the Initial Launch
Period in consultation with TS in order to efficiently and effectively perform
the Initial Launch Period Checklist Item tasks listed on Schedule B.
Notwithstanding the anticipated * * * periods above, AOL may, in each such case,
delay marketing to a larger portion of the AOL Service subscriber base until AOL
is satisfied, in its reasonable discretion, that the guidelines included in the
parties' respective Performance Lists are met or are likely to be met during any
such period.
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2. During the Initial Launch Period, each of the
parties shall perform all of the Checklist Item tasks designated on Schedule B
as being its responsibility during the Initial Launch Period with respect to the
Long Distance Telecommunications Services described in Schedule C. With respect
to tasks involving the development of a definition, procedure or standard, the
responsible party shall generate a detailed written guideline that will be
applicable to the appropriate party and will be added to its respective
Performance List. Each such guideline shall be subject to the mutual agreement
of the parties, not to be unreasonably withheld. With respect to Checklist Item
tasks that are designated on Schedule B as the joint responsibility of TS and
AOL, TS and AOL shall work jointly in good faith to develop the appropriate
guidelines and to allocate responsibilities thereunder to the appropriate
Performance List.
3. The Initial Launch Period shall commence upon
completion of the Test Launch Period. The Initial Launch Period shall not end
until completion of all of the Checklist Item tasks designated for completion
during the Initial Launch Period on Schedule B. If any such Checklist Item task
remains uncompleted or if any guideline has not been agreed to as of the date
that is * * * after the commencement of the Initial Launch Period, the period
for such completion may be extended by up to * * * at the request of either
party.
E. Performance Lists.
1. The Performance Lists may be modified at any time
during the Term as mutually agreed by the parties.
2. The parties shall reasonably cooperate with one
another in facilitating the preparation of the Performance Lists and the
guidelines included therein and the completion of the Checklist Item tasks.
3. Each party shall be responsible for performing
substantially in accordance with the guidelines contained in its respective
Performance List from time to time.
F. New Services. As new Services are added under this
Agreement, the procedures set forth in this Article II, as may be reasonably
applicable to such new Services, shall be followed with respect to such
Services.
G. Failure to Agree on Guidelines. If the parties are unable
to reach agreement with respect to any guideline to be included in a party's
Performance List, the matter shall be submitted for resolution pursuant to XI.D.
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AI AOL MARKETING
A. Services Marketing.
On and after the first day of the Introductory Period, AOL shall have
the sole right to, and shall, market the Services generally across the AOL
Service in the United States, through online advertising and marketing on the
AOL Service and otherwise as the parties may agree, through mass media and
direct marketing media, as follows:
1. During each of the months during the Introductory
Period, AOL shall include for subscribers to the AOL Service on-screen
promotions and advertisements for the Long Distance Telecommunications Services,
including Pop-Up Ads, (a) in substance (the specific Long Distance
Telecommunications Services to be offered and the terms thereof and the terms on
which they are offered) developed and prepared by TS in consultation with AOL,
and (b) in form (how the offered Services are packaged and presented) developed
and prepared by AOL in consultation with TS and subject to the mutual agreement
of the parties, with an Ad Value of at least $ * * * . Such promotions and
advertisements shall include * * * . Such promotions and advertisements shall be
spaced as evenly as practicable over each such month, provided that TS and AOL
shall consult as to the manner in which such online advertising will be included
in such advertising opportunities. The parties recognize that in some months, a
$ * * * promotion and advertising campaign may not represent the best allocation
of promotion and advertising resources. Accordingly, the foregoing
notwithstanding, subject to the mutual agreement of the parties, some of the
promotional and advertising resources, * * *, allocated to the Introductory
Period may be reallocated among the months occurring during the Introductory
Period and among the * * * months following the Introductory Period and shall be
in addition to the resources required otherwise to be provided in such months.
2. During each of the months subsequent to the
Introductory Period and during the Term, AOL shall include for subscribers to
the AOL Service on-screen promotions and advertisements for the Long Distance
Telecommunications Services, including, at AOL's option (subject to the
requirements of
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Section III.A.4 hereof), Pop-Up Ads, (a) in substance (the specific Long
Distance Telecommunications Services to be offered and the terms thereof and the
terms on which they are offered) developed and prepared by TS in consultation
with AOL, and (b) in form (how the offered Services are packaged and presented)
developed and prepared by AOL in consultation with TS and subject to the mutual
agreement of the parties, with an Ad Value of at least $ * * * . Any Pop-Up Ads
included by AOL subsequent to the Introductory Period and during the Term in
excess of * * * per month shall not be counted toward meeting this $ * * *
requirement. AOL will work cooperatively with TS during this period to develop
strategies for targeting the Services to new subscribers to the AOL Service most
effectively. Such promotions and advertisements shall be spaced as evenly as
practicable over each such month, provided that TS and AOL shall consult as to
the manner in which such online advertising will be included in such advertising
opportunities.
3. During the Term, AOL may also include
advertisements and promotions for the Long Distance Telecommunications Services,
in substance (the specific Long Distance Telecommunications Services to be
offered and the terms thereof and the terms on which they are offered) developed
and prepared by TS in consultation with AOL, and form (how the offered Services
are packaged and presented) developed and prepared by AOL in consultation with
TS and subject to the mutual agreement of the parties, in or with any of AOL's
mass media advertising of any of its services or with any of AOL's direct
marketing efforts, including, without limitation, mail solicitations of
customers for any of its services and any joint advertising or marketing
programs with other companies and any other advertisements and solicitations
done in conjunction with other companies; provided that, unless TS shall have
specifically agreed with AOL to share responsibility for any such advertising
and promotions, TS shall have no responsibility for any part of the costs
thereof.
4. With respect to Pop-Up Ads:
(a) Any Pop-Up Ad * * * to be included or
provided by AOL shall contain * * * .
(b) * * * .
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(c) * * * .
5. During the Term, the parties shall also, in
consultation with each other, explore additional marketing and promotional
opportunities related to the Services, including utilizing new advertising
techniques and mechanisms, as they are developed by AOL and utilizing TS's
existing marketing channels. The parties also will, in good faith, explore the
following additional marketing opportunities (the more specific terms and
conditions of which to be as set forth in writing between the parties):
(a) Online marketing of bundled offerings of the
Services and the AOL Service by AOL, with mutually
agreed revenue sharing;
(b) Telemarketing and direct marketing by TS of
the AOL Service to TS's business customers, with a
mutually agreed bounty paid to TS; and
(c) Telemarketing and direct marketing by TS of
bundled offerings of the Services and the AOL
Service, with generally mutually agreed revenue
sharing.
6. AOL shall make available to End Users who obtain
services from TS other than the Services in accordance with this Agreement, a
hyper-text internet link in the Dedicated Area (as defined below) solely to a
billing area on a TS-hosted web site for billing of such services other than
Services, which such site shall not include any links or other traffic out to
other areas other than a return link to the AOL Service.
7. AOL commits to provide, in connection with its
activities described in Sections III.A.1, 2, 4, 5 and 6, III.C and III.D hereof,
in addition to AOL key words on the AOL Service and E-mail (including a monthly
reminder sent to End-Users concerning their statement and a hyperlink to the
Dedicated Area described below), links throughout the AOL Service, including the
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possibility of a small telephone icon that pervasively appears on the tool bar,
welcome screen, channel page or similarly-viewed pages, to a dedicated area on
the AOL Service (the "Dedicated Area") in order to facilitate ease of location
and access to this area for End Users and prospective customers.
B. AOL Reports.
1. During the Term, AOL shall provide summary monthly
reports to TS evidencing compliance with the foregoing advertising and marketing
requirements, including information concerning the type and volume of
advertising and marketing on the AOL Service, and concerning AOL's mass media
and direct marketing activities, if any, during such month.
2. AOL shall keep for two (2) years from the date of
each advertising and marketing expenditure made pursuant to Sections III.A.1 and
2 above complete and accurate records in sufficient detail to allow TS to
determine if AOL has made the expenditures required thereunder. TS shall have
the right for a period of two (2) years after receiving any report provided
pursuant to Section III.B.1 above to inspect such records. AOL shall make such
records available for inspection during regular business hours at its principal
place of business, upon reasonable notice from TS. Such inspection right shall
not be exercised more than once in any calendar year and shall not be exercised
more than once with respect to any particular records furnished by AOL to TS. TS
agrees to hold in strict confidence all information learned in the course of any
such inspection, except to the extent necessary for TS to reveal such
information in order to enforce its rights under this Agreement or if disclosure
is required by law. TS shall pay for such inspections, except that in the event
any such inspection reveals that AOL expended less than * * *% of what it was
required to expend in any quarter, AOL shall pay the reasonable costs of such
inspection. If AOL and TS are unable to agree on the amount AOL expended, then
the dispute shall be resolved by arbitration pursuant to Section XI.D hereof.
This Section shall survive expiration or termination of this Agreement.
3. Within one quarter after it has been determined as
a result of an inspection pursuant to Section III.B.2 above or otherwise that
AOL failed to expend the minimum commitment for advertising and marketing in a
given month, and such failure is not attributable to TS's unreasonable failure
to agree to the marketing program proposed by AOL, AOL shall, in addition to any
other advertising and marketing expenditure commitments it has under this
Agreement, expend an additional amount for advertising and marketing equal to
* * * % of the shortfall from such commitment.
4. AOL shall advise TS in writing or by electronic
means of any End User that ceases to be a subscriber of the AOL Service as
promptly as reasonably practicable after receiving notice thereof. TS shall
continue servicing each such End User
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according to a service plan that TS deems appropriate, subject to such End
User's continued credit-worthiness, in TS's sole discretion. To the extent that
TS incurs incremental costs associated with the billing of such End Users, TS
shall, at its sole discretion, either (i) pass such costs through to such End
Users or (ii) adjust payments to AOL under Section V.B or X.D.2, as the case may
be, to put AOL in the same economic position as if such incremental costs had
not been incurred.
C. Offering of Services.
1. AOL shall include on the AOL Service such
materials and opportunities as TS shall reasonably request to permit users of
the AOL Service who wish to become End Users to elect so to become End Users,
including, without limitation, any agreements by any such user to (i) switch
from their existing telecommunications carrier, (ii) charge their payments for
the Services to credit, charge or debit cards and/or (iii) verify such
arrangements.
D. Services Billings; Credit Card Agreements.
1. For so long as any End User is a customer of the
AOL Service (and notwithstanding the termination of this Agreement, it being
understood that this obligation shall survive such termination if AOL is
receiving payments pursuant to Section X.D.2), AOL shall provide for the
inclusion online in the AOL Service to such End User of such End User's billing
information provided by TS and any necessary opportunity for such End User to
authorize any payment and to dispute any charges for Services with TS (all as
mutually agreed to with respect to the RMG developed by TS and AOL hereunder);
provided that AOL shall not be required to incur material costs after
termination to alter its inclusion of such information due to material changes
made to the RMG by TS.
2. AOL shall use all reasonable efforts to cause the
credit, charge and debit card companies through which AOL bills its customers
for the AOL Service to charge the same rates for Services billings as they
charge for billings for the AOL Service.
3. AOL shall use all reasonable efforts to cause the
credit, charge and debit card companies through which AOL bills its customers
for the AOL Service to enter into direct arrangements with TS with respect to
the billing for the Services, including provision for continuation thereof with
respect to any End Users that cease to be subscribers of the AOL Service or any
other services billed to such End User by AOL.
4. With respect to any End Users who do not pay their
bills for the AOL Service through a credit, charge or debit card, AOL shall,
subject to applicable law and AOL's terms of service with its subscribers,
provide to TS all information available to
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AOL with respect to such End Users as TS may reasonably request to permit TS to
bill such End Users for the Services.
E. Use of AOL Marks.
1. AOL hereby grants to TS an exclusive license
(subject to the right of AOL and its affiliates to use the AOL Marks in
connection with the Services) for TS to use the AOL Marks solely in connection
with its operation of the Services for which TS is then the exclusive provider
under this Agreement; and AOL hereby grants to TS an exclusive license (subject
to the right of AOL and its affiliates to use the AOL Marks in connection with
the Services) for TS to use the AOL Marks solely in connection with its
operation of the Services for which TS is then the provider under this Agreement
on a non-exclusive basis, unless the parties mutually agree (such agreement not
to be unreasonably withheld) that the license with respect to those
non-exclusive Services should itself be non-exclusive; provided that in both
cases TS (i) does not create a unitary composite mark involving the AOL Marks
without the prior written approval of AOL and (ii) displays symbols and notices
clearly and sufficiently indicating the trademark status and ownership of the
AOL Marks in accordance with applicable trademark law and practice; and provided
further that AOL retains the right to use the AOL Marks in connection with the
services provided as part of the core business of ANS CO+RE Systems, Inc. as of
the date hereof. The foregoing license is personal to TS and may not be
sublicensed, assigned or otherwise transferred except as provided by Section
XII.F. TS acknowledges that: (i) the AOL Marks are and shall remain the sole
property of AOL; (ii) nothing in this Agreement shall confer in TS, and TS shall
not represent that it has, any right of ownership in the AOL Marks; and (iii) TS
shall not now or in the future contest the validity of the AOL Marks.
2. TS further acknowledges and agrees that no use of
the AOL Marks by TS shall impair the rights of AOL in the AOL Marks. TS agrees
to reasonably assist AOL, at AOL's expense, to the extent necessary in the
enforcement and protection of AOL's rights in the AOL Marks. If a senior
executive officer of TS learns of any infringements or uses of marks similar to
the AOL Marks, such officer shall inform AOL as soon as reasonably practicable
and TS shall cooperate with AOL as AOL reasonably requests, at AOL's expense, to
protect AOL's rights in the AOL Marks.
3. AOL agrees to take all reasonable steps necessary
to register and protect the AOL Marks.
4. Use by TS of the AOL Marks with respect to form
and appearance shall be subject to the prior written approval of AOL, not to be
unreasonably withheld.
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5. TS acknowledges that, except as provided herein,
it is not authorized hereunder to use the AOL name or logo. Any such use shall
require the prior written consent of AOL and shall be subject to such conditions
and restrictions as AOL deems appropriate.
F. TS Trademarks and Service Marks.
This Agreement shall not convey a license to AOL to use any trademarks,
service marks, trade names or logos owned or otherwise used by TS. Nothing
herein shall give AOL any right, title and interest in and to any such
trademarks, service marks, trade names or logos owned or otherwise used by TS,
other than the right to display such trademarks, service marks, trade names or
logos in connection with the marketing of the Services.
G. Expenses.
Except as otherwise provided herein or agreed by the parties
in writing, all costs and expenses of providing the marketing and advertising
services referred to in Section III.A. shall be borne exclusively by AOL.
H. Representatives. AOL shall appoint a technical
representative, a marketing representative, a billing and customer service
representative and a project manager to interface with their respective TS
counterparts. If TS is dissatisfied with any of the foregoing representatives or
manager, it shall so inform AOL and AOL shall replace him/her as soon as
reasonably practicable, consistent with a smooth transition and AOL's staffing
commitments. TS shall not be entitled to have more than one representative or
manager replaced in any six-month period. Except as may be the case pursuant to
Section XII.H, no AOL manager or representative appointed hereunder shall have
any right, power or authority to enter into any agreement for or on behalf of,
or incur any obligation or liability of, or to otherwise bind, AOL.
I. Limitation on AOL Authority. AOL shall have no right,
authority or power, and shall not hold itself out as having the right, power or
authority, to create any contract or obligation, express or implied, binding
upon TS, including, but not limited to, accepting orders for Services or
agreeing to or offering prices, terms or conditions of sale that are not in
compliance with the prices and terms and conditions that TS, or TS and AOL, as
the case may be, have developed and prepared as provided elsewhere herein.
J. Insurance. So long as AOL shall have executory obligations
under this Agreement, AOL shall maintain insurance in amounts and types
customary within its industry for companies of comparable size.
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ARTICLE IV
TS SERVICES
A. Services.
1. The telecommunications services to be provided by
TS hereunder initially shall be the Long Distance Telecommunications Services.
Such Long Distance Telecommunications Services initially will include the
services described in Schedule C. Subject to Article VII, the Services to be
provided by TS hereunder will be expanded to include Local Telecommunications
Services and Commercial Mobile Radio Services as and to the extent offered by
TS.
B. Provision of Services.
1. TS shall provide the Services to all subscribers
to the AOL Service that elect to become End Users, provided that the initial and
continued provisioning of any such customer will be subject to such credit
approvals as TS may, in its sole discretion, apply.
C. Terms of Services.
1. The Services will be offered by TS, as the
carrier, under the AOL Marks.
2. Notwithstanding anything to the contrary set forth
in this Agreement, the quality, timeliness and efficiency of Services provided
hereunder and the performance by TS of its other obligations hereunder shall, at
a minimum, be consistent with telecommunications common carrier industry
standards, government regulations and sound business practices and generally of
no lesser quality than the best comparable services provided by TS to other
customers.
3. The specific types of Services other than Long
Distance Telecommunications Services, Local Telecommunications Services and
Commercial Mobile Radio Services shall be determined from time to time by mutual
agreement of the parties.
4. The rates to be charged by TS for Services subject
to telecommunications regulation shall be determined from time to time by TS, in
its sole discretion. TS shall give AOL reasonable prior notice of prospective
rate changes and a reasonable opportunity to consult with respect to such
prospective rate changes. TS's current intention is that its initial rates for
Long Distance Telecommunications Services will be as set forth in Schedule D
hereto. To the extent the parties reasonably agree that it is legally
permissible to do so with respect to any
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specific Services, the rates for those Services shall be determined from time to
time by mutual agreement of the parties.
5. Customer Service.
a. TS shall provide customer service 24 hours per day, 7 days per
week.
b. TS shall comply with the applicable customer service
provisions of the TS Performance List developed pursuant to
Article II.
c. If TS fails to conform to the customer service standards set
forth in this Section IV.C.5. above within thirty (30) days
following notice of such non-conformance from AOL, AOL shall
have the right, at its discretion and as one of its available
remedies, either to assume the customer service function
itself or to outsource it to a third party provider. In that
event, (a) TS shall, at TS's expense, assist AOL in the
transition of the customer service function as AOL may
reasonably request, and (b) TS shall reimburse AOL for AOL's
reasonable costs and expenses associated with providing the
customer service function. Notwithstanding the foregoing, if,
at any time, AOL shall have assumed the customer service
function or outsourced it to a third party provider and TS
shall thereafter demonstrate to AOL's reasonable satisfaction
that it can conform to the applicable customer service
standards, TS shall have the right to resume the provision of
the customer service function and AOL shall cause the
transition of the customer service function back to TS.
6. AT&T Reseller Services. It is anticipated by the
parties that the Services will include initially, and TS initially shall provide
as part thereof, AT&T-based operator services, directory assistance, calling
card services and international. In the event TS replaces such AT&T-based
services, TS shall ensure that the replacement services are of substantially
equivalent or better quality and price.
7. Network Integrity. TS shall comply with the
applicable network integrity provisions of the TS Performance List developed
pursuant to Article II.
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8. Billing.
a. TS shall comply with the applicable billing provisions of the
TS Performance List developed pursuant to Article II.
b. If TS fails to conform to the billing services guidelines
developed as part of the applicable Performance List pursuant to Article II
within thirty (30) days following notice of such non-conformance from AOL, AOL
shall have the right, at its discretion and as one of its available remedies,
either to assume the billing services function itself or to outsource it to a
third provider. In that event, (a) TS shall, at TS's expense, assist AOL in the
transition of the billing service function as AOL may reasonably request, and
(b) TS shall reimburse AOL for AOL's reasonable costs and expenses associated
with providing the billing service function. Notwithstanding the foregoing, if,
at any time, AOL shall have assumed the billing services function or outsourced
it to a third party provider and TS shall thereafter demonstrate to AOL's
reasonable satisfaction that it can conform to the applicable billing services
standards, TS shall have the right to resume the provision of the billing
services function and AOL shall cause the transition of the billing services
function back to TS.
9. TS shall provide to AOL as promptly as reasonably
practicable after the end of each month an updated roster of End Users at such
month-end in order to facilitate performance by AOL of its obligations under
Section III.B.4.
10. TS shall, where possible, make available the
Dedicated CIC and shall route all Services to End Users thereunder and shall not
route any other customers of its telecommunications services based thereon
(excluding customers (i) in Alaska, Hawaii, Puerto Rico and the Virgin Islands,
(ii) in other areas in the 48 contiguous states of the United States where OBN
is not loaded and (iii) in overflow situations where required to manage
capacity). All non-OBN traffic shall be carried on the AT&T network. TS shall
use its best efforts to at all times have the capability to route the Dedicated
CIC over a redundant network.
D. Regulatory.
1. TS shall be responsible for obtaining and
maintaining all federal, state and local consents, approvals and licenses
required to be obtained or maintained by TS for TS's provision of the Services
hereunder other than any consents and approvals or licenses required by
applicable law to be obtained or maintained by AOL by reason of its performance
of its obligations hereunder or otherwise, for all of which AOL shall be
responsible, and all expenses of obtaining and maintaining such, including all
tariffs, taxes, filings and fees with respect thereto, shall be
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borne exclusively by the party so responsible for obtaining or maintaining such.
2. TS shall file any required state and federal
tariffs in accordance with applicable law and regulations.
3. TS shall pay all federal, state and local taxes
required by applicable law or tariff.
E. AT&T.
1. * * * .
2. TS shall notify AOL as promptly as reasonably
practicable of any changes in its relationship with AT&T that could have a
material adverse effect on the performance of the parties' obligations under
this Agreement and/or the provision of the Services to End Users.
F. LOAs.
1. TS shall be the contracting party to the
telecommunication letters of agency (and any other contracts and agreements with
the customers for the provision of telecommunications services to the End Users,
collectively, "LOAs") and thereby be entitled to all rights deriving therefrom.
Except in connection with an assignment of this Agreement permitted by Section
XII.F, TS shall not assign any of the LOAs, i.e., not sell any of the End Users.
G. Representatives.
1. TS shall appoint a technical representative, a
marketing representative, a billing and customer service representative and a
project manager to interface with their respective AOL counterparts. If AOL is
dissatisfied with any of the foregoing representatives or manager, it shall so
inform TS and TS shall replace him/her as soon as reasonably practicable,
consistent with a smooth transition and TS's staffing commitments. AOL shall not
be entitled to have more than one representative or manager replaced in any six
month period. Except as may be the
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case pursuant to Section XII.H, no TS manager or representative appointed
hereunder shall have any right, power or authority to enter into any agreement
for or on behalf of, or incur any obligation or liability of, or to otherwise
bind, TS.
H. Limitation on TS Authority. TS shall have no right,
authority or power, and shall not hold itself out as having the right, power or
authority, to create any contract or obligation, express or implied, binding
upon AOL.
I. Insurance. So long as TS shall have executory obligations
under this Agreement, TS shall maintain insurance in amounts and types customary
within its industry for companies of comparable size.
ARTICLE V
PAYMENTS TO AOL
A. Initial Payment to AOL.
1. On the date hereof, TS shall pay to AOL an initial
payment in the amount of $100,000,000 (the "Initial Payment"). Up to $57,000,000
of the Initial Payment shall be earned by AOL over time in increments in
accordance with the performance milestones set forth in Schedule E.
B. Marketing Payments to AOL.
1. In partial consideration of AOL providing
marketing services and exclusivity commitments hereunder, TS shall make the
following payments in immediately available funds wired to AOL's account
pursuant to the wiring instructions attached as Schedule F (which instructions
may be modified in writing by AOL on five (5) days notice):
a. For each calendar quarter ending on March
31, June 30, September 30 and December 31, commencing with the Effective Date
and so long as this Agreement shall not have terminated or been terminated, TS
shall pay to AOL, in accordance with the procedures set forth in Section V.B.3,
the Quarterly Payment Amount for such quarter.
b. Against the amount of each such payment
to be made to AOL for any calendar quarter after December 31, 1997 and through
(and including) the calendar quarter ending June 30, 2000, there shall be
credited to TS, as of the last day of such quarter, a portion of the Initial
Payment equal to the lesser of (a) the Quarterly Payment Amount for such quarter
and (b) $ * * *, and such amount so credited shall, for all purposes, be deemed
to have been paid by TS to AOL and to have satisfied TS's obligation to AOL in
such amount. The amount, if any, by which $ * * *
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exceeds the Quarterly Payment Amount in any such calendar quarter is called a
"Quarterly Shortfall Amount".
2. If this Agreement shall be terminated by either
party prior to the end of the Term, TS' only obligation to pay AOL hereunder
(exclusive of any damages to which AOL may be entitled as a result of such
termination) shall be as set forth in Articles X and XI hereof.
3. Within thirty (30) days after the end of any
period for which payment is to be made pursuant to Section V.B.1 or V.B.2
hereof, TS shall deliver to AOL a statement of the Applicable Profit Percentage
(for periods prior to any termination hereof) and Pre-Tax Profit for such period
and the amount, if any, payable to AOL with respect to such period, showing the
manner in which it was determined and certified as correct by the Chief
Financial Officer of TS. Such statement shall be accompanied by a payment of any
such amount. This Section V.B.3 shall survive the termination or expiration of
this Agreement.
4. TS shall keep for two (2) years from the date of
each payment to AOL pursuant to Section V.B.1 complete and accurate records in
sufficient detail to allow AOL to determine if TS has computed Gross Revenues,
Actual Services Costs and Pre-Tax Profit accurately. AOL shall have the right
for a period of two (2) years after receiving any report or statement with
respect to payment due to inspect such records. TS shall make such records
available for inspection during regular business hours at its principal place of
business, upon reasonable notice from AOL. Such inspection right shall not be
exercised more than once in any calendar year and shall not be exercised more
than once with respect to any particular records furnished by TS to AOL. AOL
agrees to hold in strict confidence all information learned in the course of any
such inspection, except to the extent necessary for AOL to reveal such
information in order to enforce its rights under this Agreement or if disclosure
is required by law. AOL shall pay for such inspections, except that in the event
there is any upward adjustment in payments owed for any quarter shown by such
inspection of more than two percent (2%) of the amount paid, TS shall pay the
reasonable costs of such inspection. If AOL and TS are unable to agree on the
amount owed, then the dispute shall be resolved by arbitration pursuant to
Section XI.D hereof. Payments not made within the time period set forth in
Section V.B.3 hereof shall bear interest at a rate of one percent (1%) per month
or the highest rate permitted by law, whichever is lower, from the due date
until paid in full. This Section V.B.4 shall survive the termination or
expiration of this Agreement.
5. It is understood and agreed that the foregoing
payment terms and conditions in this Section V.B. are in respect of the
provision of Long Distance Telecommunications Services only and that the parties
are to mutually agree as to payment terms and conditions in respect of the
provision of Services of any other
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nature at the time such other Services are to be offered hereunder.
ARTICLE VI
WARRANTS; WARRANT HOLDER AND STOCKHOLDERS AGREEMENT
A. Warrants. On the date hereof and to induce AOL to enter
into the ongoing business relationship represented by this Agreement and as
partial consideration therefor, Holdings is entering into two Warrant
Agreements, each dated as of the date hereof (collectively, the "Warrants"), one
giving AOL the right to acquire 5,000,000 shares of Holdings Common Stock (the
"Holdings Common Stock") on the terms and subject to the conditions thereof, and
the other (the "Supplemental Warrant") giving AOL the right to acquire up to
7,000,000 shares of Holdings Common Stock on the terms and subject to the
conditions thereof.
B. Warrantholder and Stockholders Agreement. On the date
hereof, AOL, TS and Holdings are entering into the Warrantholder and
Stockholders Agreement, dated as of the date hereof (the "Warrantholders and
Stockholders Agreement").
ARTICLE VII
EXCLUSIVITY; NON-COMPETITION
A. Exclusive Arrangement.
1. * * * .
2. * * * .
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3. * * * .
4. * * * .
5. * * * .
6. * * * .
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7. * * * .
8. * * * .
9. * * * .
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B. Confidentiality.
1. Each party hereto shall treat, and shall cause its
respective directors, officers, employees, agents, representatives and
consultants to treat, as the other party's confidential property and not use or
disclose to others or permit its directors, officers, employees, agents,
representatives and consultants to use or disclose to others, without the prior
written consent of such other party, any non-publicly available information or
data of such other party (including, but not limited to, the identity of End
Users or subscribers to the AOL Service from time to time hereunder or any
information with respect thereto or any technical information or data provided
by such other party) that may have heretofore or hereafter been provided or
disclosed by such other party in connection with this Agreement, any
negotiations pertaining thereto or to any of the transactions contemplated
hereby.
2. The foregoing Section VII.B.1 shall not prevent
any party hereto from using or disclosing to others information: (i) which such
party can show has become part of the public domain other than by acts or
omissions of such party, its directors, officers, employees, agents,
representatives and consultants; (ii) which has been furnished to such party by
third parties as a matter of right, without restriction on disclosure or use
known to such party; (iii) which was lawfully in such party's possession prior
to the time AOL and TS first entered into discussions relating to the subject
matter of this Agreement and that was not acquired by such party, its directors,
officers, employees, agents, representatives and consultants directly or
indirectly from the other party, its employees or agents; (iv) which a party can
prove was developed by it independently of any information received from such
other party, its directors, officers, employees, agents, representatives and
consultants, either directly or indirectly; (v) that such party is required to
disclose by applicable law or regulation, in which case the party so required to
disclose shall give the other party prompt notice of such requirement in all
cases with sufficient time for such other party to seek a protective order or
other limit on disclosure (unless the party subject to the disclosure
requirement would suffer penalties or sanctions for failure to immediately
disclose such information). It is further understood and agreed that specific
information shall not be deemed available to the public or in any party's prior
possession merely because it is embraced by more general information available
to the public or in such party's prior possession; or (vi) as necessary for the
enforcement of this Agreement. In addition, (1) either party may disclose the
terms of this Agreement to the extent it deems such disclosure reasonably
necessary under applicable federal and state securities laws, regulations and
policies in connection with its (or Holdings') status as a public company and
with transactions involving the offering of its (or Holdings') securities and
(2) either party may disclose the terms of this Agreement to third
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parties as necessary in connection with other financing or merger and
acquisition activities, provided that, in the case of clauses (1) and (2) above
it seeks to protect the confidentiality of such confidential information in the
same manner and to the same degree as its own confidential information, to the
full extent that such confidential treatment is consistent with the purpose of
the disclosure. If either party becomes aware of any motion or other regulatory
or court proceeding that might require it to disclose any of the terms of this
Agreement, that party will give immediate written notice of such motion or
proceeding to the other and both parties shall act cooperatively to retain the
confidentiality of the terms hereof. For purposes of this paragraph, "third
party", does not include a person (other than a direct competitor of AOL or TS
or their respective affiliates) retained by either party to provide advice,
consultation, analysis, legal counsel or any other services in connection with
this Agreement, if such person agrees to be bound by the confidentiality
obligations of this Agreement.
3. In the event that this Agreement is terminated,
any and all notes, memoranda, records, drawings, tracings, specifications,
sketches, reports or other documents, including, without implied limitation, all
copies, excerpts or reproductions thereof, furnished or made available by TS to
AOL, or AOL to TS, as the case may be, their respective directors, officers,
employees, agents, representatives and consultants or developed thereby (except,
in any case, for information necessary to complete the performance of such
party's obligations under this Agreement and, in the case of TS, for any
information relating to any End User hereunder with respect to the Services,
and, in the case of AOL, any information relating to any subscriber to the AOL
Service with respect to the AOL Service) shall be promptly destroyed by such
party at such other party's request and such party shall advise such other party
in writing that such destruction has been completed. This Section shall survive
any termination of this Agreement.
C. Public Announcement.
1. No press release, public announcement,
confirmation or other information regarding this Agreement or the Warrants or
the contents hereof or thereof shall be made by any party without the prior
written consent of the other party, which consent shall not be unreasonably
withheld. It is agreed and understood that the parties shall work together to
prepare any such press release or public announcement. The foregoing
notwithstanding, if a party is required pursuant to applicable securities laws
to make such a public announcement or press release, such party shall be
permitted to do so provided that such party has furnished the other party with
the text of such public announcement or press release sufficiently in advance of
such public announcement or press release as to afford the receiving party a
reasonable opportunity to review such public announcement or press release
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and such party, to the extent consistent with its legal disclosure obligations,
modifies such public announcement or press release as reasonably requested by
the other party.
ARTICLE VIII REPRESENTATIONS AND WARRANTIES
A. AOL Representations and Warranties. AOL hereby represents
and warrants to TS as follows:
1. Due Organization; Etc. AOL (a) is a corporation
duly organized, validly existing and in good standing under the laws of the
state of its organization; (b) is duly qualified or licensed to do business as a
foreign corporation and is in good standing in each jurisdiction in which its
ownership or lease of property or its conduct of business requires it so to be
qualified or licensed; (c) has all licenses, authorizations, consents, orders,
approvals and qualifications necessary to conduct its business; and (d) has the
corporate power and authority to own its properties and assets and to carry on
its business as now conducted.
2. Authorization. The execution, delivery and
performance by AOL of this Agreement are within its corporate powers and have
been duly authorized by all necessary corporate action.
3. No Conflict. The execution, delivery and
performance by AOL of this Agreement (i) do not contravene any provision of its
charter or by-laws; and (ii) do not violate or conflict with any law, regulation
or contractual restriction to which it is subject or result in a violation of or
conflict with any other agreement to which it is a party or by which it is
bound.
4. Enforceability. This Agreement is the legal, valid
and binding obligation of AOL, enforceable against AOL in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization, or other laws affecting creditors'
rights generally or by the availability of equitable remedies.
5. Acquisition for Investment. AOL is an "accredited
investor" within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act. AOL is acquiring the Warrants and the Holdings Common Stock
issuable upon exercise thereof for its own account for investment and not for
the account of others or with a view to the distribution or resale of such
Warrants or Holdings Common Stock. AOL has such knowledge and experience in
financial and business matters generally that AOL is capable of evaluating the
merits and risks of an investment in the
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Warrants and Holdings Common Stock. AOL is aware that neither the Warrants nor
the Holdings Common Stock issuable upon exercise thereof may be sold or
otherwise transferred absent registration under the Securities Act or an
exemption therefrom. AOL acknowledges that it has received from Holdings all
financial and other information regarding its investment in the Warrants and the
Holdings Common Stock issuable upon exercise thereof that it has requested and
has been afforded the opportunity to discuss such investment with Holdings. The
only representations and warranties that have been made with respect to
Holdings, its subsidiaries, including TS, or their respective businesses and
assets or otherwise in connection with the transactions herein contemplated are
those contained in this Agreement and in the Warrants.
B. TS Representations and Warranties. TS hereby represents and
warrants to AOL as follows:
1. Due Organization; Etc. TS (a) is a corporation
duly organized, validly existing and in good standing under the laws of the
state of its organization; (b) is duly qualified or licensed to do business as a
foreign corporation and is in good standing in each jurisdiction in which its
ownership or lease of property or its conduct of business requires it so to be
qualified or licensed; (c) has all licenses, authorizations, consents, orders,
approvals and qualifications necessary to conduct its business; and (d) has the
corporate power and authority to own its properties and assets and to carry on
its business as now conducted.
2. Authorization. The execution, delivery and
performance by TS of this Agreement are within its corporate powers and have
been duly authorized by all necessary corporate action.
3. No Conflict. The execution, delivery and
performance by TS of this Agreement (i) do not contravene any provision of its
charter or by-laws; and (ii) do not violate or conflict with any law, regulation
or contractual restriction to which it is subject or result in a violation of or
conflict with any other agreement to which it is a party or by which it is
bound.
4. Enforceability. This Agreement is the legal, valid
and binding obligation of TS, enforceable against TS in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization, or other laws affecting creditors'
rights generally or by the availability of equitable remedies.
5. AOL Representations. The only representations and
warranties that have been made with respect to AOL, its subsidiaries or their
respective businesses and assets or
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otherwise in connection with the transactions herein contemplated are those
contained in this Agreement.
ARTICLE IX THE EFFECTIVE DATE
A. The Effective Date
1. * * * . This Agreement and the obligations of the parties
shall become effective for all purposes at 5:00 p.m., EST, on February 27, 1997
if, on or before such time on such date, AOL shall not have given written notice
to TS that it had elected not to proceed with this Agreement, accompanied by the
return of the full amount of the Initial Payment to TS and of the Warrants to
Holdings and (ii) TS has provided to AOL a legal opinion reasonably acceptable
to AOL with respect to the valid issuance and due authorization of the Warrants
and (iii) the check representing the Initial Payment delivered to AOL on the
date hereof shall have cleared so long as it was deposited in a bank on Monday,
February 24, 1997. Such time on such date that this Agreement so becomes
effective, or such earlier time as the parties shall agree in writing that this
Agreement shall be effective, is called the "Effective Date."
2. If AOL shall elect, as provided above, not to proceed and
shall, on or before 5:00 p.m., EST, on February 27, 1997, have returned the full
amount of the Initial Payment to TS and the Warrants to Holdings, this Agreement
and the Warrants shall be void and of no further force and effect, without any
further obligation on the part of any party hereto.
B. Announcement.
Immediately following the Effective Date, if it shall occur,
TS and AOL shall publicly announce the entering into the relationship
contemplated by this Agreement, subject to the parties' mutual agreements on the
content of such announcement and the procedures for the same pursuant to Section
VII.C.
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ARTICLE X TERM AND TERMINATION
A. Term of Agreement.
1. The term of this Agreement shall be for the Term;
provided that, notwithstanding anything set forth in this Agreement to the
contrary, so long as any End User shall be using any Service, each of TS and AOL
shall continue to perform its obligations under Article IV and Section III.D.1,
respectively, with respect to End Users post such Term as well as any other
obligations that survive termination or expiration of this Agreement pursuant to
Section XI.K.
B. Extension of the Term.
1. * * * .
2. In connection with each of the first two Extension
Periods, if any, elected by AOL, and in consideration thereof and to induce AOL
so to extend, Holdings shall deliver to AOL, on or before the first day of the
applicable Extension Period, a warrant (each, an "Additional Warrant" and the
Additional Warrant that is issued with respect to the first Extension Period,
the "First Additional Warrant" and the Additional Warrant that is issued with
respect to the second Extension Period, the "Second Additional Warrant") to
purchase up to 1,000,000 shares (as such number would have been adjusted after
the date hereof pursuant to the terms of the Supplemental Warrant, the
"Additional Warrant Number") of Holdings Common Stock, at an exercise price
equal to the average of the closing prices of such Common Stock for the ten (10)
consecutive business days before the issuance of such Additional Warrant, and
substantially in the form of the Supplemental Warrant,
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except that (a) the "Vesting Multiplier" thereunder shall be 1 (as such number
would have been adjusted after the date hereof pursuant to the terms of the
Supplemental Warrant), (b) the "Termination Date" shall be the fifth anniversary
of the issuance date of such Additional Warrant and (c) the "Warrant Shares"
thereunder shall mean at any time such number of shares of Common Stock as shall
have vested as of such time as follows:
(i) such number of shares of Common Stock as shall equal the
product of the "Vesting Multiplier" times the amount by which (x)
the number (the "First Quarter Number") of End Users for whom TS
is providing Services as of the last day of the first full
calendar quarter of such Extension Period (the "First Vesting
Date") exceeds (y) the number of End Users (the "Starting Number")
for whom TS was providing services as of the last day of the
calendar quarter next preceding such Extension Period, shall vest
and shall be Warrant Shares thereunder as of such First Vesting
Date; and
(ii) such number of shares of Common Stock as shall equal the
product of the "Vesting Multiplier" times the amount by which (x)
the number of End Users (each, a "Subsequent Quarter Number") for
whom TS is providing Services as of the last day of each full
calendar quarter (each, a "Subsequent Vesting Date") after the
First Vesting Date and on or before the last day of the full
calendar quarter in which this Agreement is terminated, exceeds
(y) the greatest of the Starting Number, the First Quarter Number
and any prior Subsequent Quarter Number, shall vest and shall be
Warrant Shares thereunder as of such Subsequent Vesting Date;
provided that in no event will the aggregate number of Warrant Shares exceed the
Additional Warrant Number, subject to further adjustment as provided in
Paragraph 6 of such Additional Warrant and to successive reduction upon any
exercise of such Additional Warrant as provided in such Additional Warrant and
provided, further, that no Warrant Shares under the Second Additional Warrant
shall vest until all Warrant Shares have vested under the First Additional
Warrant (and no Warrant Shares shall vest under any Additional Warrant on
account of any End User that was the basis of any Warrant Share vesting under
the other Additional Warrant).
C. Termination of Agreement.
1. This Agreement may be terminated as follows:
a. TS and AOL may terminate this Agreement at any time
by mutual written consent.
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b. Either TS or AOL may terminate this Agreement at any
time upon 30 days prior written notice to the other upon a material breach by
the other in the performance of its agreements and obligations hereunder and
such other party's failure to cure such breach within 30 days after written
notice thereof, provided that the party giving notice pursuant to this clause
(b) is not in such breach of this Agreement as would permit the other party to
give a notice pursuant to this clause (b).
c. * * * .
d. If, at any time during the Term, AT&T ceases to
provide long distance telecommunications services to TS, TS shall promptly
inform AOL in writing and AOL may, upon thirty (30) days written notice to TS
given within fourteen (14) days after AOL receives notice of such AT&T
termination from TS, plus payment by AOL to TS of an amount equal to the
aggregate of all amounts theretofore paid to AOL by TS pursuant to Section V.B.
hereof, if any (i.e., not including the Initial Payment), terminate this
Agreement; provided, however, that AOL shall have no obligation to make the
foregoing payment if TS shall not have contracted for viable substitute services
to replace those formerly provided by AT&T.
e. If, as the result, direct or indirect, of an event
described in Section XII.O, which event is either incurable or has continued for
at least 60 days, the performance of this Agreement substantially as
contemplated hereby is rendered impracticable, either AOL or TS may terminate
this Agreement by 30 days prior written notice to the other.
D. Effects of Termination.
1. Except as otherwise provided below, upon termination or
expiration of this Agreement, neither party shall have any further liability or
obligation to the other, other than for amounts accrued but unpaid as of the
date of expiration on termination, liabilities for any damages to which a party
may be entitled in connection with a termination pursuant to Section X.C.1(b),
obligations contemplated to be performed or observed subsequent to any
termination or expiration of this Agreement and obligations that are
specifically described herein as surviving termination of this Agreement.
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2. Upon the expiration or any termination of this Agreement after
the first day of the Test Launch Period, and provided that AOL elects to
continue to provide to TS online billing services of the types described in
Section III.D. hereof, TS shall pay to AOL, for each subsequent calendar
quarter, in arrears at the time and in accordance with the procedures set forth
in Section V.B.3 hereof, an amount equal to * * * % of the Pre-Tax Profit for
such quarter derived by TS, or any successor to TS, or any third party to which
TS may assign customers who were End Users as of the date of expiration or
termination of this Agreement, from telecommunication services in the nature of
the Services provided to customers who were End Users as of the date of
expiration or termination of this Agreement. Such election shall be made not
less than 30 days prior to expiration or 10 days prior to the effective date of
termination, as the case may be, by written notice to TS. Against the amount of
each payment to be made to AOL by TS pursuant to this Section for any calendar
quarter, there shall be credited to TS, as of the last day of such quarter, in
accordance with the terms of this Agreement, an amount equal to the lesser of
(a) * * * of the amount that, but for this provision, was to be paid to AOL in
respect of such quarter pursuant to this Section X.D.2 and (b) the amount of* *
* .
3. If this Agreement shall have been terminated by TS pursuant to
Section X.C.1(b) hereof by reason of a material breach by AOL or by AOL pursuant
to Section X.C.1(c) hereof or by either party pursuant to Section X.C.1(e)
hereof, AOL shall, within 10 days after such termination, pay to TS in
immediately available funds, the amount, if any, equal to the Unamortized Amount
at the time of such termination.
4. * * * .
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5. If at any time subsequent to the expiration or termination of
this Agreement, TS shall make or receive any offer to transfer or assign,
directly or indirectly, all or any portion of its rights to provide Services to
End Users, which shall in any event include assumption by the offeror of TS's
responsibilities to End Users and obligations to AOL hereunder, TS shall give
AOL written notice of such offer, stating the name of the third party and
describing the offer's material terms. If AOL shall not, within thirty (30) days
after receiving such notice, offer to acquire such rights on terms and
conditions substantially similar to those offered by or to such third party (it
being understood that if the offer to or from the third party includes
securities of such third party, AOL shall have no obligation to provide such
securities as part of its offer but shall be required to provide equivalent
value), TS shall be free to transfer or assign such
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rights to such third party, provided that any such transaction is completed
within a period of ninety (90) days after expiration of the foregoing thirty
(30) day period. Otherwise, AOL shall have the right, exercisable for thirty
(30) days, to acquire such rights upon the terms set forth in AOL's offer.
6. Termination without Cause. Notwithstanding anything
provided in this Section X.D.6 or otherwise in this Agreement, neither TS nor
AOL has the right to terminate this Agreement without cause.
a. If AOL should nonetheless terminate this Agreement
without cause, TS may elect as its sole remedy, in lieu
of its other remedies in law and equity, to be awarded
liquidated compensatory damages in an amount of
* * * less amounts previously credited to AOL pursuant
to Section V.B.1(b). The parties have agreed to this
liquidated damage clause because of the difficulty of
ascertaining with accuracy, in advance, the amount of
damages that TS would suffer if AOL were to terminate
this contract without cause. The parties further agree
that (i) these liquidated damage payments are wholly
compensatory in nature and constitute a reasonable
approximation of the damages TS would actually suffer in
the event of a termination by AOL, and (ii) as a result
of a termination by AOL, TS would lose funds that it had
invested in its arrangement with AOL and these
liquidated damages would provide the funds necessary for
TS to establish and finance a comparable arrangement
with another online service if it elects to do so.
b. If TS should nonetheless terminate this Agreement
without cause, AOL, as a remedy in addition to those it
already possesses in equity and in law, shall be able to
require TS to provide 180 days of Service under this
Agreement from the date of termination or notice of
termination, whichever is earlier. The purpose of this
180-day period is to provide AOL with the time necessary
reasonably to transfer End Users to other comparable
telecommunications carrier(s) with a minimum of
disruption.
c. For purposes of this Section X.D.6 only, the
parties further agree that a termination made by either
party with a good faith belief that such party has a
right to terminate pursuant to a provision of this
Agreement (a "Permitted Termination"), which is
ultimately determined not to have been effected pursuant
to a provision of this Agreement, will not constitute a
termination without cause for purposes of this Section.
A termination without cause shall be any termination
other than a Permitted Termination.
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ARTICLE XI
REMEDIES
A. Indemnification.
1. Subject to the terms and conditions of this
Article XI, AOL hereby indemnifies and agrees to defend and hold harmless TS
from and against all losses, costs, damages and expenses, including, without
limitation, reasonable attorneys' fees (collectively "Damages"), incurred by TS
resulting from or relating to (i) a breach of any representation or warranty of
AOL contained in this Agreement, (ii) the non-performance of any obligation to
be performed by AOL under this Agreement or (iii) any claim that the AOL Marks
that are authorized by this Agreement infringe the intellectual property rights
of any third party.
2. Subject to the terms and conditions of this
Article XI, TS hereby indemnifies and agrees to defend and hold harmless AOL
from and against all Damages incurred by AOL resulting from or relating to (i) a
breach of any representation or warranty of TS contained in this Agreement, (ii)
the non-performance of any covenant or obligation to be performed by TS under
this Agreement or (iii) any claim that any TS trademarks, service marks, trade
names or logos displayed in connection with the marketing of the Services
infringe the intellectual property rights of any third party.
B. Conditions of Indemnification.
1. The party seeking indemnification under this
Agreement (the "Indemnified Party") shall promptly notify the party expected to
provide indemnification under this Agreement (the "Indemnifying Party") of the
facts and circumstances upon which the Indemnified Party intends to base a claim
for indemnification hereunder ("Notice of Claim"). Notice shall in all events be
considered prompt if given (a) no later than thirty (30) days after the
Indemnified Party learns of such facts and circumstances, or (b) if later, in
sufficient time to allow the Indemnifying Party to exercise its rights pursuant
to this subpart 3 without any material impairment of, or prejudice to, the
Indemnifying Party in the exercise of such rights.
C. Defense of Third-Party Claims.
1. Subject to subsection (b) below, if Damages arise
out of a third party claim seeking recovery of money damages (a "Money Claim"),
the Indemnifying Party shall have the right and obligation, at its expense, to
assume sole control of the defense of such Money Claim with counsel reasonably
acceptable to the Indemnified Party. Notwithstanding the foregoing, the
Indemnified Party shall have the right to employ its own counsel in any such
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case, but the fees and expenses of such counsel shall be at the expense of the
Indemnified Party unless (x) the employment of such counsel shall have been
authorized in writing by the Indemnifying Party in connection with the defense
of such action at the expense of the Indemnifying Party, or (y) the Indemnifying
Party shall not have employed counsel to have charge of the defense of such
action within a reasonable time after the Notice of Claim is given, or having
assumed such defense, fails to pursue it within reasonable time, or (z) the
named parties to such claim include both the Indemnified and the Indemnifying
Parties and the Indemnified Party shall have been advised by counsel that
counsel employed by the Indemnifying Party would, under applicable professional
standards, have a conflict in representing both the Indemnifying Party and the
Indemnified Party, in any of which events such fees and expenses of one
additional counsel for the Indemnified Party shall be borne by the Indemnifying
Party. The Indemnified Party shall have the right to settle or compromise any
Money Claim and recover the amount paid in such settlement from the Indemnifying
Party without the consent of the Indemnifying Party if the Indemnified Party has
given written notice thereof to the Indemnifying Party and the Indemnifying
Party has failed to assume the defense of the Money Claim or, having assumed the
defense, has failed to pursue it diligently within a reasonable length of time.
The Indemnifying Party shall have the right to settle or compromise any Money
Claim against the Indemnified Party without the consent of the Indemnified Party
provided that the terms of such settlement or compromise provide for the
unconditional release of the Indemnified Party and require the payment of money
damages only by the Indemnifying Party.
2. If Damages arise out of a third party claim
seeking equitable relief alone or in addition to monetary damages and, if such
equitable relief, standing alone, if obtained, would materially and adversely
affect the business, operations, assets or financial condition of the
Indemnified Party (an "Equitable Claim"), the Indemnified Party shall be
entitled to defend such Equitable Claim with counsel reasonably acceptable to
the Indemnifying Party in a reasonable manner under the circumstances and at the
reasonable expense of the Indemnifying Party. The Indemnifying Party shall be
provided by counsel to the Indemnified Party with regular information regarding
the costs of such defense. The Indemnifying Party shall be entitled to
participate at its own expense in the defense of any such Equitable Claim. The
Indemnified Party shall make no settlement, compromise, admission, or
acknowledgment which would give rise to liability on the part of the
Indemnifying Party without the prior written consent of the Indemnifying Party,
which shall not be unreasonably withheld or delayed.
3. The parties shall extend reasonable cooperation to
one another in connection with the defense of any third-party claim pursuant to
this Article XI and, in connection therewith, shall furnish such records,
information, and testimony and attend
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such conferences, discovery proceedings, hearings, trials, and appeals as may be
reasonably requested.
4. Notwithstanding anything else in this Agreement or
elsewhere contained, IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT EXCEPT FOR
LIABILITY AMONG THE PARTIES HERETO ARISING UNDER SECTIONS IIIE, IIIF, VIIB AND
VIIC HEREOF, NO PARTY SHALL BE LIABLE TO ANY OTHER PARTY OR ANY OTHER PERSON FOR
ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES, INCLUDING,
WITHOUT LIMITATION, LOSS OF GOODWILL OR LOSS OF PROFITS, ARISING IN ANY MANNER
FROM THIS AGREEMENT OR THE PERFORMANCE OR NONPERFORMANCE OF ITS OBLIGATIONS
HEREUNDER.
D. Arbitration.
1. If the parties are unable to resolve any dispute,
controversy or claim arising under this Agreement (excluding, any disputes
relating to intellectual property rights or confidentiality) (each a "Dispute"),
such Dispute will be submitted to senior executive officers of each of the
parties for resolution. If such officers are unable to resolve the Dispute
within ten (10) days after submission to them, the dispute shall be solely and
finally settled by arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association ("AAA") then obtaining; provided
that the Federal Rules of Evidence shall apply in toto to any such Dispute and,
subject to the arbitrators' limiting the time for and scope of discovery to
comply with the time limit set forth in Section XI.D.4, the Federal Rules of
Civil Procedure shall apply with respect to discovery.
2. The arbitration panel shall be composed of three
arbitrators, one of whom shall be chosen by AOL, one by TS and the third by the
two so chosen. If both or either of AOL or TS fails to choose an arbitrator or
arbitrators within seven (7) days after receiving notice of commencement of
arbitration or if the two arbitrators fail to choose a third arbitrator within
seven (7) days after their appointment, the then director of the office of the
American Arbitration Association in the District of Columbia shall, upon the
request of both or either of the parties to the arbitration, appoint the
arbitrator or arbitrators required to complete the board.
3. Unless the parties to the arbitration shall
otherwise agree to a place of arbitration, the place of arbitration shall be in
the District of Columbia.
4. The arbitration panel shall commence proceedings
no later than sixty (60) days after the appointment of the third arbitrator. All
discovery shall be completed prior to commencement of proceedings. Such
proceedings shall be conducted for no less than three (3) full days per week
until completed.
39
<PAGE>
5. The arbitration panel is empowered to render the
following awards in accordance with the terms and conditions of this Agreement:
(i) enjoining a party from performing any act prohibited, or compelling a party
to perform any act required, by the terms of this Agreement and any order
entered pursuant to this Agreement or deemed necessary by the arbitration panel
to resolve disputes arising under or relating to this Agreement or any order;
(ii) where, and only where, violations of this Agreement have been found,
shortening or lengthening any period established by this Agreement or any order;
(iii) monetary awards and (iv) ordering such other legal or equitable relief,
including any provisional legal or equitable relief, or specifying such
procedures as the arbitrators deem appropriate, to resolve any Dispute submitted
to it for arbitration. The arbitration panel shall not be empowered to award
consequential or punitive damages and shall not be empowered to award specific
performance in the event that such performance would have a materially
detrimental effect on aspects of the party's business that are not directly
related hereto.
6. When resolving a Dispute arising under Article II
hereof and resulting from the failure of the parties to mutually agree on a
guideline to be included on the Performance List of one of the parties, each
party shall submit to the arbitrators a form of the particular guideline
proposed by such party. The arbitrators' decision in any such instance shall be
limited to designating one of the proposals as being the most consistent with
generally accepted industry practice in the context of comparable business
arrangements. The proposed guideline so designated by the arbitrators shall be
included in the Performance List of the appropriate party.
7. The arbitrators shall render their decision within
thirty (30) days after submission of all evidence and the conclusion of all
testimony. The decision of the arbitrators shall be by majority vote and, at the
request of either party, the arbitration panel shall issue to both parties a
written explanation of the reasons for the award and a full statement of the
facts as found and the rules of law applied in reaching its decision.
8. Any monetary awards shall be made and shall be
payable in U.S. dollars free of any tax or any other deduction (except as may be
required by law). Monetary awards shall include interest from the date of breach
or other violation of this Agreement to the date when the award is paid in full.
The interest rate or rates applied during such period shall be the lower of 12%
per annum or the maximum rate permitted by applicable law (the "Interest Rate").
9. The award of the arbitration panel will be the
sole and exclusive remedy between the parties regarding any and all claims and
counterclaims with respect to the subject matter of the arbitrated dispute. An
award rendered in connection with an
40
<PAGE>
arbitration shall be final and binding upon the parties, and any judgment upon
such an award may be entered and enforced in any court of competent
jurisdiction. The parties hereby waive all jurisdictional defenses in connection
with any arbitration hereunder or the enforcement of an order or award rendered
pursuant thereto (assuming that the terms and conditions of this arbitration
clause have been complied with), defenses based on the general invalidity of
this Agreement or this arbitration clause. With respect to any order issued by
the arbitration panel pursuant to this Agreement, the parties expressly agree
and consent (i) to the bringing of an action by one party against the other in
the federal courts of the forum state agreed to above to enforce and confirm
such order; and (ii) that any federal court sitting in such state may enter
judgment and enforce such order, whether pursuant to the U.S. Arbitration Act or
otherwise.
10. Neither party shall be excused from performing
its obligations hereunder during the pendency of such arbitration.
E. Reservation of Remedies. Except where otherwise expressly
specified, the rights and remedies granted to a party under this Agreement are
cumulative and in addition to, and not in lieu of, any other rights or remedies
which the party may possess at law or in equity.
F. Survival. This Article XI shall survive termination of this
Agreement.
ARTICLE XII
GENERAL
A. Regulatory Filings. Each of TS and AOL will cooperate to
the extent reasonably practicable in the preparation and filing of any other
regulatory filings necessary or advisable to permit the proposed transactions
and the provision of the Services hereunder, including, without limitation, the
provision of any information as may reasonably be necessary therefor.
B. Notices. All notices and other communications hereunder
shall be given by telephone and immediately confirmed in writing and shall be
deemed given if delivered personally or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
41
<PAGE>
1. if to TS or Holdings:
Tel-Save Holdings, Inc.
Law Department
6805 Route 202
New Hope, Pennsylvania 18938
Attention: General Counsel
Telephone Number: (215) 862-1500
Facsimile Number: (215) 862-1515
2. if to AOL:
America Online Inc.
22000 AOL Way
Dulles, Virginia 20166-9323
Attention: General Counsel
Telephone Number: (703) 265-2739
Facsimile Number: (703) 265-2208
with a copy to:
Head of Business Affairs
AOL Networks
22000 AOL Way
Dulles, Virginia 20166-9323
Telephone Number: (703) 265-2365
Facsimile Number: (703) 265-1206
C. Interpretation. The headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. References to Sections, Articles and Schedules
refer to sections, articles and exhibits of this Agreement unless otherwise
stated.
D. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, the remainder of the terms, provisions,
covenants, and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated and the parties
shall negotiate in good faith to modify this Agreement to preserve, to the
fullest extent legally permitted, each party's anticipated benefits and
obligations under this Agreement. If the parties are unable to so agree, the
matter shall be resolved pursuant to Article XI.D hereof.
E. Entire Agreement. This Agreement, together with the other
agreements referred to herein and the schedules attached hereto, constitutes the
entire agreement, and supersedes all other prior agreements and undertakings,
both written and oral, among the parties with respect to the subject matter
hereof.
42
<PAGE>
F. Assignments. This Agreement (i) is not intended to confer
upon any other person any rights or remedies hereunder; and (ii) shall not be
assigned by operation of law or otherwise except (a) to a wholly owned
subsidiary (provided such subsidiary becomes a party to this Agreement and that
the transferring party agrees and acknowledges that it is not released from its
obligations hereunder), or (b) to any entity that may acquire all or
substantially all of the assets of a party hereto. This Agreement, together with
the other agreements referred to herein and the schedules attached hereto, shall
inure to the benefit of and be binding upon the parties' respective successors
and permitted assigns.
G. Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the internal laws of
the State of New York, without giving effect to the principles of conflict of
laws thereof.
H. Amendments. No provision of this Agreement may be amended,
modified or waived except by written agreement duly executed by each of the
parties, by, in the case of AOL, an officer of at least equal standing to that
officer who signed this Agreement on behalf of AOL.
I. Independent Contractors. The parties to this Agreement are
independent contractors. Neither party is an agent, representative, or partner
of the other party. Neither party shall have any right, power or authority to
enter into any agreement for or on behalf of, or incur any obligation or
liability of, or to otherwise bind, the other party. This Agreement shall not be
interpreted or construed to create an association, agency, joint venture or
partnership between the parties or to impose any liability attributable to such
a relationship upon either party.
J. No Waiver. The failure of either party to insist upon or
enforce strict performance by the other party of any provision of this Agreement
or to exercise any right under this Agreement shall not be construed as a waiver
or relinquishment to any extent of such part's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same shall be
and remain in full force and effect.
K. Survival. Any provision of this Agreement which
contemplates performance or observance subsequent to, or otherwise states that
it would survive, any termination or expiration of this Agreement will survive
the termination or expiration of this Agreement. This Article XII shall survive
termination of this Agreement.
L. Third Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and thereto, as the case may be, and their
respective successors and permitted assigns, and are
43
<PAGE>
not for the benefit of nor may any provision hereof be enforced by, any other
person, including, without limitation, any End User (such End Users having no
rights whatsoever herein).
M. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall constitute an original, but together shall
be construed as one document.
N. Nonsolicitation. Neither party, for itself, or through any
third party shall, directly or indirectly, solicit or attempt to solicit, entice
or persuade any employee of or consultant to the other party to leave the
services of such other party.
O. Force Majeure. Neither Party shall be held liable for
failure to perform any of its obligations hereunder if such failure is (i) due
to an Act of God, fire, explosion, accident, flood, landslide, lightning,
earthquake, storm, civil disturbance, power failure, strike or other labor
disturbance affecting a party other than TS or AOL, act of war (whether war be
declared or not), national defense requirement, failure of a non-party
telecommunications carrier, failure or disruption of machinery, apparatus or
systems; acts, injunction, or restraint of government (whether or not now
threatened) and (ii) beyond the reasonable control of such party. For purposes
of this Section XII.O, a failure shall not be deemed to be beyond the reasonable
control of the party affected if
(i) such failure would not have occurred had
the affected party been performing in accordance with the provisions of this
Agreement, including its Performance List, or in accordance with generally
accepted industry practice; or
(ii) with respect to acts, injunctions or
restraints of governments, such failure results from the unlawful act or
omission of the affected party (other than actions contemplated by the parties
in furtherance of this Agreement).
Upon such an occurrence, the party whose performance is affected shall
immediately give written notice of the occurrence to the other party, and shall
thereafter exert all reasonable efforts to overcome the occurrence and resume
performance of this Agreement. If, despite such efforts, the affected party
cannot overcome the occurrence and resume performance within 90 days following
notification given hereunder, then unless either party has terminated this
Agreement in accordance with Section X.C.1(e), the parties shall mutually agree
on an equitable resolution. If the parties are unable to reach mutual agreement,
the matter shall be submitted for resolution in accordance with Section XI.D.
44
<PAGE>
ARTICLE XIII
HOLDINGS GUARANTEE
Holdings hereby unconditionally guarantees to AOL (i) the full
and prompt payment of all amounts which may become due and owing to AOL from TS
pursuant to this Agreement and (ii) the due performance by TS of all of its
obligations under this Agreement, (all of the foregoing, collectively, are
hereinafter referred to as the "Guaranteed Obligations"). The obligations of
Holdings under this Article shall not be impaired by any modification,
supplement, extension or amendment of any contract or agreement between AOL and
TS, whether now existing or hereafter arising, including, without limitation,
this Agreement, nor by any modification, release or other alteration of any of
the Guaranteed Obligations or of any security therefor, and the liability of
Holdings shall apply to the Guaranteed Obligations as so altered, modified,
supplemented, extended or amended. No invalidity, irregularity or
unenforceability of all or any part of the Guaranteed Obligations or of any
security therefor (including, without limitation, as a result of the bankruptcy,
reorganization or insolvency of the TS, or pursuant to any assignment for the
benefit of creditors, receivership, or similar proceeding) shall affect, impair
or be a defense to the obligations of Holdings under this Article XIII which are
a primary obligations of Holdings, and nothing shall discharge or satisfy the
liability of Holdings hereunder except the full payment and performance of the
Guaranteed Obligations. This Article XIII shall survive termination of this
Agreement.
45
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
signed on their behalf as of the day and year first written above.
AMERICA ONLINE INC.
By
------------------------
Name: David M. Colburn
Title: Senior Vice-President
TEL-SAVE, INC.
By
------------------------
Name: Daniel Borislow
Title: Chairman & CEO
TEL-SAVE HOLDINGS, INC.
By
------------------------
Name: Daniel Borislow
Title: Chairman & CEO
46
<PAGE>
CONFIDENTIAL
Schedule A
Services Costs
* * *
<PAGE>
CONFIDENTIAL
Schedule B
Checklist Items Schedule
* * *
<PAGE>
CONFIDENTIAL
SCHEDULE C
Initial Long Distance Services
1. Outbound and inbound long distance, including but
not limited to interlata, intralata, intrastate, international and toll-free
services.
2. Calling cards, including but not limited to
domestic and international, credit and debit cards
3. Operator services, including but not limited to,
collect calling, etc.
4. Directory assistance.
5. Conference calling.
6. Private line and dedicated services.
7. Online Billing and paper Billing Services for all
telecom services.
<PAGE>
CONFIDENTIAL
Schedule D
Rate Schedule
* * *
<PAGE>
CONFIDENTIAL
Schedule E
Performance Milestones
* * *
Exhibit 11.1
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1996 1995(A) 1994(A)
------------------------------------------
<S> <C> <C> <C>
Net income $ 20,168 $10,819 $ 5,613
======== ======= =======
PRIMARY
Weighted average common and common equivalent
shares outstanding - Primary:
Weighted average shares 52,650 31,422 28,650
Weighted average equivalent shares 4,352 2,183 2,013
-------- --------- -------
Weighted average common and common
equivalent shares - Primary 57,002 33,605 30,663
======== ======== =======
Net income per share - Primary $ .35 $ .32 $ .18
======== ========= =======
FULLY DILUTED
Weighted average common and common equivalent
shares outstanding - Fully
Diluted:
Weighted average shares 52,650 31,422 28,650
Weighted average equivalent shares 5,377 2,183 2,013
--------- ------- --------
Weighted average common and common
equivalent shares - Fully Diluted 58,027 33,605 30,663
======== ======= =======
Net income per share - Fully Diluted $ .35 $ .32 $ .18
========= ======== ========
</TABLE>
(A) Pro forma tax provisions have been calculated as if the Company's results of
operations were taxable as a C corporation (the Company's current tax status)
for the years ended December 1995 and 1994. Prior to September 20, 1995, the
Company was an S corporation with all earnings taxed directly to its
shareholders.
SUBSIDIARIES OF THE REGISTRANT
The companies listed below are wholly owned by Tel-Save Holdings, Inc.
and are included in its consolidated financial statements.
NAME JURISIDICTION OF INCORPORATION
Tel-Save, Inc. Pennsylvania
Emergency Transport Corp. Delaware
(formerly TS Investment Corporation)
In addition to doing business under its own name, Tel-Save, Inc. also
does business under the names Tel-Save, Inc. of Pennsylvania, Pennsylvania
Tel-Save, Inc., The Phone Company, The Phone Company of New Hope, Network
Services of New Hope, Group Network Services, Inc. and Network Services of
Pennsylvania.
CONSENT OF BDO SEIDMAN, LLP
Tel-Save Holdings, Inc.
New Hope, Pennsylvania
We hereby consent to the incorporation by reference in the respective
Prospectuses constituting a part of the Registration Statements on Forms S-8
Nos. 333-04479 and 333-05923 and Forms S-3 Nos. 333-14549 and 333-23193 of our
reports dated January 29, 1997, relating to the consolidated financial
statements and schedule of Tel-Save Holdings, Inc. and subsidiaries, appearing
in the Company's Annual Report on Form 10-K for the year ended December 31,
1996.
We also consent to the reference to us under the caption "Experts" in
the Prospectuses.
/s/ BDO Seidman, LLP
New York, New York
March 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER, 1996 OF TEL-SAVE HOLDINGS, INC.
AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 8,023,000
<SECURITIES> 149,237,000
<RECEIVABLES> 20,958,000
<ALLOWANCES> 987,000
<INVENTORY> 0
<CURRENT-ASSETS> 201,885,000
<PP&E> 30,596,000
<DEPRECIATION> 499,000
<TOTAL-ASSETS> 257,008,000
<CURRENT-LIABILITIES> 26,288,000
<BONDS> 0
622,000
0
<COMMON> 0
<OTHER-SE> 230,098,000
<TOTAL-LIABILITY-AND-EQUITY> 257,008,000
<SALES> 0
<TOTAL-REVENUES> 232,424,000
<CGS> 0
<TOTAL-COSTS> 200,597,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 32,373,000
<INCOME-TAX> 12,205,000
<INCOME-CONTINUING> 20,168,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,168,000
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.35
</TABLE>
