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
For the Year Ended December 31, 1998
Commission File No. 0-26728
TEL-SAVE.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2827736
(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:
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. [X]
<PAGE>
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 26, 1999 was approximately $556,725,623 based on the
average of the high and low prices of the Common Stock on March 26, 1999 of
$10.1875 per share as reported on the Nasdaq National Market.
As of March 26, 1999, the Registrant had issued and outstanding 60,100,182
shares of its Common Stock, par value $.01 per share.
2
<PAGE>
TEL-SAVE.COM, INC.
INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I
<TABLE>
<CAPTION>
<S> <C>
1. BUSINESS.....................................................................................................
2. PROPERTIES...................................................................................................
3. LEGAL PROCEEDINGS............................................................................................
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................................
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS......................................................................................................
6. SELECTED CONSOLIDATED FINANCIAL DATA.........................................................................
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................................................
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................................
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
RELATED TRANSACTIONS.........................................................................................
PART III
10. DIRECTORS AND EXECUTIVE OFICERS OF THE REGISTRANT............................................................
11. EXECUTIVE COMPENSATION.......................................................................................
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................................
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................................
PART IV
14. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................................
3
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
Tel-Save.com, Inc. (together with its subsidiaries, the "Company" or
"Tel-Save.com") provides telecommunications services to business and residential
customers throughout the United States, primarily through its e-commerce
platform. The Company believes that it currently has the largest share of the
e-commerce market for long distance telephone services. The Company's e-commerce
platform is built around the Company's advanced online and web-enabled customer
care, billing and information systems. The Company has announced that it will
seek in the future to utilize its e-commerce business platform to market and
sell new products and services, including the sale of advertising.
The Company's telecommunication service offerings include long distance
outbound service, inbound toll-free service and dedicated private line services
for data. The Company markets its telecommunications services through its
exclusive telecommunications marketing agreement with AOL and on the internet
through its web site located at www.tel-save.com. The Company also sells its
services on a wholesale basis.
Tel-Save.com operates a network that carries a majority of its
customers' calls. The Company's network includes Company-owned Lucent 5ESS-2000
switches located in selected areas throughout the United States. These switches
are widely considered among the highest quality and most reliable
telecommunications switches available in the market today. The network is
further supported by agreements with major interexchange carriers that provide
interconnections among the Company's switches and local carriers' switches,
origination and termination of calls, overflow capacity, international long
distance services and other services that the Company provides to its customers.
The Company has also developed and integrated into its network sophisticated
information and billing systems that allow the Company to manage its network
efficiently and to provide its customers with high quality customer care and
billing systems.
In early 1997, the Company acquired from AOL rights to market and sell
the Company's telecommunications services to AOL subscribers. The agreement with
AOL has become an important part of the Company's current business strategy. A
majority of the Company's customers come from AOL's rapidly growing subscriber
base. As a result of the AOL agreement, the Company believes that it has one of
the largest bases of online customers making repetitive purchases of products or
services through online billing and automatic credit card payments.
<PAGE>
Under the AOL marketing agreement, the Company maintains sites on the
AOL online network to provide for customer sign-up and to provide customers and
potential customers with information about the Company's products and services
as well as billing information and customer service. The Company provides these
services and features using the Company's web-enabled technologies that allow
the Company to offer e-commerce customers:
o Detailed rate schedules and product and service related information.
o Fast and easy online sign-up for the Company's telecommunications
services.
o Credit card billing, avoiding costly and cumbersome paper billing.
o Real-time billing services and online information, providing customers
with up-to-date billing information 24 hours a day, 7 days a week.
Since the beginning of its relationship with AOL, the Company has
negotiated a number of amendments to its agreements with AOL based on the
experience gained by the Company in the marketing and sale of services to AOL
subscribers. Substantial amendments negotiated with AOL during the fourth
quarter of 1998 were completed on January 5, 1999. These amendments accomplished
the following changes to the Company's relationship with AOL:
o Eliminated the Company's obligation to make profit-sharing and bounty
payments to AOL and introduced fixed quarterly payments during the
exclusivity period of the agreement.
o Altered the terms of the online and offline marketing arrangements
between the Company and AOL. The Company maintains valuable marketing
rights which continue under the agreement through June 2003.
o Extended the term of the AOL agreement, including the long distance and
wireless exclusivity periods, up until June 2003 while eliminating any
exclusive rights for marketing local telecommunications services,
subject to payment of certain amounts to the Company. AOL can allow
others to market long distance telephone and wireless services to the
AOL membership after June 2000 by foregoing the fixed quarterly
payments described above.
o Eliminated AOL's rights to receive further common stock warrants. AOL
reported beneficial ownership (including the warrants) of approximately
11% of the Company's Outstanding common stock.
o Established the rights of the Company to offer additional services and
products to AOL subscribers.
5
<PAGE>
In connection with the amendments to the AOL agreements, AOL made a
significant equity investment in Tel-Save.com, acquiring 4,121,372 shares of
common stock for $55 million in cash and the surrender of rights to acquire up
to 5,076,016 shares of common stock pursuant to various warrants held by AOL.
AOL retained existing warrants to acquire up to an additional 2,721,984 shares
of the Company's common stock. For a discussion of certain rights of AOL to
require the Company to reimburse AOL for certain losses on the sale of shares by
AOL, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources".
Tel-Save, Inc., the Company's predecessor and now its principal
operating subsidiary, was incorporated in Pennsylvania in May 1989. The Company
was incorporated in June 1995. The address of the Company's principal current
executive offices is 6805 Route 202, New Hope, Pennsylvania 18938, and its
telephone number is (215) 862-1500. The Company's web site is located at
www.tel-save.com. The Company recently entered into a lease for a 3,700 square
foot facility in Reston, Virginia, which will serve as the Company's future
headquarters for the majority of its executive officers and marketing personnel.
Unless the context otherwise requires, references to the "Company" or to
"Tel-Save.com" refer to Tel-Save.com, Inc. and its subsidiaries.
SALES AND MARKETING
The Company conducts its sales and marketing efforts both online,
through AOL and the Company's own web site located at www.tel-save.com, as well
as through traditional channels, such as direct mail, telemarketing and
independent resellers or partition arrangements.
In 1998, the Company's sales and marketing efforts focused almost
exclusively on recruiting AOL subscribers as customers of its telecommunications
services and establishing a substantial base of online customers. The Company's
marketing efforts were carried out through online marketing initiatives over the
AOL network and through a variety of direct marketing programs targeting AOL
subscribers. For those AOL customers that have not subscribed to the Company's
services online, the Company has a program with AOL for the referral of AOL
customers by AOL directly to the Company's telephone service centers. During
1998, the Company invested substantial sums to establish quickly its subscriber
base of AOL customers as part of the Company's e-commerce strategy.
The Company's own web site is located at www.tel-save.com and is the
platform for marketing the Company's telecommunications services and for
enabling customers to sign up for the Company's services through the internet.
With the development of the Company's advanced sign up and billing
systems, customers can purchase the Company's telecommunications services while
online on AOL's network or through the Company's own web site. The Company
employs its own proprietary billing systems to enable online billing and credit
card payment, eliminating the need for costly paper billing. The Company's
billing system enables a customer to view his or her bill online or over the
internet on a real-time basis with the call detail and cost for most calls
posted within minutes after a customer completes a call. The Company believes
that its online billing systems provide it with a competitive advantage in the
online market for telecommunications services.
6
<PAGE>
The Company's rights to market long distance and wireless
telecommunications services on AOL on an exclusive basis expire on June 30,
2003. AOL may elect after June 30, 2000 to allow others to market long distance
and wireless telecommunications services over the AOL network if AOL elects to
forego annual payments from the Company under the agreement (at least $60
million in the 12 months ending June 30, 2001). Absent a termination of the AOL
agreement upon a breach of the agreement, the Company is entitled to continue
marketing its products and services on the AOL network through June 2003. The
minimum marketing rights available to the Company under the AOL agreement
throughout the term of the agreement until June 2003 include varying ranges of
the following rights and benefits:
o Regular, monthly and daily AOL welcome screen advertisements, pop-up
advertisements and other on-screen promotions and advertisements.
o Telemarketing and direct mail to advertise the Company's products to
AOL subscribers, other than subscribers who have elected not to receive
telemarketing calls or other promotional materials through AOL.
o A program for promoting the Company's products to specified percentages
of AOL subscribers who call AOL's customer inquiry centers.
o Specified relationship marketing rights, which extend beyond 2003 .
o The right (either exclusive or non-exclusive) to market and sell
wireless, long distance and other products and services over the AOL
online network.
Because of significant marketing rights that continue even after a
termination of the exclusivity period under the AOL agreement, the Company is
unable to determine at this date whether the early termination of the
exclusivity period and the release of the Company's obligation to make the fixed
payments to AOL will be beneficial or detrimental to the Company's business. The
Company believes that the exclusivity feature of the AOL agreement has given the
Company a valuable lead in marketing telecommunications services to AOL
subscribers. However, the Company is unable to predict: (1) whether potential
competitors of the Company will be willing to pay the substantial sums that the
Company believes would be required to compensate AOL for foregoing the fixed
payments to be paid by the Company during the long distance exclusivity period;
or (2) whether potential competitors would be required, or otherwise be willing,
to invest the substantial sums that the Company believes would be required to
acquire a base of AOL customers for telecommunications services comparable to
the Company's existing base of AOL subscribers.
Tel-Save.com also provides, as a declining portion of its business,
telecommunications services to small and medium-sized businesses through
independent resellers. Although the Company still serves many customers in this
manner, such partitions no longer comprise a majority of the Company's business
as they once did.
THE COMPANY'S NETWORK
To provide its telecommunications services to customers, the Company
predominantly uses its telecommunications network, One Better Net ("OBN"). The
Company generally uses OBN to provide services directly to its end users and
partitions. As of December 31, 1998, the Company provisioned more than 80% of
the lines using its services over OBN.
Controlling its own network provides the Company with advantages
compared to when the Company operated strictly as a reseller of the
telecommunications services of other carriers. With the deployment of OBN, the
Company has lowered its costs of providing long distance services to its
customers and has established greater control over those costs. This control
allows the Company to manage its growth as a telecommunications service provider
and to target its marketing efforts according to the overhead costs of
delivering its services.
Structure of the Network
The Company's network is comprised of equipment that is either owned or
leased by the Company and contracts for certain telecommunications services that
the Company maintains with a variety of other carriers. The Company owns,
operates and maintains five Lucent 5ESS-2000 switches in its network. These
switches are generally considered the most reliable in the telecommunications
industry and feature the Digital Networking Unit--SONET technology. The Digital
Networking Unit is a switching interface that is designed to increase the
reliability of the 5ESS-2000 and to provide much greater capacity in a
significantly smaller footprint.
The switches are connected to each other by connection lines and
digital cross-connect equipment that the Company leases. See "Service Agreements
with Other Carriers." The Company also has installed lines to connect its OBN
switches to switches owned by various local telecommunications service carriers.
The Company is responsible for maintaining these lines and has entered into a
contract with GTE with respect to the monitoring, servicing and maintenance of
this equipment.
7
<PAGE>
The access charges that the Company pays to connect its switches to a
local carrier's switch represent a substantial portion of the total cost of
providing long distance services over OBN. As a result of the Telecommunications
Act of 1996 and the ongoing regulatory and judicial interpretations thereunder,
it is generally expected that the entry over time of competitors into the local
service market will result in the lowering of access fees, but there is no
assurance that this will occur. To the extent it does occur, the Company will
receive the benefit of any future reduction in such access fees for calls
serviced over OBN. See "Regulation" for a discussion of universal service
contributions imposed on carriers, which may offset some or all of the savings
from lower access charges.
In addition, the Company maintains contracts with other carriers that
provide it with a variety of other services. See "Service Agreements with Other
Carriers." These contracts include services for assisting with the overflow of
telecommunications traffic over OBN, for carrying calls internationally and for
providing directory assistance and other operator assisted calls. The
combination of these contracts permits the Company to obtain a particular type
of service from more than one carrier at a given time and gives the Company the
flexibility to seek the best rates available for a particular service at a given
time.
The fact that the Company operates its own switches subjects the
Company to risk of significant interruption. Fires or natural disasters, for
example, could cause damage to the Company's switching equipment or to
transmission facilities connecting its switches. Any interruption in the
Company's services over OBN caused by such damage could have a material adverse
impact on the Company's financial condition and results of operations. In such
circumstances, the Company could attempt to minimize the interruption of its
service by carrying traffic through its overflow and resale arrangements with
other carriers.
The Company has continued to expand the capacity of OBN to meet its
increased demand and believes that such capacity may be further expanded at
reasonable cost to meet the Company's needs in the foreseeable future, including
expansion resulting from the Company's relationship with AOL and the launch of
its own web site.
Service Agreements with Other Carriers
The Company historically obtained services from AT&T through multiple contract
tariffs. With the deployment of OBN, the Company requires fewer such services
from that carrier to sell its services. Instead of relying on exclusively on
AT&T, the Company has entered into and is currently negotiating contracts with
various long distance and local carriers of telecommunications services (of
which one contract is with AT&T) for both its OBN and reselling operations.
These services enable the Company to:
o Connect the Company's OBN switches to each other
8
<PAGE>
o Connect the Company's switches to the switches of local
telecommunications service carriers
o Carry overflow traffic during peak call times
o Connect international calls
o Provide directory assistance and other operator assisted services
With respect to connections to local carriers, overflow, international
and operator assisted services, the Company maintains contracts with more than
one carrier for each of these services. The Company believes that it is no
longer dependent upon any single carrier for these services. Currently, many
price differences exist in the market for purchasing these services in bulk. For
example, one carrier may offer the lowest international rates to one country
while another offers the lowest rates to a different country. Under the terms of
the Company's contracts with its various carriers, the Company is able to choose
which services and in what volume (with some minimum commitments) the Company
wishes to obtain the services from each carrier. This flexibility enables the
Company to minimize its costs for such services by purchasing those services
that offer the Company the best rates at a given time.
In February 1999, the Company terminated its old Master Carrier
Agreement and its IRU Agreements with AT&T and entered into a new Master Carrier
Agreement with AT&T. The agreement provides the Company with a variety of
services, including transmission facilities to connect the OBN switches as well
as services for international calls, overflow traffic and operator assisted
calls. The new contract eliminated a requirement for the Company to purchase the
majority of its requirements for these services from AT&T and replaced it with a
requirement for the Company to purchase minimum dollar amounts of services from
AT&T during the term of the agreement. The Company does not anticipate any
difficulty in satisfying these minimum requirements.
Information and Billing Services
In connection with its online billing area under the AOL agreement, the
Company developed advanced online billing and information systems in connection
with its online initiative with AOL. In March 1999, the Company began providing
its non-AOL customers with online access to billing information through its
website (www.tel-save.com) which enables customers to view their billing
information and call detail within minutes of completing a call. The Company
believes this online service provides the most current billing information to
customers offered by any telecommunications company. The Company also acquires
billing and customer care services from other carriers and third party
intermediaries.
The Company provides to each partition computerized management systems
that control order processing, accounts receivable, billing and status
information in a streamlined fashion. Furthermore, when applicable, the systems
interface with third party billing systems for order processing and billing
services. Enhancements and additional features are provided as needed.
9
<PAGE>
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 other valuable 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 also allows the Company and
its partitions to identify unusual or declining use by an individual end user,
which may indicate fraud or that an end user is switching its service to a
competitor. Recently released FCC rules, however, may limit the Company's use of
such customer proprietary network information. See "Regulation."
10
<PAGE>
COMPETITION
Competition is intense in the long distance industry, even as the
market continues to expand. Based on published FCC estimates, toll service
revenues of U.S. long distance carriers have grown from $38.8 billion in 1984 to
$88.6 billion in 1997. Although the Company believes that it has the human and
technical resources to compete effectively, the Company's success will depend
upon its continued ability to provide profitably high quality, high value
services at prices generally competitive with, or lower than, those of its
competitors.
The Company has numerous competitors, many of which are substantially
larger and have greater financial, technical and marketing resources than the
Company. Three large carriers, AT&T, MCI WorldCom and Sprint, generate
approximately 80% of aggregate revenue in the U.S. long distance industry.
Approximately 140 other carriers account for the remainder of the long distance
market. The aggregate market share (based on operating revenues) of all long
distance carriers other than AT&T, MCI WorldCom and Sprint has grown from 2.6%
in 1984 to 19.8% in 1997. During the same period, the market share of AT&T
declined from 90.1% to 44.5%.
The long distance market is subject to pricing pressure. The major
carriers have targeted price plans at residential customers (the Company's
primary target market under the AOL Agreement and its internet offering) with
significantly simplified rate structures, which may lower overall long distance
prices. Competition is fierce for the small to medium-sized businesses that the
Company also serves. Additional pricing pressure may come from the introduction
of new technologies, such as a internet telephony, which seek to provide voice
communications at a cost below that of traditional circuit-switched long
distance service. Reductions in prices charged by competitors may have a
material adverse effect on the Company.
The Company also competes on the basis of the quality of customer
service that it provides to end users. The Company believes that its online and
web-enabled billing and information systems have been an important factor in
attracting customers from the AOL subscriber base and will be an important
factor in determining the success of its overall e-commerce initiatives. There
can be no assurance that competitors will not develop online billing and
information systems that are comparable to the Company's systems.
The impending entry of the Bell operating companies ("BOCs") into the
long distance market may further heighten competition. Under the
Telecommunications Act of 1996, the BOCs were authorized to provide long
distance service that originates outside their traditional services areas, and
may gain authority to provide long distance service that originates within their
region after satisfying certain market opening conditions. No BOC has yet been
certified as having met all of the conditions. The FCC, the Department of
Justice and state regulators, however, have been working with the BOCs to ensure
they satisfy the conditions, and some analysts are predicting the BOCs' entry
into the long distance market could begin in some states by the end of 1999. BOC
entry into the long distance market means new competition from well-capitalized,
well-known companies. While the Telecommunications Act includes certain
safeguards against anti-competitive conduct by the BOCs, it is impossible to
predict whether such safeguards will be adequate or what effect such conduct
would have on the Company. Because of the BOCs' name recognition in their
existing markets, 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 interpretations of the
Telecommunications Act favorable to the BOCs, it may be more difficult for other
providers of long distance services, such as the Company, to compete.
11
<PAGE>
Consolidation and alliances across geographic regions (e.g., Bell
Atlantic/Nynex/GTE and SBC/Pacific Telesis Group/SNET/Ameritech) and in the long
distance market (e.g., MCI/WorldCom domestically and France Telecom/Deutsche
Telekom/Sprint and AT&T/British Telecom internationally) and across industry
segments (e.g., MCI WorldCom/MFS/UUNet and AT&T/Teleport/TCI) may also intensify
competition from significantly larger, well-capitalized carriers. Such
consolidation and alliances are providing some of the Company's competitors with
the capacity to offer a "bundle" of services, including local, long distance and
wireless telephone service, as well as Internet access and cable television
service.
The competitive telecommunications marketplace is marked by a high rate
of customer attrition. The Company's competitors engage in national advertising
campaigns, telemarketing programs and offer cash payments and other incentives
to the Company's end users, who are not obligated to purchase any minimum usage
amount and can discontinue service, without penalty, at any time. There can be
no assurance that the Company will be able to continue to replenish its end user
base, and failure to do so would have a material adverse effect on the Company.
Although the Company currently enjoys exclusive marketing rights with
AOL, the Company's online marketing and provision of telecommunications services
has been widely imitated, by competitors on the internet and through their own
web site offerings, numerous competitors now offer over the internet and on
their own web sites or through links from other web sites sign-up and billing
and automatic payment through a credit card. The Company believes that its
real-time, online billing system is unique in the marketplace and currently
gives the Company a competitive advantage in the e-commerce market for
telecommunications services. There can be no assurance, however, that potential
competitors will not develop comparable billing and information systems. The
Company from time to time considers providing telecommunications services it has
not previously provided, such as wireless services, and which new services, if
offered, would face the same competitive pressures that affect the Company's
existing services. The Company faces competition not only from other providers
of presubscribed long distance service, but also from dial-around long distance
service and prepaid long distance calling cards.
One of the Company's principal competitors, AT&T, is also a major
supplier of services to the Company. The Company links some of its switching
equipment with transmission facilities and services purchased or leased from
AT&T and resells services obtained from AT&T. The Company also utilizes AT&T and
ACUS to provide certain billing services.
REGULATION
The Company's provision of communications services is subject to
government regulation. The Federal Communications Commission ("FCC") regulates
interstate and international telecommunications, while the states regulate
telecommunications that originate and terminate within the same state. Changes
in existing regulations could have a material adverse effect on the Company.
12
<PAGE>
The Company's marketing of its AOL based services, the Company's
marketing over the internet, the Company's other current and past direct
marketing efforts, and the marketing efforts of the Company's partitions all
require compliance with relevant federal and state regulations that govern the
sale of telecommunications services. The FCC and some states have rules that
prohibit switching a customer from one long distance carrier to another without
the customer's consent and specify how that consent can be obtained and must be
verified. Most states also have consumer protection laws that further define the
framework within which the Company's marketing activities must be conducted.
While directed at curbing abusive marketing practices, unless carefully designed
and enforced, such rules can have the incidenta
l effect of entrenching incumbent
carriers and hindering the growth of new competitors, such as the Company.
Restrictions on the marketing of telecommunications services are
becoming stricter in the wake of widespread consumer complaints throughout the
industry about "slamming" (the unauthorized conversion of a customer's
preselected telecommunications carrier) and "cramming" (the unauthorized
provision of additional telecommunications services). The Telecommunications Act
of 1996 strengthened penalties against slamming, and the FCC recently issued
rules tightening federal requirements on the verification of orders for
telecommunications services and establishing additional financial penalties for
slamming. The FCC is also considering new rules that would require that sales of
telecommunications services made over the internet be verified through a
telephone call or other off-line method. In addition, many states have been
active in restricting marketing through new legislation and regulation, as well
as through enhanced enforcement activities. The constraints of federal and state
regulation, as well as increased FCC and state enforcement attention, could
limit the scope and the success of the Company's and its partitions' marketing
efforts and subject them to enforcement action.
Allegedly to combat slamming, many local exchange carriers have
initiated "PIC freeze" programs that, once selected by the customer, then
require a customer seeking to change long distance carriers to contact the local
carrier directly instead of having the long distance carrier contact the local
carrier on the customer's behalf. Many local carriers have imposed burdensome
requirements on customers seeking to lift PIC freezes and change carriers, and
thereby made it difficult for customers to switch to the Company's long distance
service.
Statutes and regulations designed to protect consumer privacy also may
have the incidental effect of hindering the growth of newer telecommunications
carriers such as the Company. The FCC has released rules that severely restrict
the use of "customer proprietary network information" (information that a
carrier obtains about its customers through their use of the carrier's
services). These rules may make it more difficult for the Company to market
additional telecommunications services (such as local and wireless), as well as
other services and products, to its existing customers, if and when the Company
begins to offer such services and products.
The FCC requires the Company and other providers of telecommunications
services to contribute to the universal service fund, which helps to subsidize
the provision of local telecommunications services and other services to
low-income consumers, schools, libraries, health care providers, and rural and
insular areas that are costly to serve. The Company's contributions to the
universal service fund could increase over time, and some of the Company's
potential competitors (such as providers of Internet telephony) are not
currently, and in the future may not be, required to contribute to the universal
service fund.
13
<PAGE>
The FCC imposes additional reporting, accounting, record-keeping and
other regulatory obligations on the Company. The Company must offer interstate
services under rates, terms and conditions that are just, reasonable and not
unreasonably discriminatory. The Company must file tariffs listing the rates,
terms and conditions of the Company's service, but the FCC has proposed to
abolish some tariff filing requirements and instead mandate the posting of
similar information on the Internet. Although the Company's tariffs, and the
rates and charges they specify, are subject to FCC review, they are presumed to
be lawful and have never been contested. The Company may be subject to
forfeitures and other penalties for violating the FCC's rules.
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.
The Company's partitions are also subject to the same federal and state
regulations as the Company, and any change in those regulations, or any
enforcement action, could adversely affect the partitions and their demand for
the Company's services. To the extent that the Company makes additional
telecommunications service offerings, the Company may encounter additional
regulatory constraints.
EMPLOYEES
As of December 31, 1998, the Company employed 525 persons. The Company
considers relations with its employees to be good.
ITEM 2. PROPERTIES
The Company leases an approximately 19,200 square foot facility in New
Hope, Pennsylvania that currently serves as the Company's headquarters. On
January 20, 1999, the Company entered into a lease for a 3,700 square foot
facility in Reston, Virginia, which will serve as the Company's future
headquarters for a majority of the Company's executives and marketing personnel.
The Company also leases properties in the cities in which OBN switches have been
installed.
14
<PAGE>
With respect to the Company's customer service operations in connection with its
agreement with AOL, the Company owns a 32,000 square foot facility located in
Clearwater, Florida.
ITEM 3. LEGAL PROCEEDINGS
On June 16, 1998, a purported shareholder class action was filed in the United
States District Court for the Eastern District of Pennsylvania against the
Company and certain of its officers alleging violation of the securities laws in
connection with certain disclosures made by the Company in its public filings
and seeking unspecified damages. Thereafter, additional lawsuits making
substantially the same allegations were filed by other plaintiffs in the same
court. At this point, no classes have been certified. The Company believes the
allegations in the complaints are without merit and intends to defend the
litigations vigorously. The Company also is a party to certain legal actions
arising in the ordinary course of business.
The Company believes that the ultimate outcome of the foregoing actions will not
result in 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
(a) The Company's Annual Meeting of Stockholders was held on December 30,
1998 ("Annual Meeting");
(b) Not applicable.
(c) At the Annual Meeting, the stockholders of the Company considered and
approved the following proposals:
(i) Election of Directors. The following sets forth the nominees
who were elected directors of the Company for the term
expiring in the year indicated as well as the number of votes
cast for, against or withheld:
<TABLE>
<CAPTION>
VOTES
Term (year expires) Name For Against Withheld
<S> <C> <C> <C> <C>
2001 Daniel Borislow* 32,947,114 0 23,088
2001 Ronald R. Thoma 32,947,114 0 23,088
* Effective January 5, 1999, Mr. Borislow resigned as Director and Chairman of the Board of Directors of the Company.
</TABLE>
15
<PAGE>
(ii) At the Annual Meeting, the stockholders approved a proposal to
approve the Company's 1998 Long-Term Incentive Plan, which
provides for the issuance of up to 5,000,000 shares of the
Company's Common Stock to employees and directors of the
Company selected at the discretion of a committee (initially,
the Compensation Committee) of the Board of Directors of the
Company. The proposal received 26,750,198 votes in favor,
6,218,455 votes in opposition and 1,529 votes abstained from
such matter.
(iii) At the Annual Meeting the stockholders approved the
appointment of BDO Seidman LLP as independent certified
public accountants of the Company. The appointment received
32,967,942 votes in favor, 2,111 votes in opposition and 129
votes abstained from such matter.
16
<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 under the symbol "Talk". High and low quotations
listed below are actual sales prices as quoted in the Nasdaq National Market and
as reported by Tradeline:
Common Stock Price Range of Common Stock
- - ------------ ---------------------------
High Low
---- ---
1997
First Quarter 20 5/8 12 1/4
Second Quarter 17 1/2 13 1/4
Third Quarter 24 3/16 13 3/4
Fourth Quarter 26 1/16 16 5/16
1998
First Quarter 30 19 1/4
Second Quarter 24 5/16 13 9/16
Third Quarter 19 3/8 9 1/16
Fourth Quarter 19 3/8 4 23/32
1999
First Quarter (through March 30, 1999 22 1/2 7 1/2
As of March 24, 1999, there were approximately 366 record holders of Common
Stock.
The Company has never declared or paid any cash dividends on its capital stock.
The Company currently intends to retain any future earnings to finance the
growth and development of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On or about December 30, 1998, the Company issued 500,000 shares of Common
Stock, in the aggregate, to Menachem Goldstone and Avrohom Oustatcher in
connection with a settlement among Mssrs. Goldstone, Oustatcher and the Company.
Messrs. Goldstone and Outstatcher are former employees and consultants of the
Company.
On or about December 16, 1998, the Company issued 130,000 shares of Common Stock
to Michael Ferezacca in connection with his execution of an employment agreement
with the Company.
On or about December 30, 1998, the Company issued 758,359 shares of Common
Stock, in the aggregate, to the entities described below in connection with the
conversions of certain convertible notes that had been issued by the Company to
such as entities, as follows: 150,922 shares of Common Stock to Kennilworth
Partners LP II, 236,900 shares to Taft Securities, L.L.C., 194,380 shares to
Aragon Investments, Ltd. and 176,157 shares to Olympus Securities, Ltd. The
Company has been advised that Citadel Limited Partnership is the trading manager
of each of Taft Securities, L.L.C., Aragon Investments, Ltd. and Olympus
Securities, Ltd. and consequently has voting control and investment discretion
over securities held by those entities. Citadel Limited Partnership, Taft
Securities, L.L.C., Aragon Investments, Ltd. and Olympus Securities, Ltd. each
disclaims beneficial ownership of the securities held by the other entities.
Each of the above issuances were made by the Company in reliance in Section 4(2)
of the Securities Act of 1933.
17
<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,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Consolidated Statements of Income Data:
<S> <C> <C> <C> <C> <C>
Sales $448,600 $304,768 $232,424 $180,102 $82,835
Cost of sales 361,957 294,484 200,597 156,121 70,104
Gross profit 86,643 10,284 31,827 23,981 12,731
General and administrative expenses 41,939 34,650 10,039 6,280 3,442
Promotional, marketing and advertising -
primarily AOL 210,552 60,685 -- -- --
Significant other charges 91,025 -- -- -- --
Operating income (loss) (256,873) (85,051) 21,788 17,701 9,289
Investment and other income (expense),
net (11,175) 50,715 10,585 331 66
Income (loss) before income taxes (268,048) (34,336) 32,373 18,032 9,355
Provision (benefit) for income taxes (1)(2) 40,388 (13,391) 12,205 7,213 3,742
Income (loss) before extraordinary gain (1) (308,436) (20,945) 20,168 10,819 5,613
Extraordinary gain 87,110 -- -- -- --
Net income (loss) (1) $(221,326) $(20,945) $ 20,168 $ 10,819 $ 5,613
Income (loss) before extraordinary gain $ $ $
per share - Basic (1) $ (5.20) (0.33) 0.38 0.34 $ 0.20
Extraordinary gain per share - Basic 1.47 -- -- -- --
Net income (loss) per share - Basic (1) $ (3.73) $ (0.33) $ 0.38 $ 0.34 $ 0.20
Weighted average common shares outstanding
- Basic 59,283 64,168 52,650 31,422 28,650
Income (loss) before extraordinary gain $ (5.20) $ $ $ $ 0.18
per share - Diluted (1) (0.33) 0.35 0.32
Extraordinary gain per share - Diluted 1.47 -- -- -- --
Net income (loss) per share - Diluted(1) $ (3.73) $ (0.33) $ 0.35 $ 0.32 $ 0.18
Weighted average common and common
equivalent shares outstanding -Diluted 59,283 64,168 57,002 33,605 30,663
AT DECEMBER 31,
--------------------------------------------------------------------------------------------
1998(3) 1998 1997 1996 1995 1994
------- ---- ---- ---- ---- ----
Pro Forma (In thousands)
Consolidated Balance Sheets Data:
Working capital $ 12,658 $ 13,061 $634,788 $175,597 $38,171 $12,265
Total assets 215,749 272,560 814,891 257,008 71,388 21,435
Convertible debt 114,762 242,387 500,000 -- -- --
Total stockholders' equity (65,971) (136,785) 222,828 230,720 41,314 14,042
(deficit)
</TABLE>
(1) For the year and period ended December 31, 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.
(2) The provision for income taxes in 1998 represents a valuation
allowance for deferred tax assets recorded in prior periods
and current tax benefits which may result from the 1998 loss.
The Company provided the valuation allowances in view of the
loss incurred in 1998, the uncertainties resulting from
intense competition in the telecommunications industry and the
lack of any assurance that the Company will realize any tax
benefits.
(3) The pro forma financial data as of December 31, 1998 gives
effect to the January 5, 1999 investment of $55.0 million by
America Online, Inc. and the January 5, 1999 repurchase of
$127,625,000 face amount of convertible debt for $109.1
million from trusts for the benefit of the children of the
former Chairman and Chief Executive Officer, consisting of a
cash payment of $55.4 million and the transfer of the $53.7
million principle amount of the note receivable from
WorldxChange.
18
<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.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
financial data as a percentage of sales:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 80.7 96.6 86.3
------ ------ ------
Gross profit 19.3 3.4 13.7
General and administrative expenses 9.3 11.4 4.3
Promotional, marketing and advertising expenses - primarily
AOL 46.9 19.9 --
Significant other charges 20.3 -- --
------ ------ ------
Operating income (loss) (57.2) (27.9) 9.4
Investment and other income (expense), net (2.5) 16.6 4.5
------ ------ ------
Income (loss) before income taxes (59.7) (11.3) 13.9
Provision (benefit) for income taxes 9.0 (4.4) 5.2
------ ------ ------
Income (loss) before extraordinary gain (68.7) (6.9) 8.7
Extraordinary gain 19.4 -- --
------ ------ ------
Net income (loss) (49.3)% (6.9)% 8.7%
========= ======== =======
</TABLE>
19
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Sales. Sales increased by 47.2% to $448.6 million in 1998 from $304.8
million in 1997. The increase in sales resulted primarily from the Company's
marketing campaign directed at generating new customers under the AOL Agreement.
This AOL-related sales increase offset a decrease in the Company's non-AOL
sales, and reflected, to a lesser extent, the Company's focus on marketing under
the AOL Agreement.
Since entering into the AOL Agreement in February 1997, the Company and
AOL have had frequent discussions, and have negotiated a number of changes
including a substantial amendment in January 1999, regarding the marketing of
services under the AOL Agreement and expenditures by the Company in connection
with such marketing, particularly off-line marketing programs. While these
marketing agreements, principally those related to off-line marketing, have
significantly contributed to the rate of growth in the Company's AOL-related
business, AOL-related sales could be affected adversely by the intense
competition in this industry and have continued to be affected adversely by the
PIC freezes implemented by the local telephone companies. Accordingly, 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. Cost of sales increased by 22.9% to $362.0 million in
1998 from $294.5 million in 1997 as a result of increased sales offset by
certain charges in 1997, totaling $41.5 million, discussed below.
Gross Margin. Gross margin increased to 19.3% in 1998 from 17.0%,
excluding certain charges totaling $41.5 million (as described below) in 1997.
The increase in gross margin was primarily due to lower network usage costs for
OBN services and lower local and international access charges, in each case on a
per call basis. The Company anticipates that gross margins will continue to
increase; however, price competition continues to intensify for the Company's
products and this trend can be expected to continue to put downward pressure on
gross margins.
General and administrative expenses. General and administrative
expenses increased by 21.0% to $41.9 million in 1998 from $34.7 million in 1997.
The increase in general and administrative expenses was due primarily to the
costs associated with hiring additional personnel to support the Company's
continuing growth, the general and administrative expense incurred as a result
of the acquisitions of Compco, Inc. and ADS which were acquired in November 1997
and January 1998, respectively and increased fees for professional services.
Promotional, Marketing and Advertising Expense - Primarily AOL. During
1998 the Company incurred $210.6 million of expenses to expand its online
customer base. These expenses included $49.7 million for online advertising
under the AOL Agreement, $22.0 million for the value of performance warrants
granted to AOL for net customer gains and $138.9 for offline advertising. During
1997, the Company incurred $60.7 million that consisted of $35.9 million for
exclusivity under the AOL Agreement, $13.2 million for production of
advertising, $7.9 million for online advertising for the fourth quarter of 1997,
$1.2 million representing the value of performance warrants paid to AOL for net
customer gains and $2.5 million for other advertising.
Significant Other Charges. Significant other charges consist of $91.0
million of expenses incurred in the fourth quarter of 1998 related to changes in
the Company's basic business operations.
As discussed above the Company negotiated substantial amendments to the
AOL and CompuServe agreements which among other things reduced the amount of
online advertising that the Company was entitled to over the remaining term of
the agreement and eliminated payments and issuance of warrants to AOL for
subscriber gains and profit sharing payments to AOL. The Company agreed to fixed
quarterly payments ranging from $10 - $15 million during the exclusivity period
of the agreement and AOL agreed to contribute up to $4.0 million per quarter for
offline marketing. As a result of the amendment the Company wrote off prepaid
AOL, CompuServe and other marketing expenses of $37.6 million.
In connection with hiring a new Chairman and Chief Executive Officer
and several other key executive personnel and severance payments relating to
this change in management, the Company incurred $12.7 million of incentive and
severance expense.
The Company acquired ADS Holdings, Inc. (formerly Symetrics, Inc.), a
manufacturer of digital telephone switching equipment, in January, 1998 for
$18.6 million. This Company planned to complete development of a digital switch
to provide state of the art features for use in the Company's operations as a
competitive local exchange carrier. The Company allocated $21 million of the
acquisition cost to purchased research and development expense in the first
quarter of 1998 and continued to invest in additional research and development
throughout 1998. In November 1997, the Company acquired Compco, Inc, a provider
of communications software in the college and university marketplace for $13.7
million which exceeded the net assets acquired by $10.6 million. In the
20
<PAGE>
fourth quarter of 1998, the Company decided to sell the assets of ADS Holdings,
Inc. and to delay entry into the college and university marketplace. As a result
the assets of ADS Holdings, Inc. and Compco, Inc. were written down to expected
realizable value. The Company recorded $15 million relating to the impairment of
these assets and reclassified $22.2 million of research and development expense
to significant other costs.
In the fourth quarter of 1998, the Company reconfigured its
telecommunications network, OBN, to provide for fiber optic connections among
its switches and incurred $3.5 million of expense.
Investment and Other Income (Expense), Net. Investment and other income
(expense), net was $(11.2) million in 1998 versus $50.7 million in 1997. During
1998, investment and other income (expense), net consists primarily of
investment income and trading losses of $11.0 million offset by interest expense
related to the Company's Convertible Notes of $22.2 million.
Provision for Income Taxes. The Company had recorded net deferred tax
assets at December 31, 1997and March 31, 1998 primarily representing net
operating loss carry-forwards and other temporary differences because the
Company believed that no valuation allowance was required for these assets due
to future reversals of existing taxable temporary differences and expectation
that the Company will generate taxable income in future years. In June 1998, the
Company decided to make substantial marketing and advertising expenditures to
establish a broad base of online customers from AOL's membership. As discussed
above, these expenditures led to a significant loss for 1998. In view of these
losses, the uncertainties resulting from intense competition in the
telecommunications industry and the lack of any assurance that the Company will
realize any of the tax benefits, the Company decided in June 1998 to provide a
100% valuation allowance for the previously recorded deferred tax benefits and
to provide a 100% valuation allowance for the current and future tax benefits
resulting from the 1998 loss. Valuation allowances of approximately $78.4
million were included in provision for income taxes, for the year ended December
31, 1998.
Extraordinary Gain. During 1998, the Company recorded an extraordinary
gain of $87.1 million in connection with the acquisition of the Company's
convertible debt at a discount.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Sales. Sales increased by 31.1% to $304.8 million in 1997 from $232.4
million in 1996. The increase in sales resulted primarily from the marketing of
the Company's OBN services and the addition of new partitions. One partition,
Group Long Distance Inc., accounted for approximately 13% of the Company's sales
in 1997.
Cost of Sales. Cost of sales increased by 46.8% to $294.5 million in
1997 from $200.6 million in 1996 as a result of increased sales and charges of
$11.5 million primarily as a result of the Company's change in its accounting
for customer acquisition costs, and $30.0 million primarily related to the
restructuring of its sales and marketing efforts (Note 3).
Gross Margin. Gross margin decreased to 3.4% in 1997 from 13.7% in
1996. The decrease in gross margin was primarily due to the charges discussed
above. Absent these charges, gross margin increased to 17.0% in 1997 from 13.7%
in 1996, due to lower network costs for OBN services which were lower on a per
call basis when compared to the costs of purchasing these services.
General and administrative expenses. General and administrative
expenses increased by 245.2% to $34.7 million in 1997 from $10.0 million in
1996. The increase in general and administrative expenses was due primarily to
compensation expenses related to the issuance of options to and the purchase of
shares of Company common stock by executive officers of the Company in
connection with the commencement of their employment with the Company, the costs
associated with hiring additional personnel to support the Company's continuing
growth, the development costs associated with AOL and increased fees for
professional services.
21
<PAGE>
Other Income. Other income was $50.7 million in 1997 versus $10.6
million in 1996. Other income in 1997 consists primarily of fees for customer
service and support for the marketing operations of the Company's carrier
partitions in 1997 of $8.1 million and investment income earned by the Company.
In 1997, other income also includes $32.1 million, net of related costs,
associated with the break-up of a proposed merger between the Company and STF.
Provision for income taxes. The Company's effective tax rate increased
to 39.0% in 1997 from the effective tax rate of 37.7% in 1996 primarily due to
an anticipated higher effective state tax rate in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital was $13.1 million and $634.8 million at
December 31, 1998 and 1997, respectively. The significant decrease in working
capital at December 31, 1998, when compared to historical amounts, is primarily
a result of the repurchase of the Company's securities, the loss for the year
which was primarily attributble to the advertising and marketing expenditures
incurred in connection with the AOL Agreement and significant other charges, the
advance to WXC described below, and the increase in accounts payable, primarily
reflecting recent rapid growth in the Company's AOL business.
The Company expended an aggregate of $429.9 million and $125.4 million
of cash, Company common stock and other consideration for the repurchase of
outstanding securities during 1998 and 1999, respectively. Under various
authorizations from the Board of Directors during 1998 the Company repurchased
approximately 18.8 million shares for an aggregate of $265.1 million ($239.9
million cash and $25.2 million in other consideration) and repurchased
approximately $257.6 million principal amount of the Company's Convertible Notes
for approximately $164.8 million ($86.3 million in cash, $69.5 million in
Company common stock and $9.0 million in other consideration). In the first
quarter of 1999, the Company (a) purchased from Mr. Borislow and two trusts for
the benefit of Mr. Borislow's children $76,557,000 aggregate principal amount of
the Company's Convertible Notes for $65.4 million in cash (b) exchanged the
$53.7 million remaining on the WXC Notes (as defined below) to a trust for the
benefit of Mr. Borislow's children for $62,545,000 aggregate principal amount of
the Company's Convertible Notes and (c) purchased $9,000,000 aggregate principal
amount of the Company's Convertible Notes for $6.3 million in Company common
stock. To date, with these most recent acquisitions, the Company had reduced the
principal amount outstanding of its Convertible Notes to $94.3 million ($66.9
million of 4 1/2% notes and $27.4 million of 5% notes) of which approximately
$52.4 million continues to be held by one of such trusts.
The Company invested $16.9 million in capital equipment during 1998.
In connection with the Company entering into the Telecommunications
Service Agreement ("TSA") with Communication Telesystems International d/b/a/
WorldxChange Communication ("WXC"), the Company advanced $56.2 million to WXC
which was due and payable on November 30, 2000 ("WXC Notes"). Interest on the
WXC Notes is payable quarterly commencing November 25, 1998 at a rate of 12.5%
per annum. The Company purchases international termination telecommunication
services pursuant to the TSA. The note which had a remaining principal balance
of $53.7 million was exchanged for $62,545,000 face amount of Convertible Notes
on January 5, 1999.
On January 5, 1999, pursuant to an Investment Agreement between AOL and
the Company, AOL made a significant equity investment in the Company, acquiring
4,121,372 shares of common stock for $55.0 million in cash and the surrender of
rights to acquire up to 5,076,016 shares of common stock pursuant to various
warrants held by AOL. Under the terms of the Investment Agreement with AOL, the
Company has agreed to reimburse AOL for losses AOL may incur on the sale of any
of the 4,121,372 shares during the period from June 1, 1999 through September
30, 2000. The reimbursement amount would be determined by multiplying the number
of shares, if any, that AOL sells during the applicable period by the difference
between the purchase price per share paid by AOL, or $19 per share, and the
price per share that AOL sells the shares for, if less than $19 per share. The
reimbursement amount may not exceed $14 per share for 2,894,737 shares or $11
for 1,226,635 shares. Accordingly, the maximum amount payable to AOL as
reimbursement on the sale of AOL's shares would be approximately $54.0 million
plus AOL's reasonable expenses incurred in connection with the sale. Assuming
AOL were to sell all of its shares subject to the Company reimbursement
obligation at the closing price of the Company's common stock as of March 26,
1999, the reimbursement amount would be approximately $35.5 million. AOL also
has the right on termination of long distance exclusively to require the Company
to repurchase 2,721,984 warrants to purchase common stock of the Company held by
AOL for a minimum price of $36.3 million. The Company has agreed to fund an
escrow account of up to $35 million from 50% of the proceeds of any debt
financing, other than a bank, receivable or other asset based financing of up to
$50 million, to secure its obligations under the Investment Agreement with AOL.
AOL has not advised the Company that it intends to sell any shares during the
relevant period. Mr. Borislow has agreed to guarantee up to $20,000,000 of the
Company's reimbursement obligations under the Investment Agreement with AOL.
22
<PAGE>
The Company is subject to certain restrictions under the terms of
certain registration rights agreements that could affect the Company's ability
to raise capital. Under these agreements, entered into by the Company for the
benefit of Mr. Borislow and two trusts for the benefit of his children (the
"Trusts"), the Company has agreed that so long as Mr. Borislow continues to own
at least 2% of the Company's outstanding common stock, the Company will use up
to 40% of the proceeds from the sale of any public or private debt securities,
excluding borrowings from a commercial bank or financial institution, to
repurchase the Company's Convertible Notes held by Mr. Borislow or the Trusts
and that until June 2000, the Company will not sell any shares of captial stock
of the Company without the consent of Mr. Borislow (other than sales of common
stock on exercise of options on rights so long as the proceeds are used to
repurchase common stock of the Company held by Mr. Borislow or the Trusts).
The Company generally does not have a significant concentration of
credit risk with respect to accounts receivable due to the large number of 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 does not, and has not historically, required significant
amounts of working capital for its day to day operations. The Company believes
that its current cash positions 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. The Company
believes that, at its current market price, its cash flow from operations will
be sufficient to fund any reimbursement amount in the event that AOL elects
after May 31, 1999 to sell its shares of the Company's common stock at a price
below $19 per share and that , alternatively, it also has the ability to obtain
the necessary financing to find its obligations under the AOL Investment
Agreement. Should the Company seek to raise additional capital, there can be no
assurance that, given current market conditions, the Company would be able to
raise such additional capital on terms acceptable to the Company.
YEAR 2000
The "Year 2000 issue" refers to the potential harm from computer
programs that identify dates by the last two digits of the year rather than
using the full four digits. Such programs could fail due to misidentification of
dates on or after January 1, 2000. If such a failure were to occur to the
Company's internal computer-based systems or to the crucial computer-based
systems operated by third parties, the Company could be unable to continue to
provide telecommunications services, to sign up new customers or to bill
existing customers for services. Such failures, if they occurred, would have a
material adverse effect on the Company's business, results of operations and
financial condition. However, because of the complexity of the issues, the
number of parties involved and the fact that many of the issues are outside the
Company's control, the Company cannot reasonably predict with certainty the
nature or likelihood of such effects.
The Company, using its internal staff, has conducted a review of most
of its internal computer-based systems. Most of the Company's systems are
relatively new. Much of the software used by the Company has been developed
internally and is regularly modified and updated to meet the changing
requirements of its business. The Company expects that its critical internal
systems will be able to process relevant date information in the future to
permit the Company to continue to provide its services without significant
interruption or material adverse effect on its business, results of operations
and financial condition. However, there can be no assurances that the Company
will not experience unanticipated negative consequence caused by undetected
errors or defects in the technology used in its internal systems.
Notwithstanding the Company's expectation that its own systems will be
able to process Year 2000 date information, the Company's business depends
significantly on receiving uninterrupted services by other parties. The
principal service suppliers to the Company include other switch-based
lonf-distance providers, the local exchange carriers throughout the country and
AOL. Other parties whose ability to deal with year 2000 issues could affect the
Company include the Company's partitions and the credit card companies through
which most of the Company's AOL customers are billed. The Company has made
inquiries of some of these parties regarding their respective levels of
preparedness for Year 2000 issues as they may affect the Company. The Company
will continue to make such inquiriesand will monitor the public disclosures of
such companies regarding their Year 2000 status. So, far, the responses to such
inquiries have been generally non-committal regarding levels of preparedness or
willingness to provide assurances to the Company. In almost all cases, the
Company is not in a position to require either affirmative action or assurances
by these parties regarding continued provision of services in the Year 2000.
Accordingly, while the Company has not been advised by any of these other
companies on which it depends that they do not expect to be ready for Year 2000
issues, the Company does not believe it is in a position to project the
likelihood of such parties' abilities to provide uninterrupted services to the
Company. The Company has considered possible contingency plans should one of
these significant suppliers fail, including entering into multiple contracts
with other long-distance service providers OBN network. However, given the
nature of the Company's relationships with most of these significant suppliers,
it may be impracticable for the Company to replace them should they be unable to
continue to provide these services. The failure of any of these companies to
provide uninterrupted service to the Company would likely have a material
adverse effect on the Company's business and its results of operations and
financial condition.
23
<PAGE>
The Company does not separately identify costs incurred in connection
with Year 2000 compliance activities. To date, however, the Company does not
believe such costs to be significant because they generally have been incurred
in the normal course of internally modifying and updating the Company's software
programs. Future expenditures are not expected to be significant and will be
funded out of operating cash flows.
* * * * *
Certain of the statements contained herein may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are identified by the use of forward-looking words or phrases,
including, but not limited to, "estimates," "expects," "expected,"
"anticipates," and "anticipated." These forward-looking statements are based on
the Company's current expectations. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to have been correct.
Forward-looking statements involve risks and uncertainties and the Company's
actual results could differ materially from the Company's expectations.
Important factors that could cause such actual results to differ materially
include, among others, adverse developments in the Company's relationship with
AOL, increased price competition for long distance services, failure of the
marketing of long distance services under the AOL Agreement, attrition in the
number of end users, and changes in government policy, regulation and
enforcement. The Company undertakes no obligation to update its forward-looking
statements.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEL-SAVE.COM, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants...................... 26
Consolidated balance sheets as of December 31, 1998 and 1997............ 27
Consolidated statements of operations for the years ended
December 31, 1998, 1997, and 1996....................................... 28
Consolidated statements of stockholders' equity for the years
ended December 31, 1998, 1997 and 1996.................................. 28
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996........................................ 29
Notes to consolidated financial statements.............................. 30
25
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of Tel-Save.com, Inc.
We have audited the accompanying consolidated balance sheets of
Tel-Save.com, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1998. 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.com, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
New York, New York
February 22, 1999, except for Note 8, which is as
of March 26, 1999
26
<PAGE>
TEL-SAVE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, 1998 DECEMBER 31,
------------------------ --------------------------------
UNAUDITED-NOTE 1(C)) 1998 1997
---- ----
ASSETS
CURRENT:
<S> <C> <C> <C>
Cash and cash equivalents $2,660 $ 3,063 $316,730
Marketable securities 89,649 89,649 212,269
Accounts receivable, trade net of allowance for uncollectible
accounts of $1,669, $1,669 and $2,419, respectively 46,587 46,587 44,587
Advances to partitions and notes receivable 1,870 1,870 26,110
Due from broker -- -- 21,087
Prepaid AOL marketing costs - current -- -- 30,857
Deferred taxes - current -- -- 30,916
Prepaid expenses and other current assets 8,600 8,600 8,495
-------- --------- ---------
Total current assets 149,366 149,769 691,051
------- ------- --------
Property and equipment, net 56,703 56,703 55,835
Intangibles, net 1,150 1,150 10,590
Prepaid AOL marketing costs -- -- 32,722
Other assets 8,530 64,938 24,693
------- --------- ---------
Total assets $215,749 $272,560 $814,891
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT:
Margin account indebtedness $ 49,621 $ 49,621 $ --
Accounts payable and accrued expenses:
Trade and other 64,794 64,794 16,858
Partitions 4,380 4,380 7,740
Interest and other 17,913 17,913 10,578
Securities sold short -- -- 21,087
----------- ------------ ----------
Total current liabilities 136,708 136,708 56,263
Convertible debt 114,762 242,387 500,000
Deferred revenue 28,400 28,400 35,800
Other liabilities 1,850 1,850 --
-------- ---------- ------------
Total liabilities 281,720 409,345 592,063
------- --------- ---------
Commitments and Contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares outstanding -- -- --
Common stock - $.01 par value, 300,000,000 shares authorized;
66,934,635, 66,934,635 and 67,249,635 issued, respectively 669 669 672
Additional paid-in capital 262,131 265,325 291,952
Retained earnings (accumulated deficit) (202,415) (218,229) 3,097
Treasury stock (126,356) (184,550) (72,893)
--------- ----------- ----------
Total stockholders' equity (deficit) (65,971) (136,785) 222,828
--------- ---------- --------
Total liabilities and stockholders' equity (deficit) $215,749 $272,560 $814,891
======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
27
<PAGE>
TEL-SAVE.COM, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales $448,600 $304,768 $232,424
Cost of sales 361,957 294,484 200,597
--------- ---------- ---------
Gross profit 86,643 10,284 31,827
General and administrative expenses 41,939 34,650 10,039
Promotional, marketing and advertising expenses -
primarily AOL 210,552 60,685 --
Significant other charges 91,025 -- --
---------- ------------ -------------
Operating income (loss) (256,873) (85,051) 21,788
Investment and other income (expense), net (11,175) 50,715 10,585
---------- --------- ----------
Income (loss) before provision for income taxes (268,048) (34,336) 32,373
Provision (benefit) for income taxes 40,388 (13,391) 12,205
---------- ---------- ---------
Income (loss) before extraordinary gain (308,436) (20,945) 20,168
Extraordinary gain 87,110 -- --
---------- ------------ ------------
Net income (loss) $(221,326) $(20,945) $ 20,168
========== ========= ========
Income (loss) before extraordinary gain per share - Basic $ (5.20) $ (.33) $ .38
Extraordinary gain per share - Basic 1.47 -- --
---------- ------------ ------------
Net income (loss) per share - Basic $ (3.73) $ (.33) $ .38
=========== =========== ==========
Weighted average common shares outstanding - Basic 59,283 64,168 52,650
========= ========= =========
Income (loss) before extraordinary gain per share - $ (5.20) $ (.33) $ .35
Diluted
Extraordinary gain per share - Diluted 1.47 -- --
---------- ------------ -------------
Net income (loss) per share - Diluted $ (3.73) $ (.33) $ .35
=========== =========== ==========
Weighted average common and common equivalent shares
outstanding - Diluted 59,283 64,168 57,002
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
TEL-SAVE.COM, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
RETAINED
ADDITIONAL EARNINGS
COMMON STOCK PAID-IN (ACCUMU- TREASURY STOCK
SHARES AMOUNT CAPITAL LATED DEFICIT) SHARES AMOUNT TOTAL
---------- --------- ------------- ---------------- ----------- -------- ------
<S> <C> <C>
Balance, January 1, 1996 50,619 $506 $36,934 $ 3,874 -- $ -- $41,314
Net income -- -- -- 20,168 -- -- 20,168
partitions -- -- 1,077 -- -- -- 1,077
Sale of common stock 8,534 85 138,984 -- -- -- 139,069
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 -- -- -- -- (428) (4,560) (4,560)
------------ ----------- ------------- --------------- ----------- ---------- --------
Balance, December 31, 1996 62,238 622 210,616 24,042 (428) (4,560) 230,720
Net loss -- -- -- (20,945) -- -- (20,945)
Issuance of warrants to AOL -- -- 21,200 -- -- -- 21,200
Issuance of common stock for
acquired business 141 1 2,217 -- -- -- 2,218
Exercise of common stock
warrants 2,662 27 11,977 -- -- -- 12,004
Exercise of common stock
options 2,209 22 9,318 -- -- -- 9,340
Purchase of common stock
warrants -- -- (4,400) -- -- -- (4,400)
Issuance of common stock
options for compensation -- -- 13,372 -- -- -- 13,372
Acquisition of treasury stock -- -- -- -- (3,520) (71,959) (71,959)
Issuance of treasury stock for
acquired businesses -- -- 1,999 -- 340 3,626 5,625
Income tax benefit related to
exercise of common stock
options and warrants -- -- 25,653 -- -- -- 25,653
------------ ----------- ------------- --------------- ----------- ---------- -------
Balance, December 31, 1997 67,250 672 291,952 3,097 (3,608) (72,893) 222,828
Net loss -- -- -- (221,326) -- -- (221,326)
Issuance of warrants to AOL -- -- 33,086 -- -- -- 33,086
Exercise of common stock
warrants -- -- (3,620) -- 250 5,052 1,432
Exercise of common stock
options -- -- (41,493) -- 2,853 55,550 14,057
Exercise of AOL warrants -- -- (7,693) -- 381 7,693 --
Retirement of common stock (315) (3) (1,467) -- -- -- (1,470)
Acquisition of treasury stock -- -- -- -- (18,809) (265,054) (265,054)
Issuance of common stock and
options for compensation -- -- (3,123) -- 895 13,224 10,101
Issuance of common stock for
convertible debt -- -- (2,317) -- 5,089 71,878 69,561
------------ ----------- ------------- --------------- ----------- ---------- --------
Balance, December 31, 1998 66,935 $669 $265,325 $(218,229) (12,949) $(184,550) $ (136,785)
============ =========== ============= =============== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
<TABLE>
<CAPTION>
TEL-SAVE.COM, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $(221,326) $ (20,945) $ 20,168
Adjustment to reconcile net income to net cash provided by
operating activities:
Unrealized loss on securities -- 1,865 179
Provision for bad debts (235) 1,579 38
Depreciation and amortization 5,499 5,429 2,462
Vested AOL warrants and amortization of prepaid AOL marketing
costs 71,665 58,185 --
Charge for customer acquisition costs -- 11,550 --
Significant other charges 55,034 -- --
Write-off of intangibles -- 23,032 --
Deferred revenue (7,400) -- --
Deferred credits -- -- (280)
Compensation charges 8,402 13,372 --
Income tax benefit related to exercise of options and 25,653
warrants -- 21,311
Valuation allowance for deferred tax assets 40,388 -- --
Extraordinary gain (87,110) -- --
(Increase) decrease in:
Accounts receivable, trade (1,250) (26,048) (1,065)
Advances to partitions and notes receivable 24,241 (12,700) (20,797)
Prepaid AOL marketing costs -- (100,564)
Prepaid expenses and other current assets (23,712) (38,259) (10,183)
Other assets (49,127) (20,769) (3,924)
Increase (decrease) in:
Accounts and partition payables and accrued expenses 56,419 9,608 7,978
Deferred revenue -- 35,800 --
Other liabilities (1,302) -- (5,184)
-------------- --------------- ---------------
Net cash (used in) provided by operating activities (129,814) (33,212) 10,703
-------------- --------------- ---------------
Cash flows from investing activities:
Acquisition of intangibles (285) (9,293) (9,800)
Acquisition of Symetrics Industries, Inc. (26,707) -- --
Capital expenditures, net (16,928) (28,876) (27,679)
Securities sold short (21,087) 17,700 (411)
Due from broker 21,087 (20,220) 233
Loans to stockholder -- -- (3,034)
Repayment of stockholder loans -- -- 5,109
Sale (purchase) of marketable securities, net 122,620 (62,377) (149,238)
-------------- --------------- ---------------
Net cash provided by (used in) investing activities 78,700 (103,066) (184,820)
-------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from margin account indebtedness 49,621 -- --
Proceeds from sale of convertible debt -- 500,000 --
Acquisition of convertible debt (86,301) -- --
Payment of note payable to stockholder -- -- (5,921)
Proceeds from sale of common stock -- -- 139,069
Proceeds from exercise of options and warrants 15,489 21,344 12,341
Purchase of common stock warrants -- (4,400) --
Retirement of common stock (1,470) -- --
Acquisition of treasury stock (239,892) (71,959) (4,560)
-------------- --------------- ---------------
Net cash (used in) provided by financing activities (262,553) 444,985 140,929
-------------- --------------- ---------------
Net (decrease) increase in cash and cash equivalents (313,667) 308,707 (33,188)
Cash and cash equivalents, at beginning of year 316,730 8,023 41,211
-------------- --------------- ---------------
Cash and cash equivalents, at end of year $ 3,063 $316,730 $ 8,023
============== =============== ===============
See accompanying notes to consolidated financial statements.
</TABLE>
30
<PAGE>
TEL-SAVE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES
(a) Business
Tel-Save.com, Inc., a Delaware corporation, together with its
consolidated subsidiaries (the "Company"), provides long distance services
throughout the United States to increasing numbers of residential customers as a
result of the Company's recent online marketing efforts and to small and
medium-sized businesses. The Company's long distance service offerings include
outbound service, inbound toll-free 800 service and dedicated private line
services for data. The Company sells these services through its exclusive
relationship with AOL and through its recently launched web site located at
www.Tel-Save.com, as well as through partitions, which are independent marketing
companies.
(b) Basis of financial statements presentation
The consolidated financial statements include the accounts of
Tel-Save.com, Inc. and its 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.
Certain amounts relating to 1997 have been reclassified to conform to
the current year presentation.
(c) Pro forma balance sheet
The pro forma balance sheet as of December 31, 1998 gives effect to the
January 5, 1999 investment of $55.0 million by America Online, Inc. ("AOL")
(Note 2) and the January 5, 1999 repurchase of $127,625,000 face amount of
convertible debt for $109.1 million from two trusts for the benefit of the
children of the former Chairman and Chief Executive Officer of the Company for a
cash payment of $55.4 million and the transfer of the $53.7 million principal
amount of the 12.5% note receivable from WorldxChange.
(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.
(f) Marketable securities
Securities bought and held principally for the purpose of selling them
in the near term are classified as "trading securities" and carried at market.
Securities bought and held for the purpose of long-term investment are
classified as "securities held for sale". Unrealized holding gains and losses
(determined by specific identification) on investments classified as "trading
securities" are included in earnings. Unrealized holding gains and losses on
"securities held for sale" are included in Stockholders Equity (Deficit).
(g) Advances to partitions and notes receivable
The Company made advances to partitions to support their marketing
activities. The advances are secured by partition assets, including contracts
with end users and collections thereon.
31
<PAGE>
(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, as follows:
Buildings and building improvement...................... 39 years
Switching equipment..................................... 15 years
Equipment, vehicles and other........................... 5-7 years
(i) Intangibles and amortization
Intangibles of $1,150,000 and $10,590,000 at December 31, 1998 and
1997, respectively, respesent goodwill arising from business acquisitions.
Amortization is computed on a straight-line basis over the estimated useful
lives of the intangibles which is 15 years.
(j) Deferred revenue
Deferred revenue is recorded for a non-refundable prepayment received
in connection with an amended telecommunications services agreement with Shared
Technologies Fairchild, Inc. ("STF") and is amortized over the five year term of
the agreement. This agreement is terminable by either party on thirty days
notice. Termination by either party would accelerate recognition of the deferred
revenue.
(k) 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. Certain of the Company long-lived assets were considered impaired at
December 31, 1998 (Note 3).
(l) Income taxes
The Company has provided a full valuation allowance for deferred tax
assets and liabilities for the estimated future tax effects attributable to
temporary differences between the basis of assets and liabilities for financial
and tax reporting purposes (Note 10).
(m) Net income (loss) per share
Basic earnings per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflect,
in periods in which they have a dilutive effect, the effect of common shares
issuable upon exercise of stock options and conversion of convertible debt.
The computation of basic net income per share is based on the weighted
average number of common shares outstanding during the period. In 1996, diluted
earnings per share also includes the effect of 4,352,000 common shares, issuable
upon exercise of common stock options and warrants.
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 stock splits.
32
<PAGE>
(n) Financial instruments and risk concentration
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash investments and marketable securities.
The Company believes no significant concentration of credit risk exists with
respect to these cash investments and marketable securities.
The carrying values of accounts receivable, advances to partitions and
note receivables, accounts payable and accrued expenses, approximate fair
values. Convertible debt is recorded at face amount but such debt has traded in
the open market at substantial discounts to face amount (Note 6). At December
31, 1998 the market value of the convertible debt was approximately 85% of face
amount.
(o) Securities sold short/financial investments with off-balance sheet
risk
At December 31, 1997, 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. Securities sold short may give rise
to off-balance sheet market risk. The Company may incur a loss if the market
value of these securities subsequently increases.
(p) Stock-based compensation
The Company accounts for its stock option awards under the intrinsic
value based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic
value based method, compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. The Company makes pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied as required by Statement of Financial
Accounting Standards ("SFAS") 123, "Accounting for Stock-Based Compensation."
(q) New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company adopted SFAS in 1998; however, as of December 31, 1998
there were no components of comprehensive income for disclosure for any of the
periods presented.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131. Disclosures about Segments of an Enterprise and Related Information, (SFAS
131) which supercedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise. SFAS 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance. The Company adopted SFAS
131 in 1998; however, there are no operating segments or selected information
about such segments required to be disclosed for any of the periods presented.
In June 1998, the Financial Accounting Standard Board Issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133"), which requires companies
to recognize all derivatives as either assets or liabilities in the assessment
of financial position and measure those instruments at fair value. SFAS No. 133
is effective for fiscal years beginning after June 15, 1999. The Company does
not presently enter into any transactions involving derivative financial
instruments and accordingly, does not anticipate the new standard will have any
effect on its financial statements.
33
<PAGE>
NOTE 2 -- AOL AGREEMENTS
The Company has negotiated a number of amendments to its agreements
with AOL based on the experience gained by the Company in the marketing and sale
of telecom services to AOL subscribers during 1998. A substantial amendment to
the AOL agreement in January 1999 in which the Company agreed to fixed quarterly
payments ranging from $10 to $15 million during the exclusivity period of the
agreement resulted in: the elimination of the Company's obligation to make
bounty and profit-sharing payments to AOL; altering of the terms of the online
and offline marketing arrangements between the Company and AOL; extension of the
term of the AOL agreement, including the exclusivity period, until June 2003,
although AOL can end the Company's exclusivity period on or after June 2000 by
foregoing the fixed quarterly payments described above; elimination of AOL's
rights to receive further common stock warrants based upon customers gained from
the AOL subscriber base; AOL's contributing of up to $4.0 million per quarter
for offline marketing; and establishment of the framework for the Company to
offer additional services and products to AOL subscribers. As a result of the
January 1999 amendment, the Company wrote off $37.6 million of unamortized
prepaid AOL marketing as part of the restructuring charges. (Note 3).
On January 5, 1999 pursuant to an Investment Agreement between AOL and
the Company, AOL purchased a total of 4,121,372 shares of common stock of the
Company for $55.0 million in cash and the surrender of rights to purchase
5,076,016 shares of common stock of the Company pursuant to various warrants
held by AOL. AOL agreed to end further vesting under the outstanding performance
warrant and retained warrants exercisable for 2,721,984 shares of Company common
stock. (Notes 8 and 9).
In conjunction with the initial Telecommunications Marketing Agreement
(the "AOL Agreement") with America Online, Inc. ("AOL"), the Company paid AOL a
total of $100 million and issued two warrants to purchase shares of the
Company's stock. The first warrant (the "First Warrant") provided for the
purchase, at an exercise price of $15.50 per share, of up to 5,000,000 shares.
The second warrant (the "Second Warrant") provided for the purchase, at an
exercise price of $14.00 per share, of up to 7,000,000 shares, which was to
vest, based on the number of subscribers to the Company's service. With the
Second Warrant, as vesting occurred, the fair value of the incremental vested
portion of the warrant was charged to expense in the consolidated statement of
operations. In 1998, the Company issued a warrant to purchase 1,000,000
shares(the "Further Warrant") to AOL in exchange for a one year extension of the
AOL Agreement. As of December 31, 1997 the Second Warrant was vested as to
approximately 120,000 shares and $1,200,000 was charged to expense in the 1997
consolidated statement of operations.
The $100 million cash payment, the $20.0 million value of the First
Warrant and $0.6 million of agreement related costs was accounted for as
follows: (i) $35.9 million was charged to expense ratably over the period from
the signing of the AOL Agreement to December 31, 1997, as payment for certain
exclusivity rights for that period; (ii) $13.2 million was treated as production
of advertising costs and was charged to expense on October 9, 1997, the
Commercial Launch Date; and (iii) $71.5 million, the balance of the cash payment
and the value of the First Warrant and AOL Agreement related costs, represents
the combined value of advertising and exclusivities which extend over the term
of the AOL Agreement and will be recognized ratably after the Commercial Launch
Date as advertising services are received. For the year ended December 31, 1997,
the Company recognized $57.0 million of expense, related to items discussed
above.
34
<PAGE>
NOTE 3 -- SIGNIFICANT OTHER CHARGES
Significant other charges include $91.0 million of expenses incurred in
the fourth quarter of 1998 related to changes in the Company's basic business
operations.
As discussed in Note 2 above the Company negotiated substantial
amendments to the AOL and CompuServe agreements which among other things reduced
the amount of online advertising that the Company was entitled to over the
remaining term of the agreement and eliminated payments and issuance of warrants
to AOL for customer gains and profit sharing payments to AOL. The Company agreed
to fixed quarterly payments ranging from $10 - $15 million per quarter during
the exclusivity period of the agreement and to reimburse AOL for offline
marketing expenses in excess of $4 million per quarter during. As a result of
the amendment the Company wrote off prepaid AOL, CompuServe and other marketing
expenses of $37.6 million.
In connection with hiring a new Chairman and Chief Executive Officer
and several other key executive personnel, the Company incurred $12.7 million of
incentives and severance expense relating to this change in management.
The Company acquired ADS Holdings, Inc. ("ADS") (formerly Symetrics,
Inc.), a manufacturer of digital telephone switching equipment, in January 1998
for $18.6 million. This Company planned to complete development of the digital
switch to provide state of the art features for use in the Company's operations
as a competitive local exchange carrier. The Company allocated $21 million of
the acquisition cost to purchased research and development expense in the first
quarter of 1998 and continued to invest in additional research and development
throughout 1998. In November 1997, the Company acquired Compco, Inc, a provider
of communications software in the college and university marketplace for $13.7
million which exceeded the net assets acquired by $10.6 million. In the fourth
quarter of 1998, the Company decided to sell the assets of ADS Holdings, Inc.
and to delay entry into the college and university marketplace. As a result the
assets of ADS Holdings, Inc. and Compco, Inc. were written down to expected
realizable value. The Company recorded $15 million relating to the impairment of
these assets and reclassified $22.2 million of research and development expense
to significant other charges.
In the fourth quarter of 1998, the Company reconfigured its
telecommunications network, OBN, to provide for fiber optic connections among
its switches and incurred $3.5 million of expense.
The Company determined in the second quarter of 1997 to de-emphasize
the use of direct marketing to solicit customers for the Company and to focus
the majority of its existing direct marketing resources on customer service and
support for the marketing operations of its carrier partitions, on a fee basis.
The Company recognized fees of $8.1 million for the year ended December 31,
1997, included in other income, from the services net of related costs of $14.6
million for the year ended December 31, 1997.
The Company recorded a one-time charge of $11.5 million as cost of
sales in the quarter ended June 30, 1997, primarily as a result of the Company
changing its accounting for customer acquisition costs to expense them in the
period incurred versus the Company's prior treatment of capitalizing customer
acquisition costs and amortizing them over a six month period.
In October 1997, the Company decided to discontinue its internal
telemarketing operations which were primarily conducted through American
Business Alliance (which was acquired by the Company in December 1996), as part
of its restructuring of its sales and marketing efforts and wrote-off, as cost
of sales, approximately $23.0 million of intangible assets.
NOTE 4 -- MAJOR PARTITIONS
The number of Partitions who provided end user accounts, which in the
aggregate account for more than 10% of sales, are as follows:
<TABLE>
<CAPTION>
Number of Total Percentage
Partitions Of Sales
---------- --------
<S> <C> <C>
Year ended December 31, 1998 - -
Year ended December 31, 1997 1 13%
Year ended December 31, 1996 1 11%
</TABLE>
35
<PAGE>
NOTE 5 -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
-------------------- ----------------------
(In thousands)
<S> <C> <C>
Land 80 $ 220
Buildings and building improvements 2,639 4,259
Switching equipment 50,481 41,915
Equipment, vehicles and other 11,067 13,078
-------- --------
64,267 59,472
Less: Accumulated depreciation (7,564) (3,637)
--------- ---------
$56,703 $55,835
======= =======
</TABLE>
NOTE 6 -- CONVERTIBLE DEBT
In September 1997, the Company sold $300 million of 4 1/2% Convertible
Subordinated Notes which mature on September 15, 2002 (the "2002 Convertible
Notes"). Interest on the 2002 Convertible Notes are due and payable semiannually
on March 15 and September 15 of each year. The 2002 Convertible Notes are
convertible, at the option of the holder thereof, at any time after December 9,
1997 and prior to maturity, unless previously redeemed, into shares of the
Company's Common Stock at a conversion price of $24.260 per share, adjusted for
the dilutive effect of the Company's rights offering (Note 9). The 2002
Convertible Notes are redeemable, in whole or in part, at the Company's option,
at any time on or after September 15, 2000 at 101.80% of par prior to September
14, 2001 and 100.90% of par thereafter. During 1998, the Company reacquired
$152,458,000 face amount of the 2002 Convertible Notes and $147,542,000 were
outstanding at December 31, 1998.
In December 1997, the Company sold $200 million of 5% Convertible
Subordinated Notes which mature on December 15, 2004 (the "2004 Convertible
Notes"). Interest on the 2004 Convertible Notes are due and payable semiannually
on June 15 and December 15 of each year. The 2004 Convertible Notes are
convertible, at the option of the holder thereof, at any time after March 5,
1998 and prior to maturity, unless previously redeemed, into shares of the
Company's Common Stock at a conversion price of $25.067 per share, adjusted for
the dilutive effect of the Company's rights offering (Note 9). The 2004
Convertible Notes are redeemable, in whole or in part at the Company's option,
at any time on or after December 15, 2002 at 101.43% of par prior to December
14, 2003 and 100.71% of par thereafter. During 1998, the Company reacquired
$105,155,000 face amount of the 2004 Convertible Notes and $94,845,000 were
outstanding at December 31, 1998.
The 2002 Convertible Notes and 2004 Convertible Subordinated Notes
which were reacquired by the Company in 1998 were reacquired at an $87.1 million
discount from face amount. This amount is reported as an extraordinary gain in
the consolidated statement of operations.
36
<PAGE>
On January 5, 1999, the Company purchased from two trusts for the
benefit of Mr. Borislow's children $127,625,000 aggregate principal amount of
the Company's 2002 Convertible Notes and 2004 Convertible Notes owned by the
trust for $55.4 million in cash and the transfer of the $53.7 million principal
amount of the 12.5% note receivable from WorldxChange for $62,545,000 aggregate
principal amount of the Company's convertible debt. With these acquisitions, the
Company had reduced the principal amount outstanding of its subordinated
convertible notes to $114,582,000 ($71,712,000 of 4 1/2% notes; $42,870,000 of
5% notes).
NOTE 7 -- RELATED PARTY TRANSACTIONS
On January 5, 1999, Mr. Daniel Borislow, a founder of the Company and
its Chairman of the Board and Chief Executive Officer, resigned as a director
and officer of the Company. The Company entered into various agreements and
engaged in various transactions with Mr. Borislow and certain entities in which
he or his family has an interest.
The Company paid $1.0 million to Mr. Borislow, assigned certain
automobiles to him, and continued certain of his health and medical benefits and
director and officer insurance. The Company also agreed that, so long as Mr.
Borislow owns beneficially at least two percent (2%) of the common stock (on a
fully diluted basis), Mr. Borislow and trusts for the benefit of his children
would be entitled to: registration rights with respect to their shares of common
stock, the right to require the Company to use a portion of proceeds from any
public or private sale of debt securities, excluding borrowings from a
commercial bank or other financial institution, by the Company to repurchase
debt securities of the Company owned by Mr. Borislow or the trusts for the
benefit of his children and the right to require the Company to use the proceeds
from the exercise of stock options or rights to repurchase common stock owned by
Mr. Borislow or the trusts for the benefit of his children. The Company also
agreed that, so long as Mr. Borislow had such beneficial ownership, the Company
would not, without the prior written consent of Mr. Borislow and subject to
certain exceptions: (a) engage in certain significant corporate transactions,
including the sale or encumbrance of substantially all of its assets, mergers
and consolidations and certain material acquisitions, or, (b) for a period of 18
months from the agreement date, offer or sell any of its Common Stock unless and
until Mr. Borislow and the trusts have sold or otherwise disposed of all of the
shares of common stock held by him on the agreement date. In turn, Mr. Borislow
terminated his employment with the Company and agreed not to compete with the
Company for at least one year. Mr. Borislow also agreed to guarantee up to $20.0
million of the Company's obligations in connection with the America Online, Inc.
("AOL") investment noted above.
Effective December 31, 1998, the Company, in exchange for a total of
783,706 shares of Company common stock, (i) sold to Jimlew Capital, L.L.C., a
company owned by Mr. Borislow, (a) all of the capital stock of Emergency
Transportation Corporation (a wholly owned subsidiary of the Company, the
primary asset of which is an interest in a jet airplane), valued at
approximately $8.7 million, and (b) all of the real property constituting the
Company's headquarters in New Hope, Pennsylvania, valued at approximately $2.0
million, and (ii) released Mr. Borislow from an obligation for approximately
$4.7 million borrowed from the Company. Mr. Borislow agreed to lease to the
Company a portion of the headquarters property at a base monthly rent of
$12,500. The subsidiary stock and the real property were valued based on the
book value of these assets, which the management of the Company believes
approximated the fair market value of these assets on the date of exchange. The
Company common stock exchanged for the assets was valued at its market value on
the date of the exchanges. The Company had previously determined that it would
be desirable to dispose of these assets and accordingly believes that the
ownership of these assets is not required for the continued operation of the
Company's business.
Effective December 31, 1998, the Company in exchange for a total of
498,435 shares of the Company common stock and $10,007,000 aggregate principal
amount of the Company's Convertible Notes released certain officers, directors
and employees form obligation for approximately $9.8 million and $9.0 million,
respectively, borrowed from the Company.
37
<PAGE>
On January 5, 1999, the Company assigned to a trust for the benefit of
Mr. Borislow's children the Company's interest in $53,700,000 principal amount
of subordinated notes of Communication TeleSystems International d/b/a
WorldxChange Communications, in exchange for $62,545,000 aggregate principal
amount of the Company's 2002 Convertible Notes and 2004 Convertible Notes owned
by the trust. The exchange rate was determined based on the Company's assessment
of the fair values of the WorldxChange Notes and of the Company's Convertible
Notes given in exchange, which assessment was supported by the opinion of an
independent investment banking firm as to the fairness to the Company of the
consideration received.
On January 5, 1999, the Company, in open market transactions, purchased
from two trusts for the benefit of Mr. Borislow's children $65,080,000 aggregate
principal amount of the Company's 2002 Convertible Notes and 2004 Convertible
Notes owned by the trusts for $55.4 million in cash.
At December 31, 1997, executive officers of the Company had outstanding
loans from the Company of $4,237,000 which were repaid during the first quarter
of 1998.
NOTE 8 -- STOCKHOLDERS' EQUITY
(a) 1996 Public Offering
The Company consummated a public offering of 18,568,000 shares of
common stock (adjusted to reflect the most recent stock split, Note 9(b)),
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 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) 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.
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. These
stock splits have been reflected in the financial statement for all periods
present and 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.
(c) Authorized Shares
During 1997, 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 300,000,000 shares.
(d) Reimbursement Obligations
On January 5, 1999, pursuant to an Investment Agreement between AOL and
the Company, AOL made a significant equity investment in the Company, acquiring
approximately 4,121,372 shares of common stock for $55.0 million in cash and the
surrender of rights to acquire up to 5,076,016 shares of common stock pursuant
to various warrants held by AOL. Under the terms of the Investment Agreement
with AOL, the Company has agreed to reimburse AOL for losses AOL may incur on
the sale of any of the 4,121,372 shares during the period from June 1, 1999
through September 30, 2000. The reimbursement amount would be determined by
multiplying the number of shares, if any, that AOL sells during the applicable
period by
38
<PAGE>
the difference between the purchase price per share paid by AOL, or $19 per
share, and the price per share that AOL sells the shares for, if less than $19
per share. The reimbursement amount may not exceed $14 per share for 2,894,737
shares or $11 for 1,226,635 shares. Accordingly the maximum amount payable to
AOL as reimbursement on the sale of AOL's shares would be approximately $54.0
million plus AOL's reasonable expenses incurred in connection with the sale.
Assuming AOL were to sell all of its shares subject to the Company reimbursement
obligation at the closing price of the Company's common stock as of March 26,
1999, the reimbursement amount would be approximately $35.5 million. AOL also
has the right on termination of long distance exclusively to require the Company
to repurchase 2,721,984 warrants to purchase common stock of the Company held by
AOL for a minimum price of $36.3 million. The Company has agreed to fund an
escrow account of up to $35 million from 50% of the proceeds of any debt
financing, other than a bank, receivable or other asset based financing of up to
$50 million, to secure its obligations under the Investment Agreement with AOL.
AOL has not advised the Company that it intends to sell any shares during the
relevant period. Mr. Borislow has agreed to guarantee up to $20,000,000 of the
Company's reimbursement obligations under the Investment Agreement with AOL.
(e) Restriction on Future Sales of Common Stock
The Company is subject to certain restrictions under the terms of
certain registration rights agreements that could effect the Company's ability
to raise capital. Under these agreements, entered into by the Company for the
benefit of Mr. Borislow and two trusts for the benefit of his children (the
"Trusts"), the Company has agreed that so long as Mr. Borislow continues to own
at least 2% of the Company's outstanding common stock, the Company will use up
to 40% of the proceeds from the sale of any debt securities to repurchase the
Company's Convertible Notes held by Mr. Borislow or the Trusts and that until
June 2000, the Company will not sell any shares of Common stock of the Company
without the consent of Mr. Borislow (other than sales of common stock on
exercise of options or rights so long as the proceeds are used to repurchase
common stock of the Company held by Mr. Borislow or the Trusts). Mr. Borislow
has agreed to subordinate his rights for repurchase of the Company's convertible
debt until the AOL escrow is fully funded.
NOTE 9 -- STOCK OPTIONS, WARRANTS AND RIGHTS
(a) Stock Options
The Company has both qualified and non-qualified stock option
agreements with most of its key employees.
In 1996, 1997 and 1998, the Company granted certain employees and
non-employee directors of the Company 6,736,000, 2,801,000 and 5,535,000,
respectively, non-qualified options to purchase shares of the Company's common
stock. These options generally become exercisable from one to three years from
the date of the grant. In 1997, the Company recognized $13,371,785 of
compensation expenses related to the grant of options or the purchase of the
Company's stock at prices below the quoted market price at date of grant or
purchase date. In 1998, the Company recognized $_______ of compensation expenses
relating to the grant of 650,000 options and the issuance of 135,000 shares of
the Company's stock at prices below the quoted market price at the dates of
grant or issuance.
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 1996, 1997 and 1998,
respectively: no dividends paid for all years; expected volatility of 40.4% in
1996, 55.8% in 1997 and 65% in 1998; weighted average risk-free interest rates
of 5.7%, 5.49% and 4.59%, respectively; and expected lives of 1 to 10 years.
39
<PAGE>
TEL-SAVE.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands, except for per share data)
<S> <C> <C> <C>
NET INCOME:
As reported $(221,326) $(20,945) $20,168
Pro forma (244,487) (30,942) $16,521
BASIC EARNINGS PER SHARE:
As reported $ (3.73) $ (.33) $ .38
Pro forma $ (4.12) $ (.48) $ .31
DILUTED EARNINGS PER SHARE:
As reported $ (3.73) $ (.33) $ .35
Pro forma $ (4.12) $ (.48) $ .29
</TABLE>
The following tables contain information on stock options for the
three-year period ended December 31, 1998:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
OPTION PRICE RANGE AVERAGE
SHARES PER SHARE EXERCISE PRICE
------ --------- --------------
<S> <C> <C> <C>
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
Granted 2,801,000 $5.67-$22.06 $16.02
Exercised (2,208,812) $ .32-$12.78 $ 4.25
Cancelled (690,000) $5.67-$13.25 $11.98
----------- ------------ ------
Outstanding, December 31, 1997 8,885,988 $ .32-$22.06 $ 9.26
Granted 5,535,000 $5.75-$10.44 $ 7.18
Exercised (2,853,178) $ .32-$13.63 $ 4.93
Cancelled (1,337,000) $5.75-$17.50 $13.01
----------- ------------ ------
Outstanding, December 31, 1998 10,230,810 $4.08-$14.00 $7.34
========== ============ =======
</TABLE>
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
OPTION PRICE RANGE AVERAGE
EXERCISABLE AT YEAR ENDED DECEMBER 31, SHARES PER SHARE EXERCISE PRICE
- - -------------------------------------- ------ --------- --------------
<S> <C> <C> <C>
1996 2,649,800 $ .32-$ 4.58 $2.82
1997 3,866,987 $ .32-$14.50 $7.24
1998 4,571,475 $4.08-$12.78 $7.39
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS GRANTED IN FAIR VALUE
- - ------------------ ----------
<S> <C>
1996 $2.39
1997 $6.99
1998 $4.83
</TABLE>
40
<PAGE>
TEL-SAVE.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
$4.08-$7.00 $7.01-$10.00 $10.01-$14.00
----------- ------------ -------------
OUTSTANDING OPTIONS:
<S> <C> <C> <C>
Number outstanding at
December 31, 1998 5,436,810 3,649,000 1,145,000
Weighted-Average remaining
contractual life (Years) 2.83 3.51 8.74
Weighted-average exercise price $5.66 $8.80 $10.69
EXERCISABLE OPTIONS:
Number outstanding at
December 31, 1998 1,712,642 2,733,833 125,000
Weighted-average exercise price $5.39 $8.43 $12.16
</TABLE>
(b) AOL Warrants
On January 5, 1999, after the purchase of 5,076,016 Warrants from AOL,
2,721,984 AOL Warrants were outstanding and currently exercisable with exercise
prices from $14.00 to $22.00 and a weighted average exercise price of $17.03.
AOL has the right commencing on termination of the exclusivity under the AOL
Agreement up until January 5, 2003 to require the Company to repurchase all or
any portion of the AOL Warrants at prices (the "Put Prices") ranging from $10.45
to $16.82 per warrant ($36,324,002 aggregate amount). In the event AOL requires
repurchase of the warrants, the Company at its election may pay AOL in cash or
in shares of the Company's common stock based on the then current market price
for such stock. The Company may also elect to issue a 10% two-year note for a
defined portion of the repurchase price. The Company can require AOL to exercise
their warrants at any time the market price of the Company's common stock equals
or exceeds two times the then call amount for such warrants. The call amount of
a warrant is the Put Price for the warrant increased at a semi-annually
compounded rate of 5% on January 5, 1999 and on each six month anniversary
thereafter. The Company has certain reimbursement obligations in the event that
it requires AOL to exercise their warrants
(c) Other Warrants
At December 31, 1996, the Company had warrant agreements with certain
partitions and the underwriter for its IPO (Note 9(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, 3,712,000 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. In January 1997, 800,000 of these warrants were
purchased by the Company and recorded as a reduction in additional paid-in
capital and 2,662,000 warrants were exercised. The 250,000 warrants issued to
the underwriter for the Company's IPO (Note 9(b)) that were outstanding at
December 31, 1997 were exercised in 1998.
(d) Rights
The Board of Directors has approved an offering of up to 3,523,285
shares of its Common Stock, $.01 par value, to holder of record of Common Stock
and holders of record of options or warrants to purchase Common Stock at the
close of business on December 31, 1998. The Shares are being offered pursuant to
nontransferable rights to subscribe for and purchase shares of Common Stock at a
price of $17.00 per share. Holders of record on the Record Date, will receive
one Right for every 20 shares of Common Stock or underlying options or warrants
held on the Record Date, as applicable.
41
<PAGE>
NOTE 10 -- INCOME TAXES
Provision for Income Taxes. The Company reports the effects of income
taxes under FASB Statement No. 109, Accounting of Income Taxes, (SFAS 109). The
objective of income tax reporting is to recognize (a) the amount of taxes
payable or refundable for the current year and (b) deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in
the financial statements or tax returns. Under SFAS 109, the measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized. Realization
of deferred tax assets is determined on a more-likely-than-not basis.
The Company considers all available evidence, both positive and
negative, to determine whether, based on the weight of that evidence, a
valuation allowance is needed for some portion or all of a net deferred tax
asset. Judgment is used in considering the relative impact of negative and
positive evidence. In arriving at these judgments, the weight given to the
potential effect of negative and positive evidence is commensurate with the
extent to which it can be objectively verified.
The Company had net deferred tax assets of approximately $____ million
at December 31, 1997. Those deferred tax assets primarily represented the tax
consequences of benefits attributable to net operating loss carry-forwards and
$36.3 million related to deductions from the exercise of executive stock
options. The Company determined that no valuation allowance was necessary at
December 31, 1997 because, among other factors, income, which it believed would
be indicative of future operations, had been generated in recent years, with the
exception of 1997. The loss incurred in 1997 was primarily attributable to
amortization of the AOL marketing agreement.
During 1998 the Company continued to incur significant promotional,
marketing and advertising expenses attributable to its efforts to increase the
customer base. Moreover, competitive factors intensified during the period
making gains in subscriber base more costly and more time consuming.
Accordingly, the Company provided a valuation allowance against its deferred tax
assets at December 31, 1998. The valuation allowance also eliminated the net
deferred tax asset that had been recognized in previous periods. The valuation
allowance increased the net loss for the period by approximately $40.4 million.
The income statement charge to establish the valuation allowance includes
approximately $26 million of the previously recognized tax benefits from the
exercise of executive stock options which had been reported in fiscal 1997 as a
direct addition to paid-in capital.
The provision (benefit) for income taxes for the years ended December 31,
1998, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C>
Current:
Federal $ -- $ -- $10,995
State and local -- -- 1,817
------------ ------------ --------
Total current -- -- 12,812
------------ ------------ --------
Deferred:
Federal 34,140 (11,111) (607)
State and local 6,248 (2,280) --
------------ ------------ --------
Total deferred 40,388 (13,391) (607)
------------ ------------ --------
$ 40,388 $(13,391) $12,205
============ ========= =======
</TABLE>
42
<PAGE>
A reconciliation of the Federal statutory rate to the provision
(benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------------- ---------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes computed at the statutory
rate $(93,817) (35.0)% $(12,018) (35.0)% $11,331 35.0%
Increase (decrease):
State income taxes less Federal benefit (11,526) (4.3)% (1,482) (4.3) 1,199 3.7
Write-off of deferred tax assest 40,388 15.10%
Increase in valuation allowance 150,000 39.2%
Other 219 .1% 109 .3 (325) (1.0)
---------- ---------- ----------- --------- --------- --------
Total provision (benefit) for income taxes 40,368 (15.1)% $(13,391) (39.0)% $12,205 37.7%
========== ========== =========== ========= ========= ========
Deferred tax (assets) liabilities at December 31, 1998, 1997 and 1996
are comprised of the following elements:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C>
Taxable loss carry-forwards $ (66,007) $(21,548) $(3,705)
Deferred revenue taxable currently (11,076) (13,897) --
Stock based compensation (14,409) (4,951) --
Allowance for uncollectible accounts (7,377) (2,198) --
Federal and state taxes resulting from cash to accrual basis for tax
reporting -- 1,337 2,342
Amortization of certain intangibles (13,513) -- (85)
Other 1,692 869 (55)
----------- --------------- -------------
----------- --------------- -------------
Deferred tax (assets) liabilities $(110,789) $(40,388) $(1,503)
Less valuation allowance 110,789 -- --
----------- --------------- -------------
Deferred tax (assets) liabilities, net $ -- $(40,388) $(1,503)
=========== =============== =============
</TABLE>
Long-term deferred tax assets of $9,472,000 are included in other
assets in the consolidated balance sheet at December 31, 1997. A valuation
allowance has been provided against the deferred tax assets since management
cannot predict, based on the weight of available evidence, that it is more
likely than not that such assets will be ultimately realized, The tax net
operating loss carryforward of approximately $169 million, if not utilized, will
begin to expire in 2017. Internal Revenue Code Section 382 provides for the
limitation on the use of not operating loss carryforward in years subsequent to
significant change sin ownership, which limitations could significantly impact
the Company's ability to utilize its net operating loss carryforward. As a
result of certain transactions, changes in ownership may have secured which
might result in limitation on the use of net operating loss carryforwards. The
Company has not determined whether a change in ownership has occurred. However,
preliminary calculations indicate that the utilization of operating loss
carryforwards could be limited to between $25 million and $30 million per year.
NOTE 11 -- STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $28,695 $915 $ 47
Income taxes $ -- $ -- $1,090
</TABLE>
During 1997, the Company recorded an asset of $20,000,000 in connection
with the issuance of warrants to AOL (Note 2). In connection with the
acquisition of Compco in 1997, the Company issued 339,982 shares of Company
common stock with a value of $5,625,000.
43
<PAGE>
In connection with the acquisition of the assets of ABA in 1996, the
Company released ABA of its outstanding obligations to the Company of
$10,949,000. During 1996, the Company recorded an intangible of $1,077,000 in
connection with the issuance of warrants to certain partitions (Note 11(b)).
NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(In thousands, except for per share data)
1998
<S> <C> <C> <C> <C>
Sales $91,146 $111,098 $122,525 $123,831
Gross profit 14,566 18,040 22,736 31,301
Operating income (loss) (63,702) (30,049) (96,047) (67,075)
Income (loss) before extraordinary gain (41,795) (96,154) (92,296) (78,191)
Net income (loss) (41,795) (96,154) (41,734) (41,643)
Income (loss) before extraordinary gain per share -
Diluted (0.65) (1.49) (1.58) (1.56)
Net income (loss) per share - Diluted (0.65) (1.49) (0.71) (0.83)
1997
Sales $71,160 $75,032 $80,314 $78,262
Gross profit (loss) 12,966 1,511(1) 12,872 (17,065)(1)
Operating income (loss) 6,082 (13,924) (3,243) (73,966)
Net income (loss) 5,430 (5,865) 721 (21,231)
Net income (loss) per share - Diluted 0.08 (0.09) 0.01 (0.32)
(1) See Note 3.
</TABLE>
44
<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 1999 Annual Meeting of Stockholder, 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.
45
<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.
46
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO S-X SCHEDULE
PAGE
Report of Independent Certified Public Accountants...........................48
Schedule II -- Valuation & Qualifying Accounts...............................49
47
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
and Stockholders of Tel-Save.com, Inc.
The audits referred to in our report dated February 22, 1999 relating
to the consolidated financial statements of Tel-Save.com. 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, 1998. 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.
BDO Seidman, LLP
New York, New York
February 22, 1999, except for Note 8, which is
as of March 26, 1999
48
<PAGE>
<TABLE>
<CAPTION>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT END
DESCRIPTION BEGINNING OF COSTS AND OF
DEDUCTIONS PERIOD EXPENSES OTHER CHANGES DEDUCTIONS
---------- ------ -------- ------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Reserve and allowances deducted
from asset accounts:
Allowance for uncollectible $2,419 $(1,265) $515 $1,669
accounts ====== ======= ==== ======
Year ended December 31, 1997:
Reserves and allowances
deducted from asset accounts:
Allowance for uncollectible
accounts $987 $1,285 $147(a) $2,419
==== ====== ======= ======
Year ended December 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollected
accounts $804 $38 $145(a) $987
==== === ======= ====
(a) Amount represents portion of change in allowance for uncollectible accounts
applied against Accounts Payable Partitions.
</TABLE>
49
<PAGE>
(3) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
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-4 (File No. 333-38943)).
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)).
3.3 Certificate of Ownership and Merger Merging Tel-Save.com, Inc. into
Tel-Save Holdings, Inc. (Changing the name of the Registrant)
(incorporated by reference to Exhibit 3(i) to the Company's Current
Report on Form 8-K dated January 20, 1999).
10.1 Employment Agreement between the Company and Emmanuel J. DeMaio
(incorporated by reference to Exhibit 10.2 to the Company's
registration statement on Form S-1 (File No. 33-94940)).*
10.2 Employment Agreement between the Company and George P. Farley
(incorporated by reference to Exhibit 10 to the Company's report on
Form 10-Q for the quarter ended September 30, 1997).*
10.3 Employment Agreement between the Company and Aloysius T. Lawn, IV
dated October 13, 1998.
10.4 Employment Agreement between the Company and Edward B. Meyercord, III
(incorporated by reference to Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996).*
10.5 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)).
10.6 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)).
50
<PAGE>
10.7 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)).
10.9 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)).
10.10 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)).
10.11 Indemnification Agreement between the Company and Aloysius T. Lawn, IV
(incorporated by reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.12 Indemnification Agreement between the Company and Edward B. Meyercord,
III (incorporated by reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996).
10.14 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)).*
10.15 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).*
51
<PAGE>
10.19 Telecommunications Marketing Agreement by and among the Company,
Tel-Save, Inc. and America Online, Inc., dated February 22, 1997
(incorporated by reference to Exhibit 10.32 to the Company's Form 10-K
for the year ended December 31, 1996).+
10.20 Amendment No. 1, dated as of January 25, 1998, to the
Telecommunications Marketing Agreement dated as of February 22, 1997 by
and among the Company, Tel-Save, Inc. and America Online, Inc.
(incorporated by reference to Exhibit 10.31 to the Company's Form 10-K
for the year ended December 31, 1997). +
10.21 Amendment No. 2, dated May 14, 1998, among the Company, Tel-Save, Inc.
and America Online, Inc., which amends that certain Telecommunications
Marketing Agreement, dated as of February 22, 1997, as corrected and
amended by letter, dated April 23, 1997, and amended by an Amendment
No. 1, dated January 25, 1998. (incorporated by reference to Exhibit
10.1 to the Company's quarterly report on Form 10-Q, dated August 14,
1998).*
10.22 Amendment No. 3, effective as of October 1, 1998, among the Company,
Tel-Save, Inc. and America Online, Inc., which amends that certain
Telecommunications Marketing Agreement, dated as of February 22, 1997,
as corrected and amended by letter, dated April 23, 1997, and amended
by an Amendment No. 1, dated January 25, 1998, and an Amendment No. 2,
dated May 14, 1998). ++
10.23 Indenture dated as of September 9, 1997 between the Company and First
Trust of New York, N.A. (incorporated by reference to Exhibit 4.3 to
the Company's registration statement on Form S-3 (File No. 333-39787)).
10.24 Registration Agreement dated as of September 3, 1997 between the
Company and Salomon Brothers Inc, Deutsche Morgan Grenfell Inc., Bear,
Stearns & Co. Inc., Smith Barney Inc., Robertson Stephens & Company LLC
(incorporated by reference to the Company's registration statement on
Form S-3 (File No. 333-39787)).
10.25 Indenture dated as of December 10, 1997 between the Company and First
Trust of New York, N.A. (incorporated by reference to Exhibit 10.34 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997).
10.26 Registration Agreement dated as of December 10, 1997 between the
Company and Smith Barney Inc. (incorporated by reference to Exhibit
10.35 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.27 Employment Agreement, dated as of November 13, 1998, between the
Company and Gabriel Battista (incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K dated January 20, 1999).*
52
<PAGE>
10.28 Indemnification Agreement, dated as of December 28, 1998, between the
Company and Gabriel Battista (incorporated by reference to Exhibit 10.2
to the Company's Current Report on Form 8-K dated January 20, 1999).
10.29 Stock Option Agreement, dated as of November 13, 1998, between the
Company and Gabriel Battista (incorporated by reference to Exhibit 10.3
to the Company's Current Report on Form 8-K dated January 20, 1999).*
10.30 Stock Option Agreement, dated as of November 13, 1998, between the
Company and Gabriel Battista (incorporated by reference to Exhibit 10.4
to the Company's Current Report on Form 8-K dated January 20, 1999).*
10.31 Severance Agreement, dated as of December 31, 1998, between the Company
and Daniel Borislow (incorporated by reference to Exhibit 10.5 to the
Company's Current Report on Form 8-K dated January 20, 1999).*
10.32 Purchase Agreement regarding the stock of Emergency Transportation
Corporation, dated as of January 5, 1999, between the Company and
Jimlew Capital, L.L.C. (incorporated by reference to Exhibit 10.6 to
the Company's Current Report on Form 8-K dated January 20, 1999).
10.33 Exchange Agreement, dated as of December 31, 1998, among the Company,
Tel-Save, Inc. and Mark Pavol, as Trustee of that certain D&K Grantor
Retained Annuity Trust dated June 15, 1998 (incorporated by reference
to Exhibit 10.7 to the Company's Current Report on Form 8-K dated
January 20, 1999).
10.34 Modification of the Exchange Agreement, dated ___________, 1999, by and
among the Company, Tel-Save, Inc. and Mark Pavol.
10.35 Registration Rights Agreement, dated as of December 31, 1998, among the
Company, Daniel Borislow, Mark Pavol, as Trustee of that certain D&K
Grantor Retained Annuity Trust, dated June 15, 1998 and the Trustee of
that certain D&K Grantor Retained Annuity Trust II (incorporated by
reference to Exhibit 10.8 to the Company's Current Report on Form 8-K
dated January 20, 1999).
10.36 Amendment of Registration Rights Agreement dated as of March 18, 1999,
by and among the Company, Daniel M. Borislow, and Seth Tobias.
10.37 Amendment of Registration Rights Agreement dated as of March 18, 1999,
by and among the Company and Mark Pavol.
10.38 Agreement of Purchase and Sale of Real Property, dated as of January 5,
1999, between Tel-Save, Inc. and Jimlew Capital, L.L.C. (incorporated
by reference to Exhibit 10.9 to the Company's Current Report on Form
8-K dated January 20, 1999).
53
<PAGE>
10.39 Lease, dated as of January 5, 1999, between Tel-Save, Inc. and Jimlew
Capital, L.L.C. (incorporated by reference to Exhibit 10.10 to the
Company's Current Report on Form 8-K dated January 20, 1999).
10.40 1998 Long-Term Incentive Plan of the Company (incorporated by reference
to Exhibit 10.14 to the Company's Current Report on Form 8-K dated
January 20, 1999).*
10.41 Investment Agreement, dated as of December 31, 1998, among the
Company., America Online, Inc., and, solely for purposes of Sections
4.5, 4.6 and 7.3(g) thereof, Daniel Borislow, and solely for purposes
of Section 4.12 thereof, Tel-Save, Inc. and the D&K Retained Annuity
Trust dated June 15, 1998 by Mark Pavol, Trustee.
10.42 Registration Rights Agreement, dated as of January 5, 1999, between the
Company and America Online, Inc.
10.43 Sublease Agreement, dated January ___, 1997, by and between Gemini Air
Cargo, LLC and RMS International, Inc.
10.44 Sublease Agreement, dated as of January 20, 1999, by and between
RMS International and Tel-Save, Inc.
10.45 Lease by and between Aetna Life Insurance Company and Potomac Financial
Group, L.L.C.
10.46 Agreement, effective as of February 28, 1999, by and among the Company,
Communication Telesystems International, d.b.a. WorldxChange
Communications, Tel-Save, Inc., Mark Pavol, Roger B. Abbott and
Rosalind Abbott, and Edward Soren.
10.48 Letter Agreement between the Company and Emmauel DeMaio regarding
Employment Agreement dated October 13, 1998.
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 portions 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, 1999:
1. Current Report on Form 8-K dated October 29, 1998.
58
<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.
Date: March 30, 1999 TEL-SAVE.COM, INC.
By: /s/ Gabriel Battista
---------------------------
Gabriel Battista
Chairman of the Board of Directors,
Chief Executive Officer, President
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Gabriel Battista Chairman of the Board of Directors March 30, 1999
- - ----------------------------- Chief Executive Officer and Director
Gabriel Battista (Principal Executive Officer)
/s/ Emanuel J. DeMaio Chief Operations Officer March 30, 1999
- - ----------------------------- and Director
Emanuel J. DeMaio
/s/ George P. Farley Chief Financial Officer and Director March 30, 1999
- - ----------------------------- (Principal Financial Officer)
George P. Farley
/s/ Kevin R. Kelly Controller (Principal Accounting March 30, 1999
- - ----------------------------- Officer)
Kevin R. Kelly
/s/ Harold First Director March 30, 1999
- - -----------------------------
Harold First
/s/ Gary W. McCulla Director March 30, 1999
- - -----------------------------
Gary W. McCulla
/s/ Ronald R. Thoma Director March 30, 1999
- - -----------------------------
Ronald R. Thoma
</TABLE>
55
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
13th day of October, 1998 between Tel-Save, Inc. ("TSI"), a Pennsylvania
corporation and a wholly-owned subsidiary of Tel-Save Holdings, Inc.
("Holdings"), Holdings, having its principal place of business at Route 202, New
Hope, PA 18938 ("Principal Place of Business"), and Aloysius T. Lawn, IV
("Employee"). TSI and Holdings shall be collectively referred to herein as
"Company"
Preliminary Statement
WHEREAS, the term of the current employment agreement between the Company
and Employee is scheduled to terminate;
WHEREAS, Company desires to continue to employ Employee, and Employee
desires to continue 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 continued 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 December 1, 1998 (the "Effective Date") and shall continue in effect
for a period of two 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
General Counsel and Secretary of Company 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. Employer agreed that
Employee shall perform such duties and responsibilities at the Principal Place
of Business or such other place as mutually agreed by Employee and Employer.
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, business like 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.
<PAGE>
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 of not less than $200,000,
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.
4.6 Stock Options. (a) Employee shall be granted an option to purchase
50,000 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 $5.75 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 Compensation
Committee 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 of the Long Term Incentive Plan ("Stockholder
Approval") and the Option shall be null and void if such approval or Stockholder
Approval is not obtained. The Option shall be exercisable (A) in installments,
as follows: (i) 25,000 shares of common stock may be purchased on the first
anniversary hereof and, (ii) 25,000 shares of common stock may be purchased on
the second anniversary hereof; and (B) in full upon a "Change of Control", as
defined below. A "Change in Control" shall be deemed to have occurred if: (i)
any person (as defined in Section 3(a)(9) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")), other than the Company or Holdings,
becomes the Beneficial Owner (as defined in Rule 13d-3 under the Exchange Act;
provided, that a Person shall be deemed to be the Beneficial Owner of all shares
that any such Person has the right to acquire pursuant to any agreement or
arrangement or upon exercise of conversion rights,
2
<PAGE>
warrants, options or otherwise, without regard to the 60 day period referred to
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
Holdings, the Company or any Significant Subsidiary (as defined below)
representing 50% or more of the combined voting power of Holdings', the
Company's or such subsidiary's then outstanding securities; (ii) during any
period of two years, individuals who at the beginning of such period constitute
the Board of Holdings cease for any reason to constitute at least a majority of
the Board of either Holdings; (iii) the consummation of a merger or
consolidation of Holdings, the Company or any subsidiary owning directly or
indirectly all or substantially all of the consolidated assets of the Company (
a "Significant Subsidiary") with any other entity, other than a merger or
consolidation which would result in the voting securities of the Holdings, the
Company or a Significant Subsidiary outstanding immediately prior thereto
continuing to represent more than 50% of the combined voting power of the
surviving or resulting entity outstanding immediately after such merger or
consolidation; (iv) the shareholders of the Company approve a plan or agreement
for the sale or disposition of all or substantially all of the consolidated
assets of the Company in which case the Board shall determine the effective date
of the Change of Control resulting therefrom; (v) any other event occurs which
the Board determines, in its discretion, would materially alter, the structure
of the Company or its ownership and (vi) Daniel Borislow ceases to be the Chief
Executive Officer of Holdings and/or TSI.
(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 issueable 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.
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.
3
<PAGE>
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:
(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;
(c) Change of the Principal Place of Business to a location
outside the metropolitan Philadelphia area or the
inability of Employer and Employee to mutually agree to
a location other than the Principal Place of Business
from which Employer to perform his duties pursuant to
Section 3 of this Agreement; or
(d) 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.
4
<PAGE>
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) one hundred
percent (100%) 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.
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;
and (b) reimbursement for expenses which may have been incurred, reported and
documented but which have not been paid as of the date of termination.
5
<PAGE>
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 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).
6
<PAGE>
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 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, non-compete 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.
7
<PAGE>
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 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. Aloysius T. Lawn, IV
1409 Bramble Lane
West Chester, PA 19380
If to Company:
Tel-Save, Inc.
6805 Route 202
New Hope, Pennsylvania 18938
Attn: President
8
<PAGE>
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 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
------------------------------------
Aloysius T. Lawn, IV
9
AMENDMENT NO. 2
This AMENDMENT NO. 2 (this "Amendment"), dated May 14,1998 (the "Amendment
Effective Date"), by and among Tel-Save, Inc. ("TS"), a Pennsylvania
corporation, and Tel-Save Holdings, Inc. ("Holdings"), a Delaware corporation,
with their principal offices at 6805 Route 202, New Hope, Pennsylvania 18938, on
the one hand, and America Online, Inc., a Delaware corporation with its
principal offices at 22000 AOL Way, Dulles, Virginia 20166 ("AOL"), on the other
hand (each a "party" and, collectively, the "parties").
WHEREAS, TS, Holdings and AOL are parties to the Telecommunications
Marketing Agreement, dated as of February 22, 1997, as heretofore corrected and
amended by letter, dated April 23, 1997, and amended by an Amendment No. 1,
dated as of January 25, 1998 (as so corrected and amended to the date hereof,
but without giving effect to this Amendment, the "Agreement"); capitalized terms
used in this Amendment without other definition are defined as in the Agreement.
WHEREAS, the parties to the Agreement wish to make certain changes therein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
A. Extension Warrant to AOL
1. Upon AOL's execution and delivery of this Amendment, TS shall issue and
deliver to AOL a warrant to purchase 1,000,000 shares of Holdings Common Stock
at an exercise price per share equal to $22.25, which warrant shall be in the
form of Appendix A to this Amendment. This new warrant shall be a "Warrant" for
all purposes of the Warrantholder and Stockholders Agreement.
B. Agreement Amendments. The Agreement is amended as follows, effective
as of the Amendment Effective Date:
1. The references in the Agreement to "this Agreement" or "the Agreement"
(including indirect references such as "hereunder," "hereby," "herein"
and "hereof') shall be deemed to be references to the Agreement as
amended by this Amendment.
2. Section I.A.41. of the Agreement is hereby amended to substitute a
reference to "June 30, 2001 (June 30, 2000 with respect to the
parties' rights and obligations hereunder regarding Local
Telecommunications Services and Commercial Mobile Communications
Services)" for the reference to "June 30, 2000" therein.
<PAGE>
3. Section III.A.1(c) of the Agreement is amended to read in its entirety
as follows:
"(c) Notwithstanding anything to the contrary in this Agreement, the
parties agree that, commencing May 15, 1998 and ending August 14, 1998, AOL
shall provide the marketing and promotions set forth in Schedule X to this
Agreement."
and the Agreement is amended to add as Schedule X thereto the Schedule
X attached to this Amendment.
4. Section III.A.1. of the Agreement is amended to add the following new
subsection:
"(g) Notwithstanding anything to the contrary herein:
"(i) Section III.A.1(f) of this Agreement shall apply in
connection with all marketing efforts in connection with the Services,
including any * * * efforts directed to subscribers to the AOL Service that
may be provided under this Agreement.
"(ii) TS shall not contract formally or informally with or
otherwise make payments to vendors in connection with * * * in connection
with the Services. Except as otherwise agreed by AOL, AOL shall retain sole
oversight and control over such vendors' * * * efforts, including any
remote or on-site monitoring.
"(iii) All AOL Service subscriber identity information necessary
to perform any * * * efforts in connection with the Services shall be
provided to the * * * vendor by AOL and shall not be disclosed to TS, and
TS shall not purposefully examine or take possession of any such
information or otherwise encourage any vendor or other party to disclose
such information, in each case in a manner inconsistent with AOL's privacy
policies (other than by virtue of TS's contact with any such subscriber
after such subscriber becomes an End User).
"(iv) All marketing activities by TS in connection with the
Services shall be performed, and any subscriber information obtained by TS
in connection with the Agreement shall be handled in accordance with
applicable laws and regulations and in compliance with AOL's policies,
including, without limitation, AOL's privacy policies and AOL's * * *
procedures and guidelines.
5. Section V.B. of the Agreement is amended to add the following new
subsections:
"7. Commencing with April 1, 1998 and so long as AOL shall be
providing the marketing and promotions described in Schedule X hereto
(including from and after August 14, 1998, as AOL may elect), TS shall pay
to AOL the amount of $20 for each Qualified End User who subscribes to the
Long Distance Telecommunications Services, whether through the marketing
described on Schedule X or otherwise, after such commencement date, which
amounts will be paid, with respect to any month, on or before the last day
of the next succeeding month."
2
<PAGE>
"8. TS shall, upon AOL's request, (a) permit AOL to monitor TS's
compliance with the provisions of Section III.A.l.g hereof and (b) provide
to AOL reports, detailing Gross Revenues, Actual Services Costs, Pre-Tax
Profit, the gross numbers of End Users and Qualified End Users, the gross
numbers of Qualified End Users since the end of the prior quarter and net
End Users from the end of the prior period. At AOL's request, given
reasonably in advance, TS shall provide the foregoing information at a
frequency of no more than once every two weeks with respect to End User
information and no more than once every 45 days with respect to Gross
Revenues, Actual Services Costs and Pre-Tax Profit. In addition, TS shall
provide the foregoing information with-respect to any quarter within 15
days following the end of such quarter and will provide information
regarding Qualified End Users who subscribed during the last month of any
calendar quarter and became End Users within 35 days after the last day of
such month. AOL has the right to inspect TS's records with respect to the
use and treatment of all subscriber information in accordance with the
procedures set forth in Section V.13.4."
6. The second sentence of Section VII.A.5 is amended to substitute a
reference to "solely through AOL or AOL's agents" for the reference to
"directly or indirectly through a third party on its behalf."
7. Section X.B.2. of the Agreement is amended to provide that the
reference to "each of the first two Extension Periods" shall be
deleted and replaced with a reference to "the first Extension Period"
and to the extent required to reflect that there will be only one (1)
"Additional Warrant".
8. Section X.C.1.c. of the Agreement is deleted in its entirety and
replaced with the following:
"c. * * *
9. Section X.D.4. of the Agreement is amended to replace the reference
therein to "June 30, 2000" with a reference to "June 30, 2001".
10. * * *
3
<PAGE>
C. Amendment of Other Documents.
1. Upon effectiveness of this Amendment, the Warrant to Purchase Common
Stock of Tel-Save Holdings, Inc, dated as of February 22, 1997, No. W-AOL-1
(the "Base Warrant"), and the Supplemental Warrant shall be amended to read
in their entireties as set forth in Appendices B-1 and B-2, respectively,
to this Amendment.
D. Miscellaneous.
This Amendment does not, and shall not be construed to, modify any term or
condition of the Agreement (including, without limitation, any payment
obligations under the Agreement) other than those specific terms and
conditions expressly referenced in this Amendment. Except as herein
provided, the Agreement shall remain unchanged and in full force and
effect. In the event of any inconsistency or discrepancy between the
Agreement and this Amendment, the terms and conditions set forth in this
Amendment shall control. Neither party shall be bound by, and each party
specifically objects to, any term, condition or other provision that is
different from or in addition to the provisions of this Amendment and the
Agreement (whether or not it would materially alter this Amendment or the
Agreement) and which is proffered by the other party in any correspondence
or other document, unless the party to be bound thereby specifically agrees
to such provision in writing in accordance with the terms of the Agreement.
This Amendment may be executed in multiple counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same document. This Amendment shall be governed by the internal
laws of the State of New York, without giving effect to the principles of
conflict of laws thereof.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be signed
on their behalf as of the Amendment Effective Date.
AMERICA ONLINE, INC.
By: /s/ David M. Colburn
----------------------------
Name: David M. Colburn
Title: Senior Vice President
TEL-SAVE, INC.
By: /s/ Daniel Borislow
----------------------------
Name: Daniel Borislow
Title: Chairman & CEO
TEL-SAVE HOLDINGS, INC.
By: /s/ Daniel Borislow
----------------------------
Name: Daniel Borislow
Title: Chairman & CEO
5
<PAGE>
SCHEDULE X
* * *
6
EXHIBIT 10.22
"***" indicates that material has been deleted to maintain the
confidentiality of business terms
AMENDMENT NO. 3
This AMENDMENT NO. 3 (this "Amendment"), effective as of October 1,
1998, by and among Tel-Save, Inc. ("TS"), a Pennsylvania corporation, and
Tel-Save.com, Inc. (formerly, Tel-Save Holdings, Inc.), a Delaware corporation
("Holdings"), with their principal offices at 6805 Route 202, New Hope,
Pennsylvania 18938, on the one hand, and America Online, Inc., a Delaware
corporation with its principal offices at 22000 AOL Way, Dulles, Virginia 20166
("AOL"), on the other hand (each a "party" and, collectively, the "parties").
INTRODUCTION
TS, Holdings and AOL are parties to the Telecommunications Marketing
Agreement, dated as of February 22, 1997, as heretofore corrected and amended by
letter, dated April 23, 1997, and amended by an Amendment No. 1, dated January
25, 1998, and an Amendment No. 2, dated May 14, 1998 (as so corrected and
amended to the date hereof, but without giving effect to this Amendment, the
"Agreement"). Capitalized terms used in this Amendment without other definition
are defined as in the Agreement. In light of both parties' desire to increase
the number of End Users of the Services, the parties hereby agree as follows:
TERMS
1. The Agreement is amended to provide that references in the Agreement to "this
Agreement" or "the Agreement" (including indirect references such as
"hereunder," "hereby," "herein" and "hereof") shall be deemed to be references
to the Agreement as amended hereby.
2. Section I.A. of the Agreement is amended as follows:
a. Section I.A.7. of the Agreement is amended to read in its entirety
as follows: "'AOL Marks' means, collectively, the AOL LD Marks and the AOL
Wireless Marks. `AOL LD Marks' means the service mark `AOL Long Distance' owned
by AOL under which the LD Services may be marketed and operated under the terms
of this Agreement during the LD Exclusivity Period. `AOL Wireless Marks' means
any service mark, which will be owned by AOL, that includes a reference to the
AOL name therein and which may be used in the marketing of Wireless Services
under the terms of this Agreement, during the Wireless Exclusivity Period, which
service marks, if any, shall be mutually agreed to in writing by the parties
prior to or simultaneous with the parties entering into the Wireless
Arrangement."
b. Section I.A.9 of the Agreement is amended to read in its entirety as
follows:
<PAGE>
"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 Effective Date and any online service provided by AOL or any of its
affiliates that is a successor thereto or substitute therefor; provided,
however, that the AOL Service shall expressly exclude, without limitation, (i)
the CompuServe(R) brand service and any other CompuServe products or services,
(ii) Netscape Netcenter and any other Netscape products or services, (iii)
"ICQ(TM)," "Digital City(TM)," "Netmail," Yellow pages, white pages, classified
or other search or directory or review services; (iv) any property, feature,
product or service which AOL or its affiliates may acquire subsequent to the
Effective Date, except insofar as such property, feature, product or service is
a successor to, or substitute for, the then existing AOL Service; and (v) PDAs,
palmtops and other hand-held devices and AOL TV, provided that each uses
separate client software and separate (from a personal computer) hardware.
Section I.A.13. is amended to change the reference therein to
"Services" to "LD Services".
c. Section I.A.39 is amended to read in its entirety as follows:
"Services" means the telecommunications services, including the
Restricted Services, provided, from time to time, pursuant to this Agreement by
TS, as the carrier in the case of LD Services, and marketed by AOL as herein
provided under the AOL Marks or other brand names as permitted by and in
accordance with Section III.E.1; provided, however, that "Services" shall not
include (a) Internet Telephony (except for the communications components of such
telephony which are other Services; e.g., a private line) or (b) paging services
not offered in conjunction with another Commercial Mobile Radio Service.
d. Section I.A.41. of the Agreement is amended in its entirety as
follows: "'Term' means the period commencing on the date hereof and ending on
the last to occur of the last day of any Period hereunder, unless such period is
sooner terminated pursuant to the terms of this Agreement, in which event such
period shall end at such earlier termination date."
e. The following definitions are added in alphabetical order:
"Amendment No. 3" means Amendment No. 3 to this Agreement, effective as
of October 1, 1998.
"Amendment 3 Effective Date" means October 1, 1998.
"AOL Election" means the election by AOL, if no TS Election has been
made by the 30th day before the termination or expiration of the LD
2
<PAGE>
Exclusivity Period, by written notice to TS at least ten (10) days before the
termination or expiration of the LD Exclusivity Period, to provide the marketing
and promotions that would be required to be provided by the terms of this
Agreement from and after the termination or expiration of the LD Exclusivity
Period if an Election has been made, subject to the terms of this Agreement.
"Election" means both an AOL Election and a TS Election.
"Exclusivity Periods" means, collectively, the LD Exclusivity Period
and the Wireless Exclusivity Period, and each, an "Exclusivity Period".
"Initial Wireless Expiration Date" means the earlier of June 30, 2003
and the calendar quarter end that is fourteen full calendar quarters after the
Wireless Launch Date.
"Interactive Service Provider" means an entity offering one or more of
the following (each, an "Interactive Service"): (i) online or Internet
connectivity services, whether narrow band or broadband (e.g., an Internet
service provider); (ii) a broad selection of aggregated third party interactive
content (or navigation thereto) (e.g., an online service or search and directory
service) and/or marketing a broad selection of products and/or services across
numerous interactive commerce categories (e.g., an online mall or other leading
online commerce site); and (iii) communications software capable of serving as
the principal means through which a user creates, sends and receives electronic
mail or real time online messages.
"LD Services" means the Services provided hereunder that are Long
Distance Telecommunications Services.
"LD End User" means an End User of the LD Services.
"LD Exclusivity Period" means the period commencing on the date of this
Agreement and ending on June 30, 2003, subject to extension by AOL as provided
in Section X.B.1., in which case the LD Exclusivity Period shall mean the period
ending on such later date to which it may have been so extended, and subject to
termination of such Period by AOL as provided in Section VII.A.2. or VII.A.9. or
Article X (and it is understood and agreed that the LD Exclusivity Period shall
terminate upon any termination of this Agreement (or the Term) pursuant to the
terms of this Agreement) in which case the LD Exclusivity Period shall mean the
period ending on such earlier termination date.
"LD Marginable Revenue" for any calendar quarter shall mean the total
billings during such quarter by TS (a) to LD End Users (other than Unbillable
End Users) for the provision (whether provisioned under the AOL LD Marks or
under another brand in accordance with Section III.E.1.) of LD Services under
this Agreement and (b) to End Users (other than Unbillable End Users) for the
provision of Local Services under this Agreement with respect to whom AOL is not
paid an override pursuant to Section VII.A.3, but in any case, less taxes and
fees imposed by federal, state and local authorities that TS is required to
collect from End Users, less billings by TS for directory assistance
3
<PAGE>
charges to End Users less bad debt, determined in accordance with generally
accepted accounting principals, but not greater than ***, and less all PICC
charges and excluding credits and other adjustments.
"LD Mark" means a service mark (including the AOL LD Marks) that is
used in the marketing of LD Services under the terms of this Agreement, which
service mark is the AOL LD Marks to the extent required pursuant to Section
III.E.1 and, to the extent not so required, shall be another service mark
mutually agreed to in writing by the parties hereto prior to their use in
connection with the provision of LD Services hereunder, provided that,
notwithstanding the foregoing, the use of any service mark that is set forth on
Schedule X hereto is agreed to by AOL, subject to the terms of Section III.E.1.
"LD Non-Exclusive Period" means the period commencing on the first day
after the last day of the LD Exclusivity Period and ending on June 30, 2003,
subject to extension by AOL as provided in Section X.B.2., in which case the LD
Non-Exclusive Period shall mean the period ending on such later date to which it
may have been so extended, and subject to termination of such Period by AOL as
provided in Article X (and it is understood and agreed that the LD Non-Exclusive
Period shall terminate upon any termination of this Agreement (or the Term)
pursuant to the terms of this Agreement), in which case the LD Non-Exclusive
Period shall mean the period ending on such earlier termination date.
"Long Distance Residual" shall have the meaning set forth in Section
V.B.II.(e).
"Local Non-Exclusive Period" means the period commencing on the
Amendment 3 Effective Date and ending on June 30, 2003, subject to termination
of such Period by AOL as provided in Section Article X (and it is understood and
agreed that the Local Non-Exclusive Period shall terminate upon any termination
of this Agreement (or the Term) pursuant to the terms of this Agreement), in
which case the Local Non-Exclusive Period shall mean the period ending on such
earlier termination date.
"Local Services" means the Services provided hereunder that are Local
Telecommunications Services.
"Non-Exclusive Periods" means, collectively, the LD Non-Exclusive
Period, the Local Non-Exclusive Period and the Wireless Non-Exclusive Period,
and each, a "Non-Exclusive Period".
"Periods" means, collectively, the Exclusivity Periods and the
Non-Exclusive Periods, and, each, a "Period".
"TS Election" means the election by TS, by written notice to AOL at
least thirty (30) days before the termination or expiration of the LD
Exclusivity Period, to require AOL to provide the marketing and promotions that
would be required to be provided by the terms of this Agreement from and after
the termination or expiration of the LD Exclusivity Period if an Election has
been made, subject to the terms of this Agreement.
4
<PAGE>
"Unbillable End User" means any End User or subscriber with respect to
whom the credit card, debit card or checking account, as the case may be,
on-file information provided to TS by AOL upon such End User or subscriber
subscribing to the Services was not provided or was inaccurate by reason of such
End User or subscriber having cancelled his or her subscription to the AOL
Service.
"Wireless Arrangement" shall have the meaning set forth in Section
II.F.
"Wireless Services" means the Services provided hereunder that are
Commercial Mobile Radio Services.
"Wireless Exclusivity Period" means the period commencing on the
Amendment 3 Effective Date and ending on the Initial Wireless Expiration Date,
subject to extension by AOL as provided in Section X.B.1., in which case the
Wireless Exclusivity Period shall mean the period ending on such later date to
which it may have been so extended, and subject to termination of such Period by
AOL as provided in Section VII.A.2. or X (and it is understood and agreed that
the Wireless Exclusivity Period shall terminate upon any termination of this
Agreement (or the Term) pursuant to the terms of this Agreement) in which case
the Wireless Exclusivity Period shall mean the period ending on such earlier
termination date .
"Wireless Launch Date" means the date on which the Wireless Services
are first made generally available to subscribers of the AOL Service, which date
shall be agreed to in writing by the parties (provided that if the parties are
unable to agree on a date, the date shall be the date after the execution of the
Wireless Arrangement on which the Wireless Services have been offered to at
least *** of the subscribers to the AOL Service, as certified in a writing by
AOL to TS).
"Wireless Mark" means any service mark (including the AOL Wireless
Mark) that is used in the marketing of Wireless Services under the terms of this
Agreement, which service marks, if any, shall be mutually agreed to in writing
by the parties hereto prior to or simultaneous with the parties' entering into
the Wireless Arrangement and provided that, during the Wireless Exclusivity
Period, the Wireless Mark shall be the AOL Wireless Mark if AOL shall so elect
on or before the parties' entering into the Wireless Agreement.
"Wireless Non-Exclusive Period" means the period commencing on the
first day after the last day of the Wireless Exclusivity Period and ending on
June 30, 2003, subject to extension by AOL as provided in Section X.B.2., in
which case the Wireless Non-Exclusive Period shall mean the period ending on
such later date to which it may have been so extended, and subject to
termination of such Period by AOL as provided in Article X (and it is understood
and agreed that the Wireless Exclusivity Period shall terminate upon any
termination of this Agreement (or the Term) pursuant to the terms of this
Agreement), in which case the Wireless Non-Exclusive Period shall mean the
period ending on such earlier termination date.
5
<PAGE>
3. Section II.F. is amended by adding the following at the end thereof:
"TS and AOL shall jointly explore opportunities and offerings for
Commercial Mobile Radio Services to be provided by a private label service on an
agency or resold basis. Each party shall be given reasonable advance notice of,
and an opportunity to attend, all meetings with prospective service providers
and the parties shall keep each other reasonably informed of their progress. The
service offering and provider shall be selected by mutual agreement of AOL and
TS; provided, however, that AOL shall not be required to consider any offering
if (a) the offering of any such Services to End Users is not competitive (as to
End Users) with other generally available offerings of such Services to End
Users by other providers, (b) the inclusion of such offering in the Services
would, in and of itself, be materially detrimental to AOL's business or (c) the
provider of such offering does not agree to meet the requirements regarding AOL
wireless data services set forth on Schedule Y in accordance with a schedule
reasonably acceptable to AOL. Notwithstanding anything herein, it is expressly
understood and agreed that the data services required to be included in Wireless
Services need not be included in any marketing under, or otherwise marketed
through, any of the marketing provided by AOL hereunder. Neither AOL nor TS
shall unreasonably delay informing the other of whether a particular provider is
acceptable to such party, and each party agrees that * * * are acceptable
providers, provided the offering of such provider complies with clauses (a), (b)
and (c) of the immediately preceding sentence and subject to acceptable terms
and conditions on which such service will be offered. If the parties mutually
agree upon an offering and provider for Commercial Mobile Radio Services
hereunder, then the parties shall mutually agree upon the terms and conditions
upon which the Commercial Mobile Radio Services shall be offered and the rollout
and performance lists applicable to the provision thereof, and the parties shall
enter into an arrangement with such provider to so provision Commercial Mobile
Radio Services to be marketed by AOL under the Wireless Marks over the AOL
Service (the foregoing arrangement, the "Wireless Arrangement") with a term that
extends until the expiration or termination of the Wireless Non-Exclusive
Period, as such term may be extended pursuant to Section X.B.2. The parties
shall use their commercially reasonable best efforts to cause the Wireless
Launch Date to occur as soon as reasonably practicable but at least by April 1,
1999, provided that neither the failure to reach agreement with a Commercial
Mobile Radio Services provider as provided above nor the failure to launch the
Wireless Services shall permit AOL to terminate the Wireless Exclusivity Period
prior to June 30, 2000. During the Wireless Exclusivity Period, AOL and TS shall
each receive *** percent *** of all proceeds from the provision of Wireless
Services not retained by the service provider under the Wireless Arrangement,
other than cost reimbursements and other similar payments ("Wireless Proceeds"),
provided that AOL shall first receive, but only during the Wireless Exclusivity
Period, at least a mutually agreed upon guaranteed quarterly minimum payment
from the Wireless Arrangement and TS shall then receive, but only during the
Wireless Exclusivity Period, at least a mutually agreed-upon per-subscriber fee
for each subscriber to such Wireless Services. After the expiration or
termination of the Wireless Exclusivity Period and during the Term, TS shall no
longer receive the foregoing per-subscriber fee, AOL shall no longer receive the
foregoing guaranteed quarterly minimum
6
<PAGE>
payments, and AOL's share of the Wireless Proceeds shall be fifty percent (50%)
for the first year of the Wireless Non-Exclusive Period, forty percent (40%) for
the second year thereof, thirty percent (30%) for the third year thereof, twenty
percent (20%) for the fourth year thereof and ten percent (10%) for the fifth
year thereof; provided, however, that if AOL either (x) enters into, without
TS's prior written consent, any other arrangement with the provider of the
Commercial Mobile Radio Services under the Wireless Arrangement to provide
Commercial Mobile Radio Services on the AOL Service (other than an arrangement
permitted pursuant by Section VII.A.1.) or (y) does not make available to TS the
marketing required to be provided by AOL pursuant to Sections III.A.1, then AOL
shall be entitled to no further share of Wireless Proceeds. It is understood and
agreed that the Data Requirements shall apply to, and TS and any service
provider for Wireless Services shall comply with the Data Requirements with
respect to, any offering of Wireless Services hereunder, whether during the
Wireless Exclusivity Period or the Wireless Non-Exclusive Period.
4. The Agreement is amended to delete Schedule X in its entirety and to add as a
new Schedule X thereto the Schedule X attached to this Amendment and to add as
Schedule Y thereto the Schedule Y attached to this Amendment.
5. Sections III.A.1.(a) - (e), III.A.2, III.A.4. and III.A.5 of the Agreement
are deleted in their entirety and the parties acknowledge that all of AOL's
obligations thereunder have been fully discharged and AOL shall have no further
liability or obligation thereunder.
6. The following new subsections (a) - (e) are added to Section III.A.1 of the
Agreement:
[MARKETING AND PROMOTIONAL SERVICES TO BE DELIVERED]
***
7. A new Section III.A.1(h) is added to the Agreement as follows:
"(h) Except as expressly provided in Section III. A.1 and Section
III.A.7, the marketing provided by AOL under this Section III.A.1. and Section
III.A.7. may be used by TS so long as such marketing is so provided, but only to
promote the Services then offered by TS under this Agreement, whether on an
unbundled basis or bundled with any other Services then offered by TS under this
Agreement or on an exclusive or non-exclusive basis (provided that Local
Services shall be promoted solely on a bundled basis with the LD Services during
the LD Exclusivity Period), except that TS may utilize the marketing provided by
AOL under Section *** that is not dedicated to promotion of Wireless Services to
promote products or services of AOL or AOL's Partners (which products and
services shall be limited to products and services that are the same in
substance as the primary products and services marketed by *** under its ***)
subject to the terms of this Section, provided that any such products or
services of an *** and the content of any marketing
7
<PAGE>
and promotion thereof shall be approved by AOL, said approval not to be
unreasonably withheld. *** shall mean a *** with whom *** has *** a *** in
connection with *** conducted over the ***, which agreement includes *** based
on *** or other measure of *** of *** or *** of *** thereunder or provides the
*** with any *** or *** with respect to *** or the ***. Any such marketing of
*** products or services shall utilize solely the marketing commitments set
forth in Sections *** that is not dedicated to promotion of Wireless Services
and shall comply with all AOL's then standard policies governing such marketing
and AOL's exclusivities and other contractual preferences to third parties. Any
*** products or services so marketed by TS hereunder shall be on an *** basis
(i.e. *** or *** basis) pursuant to a *** with *** and TS shall not re-sell any
of the marketing commitments hereunder to a *** or any ***. If TS utilizes any
of the marketing provided by AOL pursuant to Section *** *** to market ***
products or services, the product or service being offered shall be offered as a
bundle with LD Services or, during the Wireless Exclusivity Period and to the
extent mutually agreed upon by the parties and the service provider under the
Wireless Arrangement, Wireless Services (provided that this provision shall not
preclude the bundling of other services permitted to be offered hereunder with
LD Services or Wireless Services), as a special offer in connection with
subscribing to such Services. Any *** services utilized by TS to promote a ***
products or services shall utilize TS's *** *** and shall be subject to all
other terms and conditions of this Agreement, including payment of ***. As a
condition to TS being permitted to utilize any marketing provided by AOL to
market a *** products or services, such *** shall agree in writing that (i)
sales of such *** products or services utilizing such marketing shall be counted
toward all *** and *** contained in such *** with *** and such *** shall pay ***
in accordance with such *** with *** for all such sales once such *** or *** are
met (or if such agreement does not contain *** or ***) and (ii) all such
marketing shall count against *** *** commitments to such *** contained in such
*** with ***. To the extent TS desires to enter into arrangements with *** to
utilize the marketing commitments set forth in Sections *** or to advertise such
*** products or services within the Dedicated Area pursuant to Section ***, TS
shall notify AOL of *** TS desires to enter into such arrangements and the
specific products and/or services that TS desires to market or advertise. To the
extent there is more than one *** *** providing the products and/or services
that TS desires to advertise or market, then TS may determine with which *** it
will enter into an arrangement, provided that TS shall have offered in good
faith such opportunity to all such ***. TS shall provide AOL with a 30-day
marketing plan for advertising or marketing the products and/or services of any
*** at least thirty (30) days in advance of the period to which such marketing
plan applies. *** TS shall jointly solicit any *** with which TS desires to
enter into such an arrangement; provided, however, that if *** participation in
such solicitations is having a detrimental effect on solicitations of a ***,
then TS may solicit such *** without *** participation after giving
8
<PAGE>
*** at least one (1) business day's prior notice of such detrimental effect and
an opportunity to correct the actions by *** that give rise to such detrimental
effect. AOL shall be given reasonable advance notice prior to any solicitations
of *** by TS and such solicitations during any period of time shall be limited
to a reasonable number given the parties' respective availability to conduct
such solicitations. Notwithstanding any of the foregoing, nothing herein gives
TS the right to use any of the *** of any of the ***."
9. A new Section III.A.1(i) is added to the Agreement as follows:
***
10. A new Section III.A.1(j) is added to the Agreement as follows:
"In connection with the marketing and promotion efforts provided in
this Agreement, including those provided in this Section ***, AOL will continue
to make *** to the AOL Service subscriber base available to the telemarketing
vendors and/or verification agents but only to the extent, for the purposes, and
to the vendors, that *** is provided by AOL in connection with marketing and
promotions provided to TS as of December 31, 1998; provided, however, that all
*** shall be subject to AOL's then current policies, including, without
limitation, the Terms of Service for subscribers to the AOL Service and AOL's
privacy policies, and subject to the confidentiality provisions of this
Agreement."
11. Sections III.A.2., III.A.4. and III.A.5 of the Agreement shall each read in
their entirety "Intentionally Deleted."
12. Section III. A.3. of the Agreement is amended to apply to Commercial Mobile
Radio Services and Local Telecommunications Services, to the extent offered by
TS on the AOL Service, in addition to Long Distance Telecommunications Services.
13. Section III. A.7. of the Agreement is amended to read in its entirety as
follows:
"AOL commits to provide, in connection with its activities described in
Sections III.A.1., III.A.6., III.C. and III.D hereof, keywords on the AOL
Service (which shall be at least (i) any keyword that TS has linking to the
Dedicated Area as of the Amendment 3 Effective Date, which keywords shall link
to an area on which TS has a presence, (ii) any other keyword that is listed on
Schedule X hereto and is non-generic, which keywords shall link to the Dedicated
Area or other mutually agreed upon area, and (iii) any keyword approved by AOL)
or hyperlinks on the AOL Service to a dedicated area on the AOL Service (the
"Dedicated Area") in order to facilitate ease of location and access to the
Dedicated Area for End Users and prospective customers. From and after October
1, 1998 and during the LD Exclusivity Period, (i) *** (except that in no event
shall ***
9
<PAGE>
except on a bundled basis with LD Services or, if the parties mutually agree
with the service provider under the Wireless Arrangement, Wireless Services. AOL
may sell advertising within the Dedicated Area, subject to TS's approval in its
sole discretion. TS may enter into arrangements with any third party (including
***, but subject, in any case, to any applicable exclusivities or contractual
preferences granted by AOL of which AOL shall have advised TS) to advertise such
party's products or services within the Dedicated Area during the Term, which
advertising shall be subject to AOL's then standard advertising policies and the
terms of Section III.A.1(h). Revenues from such advertising (net of third party
commissions and, in the case of advertising sold directly by AOL, *** percent
***, and, in the case of advertising sold directly by TS, *** percent ***),
shall be divided evenly between TS and AOL."
14. Section III.B.1 is amended by adding the following at the end thereof:
"In satisfaction of its obligations under this Section III.B.2., AOL
shall continue to provide (to the extent it is currently providing such reports)
the following: monthly reports of total *** and numbers of *** provided,
however, that within sixty (60) days after the end of any period for which
payment is to be made pursuant to Section III.A.7., AOL shall deliver to TS a
statement of the advertising revenues for such period, and the amount, if any,
payable to TS with respect to such period, showing the manner in which it was
determined, and such statement shall be accompanied by a payment of any such
amount. To the extent AOL is not currently providing any of the foregoing
information, AOL shall use commercially reasonable best efforts to do so, so
long as such information is relevant to AOL's then current obligations under
this Agreement.
15. The first sentence of Section III.B.2 is deleted in its entirety and the
following is inserted in lieu thereof:
"AOL shall keep for two (2) years from the date of each marketing service or
promotion provided pursuant to Section III.A.1 above complete and accurate
records in sufficient detail to allow TS to determine if AOL has provided the
marketing and promotions required thereunder."
16. Section III.B.3. is amended in its entirety as follows: "Intentionally
Deleted."
17. Section III.E.1. is amended by adding the following at the end thereof:
"Notwithstanding anything to the contrary in this Section III.E. or elsewhere in
this Agreement:
(a) Until the later to occur of December 31, 1999 and the end of the last
period as to which AOL exercises its option under paragraph (b) below, the
LD Services shall be offered under the AOL LD Mark; provided, however, that
TS may display with the AOL LD Mark, subject to the terms of this Section,
a TS owned brand name approved by AOL in writing (the "TS Co-Brand"), which
approval shall not be
10
<PAGE>
unreasonably withheld; provided, further, that the brand names appearing on
Schedule X are hereby approved by AOL. If TS elects to use the TS Co-Brand
with the AOL LD Mark, the TS Co-Brand shall be displayed as ingredient
branding and not as the primary brand, i.e., the AOL LD Mark shall always
be displayed first and *** more prominently and appear more frequently than
the TS Co-Brand, the TS Co-Brand shall always appear with the phrase
"powered by", "service(s) provided by", "service(s) by", "as an agent of"
or "agent of" or with another similar phrase approved by AOL in writing,
which approval shall not be unreasonably withheld. TS represents and
warrants that the TS Co-Brand, including those brand names appearing on
Schedule X, does not and will not infringe on AOL's or any third party's
rights of which TS has notice or violate any applicable law.
(b) At any time during a year that TS is required to offer the LD Services
under the AOL Mark pursuant to paragraph (a) above, AOL may elect, at its
option, by giving TS written notice of such election, to require TS to
continue to offer the LD Services under the AOL Mark during the one (1)
year period beginning (x) January 1, 2000, provided that, upon making such
election, AOL shall not be permitted to terminate the LD Exclusivity Period
pursuant to Section VII.A.2 prior to June 30, 2001, (y) January 1, 2001,
provided that, upon making such election, AOL shall not be permitted to
terminate the LD Exclusivity Period pursuant to Section VII.A.2 prior to
June 30, 2003, and (z) January 1, 2002, provided that, upon making such
election, AOL shall not be permitted to terminate the LD Exclusivity Period
pursuant to Section VII.A.2 prior to June 30, 2003.
(c) From and after the later to occur of January 1, 2000 and January 1 of any
year as to which AOL did not exercise its option pursuant to paragraph (b)
above and during the LD Exclusivity Period, the LD Services may, but need
not be, offered under the AOL LD Mark, provided that TS may elect to offer
LD Services under any LD Mark other than the AOL LD Mark, including
simultaneously with the offering thereof under the AOL LD Mark. An LD Mark
that is not the AOL Mark may be co-branded with the primary provider of the
resold services underlying the LD Services, provided that the brand of such
service provider shall be displayed as ingredient branding and not as the
primary brand, i.e., the LD Mark shall always be displayed first and ***
more prominently and appear more frequently than the service provider's
brand, the service provider's brand shall always appear with the phrase
"powered by", "service provided by", "service by", "as an agent of" or
"agent of" or with another similar phrase approved in writing by AOL, which
approval shall not be unreasonably withheld, and it shall be clear from
such branding that the LD Services are offered by TS; provided, further,
that TS shall not in any event use the brand name of an Interactive Service
Provider that is the brand name of an Interactive Service (e.g., *** in the
case of ***) or a brand name that is in any way false, deceptive or
misleading. TS represents and warrants that any LD Mark that is not an AOL
Mark, including any co-branding
11
<PAGE>
with a service provider, does not and will not infringe on AOL's or any
third party's rights of which TS has notice or violate applicable law.
(d) Notwithstanding the foregoing, if the LD Exclusivity Period has not
terminated, AOL shall have the right to terminate TS's rights to use the
AOL LD Mark as of or after June 30, 2000, by giving TS written notice of
such election at least 180 days prior to the date of such termination
(including, without limitation, with respect to End Users existing as of
the date of termination or expiration), in which event TS shall have no
further rights to use of the AOL LD Mark from and after the date of such
termination. In addition, if TS ceases to offer the LD Services under the
AOL LD Mark for a period of ten (10) consecutive days, AOL may terminate
TS's rights to use the AOL LD Mark at any time thereafter upon written
notice to TS thereof, in which event TS shall have no further rights to use
of the AOL LD Mark from and after the date of such termination (provided
that such rights shall continue until June 30, 2000 solely with respect to
billing, provisioning and servicing the Services to End Users existing at
the date of such termination). From and after the expiration or termination
of the LD Exclusivity Period, TS shall have no further rights to use of the
AOL LD Mark from and after the date of such expiration or termination
(including, without limitation, with respect to End Users existing as of
the date of expiration or termination). From and after termination of TS's
rights to use of the AOL LD Mark pursuant to any of the foregoing, during
the remainder of the Term, TS shall offer LD Services under any LD Mark
other than the AOL LD Mark, subject to and in accordance with the terms of
paragraph (c) above relating to an LD Mark that is not the AOL LD Mark.
(e) During the Local Non-Exclusive Period, the Local Services shall be offered
under either (i) an LD Mark (including the AOL LD Mark so long as TS has
the right to use the AOL LD Marks pursuant to this Section III.E.1) when
Local Services are offered on a bundled basis with LD Services, or (ii)
under a TS owned brand name approved by AOL in writing (the "TS Local
Brand"), which approval shall not be unreasonably withheld; provided,
however, that the brand names appearing on Schedule X are approved by AOL.
The TS Local Brand may be co-branded with the primary provider of the
agented or resold services underlying the Local Services, provided that the
brand of such service provider shall be displayed as ingredient branding
and not as the primary brand, i.e., the TS Local Brand shall always be
displayed first and *** more prominently and appear more frequently than
the service provider's brand, the service provider's brand shall always
appear with the phrase "powered by" "service provided by", "service by",
"as an agent of" or "agent of" or with a similar phrase approved in writing
by AOL, which approval shall not be unreasonably withheld, and it shall be
clear from such branding that the Local Services are offered by TS;
provided, further, that TS shall not in any event use the brand name of an
Interactive Service Provider that is the brand name of an Interactive
Service (e.g., *** in the case of ***) or a brand name that is in any way
false, deceptive or misleading. TS represents and
12
<PAGE>
warrants that the TS Local Brand (including any co-branding with a service
provider) does not and will not infringe on AOL's or any third party's
rights of which TS has notice or violate applicable law.
(f) During the Term, the Wireless Services shall be offered under the Wireless
Marks and the parties shall mutually agree upon the Wireless Marks in
connection with entering into the Wireless Arrangement; provided, however,
that, at AOL's option, the Wireless Marks shall be the AOL Wireless Marks
during the Wireless Exclusivity Period. If AOL does not elect to use the
AOL Wireless Marks for the Wireless Services as provided in the immediately
preceding sentence, and in any case from and after the termination or
expiration of the Wireless Exclusivity Period, TS shall have no further
rights to use of the AOL Wireless Marks (including, without limitation,
with respect to End Users existing as of the date of termination or
expiration). If the Wireless Mark is not an AOL Wireless Mark, then the
Wireless Mark shall be a TS owned brand approved in writing by AOL, which
approval shall not be unreasonably withheld; provided, however, that the
brand names appearing on Schedule X are hereby approved by AOL. A Wireless
Mark that is not an AOL Wireless Mark may be co-branded with the primary
provider of the resold services underlying the Wireless Services, provided
that the brand of such service provider shall be displayed as ingredient
branding and not as the primary brand, i.e., the Wireless Mark shall always
be displayed first and *** more prominently and appear more frequently than
the service provider's brand, the service provider's brand shall always
appear with the phrase "powered by", "service provided by", "service by",
"as an agent of" or "agent of" or with a similar phrase approved in writing
by AOL, which approval shall not be unreasonably withheld, and it shall be
clear from such branding that the LD Services are offered by TS; provided,
further, that TS shall not in any event use the brand name of an
Interactive Service Provider that is the brand name of an Interactive
Service (e.g., *** in the case of ***) or a brand name that is in any way
false, deceptive or misleading. TS represents and warrants that any
Wireless Mark that is not an AOL Wireless Mark (including any co-branding
with a service provider) does not and will not infringe on AOL's or any
third party's rights of which TS has notice or violate applicable law.
(g) In connection with any change in the branding of a Service that may occur
hereunder, TS shall work together with AOL to avoid confusion of the End
Users and subscribers to the AOL Service with respect to such change in
brands.
18. The last sentence of Section IV.A.1 is deleted in its entirety and the
following is inserted in lieu thereof:
"Subject to the terms of this Agreement, the Services to be provided by TS
hereunder are expanded to include Local Telecommunications Services and
Commercial Mobile Radio Services as and to the extent offered by TS."
13
<PAGE>
19. Section IV.C.1. is deleted in its entirety and the following is inserted in
lieu thereof:
"As and to the extent described in, and subject to the terms of, Section
III.E.1, the Services will be offered by TS (in the case of the LD Services, as
the carrier) under the AOL Marks or other brand names as permitted by this
Agreement."
20. Each of Section V.B.1.a. and Section V.B.1.b. is deleted and amended to read
in its entirety as follows: "Intentionally Deleted", and the parties acknowledge
that all of TS's obligations thereunder have been fully discharged and TS shall
have no further liability or obligation thereunder. The following new
subsections c., d., e. and f. are added to Section V.B.1. of the Agreement:
(c) TS shall pay AOL during (but only until the termination or
expiration of) the LD Exclusivity Period as follows:
(i) For the calendar quarter beginning October 1,
1998, TS shall pay AOL the amount of Six Million
Dollars ($6,000,000), which payment shall be made on or
before January 15, 1999.
(ii) For each of the calendar quarters beginning
January 1, 1999, April 1, 1999, July 1, 1999 and
October 1, 1999, TS shall pay to AOL the amount of Ten
Million Dollars ($10,000,000).
(iii) For each of the calendar quarters beginning
January 1, 2000 and April 1, 2000, TS shall pay to AOL
the amount of Twelve Million Dollars ($12,000,000).
(iv) For each of the calendar quarters beginning July
1, 2000, October 1, 2000, January 1, 2001 and April 1,
2001, TS shall pay to AOL (x) the amount of Fifteen
Million Dollars ($15,000,000), or (y), if AOL, in its
sole discretion, actually allocates to the *** vendors
for the TS Services substantially all *** during such
quarter (subject to the terms of Section *** with
respect to ***), the amount of Nineteen Million Dollars
($19,000,000).
(v) For each of the calendar quarters beginning on or
after July 1, 2001, TS shall pay to AOL an amount equal
to (a) 5% of the LD Marginable Revenue for such quarter
plus (b) twenty-five percent (25%) of any mark-up by TS
on directory assistance or PICC charges included in the
billings for LD Services or Local Services but excluded
from LD Marginable Revenue by the definition thereof.
(d) Beginning January 1, 1999 and until the termination or expiration
of the LD Exclusivity Period, TS shall pay AOL One Dollar ($1.00) per month for
each LD End
14
<PAGE>
User in excess of two million (2,000,000) LD End Users. Each such payment shall
be made within thirty (30) days following the end of the month for which such
payment is due and shall be calculated based on the number of LD End Users
existing as of the last day of such month."
(e) After the termination or expiration of the LD Exclusivity Period
and during the LD Non-Exclusive Period and provided that an Election has been
made and that, during any of the following periods, including those that occur
after June 30, 2003, AOL shall be making available, during such period, the
marketing and promotions required to be provided pursuant to Section III.A.1.
during the LD Non-Exclusive Period, TS shall pay AOL as follows (collectively,
the "Long Distance Residuals"):
(i) For each of the calendar quarters in the first
year after such expiration or termination, an amount
equal to (a) 5% of the LD Marginable Revenue for such
quarter plus (b) twenty-five percent (25%) of any
mark-up by TS on directory assistance or PICC charges
included in the billings for LD Services or Local
Services but excluded from LD Marginable Revenue by the
definition thereof.
(ii) For each of the calendar quarters in the second
year after such expiration or termination, an amount
equal to (a) 4% of the LD Marginable Revenue for such
quarter plus (b) twenty-five percent (25%) of any
mark-up by TS on directory assistance or PICC charges
included in the billings for LD Services or Local
Services but excluded from LD Marginable Revenue by the
definition thereof.
(iii) For each of the calendar quarters in the third
year after such expiration or termination, an amount
equal to (a) 3% of the LD Marginable Revenue for such
quarter plus (b) twenty-five percent (25%) of any
mark-up by TS on directory assistance or PICC charges
included in the billings for LD Services or Local
Services but excluded from LD Marginable Revenue by the
definition thereof.
(iv) For each of the calendar quarters in the fourth
year after such expiration or termination, an amount
equal to (a) 2% of the LD Marginable Revenue for such
quarter plus (b) twenty-five percent (25%) of any
mark-up by TS on directory assistance or PICC charges
included in the billings for LD Services or Local
Services but excluded from LD Marginable Revenue by the
definition thereof.
(v) For each of the calendar quarters in the fifth and
subsequent years after such expiration or termination,
an amount equal to (a) 1% of the LD Marginable Revenue
for such quarter plus (b) twenty-five percent (25%) of
any mark-up by TS on directory assistance or PICC
charges included in the billings for LD Services or
Local Services but excluded from LD Marginable Revenue
by the definition thereof.
15
<PAGE>
(f) The payment pursuant to the foregoing clause (c) for each calendar
quarter beginning on or after January 1, 1999 and before July 1, 2001 shall be
paid in three (3) equal monthly installments prior to the end of each of the
calendar months falling within such calendar quarter; provided, however, that
the quarterly payments for each calendar quarter after any calendar quarter in
which Holdings and its subsidiaries (including TS), have at least *** in ***
and/or *** of all *** and other ***, on a GAAP consolidated balance sheet basis
(the "Cash Threshold"), shall be payable to AOL in advance on or before the end
of the fifth (5th) business day of such quarter; provided, however, that the
quarterly payment for the first calendar quarter after the calendar quarter in
which the Cash Threshold is met shall be paid prior to the end of the first
month of such calendar quarter. For each calendar quarter for which TS is
required to pay AOL an amount based on the LD Marginable Revenue, TS shall pay
such amount to AOL within thirty (30) days after the end of the calendar quarter
for which such amount is due. All amounts paid by TS to AOL, including amounts
paid prior to October 1, 1998, shall be non-refundable and shall not be subject
to offset except as expressly set forth in this Agreement.
21. The reference in Section V.B.2. to "Articles X and XI" is amended to read as
follows: "Article XI".
22. The first sentence of Section V.B.3. of the Agreement is deleted in its
entirety and the following is inserted in lieu thereof:
"Within thirty (30) days (sixty (60) days in the case of a payment to be made
pursuant to Section III.A.7) after the end of any period for which payment is to
be made pursuant to Section II.F., III.A.7., V.B.1, or VII.A.3. hereof, TS
shall, to the extent any such payment is based thereon, deliver to AOL a
statement of the LD Marginable Revenue for such period and the components
thereof, End Users, and relevant revenue, profit and End User information in
connection with payments due in respect of the Wireless Services for such period
and the amounts payable to AOL with respect to such period, showing the manner
in which they were determined and certified as correct by the Chief Financial
Officer of TS."
23. The first two sentences of Section V.B.4. of the Agreement are deleted in
their entirety and the following is inserted in lieu thereof:
16
<PAGE>
"TS shall keep for two (2) years from the date of each payment to AOL
pursuant to Section II.F., Section III. A.7, Section V.B.1 or Section
VII.A.3 for any period after the Amendment 3 Effective Date, complete
and accurate records in sufficient detail to allow AOL to determine if
TS has computed LD Marginable Revenue and components thereof, End
Users, relevant revenue, profit and Wireless End User information in
connection with payments due in respect of the Wireless Services
accurately; provided, however, that nothing herein shall require TS to
maintain records as to any of LD Marginable Revenue or the Wireless
Services information with respect to any period prior to the time TS is
required to make payments based on LD Marginal Revenue or the Wireless
Services information. 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."
24. Sections V.B.7. and V.C. of the Agreement are deleted in their entirety, and
the following is inserted in lieu thereof: "Intentionally Deleted" and the
parties acknowledge that all of TS's obligations thereunder have been fully
discharged and TS shall have no further liability or obligations thereunder.
25. Section V.D. of the Agreement is amended by adding the following at the end
thereof:
"Notwithstanding the foregoing, during the period commencing on October 1, 1998
and ending on the earlier of June 30, 2001 and the date of termination of the LD
Exclusivity Period:
(i) TS shall not be required to pay Estimated ***
Costs in advance.
(ii) AOL shall for each calendar quarter pay (or
reimburse TS for the payment of) Covered Offline
Marketing Costs (as defined below) in such quarter in
an amount up to the applicable AOL Cost Contribution
Amount (as defined below) for such quarter, and TS
shall not be required to pay such Covered Offline
Marketing Costs, provided that TS shall continue to be
responsible, to the extent provided in this Section
V.D., for the payment of all Offline Marketing Costs in
any quarter in excess of such amounts required to be
paid by AOL.
(iii) "Covered Offline Marketing Costs" in a quarter
means and includes the actual cost (to TS) of all
Subscriber Incentives in the form of "AOL Rewards"
points purchased by TS to be provided to End Users
subscribing to the Services during such quarter as a
result of the *** services provided under this
Agreement, and all Offline Marketing Costs incurred by
AOL in such quarter and for which, absent this
provision, TS would be responsible for reimbursing AOL
for the payment or incurrence of, as provided above in
this Section V.D., including, without limitation, (w)
the actual cost of *** services incurred in connection
with *** services, (x) the actual cost (to TS) of
Subscriber Incentives in the form of
17
<PAGE>
*** points or *** of AOL Service to be provided to End
Users subscribing to the Services during such quarter
as a result of the *** services provided under this
Agreement, (y) Rep Incentives to AOL's ***
representatives for *** to the *** vendors for the
Services and (z) payments to vendors contracted by AOL
to perform the *** services provided for in this
Agreement.
(iv) "AOL Cost Contribution Amount" shall mean (A) for
the calendar quarter beginning October 1, 1998, Four
Million Five Hundred Thousand Dollars ($4,500,000);
(ii) for each calendar quarter thereafter, either (x)
Four Million Dollars ($4,000,000); or (y), if TS pays
AOL $19,000,000 pursuant to Section V.B.1.a for such
quarter, Six Million Dollars ($6,000,000).
(v) If in any quarter AOL funds less than the
applicable AOL Cost Contribution Amount for such
quarter in Offline Marketing Costs, AOL shall pay to TS
the amount by which the applicable AOL Cost
Contribution Amount exceeds the amount of Offline
Marketing Costs so funded by AOL in such quarter but in
no event more than Two Million Dollars ($2,000,000) (or
Six Million Dollars ($6,000,000) if the AOL Cost
Contribution Amount for such quarter was $6,000,000).
(vi) AOL shall use commercially reasonable efforts to
reduce telecommunications costs associated with the
Transfer Plus program.
26. Sections V.F.1, V.F.2, V.F.3, V.F.4 and V.F.5 are deleted in their entirety
and the following new Section V.E. is added to the Agreement:
"E. TS and Holdings entered into a written agreement with CompuServe Interactive
Services, Inc. ("CompuServe") with respect to the exclusive marketing of TS's
telecommunications services by CompuServe (the "CompuServe Agreement") on the
CompuServe Service (as defined in the CompuServe Agreement). TS hereby expressly
acknowledges and agrees that neither the CompuServe online service (however
defined in this Agreement or the CompuServe Agreement) nor the end users thereof
(including, without limitation, "End Users" as defined in the CompuServe
Agreement) are or shall be deemed to be within the scope of this Agreement
(including, without limitation, the exclusivity provisions set forth in Article
VII. hereof), (i) by reason of the consummation of AOL's acquisition of
CompuServe (or the fact of such acquisition) or (ii) based on the facts known to
TS existing as of the Amendment 3 Effective Date. No user of the TS
telecommunications services marketed thereunder pursuant to the CompuServe
Agreement (the "TS/CS Services") shall for any purposes of this Agreement be, or
be deemed to be, an "End User" as defined and used herein, the TS/CS Services
shall not be, or be deemed to be, "Services" as defined and used herein, no
revenues generated under or by reason of the CompuServe Agreement shall form a
part of, or in any respect be included in, "LD Marginable Revenue" as defined
and used herein, and TS's exclusivity rights set forth in Article VII. herein
shall not apply in any manner to CompuServe's
18
<PAGE>
marketing of the TS/CS Services. AOL hereby consents to TS' and Holdings'
entering into, and performing under, the CompuServe Agreement and agrees that,
in and of itself, such conduct shall not constitute a breach by TS or Holdings
of Section VII.A.6 of this Agreement or require the payment of any override
pursuant thereto."
27. Sections VII.A.1, VII.A.2, VII.A.3, VII.A.4 and VII.A.5 of the Agreement are
deleted in their entirety and the parties acknowledge that all of AOL's
obligations thereunder have been fully discharged and AOL shall have no further
liability or obligation thereunder. The following new Sections VII.A.1, VII.A.2,
VII.A.3, VII.A.4 and VII.A.5. are inserted in lieu thereof:
1. (a) Except as otherwise specifically provided in this Agreement, during the
LD Exclusivity Period, TS shall be the exclusive provider of Long Distance
Telecommunications Services marketed by AOL (or its affiliates, provided that
this reference to affiliates shall not be deemed to provide TS rights under this
Agreement with respect to any site, location or property that is not otherwise
part of the AOL Service) on the AOL Service to the AOL Service subscribers.
Except as otherwise specifically provided in this Agreement, during the Wireless
Exclusivity Period, TS shall be the exclusive provider of Commercial Mobile
Radio Services marketed by AOL (or its affiliates, provided that this reference
to affiliates shall not be deemed to provide TS rights under this Agreement with
respect to any site, location or property that is not otherwise part of the AOL
Service) on the AOL Service to the AOL Service subscribers. In addition, AOL
shall not provide to any other providers of telecommunications services (i) any
*** of subscribers to the AOL Service from the *** for purposes of *** any
telecommunications services, or (ii) *** of *** to the AOL Service for purposes
of *** or *** of any telecommunications services, in each case as to which TS is
then the exclusive provider under this Agreement; provided, however, that, such
restrictions shall not apply with respect to the *** of Broadband Services
permitted to be marketed by AOL pursuant to Section VII.A.1(b) except with
respect to *** prior to ***. Notwithstanding the foregoing or anything to the
contrary in this Agreement, and without limiting any actions which may be taken
by AOL without violation of TS's rights hereunder, (a) AOL shall be permitted to
enter into arrangements to market Bundled Online Services and offer and market
Broadband Services (each an "Excepted Service" and, collectively, "Excepted
Services") in accordance with Section VII.A.1(b) without compensation to TS
other than as expressly provided below.
(b) (1) AOL shall be permitted to enter into any arrangement with other
provider(s) of telecommunications services (each, an "Other Provider") to market
a Bundled Online Service; provided that AOL may not enter into such an
arrangement with *** prior to *** with respect to Local Telecommunications
Services or Commercial Mobile Radio Services and prior to *** with respect to
Long Distance Telecommunications Services. "Bundled Online Service" shall mean
the AOL Service co-marketed in conjunction with any telecommunications
service(s) or in conjunction with the brand of any Other Provider. Any Bundled
Online Service may be co-branded
19
<PAGE>
with an Other Provider and may also be a Broadband Service. AOL's exclusivity
and marketing obligations (including, without limitation, any obligation of AOL
to include links, key words, a dedicated area or any other presence or materials
on the AOL Service) under this Agreement shall not extend to any Bundled Online
Service; provided, however, that during the LD Exclusivity Period, (X) AOL shall
continue to include Switched Subscribers in the offline marketing subscriber
pool made available to TS and (Y) no Long Distance Telecommunications Services
shall be promoted on any Bundled Online Service that is not a Broadband Service,
by any Other Provider or by AOL, except that (i) AOL may, at its option, promote
the LD Services on such Bundled Online Service and operational, billing and
other non-promotional functions related to Long Distance Telecommunications
Services may be included on such Bundled Online Service and (ii) the Other
Provider shall be permitted to offer on its own web site Long Distance
Telecommunications Services which may be promoted through links on the Bundled
Online Service. Notwithstanding the foregoing, prior to July 31, 1999, (I) no
links to the area on the Other Provider's web site where Long Distance
Telecommunications Services are offered shall be promoted through the Bundled
Online Service to Switched Subscribers, and (II) the Other Provider for such
Bundled Online Service shall not be permitted to target market Long Distance
Telecommunications Services to Switched Subscribers. "Switched Subscribers"
shall mean any subscriber to the Bundled Online Service who switched their
subscription from the AOL Service to the Bundled Online Service. As a condition
to AOL entry into such arrangement, to the extent TS is unable to continue to
bill a Switched Subscriber who is an End User as a result of such Switched
Subscriber switching its subscription from the AOL Service to the Bundled Online
Service, AOL shall ensure that the Other Provider provides to TS satisfactory
billing of LD Services provided by TS to any Switched Subscriber who is an End
User at a cost to TS no greater than the cost to it of billing such Services
through a credit card and shall provide, if TS shall so request, standard call
detail on such bills at no additional expense. AOL shall not be required to pay
TS an override under Section VII.A.3 with respect to any subscriber to Local
Telecommunications Services billed through any Bundled Online Service. During
the LD Exclusivity Period, AOL shall not be permitted to market any Bundled
Online Service that is not a Broadband Service over the AOL Service or use AOL's
Transfer Plus, telemarketing, direct mail Service or other marketing channels to
target market any Bundled Online Service to subscribers to the AOL Service.
(2) AOL shall be permitted to offer to subscribers to the AOL Service broadband
(i.e., 128k or more in either direction) version(s) of the AOL Service (each, a
"Broadband Service") and AOL may market Broadband Services over the AOL Service
and otherwise target market Broadband Services to subscribers to the AOL
Service. Any Broadband Service(s) may be co-branded with an Other Provider
(other than, prior to January 1, 2000, AT&T if bundled with Local
Telecommunications Services or Commercial Mobile Radio Services) and may also be
a Bundled Service. AOL's marketing and exclusivity obligations shall not extend
to any Broadband Service. AOL's marketing and exclusivity obligations
(including, without limitation any obligation of AOL to include links, keywords,
a dedicated area or any presence or materials on the AOL Service) under this
Agreement shall not extend to any Broadband Services; provided, however, that
during
20
<PAGE>
the LD Exclusivity Period, AOL's online marketing obligations (including,
without limitation any obligation of AOL to include links, keywords, a dedicated
area or any presence or materials on the AOL Service) under this Agreement and,
with respect to Switched Subscribers until June 30, 1999, AOL's exclusivity
obligations with respect to Long Distance Telecommunications Services shall
extend to any Broadband Service that is not a Bundled Service. AOL's exclusivity
obligations (including, without limitation any obligation of AOL to include
links, keywords, a dedicated area or any presence or materials on the AOL
Service) with respect to Commercial Mobile Radio Services shall not extend to
Broadband Services; provided that Commercial Mobile Radio Services provided by
an Other Provider and promoted over a Broadband Service that is not a Bundled
Service shall not be billed on the bill for such Broadband Service or using
on-file billing information provided by AOL to charge the credit or debit card
or checking account, as the case may be, used for the bill for such Broadband
Service , other than through AOL's *** or *** service or other similar ***
methods; provided however, that, prior to ***, AOL shall not provide its *** or
*** services to subscribers to such Broadband Service for purposes of billing
Commercial Mobile Radio Services of an Other Provider unless AOL shall have
first provided TS with the opportunity to ***.
(3) During the LD Exclusivity Period, AOL shall pay to TS an override in the
amount of *** per month for each subscriber (A) in excess of *** to any single
Excepted Service bundled with any telecommunications services in the nature of
any of the Services and (B) in excess of *** in the aggregate for all Excepted
Services bundled with tele-communications services in the nature of the
Services; provided, however, that any overrides to which TS is entitled pursuant
to clause (B) of this sentence shall be reduced by any overrides paid for the
same period pursuant to clause (A) of this sentence. Each of such threshold
amounts shall be increased on each ***, commencing ***, by an amount equal to
the product of (a) the then threshold (without giving effect to such increase)
times (b) *** the percentage increase in the number of the *** the *** as of
such date over the number of such *** on the next preceding *** provided that
such threshold amounts on and after *** shall be at least *** with respect to
any single Excepted Service and at least *** with respect to all Excepted
Services in the aggregate. Notwithstanding the foregoing, no override shall be
payable pursuant to this Section VII.A.1(b) if, within *** following the end of
a month in which an applicable threshold is exceeded either (i) the LD
Exclusivity Period terminates or expires or (ii) the number of subscribers to
the Excepted Service or Excepted Services that exceeded the threshold has
declined below the threshold that was exceeded; provided, that if, at the end of
such *** month period, neither of such conditions has been met, AOL shall pay
such override for each month thereafter at the end of which the number of
subscribers to such Excepted Service exceeds an applicable threshold.
Notwithstanding the foregoing, with respect to any Bundled Online Service that
is bundled with Local Telecommunication Services, AOL may elect, at its option,
to pay TS an override in accordance with SectionVII.A.3. for each subscriber to
such Bundled Online Service, in which event such Bundled Online Service shall
not be counted against any of the thresholds set forth in this Section. For
purposes of clause (A) of the preceding sentence, (1) any Bundled Online Service
21
<PAGE>
shall not be counted as a Broadband Service, (2) Bundled Online Services are
considered separately from Broadband Services and (3) any Excepted Service
bundled with or promoting telecommunications services in the nature of any of
the Services is considered separately from another Excepted Service promoting
different telecommunications services or the same telecommunications services
offered by a different Other Provider. For purposes of this Section, subscribers
to each separate Excepted Service shall be counted on the basis of paid
subscribers existing as of the end of each applicable calendar month.
"2. As of June 30, 2000, or as of any subsequent anniversary thereof,
AOL may, at its option but subject to any election made pursuant to Section
III.E.1., terminate the LD Exclusivity Period by giving TS written notice of
such election at least sixty (60) days prior to the date of such termination. In
addition, as of (i) the earlier to occur of (a) the date that is eighteen (18)
months after the Wireless Launch Date and (b) June 30, 2000 if the Wireless
Launch Date shall not have occurred and September 30, 2000 if the Wireless
Launch Date shall have occurred and (iii) June 30, 2001 or any subsequent
anniversary thereof, AOL may, at its option, terminate the Wireless Exclusivity
Period by giving TS written notice of such election at least sixty (60) days
prior to the date of such termination. However, notwithstanding termination of
the LD Exclusivity Period, AOL shall not commence any marketing of Long Distance
Telecommunications Services under any AT&T brand on the AOL Service (including
bundled with any Excepted Service) prior to June 30, 2000.
"3. Notwithstanding anything in this Agreement to the contrary, AOL
shall have no exclusivity obligations with respect to Local Telecommunications
Services. TS shall have the right to offer (and promote) Local
Telecommunications Services on the AOL Service during the Local Non-Exclusive
Period solely utilizing the marketing hereunder, subject to the terms of this
Agreement, including, without limitation, Sections II, III.E. and IV and shall
have the rights with respect to such Local Services as are provided in this
Agreement; provided, however, that, during the LD Exclusivity Period, Local
Services shall be offered solely on a bundled basis with LD Services (i.e.,
offered as ancillary additional service for use in conjunction with LD
Services); provided, further, that if TS is not offering Local
Telecommunications Services on the AOL Service to subscribers of the AOL Service
as of the date of any termination of the LD Exclusivity Period, then the Local
Non-Exclusive Period shall terminate and all TS's rights under this Agreement to
offer (and utilize the marketing provided hereunder to promote) Local
Telecommunications Services on the AOL Service shall terminate as of such date
of termination. If AOL enters into any arrangement to market Local
Telecommunications Services on the AOL Service (other than with respect to a
Bundled Service), then AOL shall pay TS an override in the amount of One and
50/100 Dollars ($1.50) per month for each subscriber to such Local
Telecommunications Services who is billed using on-file billing information
provided by AOL to charge the credit or debit card or checking account, as the
case may be, or billed on the same bill as the AOL Service and who subscribes
prior to June 30, 2000, for so long as AOL is receiving revenue from such
22
<PAGE>
Local Telecommunications Services in respect of such subscriber but not later
than June 30, 2005; provided, however, that if such marketing of Local
Telecommunications Services is under any AT&T brand, then the amount of such
override shall be Three Dollars ($3.00) and such override shall be paid with
respect to each subscriber to such Local Telecommunications Services who is
billed using on-file billing information provided by AOL to charge the credit or
debit card or checking account, as the case may be, or billed on the same bill
as the AOL Service and who subscribes prior to June 30, 2000 for so long as AOL
is receiving revenue from such Local Telecommunications Services in respect of
such subscriber, but not later than June 30, 2005. If TS offers or enters into
any arrangement to offer Local Telecommunications Services on the AOL Service,
TS shall pay AOL an override in the amount of One and 50/100 Dollars ($1.50) per
month for each subscriber (other than an Unbillable End User) to such Local
Telecommunications Services who subscribes prior to June 30, 2000, for so long
as such subscribers are End Users of Local Services, but not later than June 30,
2005; provided, however, that if such offer of Local Telecommunications Services
is under any AT&T brand, then the amount of such override shall be Three Dollars
($3.00) and such override shall be paid with respect to each subscriber to such
Local Telecommunications Services (other than an Unbillable End User) who
subscribes prior to June 30, 2000 for so long as such subscribers are End Users
of Local Services, but not later than June 30, 2005. In addition, AOL will use
all reasonable efforts to convince the provider of such Local Telecommunications
Services to use TS's billing services in connection therewith, provided that AOL
shall have no liability hereunder if such provider elects not to use TS's
billing services.
"4. Nothing contained in this Agreement shall prohibit or restrict AOL
in any manner from selling online advertising to telecommunications service
providers other than TS, provided, however, that AOL shall not sell online
advertising on the AOL Service (other than on a Bundled Service or a Broadband
Service) to market any Broadband Service as permitted under Section VII.A.1(b))
(i) for Long Distance Telecommunications Services to any other provider during
the LD Exclusivity Period or (ii) for Commercial Mobile Radio Services to any
other provider during the Wireless Exclusivity Period; provided, however, that
AOL shall not be deemed in breach of this Section as a result of any advertising
as to which AOL has not received written notice from TS provided AOL shall
comply with its obligations under Section VII.A.11.
"5. Except as otherwise specifically provided in this Section VII.A.5,
during and after the Term, AOL shall have the exclusive right to target market
products and services, including the Services, to subscribers to the AOL Service
and to End Users and TS shall not, directly or indirectly (through subsidiaries,
affiliates or otherwise), knowingly target market subscribers to the AOL Service
or the End Users. Notwithstanding the foregoing, AOL shall not target market to
LD End Users (i) prior to ***, (ii) more than *** per calendar year for any year
after *** during the Term, or (iii) for the promotion of Long Distance
Telecommunications Services, Commercial Mobile Radio Services or Local
Telecommunications Services ***; provided, however, that in no event shall AOL
be restricted from target marketing
23
<PAGE>
to the "buyers" category of subscribers to the AOL Service notwithstanding that
such buyers may also be LD End Users. Notwithstanding the foregoing, TS shall be
permitted to target market to End Users solely by utilizing the telemarketing
commitments set forth in Section *** or the *** commitments set forth in Section
***, other than those commitments dedicated to the promotion of Wireless
Services; provided, that any such target marketing shall promote solely the
Services or products and services permitted to be promoted by TS pursuant to,
and shall be subject to the terms of, Section ***; provided, further, that this
provision does not provide TS with any additional marketing commitments
hereunder and any marketing commitments utilized to target market End Users
shall count toward satisfying AOL's marketing obligations hereunder.
Notwithstanding the foregoing, nothing shall prevent TS, (i) during and after
the Term, from communicating with End Users, by e-mail or otherwise, in
connection with provisioning, operating and billing the Services; provided that
no such communications shall contain any promotional, marketing or advertising
materials or messages of any nature with respect to any product or service,
including, without limitation, the Services, and shall not request or encourage
End Users to take any action inconsistent with the purpose of this Agreement
(e.g., without limitation, purchasing telecommunications in the nature of the
Services at a different location or site than the AOL Service); provided,
further, that any such communications shall comply with AOL's then standard
policies, including without limitation, its privacy policies, Terms of Service
for the AOL Service and policies regarding unsolicited or bulk e-mail (as
applicable), and (ii) after the Term, target marketing *** to the End Users."
28. The second sentence of Section VII.A.6. of the Agreement is amended to read
in its entirety as follows:
"After such first anniversary date and during the Term, TS may so contract
without paying AOL any override or other compensation; provided, however, that
if such services are then being offered by TS on the AOL Service under this
Agreement on an exclusive basis, TS must first offer AOL the right to market
such services under the AOL Marks. If AOL exercises such right, then the parties
shall mutually agree upon compensation to AOL and the terms and conditions of
the service offering and use of the AOL Marks in connection therewith; provided,
however, that if AOL and TS cannot agree on appropriate compensation or terms
and conditions after negotiating in good faith for a reasonable amount of time,
TS may market or provide such services without paying AOL any override or other
compensation and TS shall not utilize the AOL Marks in connection therewith."
29. Section VII.A.6. is further amended to add the following at the end thereof:
"If TS shall so contract with an AOL competitor with respect to, or offer on its
own behalf, a consumer (non-commercial) offering of telecommunications services
in the nature of the LD Services, TS will offer the LD Services to End Users
under this Agreement at regular rates that are better than or equal to those
offered customers by TS on its own behalf or under such other contract, provided
that, for purposes hereof, such
24
<PAGE>
regular rates need not reflect any promotions or other like special or temporary
rates (which special or temporary rates shall be limited in time, scope and
duration) that may be offered to such customers by TS on its own behalf or under
such other contract; provided, that subscribers to the AOL Service receive
reasonably comparable special or temporary rates during the same time periods."
30. The first sentence of Section VII.A.9. of the Agreement is amended to read
in its entirety as follows:
"AOL may elect to terminate the LD Exclusivity Period if TS's overall pricing
for the LD Services exceeds overall prices for such services which are generally
available from major carriers so as to be non-competitive with those carriers'
offerings."
31. Section VII.A. is amended to add the following Sections 10 and 11:
"10. Notwithstanding that the *** content area available through the
America Online brand service (the ***) is excluded by definition from the AOL
Service, (i) during the *** period beginning on ***, AOL shall not collect more
than *** in advertising revenues from advertising sold on the *** to providers
of telecommunication services with respect to which TS is then entitled to
exclusivity hereunder, (ii) during the *** month period beginning on ***, AOL
shall not collect more than *** in advertising revenues from advertising sold on
the *** to providers of telecommunication services with respect to which TS is
then entitled to exclusivity hereunder, (iii) during the LD Exclusivity Period,
AOL shall not sell advertising on the *** promoting Long Distance
Telecommunications Services on behalf of any national provider of Long Distance
Telecommunications Services in connection with a *** (i.e., including at least
*** covered by the ***) other than in connection with marketing a Broadband
Service in compliance with the provisions of Section VII.A.1. and (iv) during
the Wireless Exclusivity Period, AOL shall not sell advertising on the ***
promoting Commercial Mobile Radio Services on behalf of any national provider of
Commercial Mobile Radio Services in connection with a *** (i.e., including at
least *** covered by the ***) other than in connection with marketing a
Broadband Service. It is understood and agreed that the *** does not include the
*** web site and the *** web site is not limited in any way hereunder.
11. AOL will use commercially reasonable best efforts, consistent with
past practices, to encourage (i) its significant partners to observe TS's
exclusivity rights under this Agreement in partner Rainman areas and other
partner areas within the AOL Service but not controlled by AOL, and (ii) any
provider of Local Telecommunications Services under an arrangement with AOL to
offer Local Telecommunications Services on the AOL Service (other than a Bundled
Online Service or Broadband Service that is offered pursuant to, and subject to
the terms of, Section VII.A.1.), from promoting to subscribers to the AOL
Service on such provider's web site linked directly to from the AOL Service
25
<PAGE>
(1) Long Distance Telecommunications Services during the LD Exclusivity Period
and/or (2) Commercial Mobile Radio Services during the Wireless Exclusivity
Period (provided, however, that such provider may provide online billing for any
services, including any telecommunications services, on such web site) but AOL
can provide no assurance that such partners will comply and AOL shall have no
liability hereunder if such partners do not comply nor will AOL have any
liability for a failure to encourage in all instances so long as AOL is acting
on an overall basis in good faith. AOL shall, consistent with past practices,
promptly remove any advertising or links that violate TS's exclusivity rights
under this Agreement from areas within the AOL Service that are controlled by
AOL.
32. Section X.A.1. is amended to add the following at the end thereof as a new
sentence: "However, notwithstanding any provision to the contrary herein, after
the termination or expiration of the Term, TS shall use all commercially
reasonable efforts to transition its billing operations and provisioning of the
Services off the AOL Service and on to the Internet and AOL will provide such
reasonable assistance in effecting such transition as TS shall reasonably
request, and, if the aggregate number of End Users (using any Service) shall
thereafter be fewer than ***, AOL shall have the right, upon *** prior written
notice to TS, to cease providing to TS billing information regarding such End
Users and all services under Section III.D.1, the Credit Card Processing
Services Agreement and the Electronic Payment Processing Services Agreement
between the parties."
33. Sections X.B.1. and X.B.2. of the Agreement are deleted their entirety and
the following is inserted in lieu thereof:
"1. If the LD Exclusivity Period shall not previously have been
terminated or expired, AOL shall have the right, by irrevocable written notice
to TS at least ninety (90) days prior to the end of such Period (as it may have
been extended previously), to extend the term of the LD Exclusivity Period, in
each case for at least one (1) four-calendar-quarter period, for up to three (3)
successive four-calendar-quarter periods, on the terms and conditions herein
provided. Furthermore, if the Wireless Exclusivity Period shall not previously
have been terminated or expired, AOL shall have the right, by irrevocable
written notice to TS at least ninety (90) days prior to the end of such Period
(as it may have been extended previously), to extend the term of the Wireless
Exclusivity Period, in each case for at least one (1) four-calendar-quarter
period, for up to three (3) successive four-calendar-quarter periods, on the
terms and conditions herein provided. Each such notice shall be binding on AOL
and TS for all purposes hereof."
"2. If the LD Non-Exclusive Period shall not previously have been
terminated or expired, AOL shall have the right, by irrevocable written notice
to TS at least ninety (90) days prior to the end of such Period (as it may have
been extended previously), to extend the term of the LD Non-Exclusive Period, in
each case for at least one (1) four-calendar-quarter period, for successive
four-calendar-quarter periods, but not beyond the later to occur of (a) the
fifth anniversary of the termination or expiration for the LD Exclusivity Period
and (b) June 30, 2006 on the terms and conditions herein provided. Furthermore,
26
<PAGE>
if the Wireless Non-Exclusive Period shall not previously have been terminated
or expired, AOL shall have the right, by irrevocable written notice to TS at
least ninety (90) days prior to the end of such Period (as it may have been
extended previously), to extend the term of the Wireless Non-Exclusive Period,
in each case for at least one (1) four-calendar-quarter period, for successive
four-calendar-quarter periods, but not beyond the later to occur of (a) the
fifth anniversary of the termination or expiration of the Wireless Exclusivity
Period and (b) June 30, 2006 on the terms and conditions herein provided. Each
such notice shall be binding on AOL and TS for all purposes hereof."
"3. AOL shall have the right (the "Buyout Right"), by written notice to
TS by not later than September 30, 2001, to terminate all Non-Exclusive Periods
as of June 30, 2002 and all of AOL's obligations to provide online marketing
(including, without limitation, *** and all other advertising or promotion on
the AOL Service) to TS from and after December 31, 2001, and, upon such notice,
all Non-Exclusive Periods shall be terminated as of June 30, 2002 and AOL's
online marketing obligations shall terminate as of December 31, 2001. If AOL
does not terminate the LD Exclusivity Period prior to June 30, 2001, then, if
AOL exercises the Buyout Right, AOL shall pay TS, on or before February 28,
2002, two (2) times the total amount received by AOL from the Long Distance
Residual during the six (6) month period ending December 31, 2001 (the "12 Month
Amount"). If AOL terminates the LD Exclusivity Period before June 30, 2001,
then, if AOL exercises the Buyout Right, AOL shall pay TS, on or before February
28, 2002, the total amount received from the Long Distance Residual during the
eighteen (18) month period ending December 31, 2001 (the "18 Month Amount"). At
AOL's option, by written notice to TS by not later than September 30, 2001, in
lieu of exercising the Buyout Right, AOL may elect to terminate all of AOL's
obligations to provide online marketing from and after December 31, 2001 but not
the Non-Exclusive Periods, in which event, AOL shall pay TS fifty percent (50%)
of (a) the 12 Month Amount or (b) the 18 Month Amount, as applicable." During
any period that AOL is not providing the online marketing under this Agreement
pursuant to this Section X.B.3., the Long Distance Residual for such period
shall be reduced by fifty percent (50%).
34. Section X.C.1.(b) of the Agreement is amended to read in its entirety as
follows:
"Either TS or AOL may terminate this Agreement at any time upon 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 (the "Cure Period");
provided, however, that in the case of a scheduled payment hereunder, the Cure
Period shall be five (5) business days after written notice thereof.
Notwithstanding the foregoing, no party shall have the right to terminate this
Agreement for a material breach of this Agreement pursuant to this Section
X.C.1.b based on any asserted breach unless such breach shall not have been
cured during the applicable Cure Period and it is determined by an arbitration
proceeding convened under Section XI.D that the breach was a material breach as
referenced in the preceding sentence and the breaching party fails to comply
with the arbitrators' order, or any portion thereof, in which event the
non-breaching party may terminate this Agreement
27
<PAGE>
immediately upon written notice to the other party; provided, however, that this
sentence shall not apply in the event of any recurrence of the same breach or
the occurrence of any substantially similar breach by the previously breaching
party if such further asserted breach shall be material and the foregoing notice
and opportunity to cure shall have been given and such breach shall continue
uncured. Nothing in this provision is intended to impair the right of any party
to contest a termination by invoking the dispute resolution procedures of this
Agreement, provided that in the event that the breaching party fails to comply
with an order issued by an arbitration panel or in the event of a recurrence of
a breach or occurrence of any substantially similar breach, a notice of
termination from the non-breaching party shall take effect immediately and all
performance obligations of the non-breaching party shall be immediately
suspended (provided that, if such terminating party shall be determined not to
have been entitled so to terminate, the other party shall be entitled to damages
for wrongful termination and suspension of such performance obligations)."
35. Section X.C.1.d. of the Agreement is amended to add after the phrase
"AT&T ceases to provide long distance telecommunications services to
TS" the following: "and TS shall not then be utilizing services
provided by another provider with long distance telecommunications
services of substantially equivalent quality or be providing such
services of substantially equivalent quality itself, provided that it
is hereby agreed by the parties that the long distance
telecommunications service of each of * * * and OBN (as currently
operated) are of substantially equivalent quality for purposes of this
Section X.C.1.d."
36. Section X.C. of the Agreement is amended by adding Section X.C.1.f. and
Section X.C.1.g. at the end of that section:
"f. If TS breaches any of its payment obligations under the
Investment Agreement, dated as of December 31, 1998 (together with all
other documents, agreements and instruments referenced therein, the
"Investment Agreement"), by and between TS and AOL, and such breach
continues beyond any applicable cure period under the Investment
Agreement, then AOL may terminate this Agreement immediately upon
written notice to TS and such termination shall not be subject to the
provisions of X.C.1.b.
g. If a voluntary or involuntary case or other proceeding is
commenced by or against any party or any of its subsidiaries seeking
liquidation, reorganization or other similar relief with respect to it
or its debts under any bankruptcy, insolvency or other similar law now
or hereafter in effect or seeking the appointment or a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its properties, or shall consent to any such relief
or to the appointment of or taking possession by any such official in
an involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any
corporate action to authorize any of
28
<PAGE>
the foregoing, or an order for relief shall be entered against any
party or any of its subsidiaries under applicable bankruptcy,
insolvency or other similar laws or hereafter in effect (each, an
"Insolvency Event"), then AOL may terminate this Agreement immediately
upon written notice to the other parties in the case of an Insolvency
Event by TS or Holdings and TS may terminate this Agreement immediately
upon written notice to AOL in the event of an Insolvency Event by AOL."
37. Each of Section X.D.2., Section X.D.4 and Section X.D.6 of the
Agreement is deleted in its entirety and the following is inserted in
lieu thereof: "Intentionally Deleted."
38. The first sentence of Section XI.D.1. of the Agreement is deleted in
its entirety and the following is inserted in lieu thereof:
"If the parties are unable to resolve any dispute, controversy or claim arising
under this Agreement (each a "Dispute"), such Dispute will be submitted to the
following senior executive officer of each of the parties: specifically, J.
Michael Kelly, the Chief Financial Officer of AOL, and Gabriel Battista, the
Chief Executive Officer of TS; for resolution, which designated senior executive
officer of either party may be changed by mutual agreement of the parties if
such persons are no longer serving in such capacity."
39. Section XI.D. of the Agreement is amended by adding Section XI.D.11 at
the end of that Section:
"11. Notwithstanding anything to the contrary in this Agreement, either
party may, without inconsistency with this agreement to arbitrate or the dispute
resolution provisions of this Agreement, seek from a court of competent
jurisdiction any provisional remedy that may be necessary to protect such party
from irreparable harm. The parties agree that any violation by TS of AOL's
privacy policies (as set forth at keyword "TOS" on the AOL Service) or of the
provisions of Section 40 of Amendment No. 3 (entitled "Public Disclosures") or
any violation of law or regulations by TS that exposes AOL to legal liability,
in each case that causes injury to AOL, would cause continuing irreparable
injury to AOL for which money damages would not adequately compensate AOL
(provided that the foregoing agreement does not constitute an acknowledgment by
any party, and there shall be no implication or statement arising from or by
reason of such agreement, as to the extent of any such injury or that any such
injury or any such event or circumstance is material or that any such event or
circumstance should result in any remedy from any court).
40. Public Disclosures
The timing, content and procedure of any press release or other public
announcement regarding the parties' entering into of this Amendment or the terms
of this Amendment shall be mutually agreed upon in advance by the parties. TS
shall not make
29
<PAGE>
any public disclosure regarding the existence or substance of any dispute,
litigation, arbitration proceeding or other conflict between the parties except
to the extent required by law, in which event TS shall use commercially
reasonable best efforts to disclose the minimum amount of information necessary
or appropriate to comply with law; provided, however, that TS may disclose the
existence of any litigation initiated by AOL that has previously been, and to
the same extent as, disclosed by AOL. TS shall not issue or permit to be issued
on its behalf any press release or other public announcement, or make or permit
to be made any public statement which intentionally impugns, maligns or
disparages AOL, its business practices or its directors, officers or employees.
Neither AOL nor Daniel Borislow shall, make, or permit to be made, any
communications with or to the press or statement to investment analysts, fund
managers or other members of the investment community, which intentionally
impugns, maligns or disparages the other, its business practices, or its
directors, officers or employees. During the *** period following the date of
this Amendment, AOL shall not issue any press release or other public
announcement announcing that AOL has entered into (i) any agreement to market
Long Distance Telecommunications Services, which agreement would violate TS's
exclusivity rights hereunder if the LD Exclusivity Period had not expired or
terminated at the time of performance under such agreement and/or (ii) any
agreement to market Commercial Mobile Radio Services over the AOL Service, which
agreement would violate TS's exclusivity rights hereunder if the Wireless
Exclusivity Period had not expired or terminated at the time of performance
under such agreement. During the *** following the date of this Amendment, in
any press release issued by AOL announcing that AOL has entered into an
agreement to market a Broadband Service, AOL shall use commercially reasonable
best efforts not to disclose the fact that AOL has the right to market
Commercial Mobile Radio Services on such Broadband Service. AOL represents that
it is not currently engaged, on the date of this Amendment, in negotiations
arising from a bona fide offer to merge with or be acquired by any third party.
41. License
(a) License. TS hereby grants to AOL a perpetual and irrevocable
(subject to clause (f)), non-exclusive, worldwide license,
(including the right to sublicense) to use, store, distribute,
display, perform communicate, transmit, promote, upgrade, enhance,
maintain, support, copy, modify and make derivative works from the
TS Technology (as defined below) in connection with the use by AOL
and/or its partners in connection with an AOL, AOL-branded or
AOL-owned or -controlled affiliated property or service; provided,
however, that such license shall be subject to any restrictions
that may be imposed by third party licensors of the TS Technology
or portions thereof, provided that TS shall use all commercially
reasonable efforts (which shall include efforts to facilitate
direct negotiations between AOL and such licensor) to secure
complete pass-through rights to all TS Technology for AOL, with
respect both to TS Technology currently licensed by TS and TS
Technology hereafter licensed by TS (provided, and so long as, TS
does not incur any costs in connection therewith that AOL does not
agree to pay). "TS
30
<PAGE>
Technology" shall mean, collectively, all technology currently
owned or licensed by TS or acquired, developed or licensed by TS
during the Term, including, without limitation, TS's online
billing, call detail record, customer service and database
technology, software and functionality, including without
limitation any tools, both in object code and source code form,
which TS develops, acquires or licenses and which are utilized in
connection with the development, navigation, use, management,
editing, updating, maintenance or upgrading of such technology,
software and functionality and any other related materials and
works, including, without limitation, Upgrades, subject to clause
(c), and documentation, designs, technical specifications and all
elements and components of the user interface, and all parts
thereof in whatever media or form.
(b) Royalties. The license granted in clause (a) shall be royalty
free; provided, however, that to the extent the TS Technology is
used or licensed by AOL in connection with the provision of any
telecommunications services in the nature of the Services, AOL
shall pay TS a mutually agreed upon royalty not to exceed the then
lowest royalty charged by TS to any unaffiliated third party for
licensing the TS Technology; and provided further that the license
granted with respect to Upgrades is subject to the payment
provisions and other restrictions set forth in clause (c).
(c) TS Upgrades. From time to time, if TS develops or acquires any
Upgrade to the TS Technology, TS shall deliver all configurations
of the then-current versions of the TS Technology to AOL, subject
to the provisions of subparagraph (a) above. For the purposes of
this license, "Upgrade" shall mean, with respect to any software
or other product, any update, upgrade, error correction, bug fix,
maintenance release, enhancement, addition, improvement,
extension, modification, configuration, replacement, substitute,
functional equivalent or successor version or product, and all
related documentation. TS shall provide such Upgrades to AOL
royalty-free, unless, if TS incurred any out-of-pocket costs at
the request of AOL in developing any such Upgrades or any costs in
providing such Upgrades to AOL as required herein, AOL shall
reimburse TS for all such costs.
(d) Representations and Warranties. TS represents and warrants that
the TS Technology shall not infringe or violate any copyright,
trademark, patent or any other third party right, or violate any
applicable law or regulation. If AOL pays royalties to TS pursuant
to clause (b) or (c), TS further represents and warrants that the
TS Technology shall be free from defects in manufacturing and
workmanship.
(e) Term. The license granted in clause (a) shall survive the
expiration or termination of the Term of the Agreement, provided
that such license may be terminated by TS if AOL fails to make any
royalty payments required pursuant
31
<PAGE>
to Section (a) or (c) after thirty (30) days following written
notice to AOL thereof.
42. As a condition to AOL's entering into this Amendment, TS shall pay to AOL
all amounts due and owing under the Agreement as of December 31, 1998,
including, without limitation, all bounties and Offline Marketing Costs
(including, without limitation, all vendor invoices and call representative
incentives), which amounts the parties hereby agree for all purposes of the
Agreement total $11,780,694 (except for amounts referred to in the last sentence
of paragraph 44 of this Amendment), provided that such amount shall be offset by
any reduction in the vendor charges included in such amount, which reduction
occurs by way of a settlement of a dispute between TS and such vendor over such
charges. TS shall pay AOL an installment of $6,000,000 upon execution of this
Amendment and the balance on or before January 31, 1999. If TS fails to make
either of the payments described in the immediately preceding sentence within 24
hours after written notice thereof, AOL shall have the right to terminate this
Agreement by giving TS written notice thereof. All such amounts, and all amounts
previously paid by or on behalf of TS or Holdings under the Agreement shall be
non-refundable and shall not be subject to any offsets.
43. In consideration of, and as a condition to, AOL entering into this
Amendment, contemporaneously with this Amendment, TS and CompuServe shall enter
into an amendment to the CompuServe Agreement in the form attached to this
Amendment as Attachment A (the "CompuServe Amendment").
44. In consideration of, and acknowledging that the Waiver (as defined below) is
a condition to, the parties' entering into this Amendment, as of January 5,
1999, each party hereby irrevocably waives and releases all claims, suits,
demands, actions and rights, whether known, unknown, contingent or fixed,
against the other parties and their respective current and former affiliates,
successors, assigns, directors, officers, agents and employees arising prior to
January 5, 1999 and arising out of or in any way related to the Agreement or the
CompuServe Agreement or the negotiation, performance or nonperformance thereof
or the negotiation of the Agreement or the CompuServe Agreement or this
Amendment or the CompuServe Amendment, other than third party claims that are
subject to indemnification under the Agreement and of which the indemnified
party has given the indemnifying party notice prior to the date this Amendment
is executed (the "Waiver"). The Waiver shall be effective notwithstanding any
terms to the contrary contained in the Agreement, the CompuServe Agreement, this
Amendment or the CompuServe Amendment. The parties further agree that no
documentary, verbal, e-mail, electronic or other evidence relating to the
negotiation, performance or nonperformance of the Agreement or the CompuServe
Agreement prior to January 5, 1999 shall be offered or admitted in any
arbitration or related proceeding between the parties with respect to the
negotiation, performance or nonperformance of this Agreement or the CompuServe
Agreement after the date of execution of this Amendment after January 5, 1999 in
connection with any dispute involving circumstances or actions or inactions
arising prior to January 5, 1999. The Waiver shall
32
<PAGE>
not apply to any claims, suits, demands, actions and rights of AOL in connection
with approved costs actually incurred by AOL that are to be reimbursed by TS
under this Agreement and that are not yet invoiced, are under dispute by TS
(other than with AOL) or that are not otherwise covered by the provisions of
paragraph 42 of this Amendment.
45. With respect to End Users who are End Users as of the expiration or
termination of the Agreement or any Period thereunder, for so long as such End
Users continue to be End Users and subscribers to the AOL Service and subject to
Section X.A.1 of the Agreement, AOL will provide all information available to
AOL that is necessary for TS to perform payment processing in respect of such
End Users in accordance with the terms of the Credit Card Processing Services
Agreement, as amended, and the Electronic Payment Processing Services Agreement,
between the parties, subject to the terms of each such agreement. In
consideration of and as a condition to AOL entering into this Amendment, the
parties shall enter into the Amendment to Credit Card Processing Services
Agreement (the "Credit Card Amendment") and into the Electronic Payment
Processing Services Agreement (the "EFT Agreement") in the forms attached hereto
as Attachment B and Attachment C, respectively.
46. If any term, provision, covenant or restriction of this Amendment 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
Amendment 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 Amendment. If the
parties are unable to so agree, the matter shall be resolved pursuant to Article
XI.D of the Agreement.
47. This Amendment does not, and shall not be construed to, modify any term or
condition of the Agreement (including, without limitation, any payment
obligations under the Agreement) except as expressly provided in this Amendment.
Except as herein provided, the Agreement shall remain unchanged and in full
force and effect. In the event of any inconsistency or discrepancy between the
Agreement and this Amendment, the terms and conditions set forth in this
Amendment shall control. This Amendment may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document. This Amendment shall be
governed by the internal laws of the State of New York, without giving effect to
the principles of conflict of laws thereof.
48. If at any time during the period from January 6, 1999 until June 30, 1999,
Daniel Borislow is employed by Holdings, TS or any affiliate in the capacity of
an executive officer, it shall be deemed a material breach of the Agreement by
TS and AOL shall have an immediate right to terminate the Agreement upon written
notice to TS, without regard to any of the dispute resolution provisions of the
Agreement.
[Signatures appear on the next page]
33
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be signed on
their behalf as of the date first written above.
AMERICA ON LINE, INC.
By: /s/ J. Michael Kelly
---------------------
Name: J. Michael Kelly
Title: Senior Vice-President and CFO
TEL-SAVE, INC.
By: /s/ Edward B. Meyercord
------------------------
Name: Edward B. Meyercord
Title: Executive Vice President
TEL-SAVE.COM, INC.
By: /s/ Edward B. Meyercord
------------------------
Name: Edward B. Meyercord
Title: Executive Vice President
S-1
<PAGE>
CONFIDENTIAL
SCHEDULE X
* * *
<PAGE>
CONFIDENTIAL
SCHEDULE Y
* * *
<PAGE>
CONFIDENTIAL
SCHEDULE Z
* * *
<PAGE>
CONFIDENTIAL
Attachment A
***
<PAGE>
CONFIDENTIAL
Attachment B
***
<PAGE>
CONFIDENTIAL
Attachment C
***
----------------------------
EXHIBIT 10.34
MODIFICATION OF THE EXCHANGE AGREEMENT
THIS MODIFICATION OF THE EXCHANGE AGREEMENT (this "Agreement") is
entered into as of the __ day of _____, 1999, by and among TEL-SAVE.com, INC., a
Delaware corporation (the "Company"), TEL-SAVE, INC., a Pennsylvania corporation
and a subsidiary of the Company (the "Subsidiary"), and MARK PAVOL, as Trustee
of that certain D&K Grantor Retained Annuity Trust dated June 15, 1998 (the
"Participant"). The Company, the Subsidiary, and the Participant shall sometimes
be referred to individually as a "Party" and two or more of them shall sometimes
be referred to collectively as the "Parties."
RECITALS
A. The Parties have entered into that certain Exchange Agreement dated as
of December 31, 1998 (the "Exchange Agreement").
B. The Parties desire to modify the Exchange Agreement in certain
respects and to enter into certain transactions related to the
Exchange Agreement.
NOW, THEREFORE, in consideration of the covenants and agreements set forth
below, and for other consideration the receipt and adequacy of which is hereby
acknowledged, the Parties hereby agree as follows:
1. Definitions. Terms in this Agreement with initial capital letters and
not otherwise defined herein shall have the meanings defined for such terms in
the Exchange Agreement. The WorldxChange Notes, the Security Agreement, the
Pledge Agreements, the stock certificates and stock powers delivered to the
Company pursuant to the Pledge Agreements, the Intercreditor Agreement, and the
Financing Statement that was filed in connection with the Security Agreement and
that showed CTS as the Debtor and Tel-Save as the Secured Party shall be
hereinafter referred to as the "Note Documents."
2. Transfer of Participation Interest and Note Documents.
(a) The Company represents and warrants to the Trust that the Company
is the owner and holder of the Company's Interest, the WorldxChange Notes, and
each of the Note Documents, free and clear of any and all liens, claims, and
encumbrances, except for rights and encumbrances granted under the Exchange
Agreement and except for restrictions imposed by applicable securities laws, and
that the Company is the sole Secured Party under the Security Agreement and
under the Pledge Agreements.
(b) The Company hereby transfers to the Trust all of the Company's
right, title, and interest in and to the Company's Interest and each of the Note
Documents.
1
<PAGE>
(c) Concurrently with the execution and delivery hereof, the Company
is delivering to the Trust the original of each Note Document and a Financing
Statement signed by the Company and referring to the assignment to the Trust of
the Company's interest under the Security Agreement. Concurrently with the
execution and delivery hereof, the Participant is delivering to the Company a
letter in the form required by Section 17 of the Intercreditor Agreement, which
letter is incorporated herein by this reference.
(d) Concurrently with the execution and delivery hereof, the Company
is paying to the Participant the amount of $1,627,222.22, being the amount of
accrued interest paid to the Company under the Accrued Interest Note and the
Notes from January 1, 1999, through February 28, 1999, plus an additional amount
of $__________, being the amount of accrued interest paid to the Company under
the Accrued Interest Note and the Notes and received by the Company from March
1, 1999, until the date immediately prior to the date hereof.
(e) The Company's Interest and the Note Documents are being acquired
by the Participant for investment for the Participant's account, not as an agent
or nominee, and not with a view to the resale or distribution thereof. The
Participant understands that neither the Company's Interest nor any of the Note
Docments has been registered or qualified under any applicable securities laws
and that the transfer of each thereof is restricted by such laws. The
Participant represents and warrants that it is experienced in evaluating and
investing in interests similar to the Company's Interest and the Note Documents
and has such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of such investment, and that the
Trust has the ability to bear the economic risks of such investment.
(f) The Participant acknowledges that it has entered into this
Agreement in reliance upon its own independent investigation of all relevant
facts and circumstances, and not in reliance on any information, representation,
or advice provided by the Company or the Subsidiary. The Participant further
acknowledges that the Participant shall, independently and without reliance on
the Company or the Subsidiary and based on such documents and information as the
Participant deems appropriate at the time, continue to make its own independent
credit and other decisions in taking or not taking any action under this
Agreement.
3. Release of Limited Guaranty.
(a) The Participant hereby releases and forever discharges the
Subsidiary of any and all of the Subsidiary's duties and obligations under the
Limited Guaranty set forth in the Exchange Agreement, and Section 5 of the
Exchange Agreement is hereby terminated and of no further force or effect.
2
<PAGE>
(b) The Subsidiary hereby releases and forever discharges the Trust of
any and all of the Trust's duties and obligations under the Limited Guaranty Fee
set forth in the Exchange Agreement, and Section 4 of the Exchange Agreement is
hereby terminated and of no further force or effect.
4. Termination of Certain Provisions of the Exchange Agreement. The Parties
hereby terminate Sections 3.4-3.18 (inclusive), 4, and 5 of the Exchange
Agreement, and such Sections shall be of no further force or effect. Sections
6.1-6.5 (inclusive) and Sections 6.7-6.18 (inclusive) of the Exchange Agreement
are hereby incorporated herein by this reference and apply to this Agreement as
well as to the Exchange Agreement.
5. Miscellaneous.
(a) Each of the Parties represents and warrants to, and agrees with,
each of the other Parties that, at the date hereof: (i) such representing and
warranting Party is not in default under the Exchange Agreement; (b) such Party
has not suffered any damage under the Exchange Agreement and has no cause of
action, right of set-off or counterclaim, or any other claim of any nature
whatsoever against any of the other Parties or any director, officer, attorney,
agent, employee, or affiliate of any of such other Parties under the Exchange
Agreement or otherwise (collectively, "Claims"); and (c) such Party hereby
waives and relinquishes any and all Claims. Such Party further hereby agrees to
indemnify and hold harmless each of the other Parties and their respective
officers, directors, attorneys, agents, employees, and affiliates harmless from
any loss, damage, judgment, liability, and expense (including counsel fees)
suffered by or rendered against the other Parties or any of them on account of
anything arising out of the Exchange Agreement, this Agreement, or any other
document delivered pursuant hereto.
(b) Except as expressly modified by this Agreement, the Exchange
Agreement continues in full force and effect.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by their respective officers, thereunto duly authorized, as of the date first
above written.
3
<PAGE>
Tel-Save.com, Inc.
By
---------------------------
Name
Title
The Subsidiary
By
---------------------------
Name
Title
The Participant
----------------------------
Mark Pavol, as Trustee of the
D&K Grantor Retained Annuity
Trust dated June 15, 1998
4
EXHIBIT 10.36
AMENDMENT OF REGISTRATION RIGHTS AGREEMENT
(Borislow and Trust II)
THIS AMENDMENT OF REGISTRATION RIGHTS AGREEMENT (this "Amendment") is
entered into as of the 18th day of March, 1999, by and among TEL-SAVE.com, INC.,
a Delaware corporation (the "Company"), DANIEL M. BORISLOW, a former director,
officer, and shareholder of the Company ("Borislow"), and SETH TOBIAS, as
Trustee of that certain D&K Grantor Retained Annuity Trust dated August 18, 1998
("Trust II").
RECITALS:
A. The parties hereto and MARK PAVOL, as Trustee of that certain D&K
Grantor Retained Annuity Trust dated June 15, 1998 (the "Trust") have entered
into that certain Registration Rights Agreement dated as of December 31, 1998
(the "Registration Rights Agreement").
B. The parties hereto, the Trust, and certain other parties have entered
into that certain Agreement dated March 15, 1999, pertaining, among other
things, to the modification of certain promissory notes issued by Communications
TeleSystems International, and it is a condition to that Agreement that the
parties hereto agree to enter into this Amendment.
C. The Company and the Trust have agreed to a separate Amendment of
Registration Rights Agreement (The Trust).
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Definitions. Terms in this Agreement with initial capital letters and
not otherwise defined herein shall have the meanings defined for such terms in
the Registration Rights Agreement.
2. Amendment of Section 7(a) of the Registration Rights Agreement. Section
7(a) of the Registration Rights Agreement is hereby amended to read in full as
follows:
"(a) The Company agrees that in the event that it makes a public or private
offering of its debt securities in exchange for cash, to the extent
permitted by law the Company will, at the option of Borislow or (subject to
the terms stated herein) Trust II, utilize up to forty percent (40%) of the
net cash proceeds of that offering to the Company after payment of the
expenses relating to the offering that are to be borne by the Company (the
"Net
1
<PAGE>
Cash Proceeds") to repurchase at the then fair market value convertible
subordinated notes of the Company then owned of record and beneficially by
Borislow or Trust II; provided, however, that the rights of Trust II
hereunder are subject and subordinate to the rights of Borislow in this
Section 7(a). Notwithstanding the foregoing, this Section 7(a) shall not
apply to any debt offering by the Company to a bank or financial
institution or in a commercial context. Borislow may exercise his option
set forth in this Section 7(a) by delivering notice to the Company within
five (5) days after the receipt by Borislow of written notice from the
Company, such notice to be sent by Registered or Certified Mail with Return
Receipt Requested, that the Company intends to make a public or private
offering of its debt securities in exchange for cash. To the extent that
any Net Cash Proceeds remain after Borislow's exercise or failure to
exercise timely his option set forth in this Section 7(a), Trust II may
exercise its rights under this Section 7(a) to the extent of such remaining
balance of Net Cash Proceeds. Trust II may exercise its option set forth in
this Section 7(a) by delivering notice to the Company within five (5) days
after the receipt by Trust II of written notice from the Company, such
notice to be sent by Registered or Certified Mail with Return Receipt
Requested, that the Company intends to make a public or private offering of
its debt securities in exchange for cash.
3. Amendment of Section 7(d) of the Registration Rights Agreement. Section
7(d) of the Registration Rights Agreement is hereby amended to read in full as
follows:
"(d) For the period commencing January 1, 1999, through June 30, 2000, the
Company shall not make any offer or sale of any of its capital stock
(including its Common Stock) unless and until Borislow has sold or
otherwise disposed of all shares of Common Stock now held by him; provided,
however, that this Section 7(d) shall not prohibit the Company from
offering or selling shares of its Common Stock in connection with any
employee benefit plan or stockholder rights distribution; and, provided
further, that up to the entire proceeds from the sale of shares of Common
Stock in connection with such employee benefit plans or stockholder rights
distributions ("Sale Proceeds") during the eighteen (18) month period
referred to above in this Section 7(d) shall be used, at Borislow's option
and if permitted by applicable law and as provided herein, to purchase
Common Stock then owned by Borislow. Notwithstanding the foregoing, and
without in any way prejudicing any other rights of Borislow, Borislow
2
<PAGE>
hereby: (1) irrevocably waives the rights provided to him under Section
7(d) of the Registration Rights Agreement with respect only to those
proceeds ("Proceeds") generated upon the exercise of options through March
18, 1999; and (2) agrees that the option set forth in Section 7(d) of the
Registration Rights Agreement with respect to the Proceeds generated
through March 18, 1999, has terminated.
"(i) Borislow may exercise his option by giving timely notice of such
exercise to the Company. Such notice shall be timely if it is received by
the Company either: (A) within five (5) days after the receipt by Borislow
of a written Receipt Notice (hereinafter defined) sent to Borislow by
Registered or Certified Mail with Return Receipt Requested; or (B) within
five (5) days after the receipt by Borislow of a written Quarterly Notice
(hereinafter defined) sent to Borislow by Registered or Certified Mail with
Return Receipt Requested.
"(ii) The Company agrees to give Borislow written notice within five
(5) calendar days after the Company's receipt of any Sale Proceeds, such
notice to be sent by Registered or Certified Mail with Return Receipt
Requested and such notice to state such receipt and the amount of such Sale
Proceeds (the "Receipt Notice"). The Company agrees to give Borislow
written notice within five (5) calendar days after the end of each calendar
quarter of the amount of any Sale Proceeds as to which the option set forth
in this Section 7(d) shall remain unexercised and unterminated at the time
of such notice, such notice to be sent by Registered or Certified Mail with
Return Receipt Requested (the "Quarterly Notice"). Borislow's option set
forth in this Section 7(d) shall terminate as to any Sale Proceeds as to
which he shall have failed to exercise such option pursuant to a proper
Receipt Notice and a proper Quarterly Notice.
"(iii) The purchase price of any Common Stock purchased pursuant to an
option exercised in response to a Receipt Notice shall be the average of
the daily closing prices (or of the closing bid and asked prices) for the
ten (10) trading days immediately preceding either the date of the receipt
by the Company of the notice of the exercise of such option or the date of
the exercise of such option with respect to Common Stock that is listed on
a national securities exchange or traded on the over-the-counter market or
quoted on NASDAQ.
3
<PAGE>
"(iv) The purchase price of any Common Stock purchased pursuant to an
option exercised in response to a Quarterly Notice shall be the average of
the daily closing prices (or of the closing bid and asked prices) for the
last ten (10) trading days of the calendar quarter then most recently ended
with respect to Common Stock that is listed on a national securities
exchange or traded on the over-the-counter market or quoted on NASDAQ."
"(v) The valuation of the Common Stock and the closing of the purchase
and sale shall take place as expeditiously as practicable after the
exercise by Borislow of his option set forth in this Section 7(d)."
4. Amendment of Section 7(e) of the Registration Rights Agreement. Section
7(e) of the Registration Rights Agreement is hereby amended to read in full as
follows:
"(e) The Company agrees to make available to Borislow, upon reasonable
notice from Borislow, in connection with one (1) securities offering to be
made by Borislow on or prior to June 30, 2000, the following Company
employees to participate in a standard securities offering "road show" of
not longer than ten (10) days' duration regarding that offering: the Chief
Executive Officer of the Company; and certain other appropriate employees
of the Company as designated by such Chief Executive Officer. The Company
may delay such participation if the time of such participation requested by
Borislow would cause undue hardship on the Company; in the event of such a
delay, the June 30, 2000, date set forth above in this Section 7(e) shall
be extended by one day for each day of such delay. The Company shall pay
for the reasonable out of pocket expenses incurred by the Company and its
officers in complying with this Section."
5. Amendment of Section 9(a) of the Registration Rights Agreement. Section
9(a) of the Registration Rights Agreement is hereby amended to read in full as
follows:
"(a) Borislow holds and owns, of record and beneficially, not less than two
percent (2%) of the outstanding Common Stock, calculated on a fully-diluted
basis, including shares that are issuable upon exercise of convertible
securities or other derivative securities of the Company; provided,
however, that if Borislow owns, of record and beneficially, less than such
amount of Common Stock, this Agreement, as amended, shall be of no force or
4
<PAGE>
effect; and provided further, that if Borislow later holds two percent (2%)
or more of such Common Stock, solely as a result his ownership at that time
of shares of Common Stock now owned of record and beneficially by Borislow
plus shares of Common Stock then owned of record and beneficially by
Borislow as a result of distributions from the Trust or Trust II, then the
provisions of this Agreement, as amended, shall again be of force and
effect; and provided further, that the running of any time periods set
forth in this Agreement, as amended, shall not be tolled as a result of any
period during which this Agreement shall not have been in force or effect."
6. Additional Agreements.
(a) The Company agrees to accept and Borislow agrees to transfer to
the Company, concurrently with the execution and delivery of this Amendment,
$4,940,000 principal amount of the Company's 5% Convertible Subordinated Notes
due 2004 (the "Notes") in complete satisfaction of Borislow's outstanding
obligation to the Company in the amount of $4,312,500 related to the exercise on
March 3, 1999, by Borislow of an option to purchase 750,000 shares of Common
Stock of the Company. Borislow represents and warrants to the Company that the
Notes are owned by Borislow of record and beneficially and that, immediately
prior to the transfer of the Notes to the Company, the Notes will be free and
clear of any and all liens, claims, and encumbrances. Concurrently with the
execution and delivery hereof, Borislow is delivering to the Company evidence
satisfactory to the Company as to the transfer of the Notes from Borislow to the
Company.
(b) The Company agrees to purchase from Borislow, and Borislow agrees
to sell to the Company, $6,537,000 principal amount of the Company's 5%
Convertible Subordinated Notes due 2004 (the "Additional Notes") for a cash
payment to Borislow of $5,706,690. Borislow represents and warrants to the
Company that the Notes are owned by Borislow of record and beneficially and
that, immediately prior to the transfer of the Notes to the Company, the Notes
will be free and clear of any and all liens, claims, and encumbrances created by
the Company. Concurrently with the execution and delivery hereof: (1) Borislow
is delivering to the Company evidence satisfactory to the Company as to the
transfer of the Additional Notes from Borislow to the Company; and (2) the
Company is delivering $5,706,690 to Borislow.
7. Miscellaneous.
(a) Each of the parties hereto represents and warrants to, and agrees
with, each of the other parties hereto that, at the date hereof: (i) such
representing and warranting party is not in default under the Registration
Rights Agreement; (b) such party
5
<PAGE>
has not suffered any damage under the Registration Rights Agreement and has
no cause of action, right of set-off or counterclaim, or any other claim of
any nature whatsoever against any of the other parties hereto or any
director, officer, attorney, agent, employee, or affiliate of any of such
other parties under the Registration Rights Agreement or otherwise
(collectively, "Claims"); and (c) such party hereby waives and relinquishes
any and all Claims. Each such party further hereby agrees to indemnify and
hold harmless each of the other parties and their respective officers,
directors, attorneys, agents, employees, and affiliates harmless from any
loss, damage, judgment, liability, and expense (including counsel fees)
suffered by or rendered against the other parties or any of them on account
of anything arising out of the Registration Rights Agreement, this
Amendment, or any other document delivered pursuant hereto.
(b) Except as expressly modified by this Amendment, the Registration
Rights Agreement continues in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
day and year first above written.
Tel-Save.com, Inc.
Witness
By:
- - ------------------------------ ------------------------------
Aloysius T. Lawn, Secretary Name:
Title:
Address: Borislow
- - ------------------------------
- - ------------------------------
- - ------------------------------ ------------------------------
Address: Trust II
- - ------------------------------
- - ------------------------------
- - ------------------------------ ------------------------------
Seth Tobias, as Trustee of that certain D&K
Grantor Retained Annuity Trust dated
_______, 1998
6
<PAGE>
has not suffered any damage under the Registration Rights Agreement and has no
cause of action, right of set-off or counterclaim, or any other claim of any
nature whatsoever against any of the other parties hereto or any director,
officer, attorney, agent, employee, or affiliate of any of such other parties
under the Registration Rights Agreement or otherwise (collectively, "Claims");
and (c) such party hereby waives and relinquishes any and all Claims. Each such
party further hereby agrees to indemnify and hold harmless each of the other
parties and their respective officers, directors, attorneys, agents, employees,
and affiliates harmless from any loss, damage, judgment, liability, and expense
(including counsel fees) suffered by or rendered against the other parties or
any of them on account of anything arising out of the Registration Rights
Agreement, this Amendment, or any other document delivered pursuant hereto.
(c) Except as expressly modified by this Amendment, the Registration
Rights Agreement continues in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
day and year first above written.
Tel-Save.com, Inc.
Witness
By:
- - ------------------------------ ------------------------------
Aloysius T. Lawn, Secretary Name:
Title:
Address: Borislow
- - ------------------------------
- - ------------------------------
- - ------------------------------ ------------------------------
7
EXHIBIT 10.37
AMENDMENT OF REGISTRATION RIGHTS AGREEMENT
(The Trust)
THIS AMENDMENT OF REGISTRATION RIGHTS AGREEMENT (this "Amendment") is
entered into as of the 18 day of March, 1999, by and among TEL-SAVE.com, INC., a
Delaware corporation (the "Company"), and MARK PAVOL, as Trustee of that certain
D&K Grantor Retained Annuity Trust dated June 15, 1998 (the "Trust").
RECITALS:
A. The parties hereto and DANIEL M. BORISLOW, a former director, officer,
and shareholder of the Company ("Borislow"), and SETH TOBIAS, as Trustee of that
certain D&K Grantor Retained Annuity Trust II dated August 18, 1998 ("Trust II")
have entered into that certain Registration Rights Agreement dated as of
December 31, 1998 (the "Registration Rights Agreement").
B. The parties hereto, Borislow, and certain other parties have entered
into that certain Agreement dated March 15, 1999, pertaining, among other
things, to the modification of certain promissory notes issued by Communications
TeleSystems International, and it is a condition to that Agreement that the
parties hereto agree to enter into this Amendment.
C. The Company, Borislow, and Trust II have entered into a separate
Amendment of Registration Rights Agreement (Borislow and Trust II).
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Definitions. Terms in this Agreement with initial capital letters and
not otherwise defined herein shall have the meanings defined for such terms in
the Registration Rights Agreement.
2. Amendment of Section 7(a) of the Registration Rights Agreement. Section
7(a) of the Registration Rights Agreement is hereby amended to read in full as
follows:
"(a) The Company agrees that in the event that it makes a public or
private offering of its debt securities in exchange for cash, to the
extent permitted by law the Company will, at the option of the Trust
(subject to the terms stated herein), utilize up to forty percent
(40%) of the net cash proceeds of that offering to the Company after
payment of the expenses relating to the offering that are to be borne
by the Company (the "Net Cash Proceeds") to repurchase at then fair
market value convertible subordinated notes of the Company then owned
of record
<PAGE>
and beneficially by the Trust; provided, however, that the rights of
the Trust hereunder are subject and subordinate to the rights of
Borislow and Trust II under Section 2 of the Amendment of Registration
Rights Agreement (Borislow and Trust II), which Section 2 amends
Section 7(a) of the Registration Rights Agreement as to Borislow and
Trust II. To the extent that any Net Cash Proceeds remain after
Borislow's exercise or failure to exercise timely his option set forth
in Section 2 of the Amendment of Registration Rights Agreement
(Borislow and Trust II) and after Trust II's exercise or failure to
exercise timely its option set forth in Section 2 of the Amendment of
Registration Rights Agreement (Borislow and Trust II), the Trust may
exercise its rights under this Section 7(a) to the extent of such
remaining balance of Net Cash Proceeds. The Trust may exercise its
option set forth in this Section 7(a) by delivering notice to the
Company within five (5) days after the receipt by the Trust of written
notice from the Company, such notice to be sent by Registered or
Certified Mail with Return Receipt Requested, that the Company intends
to make a public or private offering of its debt securities in
exchange for cash. Notwithstanding the foregoing, this Section 7(a)
shall not apply to any debt offering by the Company to a bank or
financial institution or in a commercial context."
3. Amendment of Section 7(d) of the Registration Rights Agreement. Section
7(d) of the Registration Rights Agreement is hereby amended to read in full as
follows:
"(d) If, during the period commencing March 18, 1999, and ending on
the close of business on September 17, 2000 (the "Time Period"), the
Company shall sell any shares of its capital stock (including its
Common Stock) in connection with any employee benefit plan or
stockholder rights distribution, up to the entire proceeds from the
sale of shares in connection with such employee benefit plan or
stockholder rights distribution ("Sale Proceeds") during the Time
Period shall be used, at the Trust's option and if permitted by
applicable law and as provided in this Section 7(d), to purchase
Common Stock then owned by the Trust; provided, however, that the
rights of the Trust under this Section 7(d) are subject and
subordinate to the rights of Borislow under Section 3 of the Amendment
of Registration Rights Agreement (Borislow and Trust II), which
Section 3 amends Section 7(d) of the Registration Rights Agreement as
to Borislow. To the extent that any Sale Proceeds remain after
Borislow's exercise or failure to
2
<PAGE>
exercise timely his option set forth in Section 3 of the Amendment of
Registration Rights Agreement (Borislow and Trust II), the Trust may
exercise its rights under this Section 7(d).
"(i) The Trust may exercise its option by giving timely written
notice of such exercise to the Company. Such notice shall be timely if
it is received by the Company within five (5) days after the receipt
by the Trust of a written Quarterly Notice (hereinafter defined) sent
to the Trust by Registered or Certified Mail with Return Receipt
Requested.
"(ii) The Company agrees to give the Trust written notice within
five (5) calendar days following the end of each calendar quarter of
the amount of any Sale Proceeds as to which the option set forth in
this Section 7(d) shall remain unterminated at the time of such notice
and after Borislow's exercise or failure to exercise timely his option
in Section 3 of the Amendment of Registration Rights Agreement
(Borislow and Trust II), such notice to be sent by Registered or
Certified Mail with Return Receipt Requested (the "Quarterly Notice").
The Trust's option set forth in this Section 7(d) shall terminate as
to any Sale Proceeds as to which the Trust shall have failed to
exercise its option pursuant to a proper Quarterly Notice.
"(iii) The purchase price of any Common Stock purchased pursuant
to an option exercised in response to a Quarterly Notice shall be the
average of the daily closing prices (or of the closing bid and asked
prices) for the last ten (10) trading days of the calendar quarter
then most recently ended with respect to Common Stock that is listed
on a national securities exchange or traded on the over-the-counter
market or quoted on NASDAQ."
"(v) The valuation of the Common Stock and the closing of the
purchase and sale shall take place as expeditiously as practicable
after the exercise by the Trust of its option set forth in this
Section 7(d)."
4. Amendment of Section 7(e) of the Registration Rights Agreement. Section
7(e) of the Registration Rights Agreement is hereby amended to read in full as
follows:
"(e) The Company agrees to make available to the Trust, upon
reasonable written notice from Trust, in connection
3
<PAGE>
with one (1) securities offering to be made by the Trust on or prior
to June 30, 2000, the following Company employees to participate in a
standard securities offering "road show" of not longer than ten (10)
days' duration regarding that offering: the Chief Executive Officer of
the Company; and certain other appropriate employees of the Company as
designated by such Chief Executive Officer; provided, however, that
the rights of the Trust under this Section 7(e) are subject and
subordinate to the rights of Borislow under Section 4 of the Amendment
of Registration Rights Agreement (Borislow and Trust II), which
Section 4 amends Section 7(e) of the Registration Rights Agreement as
to Borislow, and the Trust's rights under this Section 7(e) are
subject to the condition precedent that Borislow waive in writing his
rights under Section 4 of the Amendment of Registration Rights
Agreement (Borislow and Trust II); and, provided further, that such
Borislow waiver shall not be a condition to the exercise by the Trust
of its rights under this Section 7(e) if, at the time the Trust
exercises such rights, Borislow does not own any shares of Common
Stock. The Company may delay such participation if the time of such
participation requested by the Trust would cause undue hardship on the
Company; in the event of such a delay, the June 30, 2000, date set
forth above in this Scetion 7(e) shall be extended by one day for each
day of such delay. The Company shall pay for the reasonable
out-of-pocket expenses incurred by the Company and its officers in
complying with this Section."
5. Miscellaneous.
(a) Each of the parties hereto represents and warrants to, and agrees
with, each of the other parties hereto that, at the date hereof: (i) such
representing and warranting party is not in default under the Registration
Rights Agreement; (b) such party has not suffered any damage under the
Registration Rights Agreement and has no cause of action, right of set-off or
counterclaim, or any other claim of any nature whatsoever against any of the
other parties hereto or any director, officer, attorney, agent, employee, or
affiliate of any of such other parties under the Registration Rights Agreement
or otherwise (collectively, "Claims"); and (c) such party hereby waives and
relinquishes any and all Claims. Each such party further hereby agrees to
indemnify and hold harmless each of the other parties and their respective
officers, directors, attorneys, agents, employees, and affiliates harmless from
any loss, damage, judgment, liability, and expense (including counsel fees)
suffered by or rendered against the other parties or any of them on account of
anything arising out of the Registration Rights Agreement, this Amendment, or
any other document delivered pursuant hereto.
4
<PAGE>
(b) Except as expressly modified by this Amendment, the Registration
Rights Agreement continues in full force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
day and year first above written.
Tel-Save.com, Inc.
Witness
By:
- - ------------------------------ ------------------------------
Aloysius T. Lawn, Secretary Name:
Title:
---------------------------------
Address: The Trust
- - ------------------------------
- - ------------------------------
- - ------------------------------ ---------------------------------
Mark Pavol, as Trustee of that certain D&K
Grantor Retained Annuity Trust dated June 15,
1998
5
EXHIBIT 10.41
================================================================================
INVESTMENT AGREEMENT
BY AND BETWEEN
TEL-SAVE.COM, INC.
AND
AMERICA ONLINE, INC.
AS OF DECEMBER 31, 1998
As amended on
February ___, 1999*
* Amended items are preceded by "[as amended]" or "[as added]"
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I PURCHASE AND SALE OF COMMON STOCK...............................................................1
Section 1.1 Purchase and Sale of Common Stock.............................................1
Section 1.2. Purchase Price................................................................2
Section 1.3. Closing Date..................................................................2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF INVESTOR......................................................2
Section 2.1. Organization, Standing, etc...................................................2
Section 2.2. Authorization and Binding Effect..............................................3
Section 2.3. No Violations; Consents and Approvals.........................................3
Section 2.4. Transfer Restrictions.........................................................4
Section 2.5. Investment Purposes Only......................................................5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................................................5
Section 3.1. Organization, Standing, etc...................................................5
Section 3.2. Authorization; Binding Effect.................................................5
Section 3.3. Valid Issuance of Shares......................................................6
Section 3.4. No Violations; Consents and Approvals.........................................6
Section 3.5 Litigation....................................................................7
Section 3.6. Compliance with Applicable Law................................................7
Section 3.7. Disclosure....................................................................8
Section 3.8. Changes.......................................................................8
Section 3.9. Nasdaq Listing................................................................9
Section 3.10. Capitalization; Options and Warrants.........................................10
Section 3.11. Subsidiaries.................................................................10
Section 3.12 Contracts....................................................................10
Section 3.13. Brokers or Finders...........................................................11
Section 3.14. Seniority of Obligations.....................................................11
Section 3.15. Employment of Battista.......................................................11
ARTICLE IV COVENANTS AND ADDITIONAL AGREEMENTS............................................................12
Section 4.1. Ordinary Course..............................................................12
Section 4.2. Access and Information.......................................................12
Section 4.3. Further Actions..............................................................12
Section 4.4. Further Assurances...........................................................13
Section 4.5. Registration Rights..........................................................13
Section 4.6. Termination of Voting Trust Agreement and Warrantholder and
Stockholders Agreement.......................................................14
Section 4.7. Nasdaq Listing...............................................................14
Section 4.8. Removal of Legend............................................................14
Section 4.9. Limitation on Obligations [as amended].......................................14
Section 4.10. Perfection of Security Interest..............................................16
Section 4.11. Contracts with Certain Stockholders..........................................16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 4.12. Subordination of Obligations under Exchange Agreement........................16
ARTICLE V ADDITIONAL AGREEMENTS CONCERNING THE SHARES....................................................17
Section 5.1. Make-Whole for Shares [as amended]...........................................17
Section 5.2. Lock-up......................................................................20
Section 5.3. Origination Fee..............................................................22
Section 5.4. Call Right...................................................................22
Section 5.5. Make-Whole on Occurrence of Certain Events...................................23
ARTICLE VI WARRANTS.......................................................................................24
Section 6.1. Terms on Warrants and Warrant Shares.........................................24
Section 6.2. Number of Shares of Performance Warrant......................................25
Section 6.3. Put Rights on Warrants.......................................................25
Section 6.4. Required Exercise Rights on Warrants.........................................26
Section 6.5. Make-Whole for Put/Call Warrants.............................................28
Section 6.6. Registration of Put/Call Warrant Shares......................................29
ARTICLE VII CONDITIONS PRECEDENT...........................................................................29
Section 7.1. Each Party's Obligations.....................................................29
Section 7.2. Conditions to the Obligations of the Company.................................29
Section 7.3. Conditions to the Obligations of Investor....................................30
ARTICLE VIII TERMINATION....................................................................................32
Section 8.1. Termination..................................................................32
Section 8.2. Effect of Termination........................................................33
ARTICLE IX INDEMNIFICATION................................................................................33
Section 9.1. Indemnification of the Investor..............................................33
Section 9.2. Indemnification Procedures...................................................34
Section 9.3. Survival of Representations and Warranties..................................34
ARTICLE X MISCELLANEOUS..................................................................................35
Section 10.1 Transfer and Other Taxes.....................................................35
Section 10.2. Brokers; Expenses............................................................35
Section 10.3. No Waivers; Amendments.......................................................35
Section 10.4. Successors and Assigns.......................................................35
Section 10.5. Severability.................................................................35
Section 10.6. Notices......................................................................35
Section 10.7. Entire Agreement.............................................................36
Section 10.8. Governing Law................................................................36
Section 10.9. Counterparts.................................................................36
Section 10.10. Cooperation..................................................................36
Section 10.11. Expenses and Remedies........................................................36
Section 10.12. No Third Party Beneficiaries.................................................36
</TABLE>
<PAGE>
SCHEDULES
Schedule 3.10 Outstanding Rights to Cause the Company to Register Securities
under Securities Act
Schedule 3.11 List of Subsidiaries of the Company
Schedule 3.12 Contracts
EXHIBITS
Exhibit A Form of Registration Rights Agreement
Exhibit B Form of Guaranty
<PAGE>
INVESTMENT AGREEMENT
INVESTMENT AGREEMENT, dated as of December 31, 1998 (the "Agreement"), by
and between TEL-SAVE.COM, INC., a Delaware corporation (the "Company"), and
AMERICA ONLINE, INC., a Delaware corporation (the "Investor").
W I T N E S S E T H:
--------------------
WHEREAS, the Company desires to sell to Investor and Investor desires to
purchase from the Company the number of shares of Common Stock, par value $0.01
per share ("Common Stock"), of the Company described in Section 1.1, on the
terms and conditions described herein; and
WHEREAS, the Investor holds (i) a warrant, dated as of February 22, 1997
(as amended and restated as of May 14, 1998), to purchase 4,000,000 shares of
Common Stock (the "Base Warrant"), (ii) a warrant, dated as of February 22, 1997
(as amended and restated as of May 14, 1998), to purchase as of September 30,
1998 2,798,000 vested shares of Common Stock (the "Performance Warrant") and
(iii) a warrant, dated as of May 14, 1998, to purchase as of the date hereof
1,000,000 shares of Common Stock (the "Further Warrant" and, with the
Performance Warrant, the "Warrants"); and
WHEREAS, the Company and the Investor desire to set forth certain terms
governing their relationship and to provide the Investor with certain additional
rights.
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF COMMON STOCK
Section 1.1. Purchase and Sale of Common Stock. Pursuant to the terms and
subject to the conditions set forth in this Agreement, the Investor hereby
subscribes for and agrees to purchase on the Closing Date (as defined below),
and the Company hereby agrees to issue and sell to Investor, the following
number of shares of Common Stock (the "Shares"):
(i) 1,226,635 shares (the "Warrant Exchange Shares") plus
(ii) 2,894,737 shares (the "Purchase Shares") purchased at a price of
$19.00 per share (the "Per Share Purchase Price").
<PAGE>
Section 1.2. Purchase Price. In consideration of the sale of the Shares to
the Investor, and against delivery to the Investor of a certificate representing
the Shares, on the Closing Date the Investor shall (i) pay to the Company
$55,000,000 in cash by wire transfer to an account designated in writing by the
Company in exchange for the Purchase Shares, and (ii) deliver to the Company the
Base Warrant for cancellation and 1,076,016 shares issuable under the
Performance Warrant for cancellation in exchange for the Warrant Exchange
Shares, thereby reducing by 1,076,016 the number of shares issuable under the
Performance Warrant, leaving a balance of shares of Common Stock issuable as of
the date hereof under the Performance Warrant of 1,721,984 vested shares, which
together with the 1,000,000 vested shares of Common Stock issuable under the
Further Warrant equal 2,721,984 vested shares of Common Stock (the "Warrant
Shares").
Section 1.3. Closing Date.
(a) The closing of the transaction contemplated by this Agreement (the
"Closing") shall take place at the offices of America Online, Inc. in Dulles,
Virginia on January 5, 1999 (the "Closing Date") or on such later date as
mutually agreed upon by the parties hereto.
(b) For all purposes, the transactions set forth in this Agreement
shall be deemed to have occurred in the following order:
First, the warrants surrendered in exchange for the Warrant Exchange
Shares shall be deemed to be surrendered;
Second, the Warrant Exchange Shares shall be deemed to have been
issued;
Third, the Purchase Shares shall be deemed to be issued in exchange
for the purchase price therefor; and
Fourth, the Voting Trust Agreement and the Warrant and Stockholders
Agreement shall be deemed to terminate as set forth in Section 4.6.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Investor hereby represents and warrants to the Company as follows:
Section 2.1. Organization, Standing, etc. The Investor is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business
2
<PAGE>
as presently conducted.
Section 2.2. Authorization and Binding Effect. The Investor has the
corporate power and authority to execute, deliver and perform this Agreement and
the Registration Rights Agreement and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement by the Investor have been duly
authorized by all necessary corporate action on the part of the Investor. This
Agreement constitutes, and the Registration Rights Agreement, when executed or
delivered will be, valid and legally binding obligations of the Investor,
enforceable against the Investor in accordance with their respective terms,
except as such may be limited by bankruptcy, insolvency, fraudulent conveyance,
moratorium or other similar laws affecting creditors' rights and remedies
generally and subject, as to enforceability, to general principles of equity,
regardless whether enforcement is sought in a proceeding at law or in equity.
Section 2.3. No Violations; Consents and Approvals.
(a) Neither the execution, delivery or performance by the Investor of
this Agreement or the Registration Rights Agreement, the consummation by the
Investor of the transactions contemplated hereby or thereby, nor the performance
by the Investor of its obligations hereunder or thereunder (i) will result in a
violation or breach of the Investor's Certificate of Incorporation or Bylaws or
(ii) will result in a violation or breach of (or give rise to any right of
termination, revocation, cancellation or acceleration under or increased
payments under), or constitute a default (with or without due notice or lapse of
time or both) under, or result in the creation of any lien, mortgage, charge,
encumbrance or security interest of any kind (a "Lien") upon any of the
properties or assets of the Investor under, (A) any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, contract, agreement,
obligation, instrument, offer, commitment, understanding or other arrangement
(each a "Contract") or of any license, waiver, exemption, order, franchise,
permit or concession (each a "Permit") to which the Investor is a party or by
which any of their properties or assets may be bound, or (B) subject to the
governmental filings and other matters referred to in clause (b) below, any
judgment, order, decree, statute, law, regulation or rule applicable to the
Investor, except, in the case of clause (ii), for violations, breaches,
defaults, rights of cancellation, termination, revocation or acceleration or
Liens that would not, individually or in the aggregate, have a material adverse
effect on the Investor's business, properties, operations, financial condition,
income or business prospects as presently being conducted. The Investor's
investment in the Shares and other obligations of the Investor under this
Agreement and the Registration Rights Agreement are permitted by applicable law.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any government or any court, administrative agency
or commission or other governmental authority or agency, federal, state, local
or foreign (a "Governmental Entity"), (other than filings required by the
securities laws or any communication laws of any
3
<PAGE>
applicable Governmental Entity, including without limitation the Federal
Communication Commission), as a result of the transactions contemplated by this
Agreement, is required with respect to the Investor in connection with the
execution, delivery or performance by the Investor of this Agreement or the
consummation by the Investor of the transactions contemplated hereby.
Section 2.4. Transfer Restrictions.
The Investor understands that:
(a) the offer and sale of the Shares and the Warrant Shares have not
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), or under the securities laws of any state of the United States or of any
foreign jurisdiction;
(b) no resales of the Shares and the Warrant Shares may be effected
unless the resale of any such shares is registered under the Securities Act or
an exemption therefrom is available and all applicable state and foreign
securities laws are complied with;
(c) the following restrictive legend shall be placed on the
certificates representing the Shares and the Warrant Shares acquired by Investor
hereunder:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
OTHER SECURITIES LAWS. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR
AN EXEMPTION FROM SAID ACT OR SUCH OTHER LAWS AND, IF REQUESTED
BY THE ISSUER, AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED, OR IS EXEMPT
FROM SAID ACT OR SUCH OTHER LAWS. THE SHARES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF THE
INVESTMENT AGREEMENT DATED AS OF DECEMBER 31, 1998 BY AND BETWEEN
TEL-SAVE.COM, INC. AND AMERICA ONLINE, INC.
(d) appropriate stop-transfer instructions will be issued to the
Company's transfer agent with respect to the Shares and the Warrant Shares until
such time as the foregoing legend is removed from the Shares and the Warrant
Shares pursuant to Section 4.8 hereto.
4
<PAGE>
Section 2.5. Investment Purposes Only. The Investor (a) is acquiring the
Shares for investment purposes only within the meaning of the Federal securities
laws and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and (b) has no present intention to influence, control or otherwise direct the
business, management or affairs or to otherwise influence or serve on the Board
of Directors of the Company or any of its Subsidiaries other than as may be
contemplated by this Agreement and Amendment No. 3 (as defined in Section
7.1(c)).
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor as follows:
Section 3.1. Organization, Standing, etc. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Each Subsidiary (as defined in Section 3.11 of this Agreement) is duly
organized and validly existing and, if applicable, is in good standing, under
the laws of the jurisdiction of its incorporation or organization. Each of the
Company and its Subsidiaries is duly qualified or licensed and, if applicable,
is in good standing as a foreign corporation, in each jurisdiction in which the
properties owned, leased or operated, or the business conducted, by it require
such qualification or licensing, except for any such failure so to qualify or be
in good standing which, individually or in the aggregate, would not have a
material adverse effect on the business, properties, financial condition or
operations of the Company and its Subsidiaries, taken as a whole. Each of the
Subsidiaries has the requisite power and authority to carry on its business as
it is now being conducted. The Company has heretofore made available to the
Investor complete and correct copies of the Certificate of Incorporation of the
Company (the "Company Charter") and the By-laws of the Company (the "Company
By-Laws") and the certificate of incorporation and by-laws, or the comparable
organizational documents, of each of its Subsidiaries, each as amended to date
and currently in full force and effect.
Section 3.2. Authorization; Binding Effect. The Company has the corporate
power and authority to execute, deliver and perform this Agreement and the
Registration Rights Agreement, to consummate the transactions contemplated
hereby and thereby, and to issue and sell the Shares. The execution, delivery
and performance of this Agreement and the Registration Rights Agreement by the
Company and the issuance and delivery of the Shares have been duly authorized by
all necessary corporate action on the part of the Company. The Board of
Directors, being fully informed of this Agreement and related transactions,
including the use of the proceeds of the Shares, has approved the terms of the
Agreement and such related transactions with a majority of the directors having
no interest in the Agreement or such related transactions voting in favor of
such approval. This Agreement constitutes, and the Registration Rights
Agreement, when executed and delivered will constitute, valid and legally
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except
5
<PAGE>
as such may be limited by bankruptcy, insolvency, fraudulent conveyance,
moratorium or other similar laws affecting creditors' rights and remedies
generally and subject, as to enforceability, to general principles of equity,
regardless whether enforcement is sought in a proceeding at law or in equity.
Section 3.3. Valid Issuance of Shares. The Shares and the Warrant Shares,
when issued, sold and delivered in accordance with the terms hereof, will have
been duly authorized by all necessary corporate action on the part of the
Company and will be validly issued, fully paid and nonassessable, free and clear
of any liens, charges, claims or encumbrances, and will not be subject to
restrictions on transfer except as specifically provided by Sections 2.4 and 5.2
of this Agreement. The Shares and the Warrant Shares will be eligible for
listing on the National Market System of the Nasdaq Stock Market.
Section 3.4. No Violations; Consents and Approvals.
(a) Neither the execution, delivery or performance by the Company of
this Agreement or the Registration Rights Agreement, the consummation by the
Company of the transactions contemplated hereby or thereby, nor the performance
by the Company of its obligations hereunder or thereunder (i) will result in a
violation or breach of the Company Charter or the Company By-laws or the charter
or by-laws of any of the Company's Subsidiaries or (ii) will result in a
violation or breach of (or give rise to any right of termination, revocation,
cancellation or acceleration under or increased payments under), or constitute a
default (with or without due notice or lapse of time or both) under, or result
in the creation of any Lien upon any of the properties or assets of the Company
or any of its Subsidiaries under, (A) any of the terms, conditions or provisions
of any Contract or of any Permit to which the Company or any of its Subsidiaries
is a party or by which any of their properties or assets may be bound, or (B)
subject to the governmental filings and other matters referred to in clause (b)
below, any judgment, order, decree, statute, law, regulation or rule applicable
to the Company or any of its Subsidiaries, except, in the case of clause (ii),
for violations, breaches, defaults, rights of cancellation, termination,
revocation or acceleration or Liens that would not, individually or in the
aggregate, have a material adverse effect on the business, properties,
operations, financial condition, income or business prospects of the Company and
its Subsidiaries as presently being conducted. No third party has any
pre-emptive rights, or rights of first refusal or first opportunity or similar
rights to purchase, or to offer to purchase, all or any part of the Shares.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required with respect to
the Company in connection with the execution, delivery or performance by the
Company of this Agreement or the consummation by the Company of the transactions
contemplated hereby.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with any applicable Governmental Entity, including without
limitation the
6
<PAGE>
Federal Communication Commission, under any communications laws and relating to
licenses held by the Company is required with respect to the Investor in
connection with the execution, delivery or performance by the parties to this
Agreement and the consummation of the transactions contemplated hereby.
Section 3.5. Litigation. As of the date of this Agreement, there is no
action, suit, proceeding or investigation pending or currently threatened
against the Company which questions the validity of this Agreement or the
Registration Rights Agreement or the right of the Company to enter into it or to
consummate the transactions contemplated hereby or thereby. Except as disclosed
to the Investor in writing within the five business days prior to the date of
this Agreement or as disclosed in the SEC Filings (as defined in Section 3.7),
as of the date of this Agreement, there is no action, suit, proceeding or
investigation pending or currently threatened which, individually or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, could
materially adversely affect the business, properties, operations, financial
condition, income or business prospects of the Company or its Subsidiaries.
Except as disclosed to the Investor in writing within the five business days
prior to the date of this Agreement or as disclosed in the SEC Filings (as
defined in Section 3.7), as of the date of this Agreement, there are no
outstanding judgments, orders, decrees, or injunctions of any Governmental
Entity against the Company or any of its Subsidiaries that, insofar as can
reasonably be foreseen, individually or in the aggregate, in the future would
have a material adverse effect on the business, properties, operations,
financial condition, income or business prospects of the Company and its
Subsidiaries.
Section 3.6. Compliance with Applicable Law. Except as disclosed in the
Company SEC Filings, each of the Company and its Subsidiaries is in compliance
with all statutes, laws, regulations, rules, judgments, orders and decrees of
all Governmental Entities applicable to it, including without limitation the
United States Federal Communications Commission, that relate to its respective
business, and neither the Company nor any of its Subsidiaries has received any
notice alleging noncompliance except, with reference to all of the foregoing,
where the failure to be in compliance would not, individually or in the
aggregate, have a material adverse effect on the business, properties,
operations, financial condition, income or business prospects of the Company or
its Subsidiaries. Each of the Company and its Subsidiaries has all Permits that
are required in order to permit it to carry on its business as it is presently
conducted, except where the failure to have such Permits or rights would not,
individually or in the aggregate, have a material adverse effect on the
business, properties, operations, financial condition, income or business
prospects of the Company or its Subsidiaries. All such Permits are in full force
and effect and the Company and its Subsidiaries are in compliance with the terms
of such Permits, except where the failure to be in full force and effect or in
compliance would not, individually or in the aggregate, have a material adverse
effect on the business, properties, operations, financial condition, income or
business prospects of the Company or its Subsidiaries.
7
<PAGE>
Section 3.7. Disclosure. The Company has made publicly available or has
otherwise provided to the Investor (i) the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (the "1998 Annual Report"), as filed
with the Securities and Exchange Commission ("SEC") pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); (ii) the Company's proxy
statement for its 1998 Annual Meeting of Stockholders; (iii) the Company's
reports on Form 10-Q for the fiscal quarters ended March 31, 1998, June 30, 1998
and September 30, 1998 (collectively, the "Quarterly Reports"), as filed with
the SEC pursuant to the Exchange Act, and (iv) all other reports and
registration statements, if any, as filed by the Company with the SEC since
September 30, 1998 (the documents referred to in clauses (i)-(iv) above being
referred to hereinafter, collectively, as the "SEC Filings"). As of their
respective dates, the SEC Filings (including all documents incorporated by
reference therein) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Since December 31, 1997, the Company has timely filed with
the SEC all reports, documents, registration statements, definitive proxy
statements and all other filings required to be made with the SEC under the
rules and regulations of the SEC, and all such reports, documents, registration
statements, definitive proxy statements and other filings complied in all
material respects with all applicable requirements of the Securities Act, and
the Exchange Act, as applicable. The audited consolidated financial statements
of the Company included or incorporated by reference in the 1998 Annual Report
and the unaudited consolidated financial statements contained in the Quarterly
Reports have been prepared in accordance with United States generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated and with each other, except as may be indicated therein or in the
notes thereto, and fairly present the financial position of the Company as of
the dates thereof and the results of its operations, and subject, in the case of
the unaudited interim consolidated financial statements, to normal year-end
adjustments.
Section 3.8. Changes. Between September 30, 1998 and the date of this
Agreement, except as (1) contemplated by this Agreement and Amendment No. 3 (as
defined in Section 7.1 of this Agreement), (2) disclosed in the SEC Filings and
(3) disclosed to the Investor in writing within the five business days prior to
the date of this Agreement, there has not been:
(a) any changes in the assets, liabilities, financial condition,
operating results or, to the best of the Company's knowledge, prospects of the
Company and its Subsidiaries from that reflected in the 1998 Annual Report,
except changes in the ordinary course of business that have not been, in the
aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties or
financial condition of the Company or any of its Subsidiaries;
8
<PAGE>
(c) any waiver or compromise by the Company or any of its Subsidiaries
of a material right or of a material debt owed to it;
(d) any satisfaction or discharge of any Lien or payment of any
obligation by the Company or any of its Subsidiaries, except in the ordinary
course of business and which is not materially adverse to the business,
properties or financial condition of the Company or any of its Subsidiaries (as
such business is presently conducted);
(e) any change to a material contract or arrangement by which the
Company or any of its Subsidiaries or any of their assets is bound or subject,
or any breach or waiver of any breach of or under any such contract or amendment
(or the occurrence of any event which would, as a result of the passage of time,
become or result in such a breach or waiver) which change, breach or waiver has
a materially adverse effect on the Company and its Subsidiaries;
(f) any sale, assignment or transfer to a third party that is not an
Affiliate (as hereinafter defined) of any material patents, trademarks,
copyrights, trade secrets or other intangible assets for compensation which is
less than fair value;
(g) any mortgage, pledge, transfer of a security interest in, or Lien,
created by the Company or any of its Subsidiaries, with respect to any of its
material properties or assets, except Liens for taxes not yet due or payable;
(h) any declaration, setting aside or payment or other distribution in
respect of any of the Company's capital stock;
(i) any event or condition of any type that has (or will as a result
of the passage of time) materially and adversely affected (or affect) the
business, properties, financial condition, or to the best of the Company's
knowledge, the business prospects of the Company or any of its Subsidiaries.
For purposes of this Agreement the term "Affiliate" means any individual or
entity directly or indirectly controlling, controlled by or under common control
with, a party to this Agreement. Without limiting the foregoing, the direct or
indirect ownership of 50% or more of the outstanding voting securities of an
entity, or the right to receive 50% or more of the profits or earnings of an
entity, shall be deemed to constitute control.
Section 3.9. Nasdaq Listing. The Common Stock is currently traded on the
National Market System of the Nasdaq Stock Market, and the Company knows of no
reason or set of facts which is likely to result in the termination of such
trading. Nothing in this Section 3.9 shall be interpreted to preclude the
Company from listing its Common Stock on any other national securities exchange.
9
<PAGE>
Section 3.10. Capitalization; Options and Warrants. The authorized capital
stock of the Company consists of 5,000,000 shares of Preferred Stock, par value
$0.01 per share, and 300,000,000 shares of Common Stock, par value $0.01 per
share, of which no shares of Preferred Stock and 55,267,719 shares of Common
Stock were issued and outstanding as of December 31, 1998, 10,728,810 options to
purchase Common Stock were outstanding as of such date, and no warrants to
purchase Common Stock other than the Base Warrant, Performance Warrant and the
Further Warrant held by the Investor were outstanding as of such date. As of
December 31, 1998, 9,711,896 shares of Common Stock are issuable upon conversion
of the Convertible Notes (as defined in Section 3.14 hereof). Except as
disclosed in the SEC Filings, and except for the transactions contemplated by
this Agreement, since December 31, 1998, neither the Company nor any of its
Subsidiaries has issued any shares of capital stock or granted any option,
warrants, rights (including conversion or preemptive rights), or similar rights,
to any person or entity to purchase or acquire any shares or any rights with
respect to any shares of capital stock of the Company or any of its
Subsidiaries, including the Shares. Except as set forth on Schedule 3.10, there
are no outstanding rights to cause the Company to register the securities held
by any person or entity under the Securities Act.
Section 3.11. Subsidiaries.
The Company has no equity interests with a value of $100,000 or more in any
person or entity other than its Subsidiaries (other than any investment of less
than 5% of the outstanding securities of any corporation if such securities are
regularly traded on a recognized stock exchange), and there are no commitments
on the part of the Company or any Subsidiary to contribute additional capital in
respect of any equity interest in any person or entity. Each of the outstanding
shares of capital stock of each of the Subsidiaries has been duly authorized and
validly issued, and is fully paid and nonassessable. Schedule 3.11 contains a
complete and correct list of all Subsidiaries of the Company. Except as set
forth on Schedule 3.11, all of the outstanding shares of capital stock of each
Subsidiary are owned, either directly or indirectly, by the Company free and
clear of all Liens. For purposes of this Agreement the term "Subsidiary" means,
as to any person or entity, any corporation at least a majority of the shares of
stock of which having general voting power under ordinary circumstances to elect
a majority of the Board of Directors of such corporation (irrespective of
whether or not at the time stock of any other class or classes shall have or
might have voting power by reason of the happening of any contingency) is, at
the time as of which the determination is being made, owned by such person or
entity, or one or more of its Subsidiaries or by such person or entity and one
or more of its Subsidiaries.
Section 3.12. Contracts.
(a) Except as set forth on Schedule 3.12(a) and except for this
Agreement and the other agreements entered into in connection with this
Agreement, the
10
<PAGE>
Company has filed as exhibits to the Company's SEC Filings all material
agreements required to be filed under the rules and regulations of the SEC (the
"Material Contracts") and the Company has not entered into any material
contracts that will be required to be filed in future filings.
(b) All Material Contracts are legal, valid, binding, in full force
and effect and enforceable against each party thereto, except to the extent that
any failure to be enforceable, individually or in the aggregate, would not
reasonably be expected to have or result in a material adverse effect on the
business, financial condition, operations, properties, income or business
prospects of the Company and its Subsidiaries, taken as a whole, provided that
no representation is made as to the enforceability of any non-competition
provision in any employment agreement. There does not exist under any Material
Contract any violation, breach or event of default, or event or condition that,
after notice or lapse of time or both, would constitute a violation, breach or
event of default thereunder, on the part of any of the Company or its
Subsidiaries or, to the best knowledge of the Company or any of its
Subsidiaries, any other person or entity, other than such violations, breaches
or events of default as would not, individually or in the aggregate, have a
material adverse effect on the business, financial condition, operations,
properties, income or business prospects of the Company and its Subsidiaries,
taken as a whole. The enforceability of all Material Contracts will not be
adversely affected in any manner by the execution, delivery or performance of
this Agreement or the consummation of the transactions contemplated hereby, and
no Material Contract contains any change in control or other terms or conditions
that will become applicable or inapplicable as a result of the consummation of
such transactions. Except as set forth on Schedule 3.12(b), neither the Company
nor the Subsidiaries are a party to any contract prohibiting or materially
restricting the ability of the Company or any of its Subsidiaries to conduct its
business, to engage in any business or operate in any geographical area or
compete with any person.
Section 3.13. Brokers or Finders. No agent, broker, investment banker or
other firm is or will be entitled to any broker's or finder's fee or any other
commission or similar fee in connection with any of the transactions
contemplated by this Agreement.
Section 3.14. Seniority of Obligations. All payment obligations of the
Company under this Agreement shall constitute Senior Debt as that term is
defined in the Indenture dated as of September 9, 1997 relating to the Company's
4 1/2% Convertible Subordinated Notes due 2002 and the Indenture dated as of
December 10, 1997 relating to the Company's 5% Convertible Subordinated Notes
due 2004 (the "Indentures"), (collectively, the "Convertible Notes").
Section 3.15. Employment of Battista. The failure of Daniel Borislow to
resign as an executive officer of the Company shall not have any impact upon the
Company's employment relationship with Gabriel Battista.
ARTICLE IV
11
<PAGE>
COVENANTS AND ADDITIONAL AGREEMENTS
Section 4.1. Ordinary Course. During the period from the date of this
Agreement and continuing until the Closing, the Company agrees as to itself and
its Subsidiaries that, except to the extent that the Investor otherwise consents
in writing, the Company and its Subsidiaries shall conduct their respective
businesses in the ordinary course in substantially the same manner as presently
conducted.
Section 4.2. Access and Information. So long as the Investor owns any
Shares or Warrant Shares or has any unexercised Warrants outstanding or the
Company has any obligations outstanding to the Investor pursuant to this
Agreement, the Company will (and will cause each of its Subsidiaries and each of
their respective accountants, counsel, consultants, officers, directors,
employees, agents and representatives of or to any of the Subsidiaries, to) give
the Investor and its representatives, reasonable access during reasonable
business hours to all of their respective properties, assets, books, contracts,
reports and records relating to the Company and its Subsidiaries, and furnish to
them all such documents, records and information with respect to the properties,
assets and business of the Company and its Subsidiaries, as the Investor shall
from time to time reasonably request and as the Company may already have in its
possession. The Company will inform the Investor from time to time and at the
Investor's request as to the business of the Company and its Subsidiaries. Any
documents, records and information made available to the Investor under this
Section 4.2 shall be subject to the provisions of Paragraph VII.B of the Third
Amendment to the Telecommunications Marketing Agreement and the Company and the
Investor shall have the same rights and obligations with respect to disclosure
of the terms of this Agreement as are set forth with respect to the Third
Amendment in such paragraph VII.B.
Section 4.3. Further Actions.
(a) Each of the Company and the Investor shall use its reasonable best
efforts to take or cause to be taken all actions, and to do or cause to be done
all other things, necessary, proper or advisable in order to fulfill and perform
its obligations in respect of this Agreement and the Registration Rights
Agreement, or otherwise to consummate and make effective the transactions
contemplated hereby and thereby.
(b) Each of the Company and the Investor shall, as promptly as
practicable, (i) make, or cause to be made, all filings and submissions required
under any law applicable to it or any of its Subsidiaries, and give such
reasonable undertakings as may be required in connection therewith, and (ii) use
all reasonable efforts to obtain or make, or cause to be obtained or made, all
Permits necessary to be obtained or made by it or any of its Subsidiaries, in
each case in connection with this Agreement and the Registration Rights
Agreement, the sale
12
<PAGE>
and transfer of the Shares pursuant hereto and the consummation of the other
transactions contemplated hereby or thereby.
(c) Each of the Company and the Investor shall coordinate and
cooperate with the other party in exchanging such information and supplying such
reasonable assistance as may be reasonably requested by such other party in
connection with the filings and other actions contemplated by this Agreement and
the Registration Rights Agreement.
(d) At all times prior to the Closing Date, the Company and the
Investor shall promptly notify each other in writing of any fact, condition,
event or occurrence that could reasonably be expected to result in the failure
of any of the conditions contained in Article VII to be satisfied, promptly upon
becoming aware of the same.
Section 4.4. Further Assurances. Following the Closing Date, the Company
shall, from time to time, execute and deliver such additional instruments,
documents, conveyances or assurances and take such other actions as shall be
necessary, or otherwise reasonably be requested by the Investor, to confirm and
assure the rights and obligations provided for in this Agreement and the
Registration Rights Agreement and render effective the consummation of the
transactions contemplated hereby and thereby, or otherwise to carry out the
intent and purposes of this Agreement.
Section 4.5. Registration Rights. As soon as practicable, but within no
less than 45 days after the Closing Date and pursuant to the terms and
conditions of a registration rights agreement, dated as of the Closing Date (the
"Registration Rights Agreement"), by and among the Company and the Investor, the
Company shall file a registration statement under the Securities Act with the
SEC, to register the resale by the Investor of the Shares, the Warrant Shares
and the Put/Call Warrant Shares (as defined in Section 6.5), and the Company
shall use its best efforts to cause such registration statement to be declared
effective within 90 days after the Closing Date; provided, however, that the
Company shall not be required to request that such registration statement be
declared effective if it determines, on advice of its counsel, that to do so
would require the Company to file its report on Form 10-K for the year ended
December 31, 1998 prior to March 31, 1999. The form of the Registration Rights
Agreement is attached hereto as Exhibit A. The Company and Daniel Borislow (on
his own behalf and on behalf of his Affiliates) hereby waive with respect to the
rights granted in the registration rights agreement, dated as of the date hereof
(the "Borislow Registration Rights Agreement"), by and between the Company,
Daniel Borislow, Mark Pavol as Trustee of that certain D&K Grantor Retained
Annuity Trust dated June 15, 1998 and the Trustee of that certain D&K Grantor
Retained Annuity Trust II, any provision in any agreement between them that
restricts the ability of the Company to file a registration statement or any
amendment or supplement thereto, or to seek effectiveness of any registration
statement. Nothing in the Borislow Registration Rights Agreement shall restrict,
prevent or otherwise limit the Company's (i) obligations under Section 4.9 of
this Agreement, including without limitation the Company's obligations to
deposit 50% of
13
<PAGE>
the proceeds of any Indebtedness incurred by it (other than a bank revolving
loan in an amount not in excess of $50 million) up to $35,000,000, and (ii) the
issuance of securities, including without limitation the Shares, the Warrant
Shares and the Warrants and any other warrants, to the Investor under this
Agreement or any other agreement or to any other person or entity to fund the
Company's obligations to the Investor under this Agreement or any other
agreement.
Section 4.6. Termination of Voting Trust Agreement and Warrantholder and
Stockholders Agreement. Effective immediately after the Closing, the voting
trust agreement, dated as of February 22, 1997 (the "Voting Trust Agreement"),
among Daniel Borislow (as Trustee), the Investor and the Company and the
warrantholder and stockholders agreement, dated as of February 22, 1997 (the
"Warrantholder and Stockholders Agreement"), between the Investor and the
Company are hereby terminated, of no force and effect and are superseded by the
terms and conditions set forth in this Agreement and the Registration Rights
Agreement. Notwithstanding anything to the contrary in the Voting Trust
Agreement or the Warrant and Stockholders Agreement neither (1) the restrictions
on transfer of shares of Common Stock set Section 4.1. forth in the Warrant and
Stockholders Agreement nor (2) the Voting Trust and the restrictions on transfer
of shares of Common Stock set forth in the Voting Trust Agreement shall
terminate until the earlier of their termination pursuant to this Section 4.6 or
the termination of this Agreement pursuant to Article VIII of this Agreement.
Section 4.7. Nasdaq Listing. As of the Closing Date, the Shares and
Put/Call Warrant Shares will be listed on the National Market System of the
Nasdaq Stock Market.
Section 4.8. Removal of Legend. The Company covenants and agrees that, with
respect to the Shares and the Warrant Shares, stop-transfer instructions and the
restrictive legend shall be promptly removed by delivery of substitute
certificates without such legend for such shares upon (i) delivery to the
Company of evidence of the transfer of such shares represented by such
certificate pursuant to a registration statement under the Securities Act or in
accordance with the applicable provisions of Rule 144 under the Securities Act,
or (ii) the delivery by the Investor to the Company of a letter from the staff
of the SEC, or an opinion of counsel in form and substance reasonably
satisfactory to the Company, to the effect that such shares do not require
further registration under the Securities Act for subsequent transfer by the
holders thereof.
Section 4.9. Limitation on Obligations [as amended].
(a) Except as provided in subsection (b), as long as (i) the Investor
owns any Shares or Warrant Shares, (ii) the Investor owns any unexercised
Warrants, or (iii) the Company has any obligations outstanding to the Investor
pursuant to this Agreement, the Company shall not without the prior written
consent of the Investor incur or permit any Subsidiary to incur any Indebtedness
(as that term is defined in the Indentures as of the date of this Agreement) or
enter into any agreement or understanding prohibiting or restricting the
Company's ability or right to satisfy its obligations to the Investor hereunder.
14
<PAGE>
(b) Notwithstanding the provisions of Section 4.9(a), the Company may
incur (and may permit its Subsidiaries to incur) Indebtedness if:
(1) the Company deposits 50% of the proceeds of any such borrowing
(other than a Bank Debt, Receivables Facility (each as defined in Section
4.10) and/or any borrowing from Borislow in an amount not in excess of an
aggregate of $50 million) in an escrow to secure the Company's obligations
to the Investor hereunder, which escrow shall be on terms and conditions
satisfactory to the Investor in its sole discretion; provided, however,
that the Company shall have no obligation to deposit any proceeds to the
extent the escrow balance (including any amounts previously deposited
pursuant to this Section 4.9(b)(1) or otherwise and any amounts withdrawn
pursuant to the proviso in Section 5.1(h)(3), but excluding amounts
otherwise withdrawn) would exceed $35,000,000;
(2) each of the following conditions is satisfied at or prior to the
time the Indebtedness is incurred:
(A) either (i) the Investor holds a number of Shares and Warrant
Shares that are less than 1,030,343 or (ii) the Investor's
rights set forth in Section 5.1 of this Agreement have
terminated by their terms (including pursuant to Section
5.1(h));
(B) the Investor holds a number of Warrants that is less than
680,496;
(C) the Investor has had the ability to exercise the rights set
forth in Section 6.3 for a period of at least six months; and
(D) the Company has no payment obligations under this Agreement
that have arisen and have not been paid; or
(3) The balance in the escrow established pursuant to clause (1) is
$35,000,000 (less any amounts deducted pursuant to the proviso in Section
5.1(h)(3)).
(c) The Company's obligation to deposit funds in escrow with respect
to Section 4.9(b)(1) shall be reduced to the extent of any amount deposited in
escrow by Daniel Borislow to secure the Company's obligations to the Investor
hereunder if such escrow is on terms and conditions satisfactory to the
Investor.
15
<PAGE>
Section 4.10. Perfection of Security Interest. No later than 20 days after
the Closing, the Company shall execute a security agreement (the "Security
Agreement") for the benefit of the Investor to perfect the security interests
thereunder. The Security Agreement shall secure all of the Company's obligations
to the Investor under this Agreement and shall pledge all of the Company's
assets and shall be in form and substance satisfactory to the Investor in its
sole discretion; provided, however, that the Company may, subject to the
limitations on indebtedness set forth on Section 4.9 of this Agreement, encumber
or pledge its accounts receivable [as amended] its accounts receivable and/or
other assets appropriate for securitization in an asset-based financing in
connection with a receivables and/or other asset-based financing (a "Receivables
Financing") and the Company may encumber or pledge its assets in connection with
indebtedness incurred under a commercial bank facility (the "Bank Debt") in
which the obligations under the Bank Debt may be secured by any or all of the
assets of the Company and shall be senior to the Investor's security interests.
If the Company does incur Bank Debt or arranges a Receivables Financing, the
Investor shall cooperate with requests of lenders providing the Bank Debt or the
Receivables Financing and shall enter into such lenders' standard intercreditor
agreement to subordinate, to the extent permitted by Section 4.9, the Investor's
security interests in the assets of the Company to the senior interests of the
lenders providing the Bank Debt and/or the Receivables Financing; provided,
however, that the Investor shall not be required to consent to any provision
that would limit or restrict its right to receive payments under this Agreement.
In the event that the security interests under the Security Agreement are not
perfected as specified in this Section 4.10 within 20 days following the Closing
Date, such failure shall be deemed a default under this Agreement and the
Company may not incur any indebtedness pursuant to Section 4.9 of this
Agreement.
Section 4.11. Contracts with Certain Stockholders. The Company shall not
enter into any agreement, arrangement or understanding with any person or entity
who beneficially owns (within the meaning of Rule 13d-3 under the Exchange Act)
in excess of 15% of the issued and outstanding Common Stock unless a majority of
the disinterested directors of the Company determines that such agreement,
arrangement or understanding is on terms no less favorable to the Company than
could have been obtained in an arms-length transaction with a disinterested
third party.
Section 4.12. Subordination of Obligations under Exchange Agreement.
Notwithstanding anything to the contrary in the exchange agreement, dated as of
the date hereof (the "Exchange Agreement"), by and among the Company, Tel-Save,
Inc. (the "TS Sub") and Mark Pavol as Trustee of that certain D&K Grantor
Retained Annuity Trust dated June 15, 1998, the Company's and TS Sub's
obligations under the Exchange Agreement, including without limitation any
obligations under Section 5 of that agreement, shall be subordinated to the
Company's obligations to the Investor under this Agreement.
ARTICLE V
16
<PAGE>
ADDITIONAL AGREEMENTS CONCERNING THE SHARES
Section 5.1. Make-Whole for Shares. [as amended]
(a) If, during the period (the "Make-Whole Period") commencing on June
1, 1999 and ending on September 30, 2000 (as such period may be extended
pursuant to Section 5.1(e) hereto), the Investor proposes to sell any of the
Shares, it may notify the Company in writing of such intention. Within two (2)
days of receipt by the Company of such notice, the Company may purchase from the
Investor such Shares proposed to be sold. The Company may exercise such purchase
right by paying the Investor in cash, against receipt of the Shares proposed to
be sold, the product of (x) the number of Shares proposed to be sold, multiplied
by (y) the Current Market Price (as defined in Section 5.1(d) below) per share
on the date of such notice plus an amount per share (the "Make-Whole Amount")
equal to the excess, if any, of the Per Share Purchase Price over the Current
Market Price per share, provided that:
(i) with respect to the Purchase Shares, the Make-Whole Amount
shall not exceed $14.00 per share, and
(ii) with respect to the Warrant Exchange Shares, the Make-Whole
Amount shall not exceed $11.00 per share.
(b) If the Investor gives the notice provided for in paragraph (a),
the Company does not exercise the purchase right described in paragraph (a) of
this Section 5.1, and the Investor sells (whether in a market transaction, a
privately negotiated transaction or otherwise) any of the Shares so proposed to
be sold (X) after the earlier of (A) expiration of the two-day period referred
to in paragraph (a) or (B) Investor's receipt of notice from the Company that it
does not intend to exercise the purchase right and (Y) within 90 days (as
extended by any Black-Out Period Extension, if any) of the date written notice
is given pursuant to paragraph (a) of this Section 5.1, the Company shall,
within three (3) trading days of receiving notice of any such sale, pay the
Investor a Make-Whole Amount equal to the product of (x) the number of Shares
sold by the Investor during such 90-day period in arm's length transactions
multiplied by (y) the excess, if any, of (i) the Per Share Purchase Price over
(ii) the price per share at which the Investor actually sold such Shares, less
any and all reasonable expenses actually incurred by Investor in consummating
such sale (the "Sales Expense"), provided that:
(i) with respect to the Purchase Shares, the Make-Whole Amount
shall not exceed the sum of $14.00 per share plus the Sales Expense,
and
17
<PAGE>
(ii) with respect to the Warrant Exchange Shares, the Make-Whole
Amount shall not exceed the sum of $11.00 per share plus the Sales
Expense.
(c) [as added] If, after using commercially reasonable efforts to do
so, the Investor is unable to sell any Shares as to which it has given notice
pursuant to Section 5.1(a) within 30 days after giving such notice, the Investor
may, at any time until the expiration of seven days after the conclusion of the
90-day period set forth in Section 5.1(b) (as such period may be extended)
notify the Company of its inability to sell the Shares and the Company shall,
within three trading days of receipt of such notice, pay the Investor a
Make-Whole Amount calculated in accordance with paragraph (b) as though such
Shares were sold for $.01 per share and the Investor shall, upon receipt of such
payment, surrender the Shares to the Company for cancellation.
(d) If the Investor does not sell any of the Shares pursuant to
Section 5.1(b) or if the Investor has sold only a portion of its Shares, the
provisions of this Section 5.1 shall continue to be in force with respect to any
remaining Shares held by the Investor as long as the Investor reinitiates the
process specified in this Section 5.1 by providing notice to the Company.
(e) The term "Current Market Price" with respect to any day shall be
deemed to be the average of the daily closing price per share of Common Stock
for 10 consecutive Nasdaq National Market trading days before such day. The
closing price for each day shall be the last sale price regular way or, in case
no such reported sale takes place on such day, the average of the last reported
bid and lowest reported asked prices as reported by Nasdaq National Market, or
other similar organization if Nasdaq National Market is no longer reporting such
information, or if not so available, the fair market price as determined in good
faith by the Board of Directors of the Company.
(f) In the event that any shares of Common Stock received by the
Investor are not freely tradable because the registration statement under which
such shares would be sold is for any reason not deemed effective by the SEC, the
sale of any such shares pursuant to the registration statement is suspended
pursuant to Section 2(c) of the Registration Rights Agreement, or for any other
similar reason (a "Black-Out Period"), the period of time for the sale of any
such shares shall be extended for two (2) days for each day of the Black-Out
Period (a "Black-Out Period Extension") and the Make-Whole Period of this
Section 5.1 shall also be extended by the Black-Out Period Extension with
respect to any or all Shares.
(g) Notwithstanding the foregoing, the Company, at its option, may pay
a portion of the amounts due under this Section 5.1 with a note of the Company
secured by adequate, sufficient and satisfactory assets of the Company as
determined solely by the Investor and dated as of the date that payment under
Section 5.1 would otherwise be due, payable to the
18
<PAGE>
Investor in cash, accruing interest at an annual rate of 10% calculated on the
basis of 30 days and a year of 360 days, maturing six (6) months from the date
of issuance of the note; provided that the amount of such note shall not exceed
the total amount owed under this Section 5.1 minus 50% of the excess over $30
million of the Company's working capital (current assets less current
liabilities), determined in accordance with generally accepted accounting
principles consistently applied on the date of the note.
(h) [as added] At such time as the Company (or, pursuant to Section
4.9(c), Borislow) has deposited $35,000,000 in escrow pursuant to Section
4.9(b)(1), the Company shall request that the Investor accept a Terminating
Payment in accordance with this Section 5.1(h). The Investor shall, within 10
days of receipt of such request, advise the Company whether it elects to accept
the Terminating Payment.
(1) The amount of a Terminating Payment shall be, for each
Purchase Share and Warrant Exchange Share held by the Investor at the
time of the payment, an amount equal to the Make Whole Amount that
would be payable by the Company pursuant to Section 5.1(a) if the
Investor had given notice pursuant to Section 5.1(a) on the date the
Company requested that the Investor accept the Terminating Payment.
(2) If the Investor elects to receive a Terminating Payment and
(x) within five trading days of the receipt of the Terminating Payment
notifies the Company that it intends to sell any Purchase Shares or
Warrant Exchange Shares and (y) the Investor sells any Purchase Shares
or Warrant Exchange Shares during the 120-day period following receipt
of the Terminating Payment (as such 120-day period may be extended by
a Black-Out Period Extension) or gives notice in the manner provided
for in Section 5.1(c) (irrespective of whether the Make Whole rights
in Section 5.1 are in effect) that it is unable to sell Shares, then
(A) if the average price per Share at which the Investor actually
sold such Shares during the 120-day period, less Sales Expenses,
is less than the Current Market Price per share on the date the
Company requested that the Investor accept the Terminating
Payment, or if the Investor gives notice that it was unable to
sell any Shares, then the Company shall, within three trading
days of notice of such sales or inability to sell during the
120-day period, pay the Investor an additional amount for each
such Share equal to the excess of the Make Whole Amount that
would have been payable pursuant to Section 5.1(b) or Section
5.1(c) (as appropriate) with respect to any
19
<PAGE>
such Shares over the amount otherwise paid pursuant to Section
5.1(h)(1); and
(B) if the average price per Share at which the Investor actually
sold such Shares during the 120-day period, less Sales Expenses,
is greater than the Current Market Price per share on the date of
the notice, then the Investor shall within three trading days of
the end of the 120-day period reimburse to the Company any such
excess;
provided, however, that the Investor shall not sell a number of Shares
during any five trading-day period in the 120-day period that is
greater than the number that is 10% of the number of Purchase Shares
plus Warrant Exchange Shares held by the Investor on the date the
Company requested that the Investor accept a Terminating Payment.
(3) If the Investor elects to accept a Terminating Payment, then
upon payment of all amounts required to be paid by the Company
pursuant to clauses (1) and (2), the obligations of the Company in
Sections 4.9, 4.10, 5.1 and 5.5 shall terminate, the Security
Agreement and all security interests thereunder shall be released and
the restrictions and obligations on the Investor set forth in Sections
5.2 and 5.4 shall terminate; provided, however, that amounts deposited
in escrow pursuant to Section 4.9(b)(1) shall not be released to the
Company until all obligations of the Company pursuant to Sections 6.3
and 6.5 of this Agreement have either expired or been paid in full;
provided, further, however, that, at the request of the Company, such
amounts on deposit shall be applied to the satisfaction of any cash
obligations of the Company under Section 6.3 or 6.5 and that, at the
request of the Company, there shall be released from the escrow
deposit, from time to time, any amounts in excess of the existing
maximum obligations under such Sections 6.3 and 6.5.
(h) Nothing in this Section 5.1 shall restrict the Investor's ability
to sell Shares at any time or from time to time or retain any proceeds from any
such sale.
Section 5.2. Lock-up. Until May 31, 1999, the Investor will not, without
the prior written consent of the Company, directly or indirectly, offer, sell,
contract to sell (including, without limitation, any short sale), pledge,
transfer, establish any "put equivalent position" within the meaning of Rule
16a-1(b) under the Exchange Act, grant any option to purchase or otherwise sell
or dispose of (or announce any such transaction) any Purchased Shares; provided,
however, that the limitations set forth in this Section 5.2 shall terminate and
the Investor shall have the right, directly or indirectly, to offer, sell,
contract to sell (including, without limitation, any short sale), pledge,
transfer, establish any "put equivalent position" within the meaning of Rule
16a-
20
<PAGE>
1(b) under the Exchange Act, grant any option to purchase or otherwise sell or
dispose of (or announce any such transaction) any Purchased Shares in the event
that:
(a) the Company has entered into (i) a merger agreement in which the
holders of the Common Stock prior to the merger would cease to hold a majority
of the voting securities of the surviving corporation, (ii) [as amended] an
agreement or series of agreements of the Company and/or its Subsidiaries that
results in the sale of all or substantially all of the assets of the Company and
its Subsidiaries taken as a whole, or (iii) an agreement to be acquired, or to
enter unto a business combination, consolidation or any such similar
transaction, in each case with any person or entity other than a wholly-owned
Subsidiary of the Company; provided, however, the restriction shall (A) continue
if the merger agreement is with a majority-owned Subsidiary of the Company and
the Company is to be the surviving corporation in the merger or (B) be
reinstated if such merger agreement or other agreements referred to in sections
(i), (ii) or (iii) is subsequently terminated or the transactions contemplated
thereunder are not consummated;
(b) a tender or exchange offer is made by any person, entity or 13D
Group (as defined below) (other than an Affiliate of, or any person or entity
acting in concert with, the Investor) to acquire Common Stock or any other class
of capital stock of the Company with the right to vote generally in the election
of directors (the "Voting Securities") which, if added to the Voting Securities
(if any) already owned by such person, entity or 13D Group, would result, if
consummated in accordance with its terms, in the Beneficial Ownership (as
defined below) by such person, entity or 13D Group of more than 50% of all
Voting Securities of the Company then outstanding, provided that the limitation
shall be reinstated if such tender or exchange offer is withdrawn or terminated
without such person, entity or 13D Group acquiring such 50% ownership level;
(c) a materially adverse change in the business, properties,
operations, financial condition, income or business prospects of the Company and
its Subsidiaries, taken as a whole, has occurred;
(d) any executive officer of the Company (as such term is defined in
Rule 3b-7 under the Securities Exchange Act of 1934, as amended) who commenced
service with the Company on or after December 1, 1998, directly or indirectly,
offers, sells, relinquishes, contracts to sell (including, without limitation,
any short sale), pledges, transfers, establishes any "put equivalent position"
within the meaning of Rule 16a-1(b) under the Exchange Act, grants any option to
purchase or otherwise sells or disposes of (or announces any such transaction
of) any capital stock of the Company; or
(e) any of the events listed in Section 5.5 occurs.
21
<PAGE>
For purposes of this Agreement, the term "13D Group" means any group of persons
or entities formed for the purpose of acquiring, holding, voting or disposing of
Voting Securities which would be required under Section 13(d) of the Exchange
Act and the rules and regulations thereunder (as now in effect and based on
present legal interpretations thereof) to file a statement on Schedule 13D with
the SEC as a "person" within the meaning of Section 13(d)(3) of the Exchange
Act; the term "Beneficial Ownership" or any like expression with respect to any
securities means having "beneficial ownership" of such securities (as determined
pursuant to Rule 13d-3 under the Exchange Act), including pursuant to any
agreement, arrangement or understanding, whether or not in writing.
Section 5.3. Origination Fee. Subject to Section 5.4 hereof, the Company
shall pay to the Investor a fee for entering into the transactions contemplated
by this Agreement equal to $2,500,000, which fee shall be payable in cash in
eight (8) quarterly installments of $312,500 each, commencing on April 1, 1999
and each 90 days thereafter until the full amount has been paid. The Company's
obligation to pay the fee shall be reduced upon the sale by the Investor of any
Purchase Shares in an amount equal to the amount of the unpaid fee at the time
of the sale times a fraction, the numerator of which is the number of Purchase
Shares sold and the denominator of which is the number of Purchase Shares owned
by the Investor immediately prior to such sale. The amount of the fee will be
pro rated for any sales of Purchase Shares sold during any quarter in which the
fee is due.
Section 5.4. Call Right.
(a) During the period that begins April 1, 1999 and ends April 1,
2001, the Company, by notice to the Investor, may at its option request to
repurchase any or all of the Shares at a price per share equal to the Per Share
Purchase Price. The Investor may reject such request, but if the Investor
rejects or does not otherwise respond to such request within 10 days from
receipt of notice by the Company, the Company will be relieved of any obligation
to make any payments required pursuant to Section 5.3 above for any periods
following the date of the Company's request. Any such notice given by the
Company shall be irrevocable and the Company shall be obligated to purchase the
number of Shares specified in the notice in accordance with this Section 5.4. If
the Company for any reason (other than the Investor's rejection or failure to
respond) fails to purchase such Shares pursuant to any such request, the fee
required pursuant to Section 5.3 will not be affected, the Company will be in
default of its obligations and the Investor may pursue whatever remedies it may
have at law or in equity.
(b) At any time during the 12 months following the first date on which
(1) the restrictions on transfer of shares set forth in Section 5.2 of this
Agreement have terminated, (2) all Shares are subject to an effective
registration statement, (3) the right of the Investor to sell Shares pursuant to
the Registration Statement is not suspended and (4) the closing market price of
the Common Stock on the Nasdaq National Market has exceeded $21.85 for 20
consecutive trading days, the Company may request that the Investor sell all or
any portion of the Shares within 90 days of the receipt by the Investor of
notice of the Company's request, provided
22
<PAGE>
that the Company shall pay the Investor cash in an amount equal to the product
of (x) the number of Shares sold by the Investor during such 90-day period (as
extended by any Black-Out Period Extension, if any) in arm's length transactions
multiplied by (y) the excess if any, of (i) the Per Share Purchase Price over
(ii) the price per share at which the Investor actually sold such Shares, less
the Sales Expenses, within three trading days of receipt of notice of such
deficiency. If the Investor fails to sell Shares pursuant to the Company's
request, then the Investor's rights under Section 5.1 shall terminate with
respect to that number of Shares covered by the Company's request. The Company
may only make one request pursuant to this Section 5.4(b) with respect to any
Share. Nothing in this Section 5.4(b) shall restrict the Investor's ability to
sell Shares at any time or from time to time or retain any proceeds from any
such sale.
Section 5.5. Make-Whole on Occurrence of Certain Events.
(a) If (v) there is a "Change of Control" (as such term is defined in
the Indentures) of the Company, (w) [as amended] the Company, any Subsidiary of
the Company or any authorized officer of the Company or any of its Subsidiaries
discloses, orally or in writing through the issuance of a press release or any
other public disclosure, including, without limitation, filings required under
the U.S. securities laws, any litigation, arbitration or other proceeding
commenced by the Company or any of its Subsidiaries against the Investor, (x) on
or after January 15, 1999, Daniel Borislow is deemed an executive officer as
defined in Rule 3b-7 under the Exchange Act, as amended, with respect to the
Company's [as added] or any Subsidiary's business or operations, (y) the Company
materially breaches its obligations under this Agreement or under the
Telecommunications Marketing Agreement in accordance with the terms thereof
(regardless of whether such breach entitles the Investor to terminate the
Telecommunications Marketing Agreement) or fails to honor any of its payment
obligation under the Telecommunications Marketing Agreement and the applicable
notice and cure period under the Telecommunications Marketing Agreement has
expired, or (z) the Company [as added] or its subsidiaries commits a material
default under, or any action occurs that would otherwise constitute a material
default (with or without due notice or lapse of time or both) under, the
Indentures or any agreement evidencing indebtedness for borrowed money; then at
any time within 60 days after the Investor has actual knowledge of each
occurrence of any such event, the Investor can elect to sell any or all of the
Shares and put any or all of the Warrants to the Company by notifying the
Company in writing of such intention. The Company shall:
(A) with respect to the Shares, at the option of the Investor, either:
(i) within seven (7) days of receipt by the Company of such notice
purchase from the Investor such Shares proposed to be sold by the Investor, in
which event the Company shall purchase such shares, against receipt of the
Shares proposed to be sold for a purchase price per share in cash equal to the
Per Share Purchase Price; or
(ii) if the Investor sells any of the Shares so proposed to be sold
within 90 days (as extended by any Black-Out Period Extension, if any) of the
date written notice is given pursuant to this Section 5.5(a)(i), within three
(3) trading days of receiving notice of any
23
<PAGE>
such sale, pay the Investor cash in an amount equal to the product of (x) the
number of Shares sold by the Investor during such 90 day period (as extended by
any Black-Out Period Extension, if any) in arms length transactions multiplied
by (y) the excess, if any, of (i) the Per Share Purchase Price over (ii) the
price per share at which the Investor actually sold such Shares, less the Sales
Expense; and
(B) with respect to the Warrants, within seven (7) days of receipt by
the Company of such notice pay the Investor in cash, against receipt of the
Warrants, the "respective Put Price" (as described in Section 6.3 hereof)
for each of the Warrants being put to the Company.
(b) The Company shall promptly (and in no event more than one business
day following such event) notify the Investor in writing of (i) any events
giving rise to the rights specified in this Section 5.5 and (ii) any event that
would otherwise have been deemed to be a commission by the Company of a material
default under, or any action that would constitute a material default (with or
without due notice or lapse of time or both) under, the Indentures or any
agreement evidencing indebtedness for borrowed money, except for the granting of
a waiver by any party with respect to any such default.
(c) Notwithstanding the foregoing, the Company, at its option (except
in the case of an event specified in clause (y) of Section 5.5(a)), may pay a
portion of the amounts due under this Section 5.5 with a note of the Company
secured by adequate, sufficient and satisfactory assets of the Company as
determined solely by the Investor and dated as of the date that payment under
Section 5.5 would otherwise be due, payable to the Investor in cash, accruing
interest at an annual rate of 10% calculated on the basis of a month of 30 days
and a year of 360 days, maturing six (6) months from the date of issuance of the
note; provided that the amount of such note shall not exceed the total amount
owed under this Section 5.5 minus 50% of the excess of the Company's working
capital (current assets less current liabilities), determined in accordance with
generally accepted accounting principles consistently applied on the date of the
note, over $30 million.
(d) Nothing in this Section 5.5 shall restrict the Investor's ability
to sell Shares at any time or from time to time or retain any proceeds from any
such sale.
ARTICLE VI
WARRANTS
Section 6.1. Terms on Warrants and Warrant Shares. The parties hereto agree
that the provisions set forth in this Article VI supersede any inconsistent
provisions in any and all prior agreements entered into by the parties hereto
with respect to the terms and conditions of the Base Warrant, the Performance
Warrant and the Further Warrant (each a "Warrant" and, collectively, the
"Warrants") and the Warrant Shares.
24
<PAGE>
Section 6.2. Number of Shares of Performance Warrant. Concurrently with the
execution of Amendment No. 3, the Performance Warrant shall be, and hereby is,
further amended to provide (a) that it is exercisable only with respect to the
number of "Warrant Shares" (as defined in such Performance Warrant) as shall, in
accordance with the terms of such Performance Warrant, have vested as of (and
including) September 30, 1998, which number of shares is agreed to be 2,798,000;
(b) that the term "Warrant Shares" as used therein shall for all purposes of
such Performance Warrant mean such number of shares of the Common Stock as shall
equal the 2,798,000 "Warrant Shares" so vested as of September 30, 1998; and (c)
that no further adjustment in the number of "Warrant Shares" for which such
Performance Warrant may be exercised shall be made (except only pursuant to
paragraph 6 thereof). As of the Closing Date, the number of shares issuable
under the Performance Warrant will be reduced by 1,076,016 to reflect the
exchange set forth in Section 1.2.
Section 6.3. Put Rights on Warrants. The Investor shall have the right (the
"Put Right"), with respect to all or any portion of each tranche of the
Performance Warrants and the Further Warrant, at any time and from time to time,
after the termination of the LD Exclusivity Period (as defined in the
Telecommunications Marketing Agreement) up until the date that is five (5) years
following the Closing Date (and in any event, the Investor shall have such
rights on the earlier to occur of the date 30 days prior to (i) the expiration
of each of the respective warrants and (ii) the date that is five (5) years
following the Closing Date), to require the Company (or any designee that shall
be designated by the Company) to purchase all or a portion of any of such
Warrants then held by the Investor for an amount equal to the respective Put
Price (as hereinafter defined) therefor upon prior written notice to the Company
specifying a closing date (the "Put Closing Date") not sooner than ten (10)
business days after such notice, the specific Warrants to be put and the number
of shares of Common Stock thereunder with respect to which the purchase is
required. On the Put Closing Date, the Investor shall deliver to the Company the
specific Warrants being put on such date to the Company and the Company shall,
at its election, either (x) pay to the Investor in cash in immediately available
funds the respective Put Price for such Warrants so put, or (y) deliver to the
Investor a certificate, registered in the Investor's name, for such number of
shares of Common Stock as shall then have a "Current Market Price" (as defined
in such Warrant) on the Put Closing Date equal to the Put Price; provided that
with respect to the portion of the Put Price as equals the amount (the "Excess
Amount") of the excess of the Put Price over the value (based on a Black-Scholes
calculation done on the same basis as the "Adjustment Value" for share vestings
as determined pursuant to Amendment No. 1, dated as of January 25, 1998, to the
Telecommunications Marketing Agreement, but without regard to any of the
provisions hereof as they may affect the terms or exercise prices of such
Warrants) on the Put Closing Date of such Warrant (as to each Warrant on a Put
Closing Date, its "Current Warrant Value"), the Company may, at its election,
deliver a Warrant Note (as defined below) to the Investor in an amount equal to
such Excess Amount in lieu of cash pursuant to clause (x) above or delivery of
shares of Common Stock for such amount pursuant to clause (y) above. A "Warrant
Note" delivered in respect of any Warrant put by the Investor on a Put Closing
Date shall mean a senior subordinated promissory note of the Company, dated such
Put Closing Date, payable to the Investor in cash, in principal amount equal to
the amount of the Put Price
25
<PAGE>
otherwise payable, accruing interest at an annual rate of 10% calculated on the
basis of a month of 30 days and a year of 360 days, maturing on the second
anniversary of such Put Closing Date, mandatorily payable on a quarterly basis
of accrued interest and equal quarterly amounts of principal designed to
amortize the Warrant Note over the term of such Warrant Note and in full upon a
"Change in Control" (as defined in the Warrants). The Warrant Note shall be
prepayable at any time and from time to time, in whole or in part by the Company
without penalty, with any such prepayment being applied first to accrued but
unpaid interest and then to principal payments in inverse order of maturity. The
"respective Put Price" for each of the Warrants as of any date is an amount
equal to the respective Booked Amount for such Warrant. The "respective Booked
Amount" and "respective Subject Shares" for each of the Warrants as of the date
of this Agreement are as follows:
<TABLE>
<CAPTION>
Warrant Booked Amount Subject Shares
------- ------------- --------------
<S> <C> <C>
(i) Performance Warrant $24,034,002 1,721,984
(in the aggregate), which
consists of three tranches,
respectively:
Tranche A Performance Warrant $ 2,544,501 206,870
Tranche B Performance Warrant $14,936,160 888,000
Tranche C Performance Warrant $ 6,553,341 627,114
(ii) Further Warrant $12,290,000 1,000,000;
</TABLE>
provided, however, that the number of such respective Subject Shares shall be
subject to adjustment, if any, after the date of this Agreement pursuant to
paragraph 6 of the Warrants; and provided, further, that, if any of the Warrants
shall have been exercised by the Investor (including by reason of a Required
Exercise, as defined below) in part prior to the exercise of any Put Right with
respect thereto, the respective Booked Amount thereof shall equal the product of
the Booked Amount therefor set forth above times a fraction, the numerator of
which shall be the number of shares of Common Stock as to which such Warrant
then continues to be exercisable and the denominator of which shall be the
number of respective Subject Shares for such Warrant set forth above (as such
number may then have been adjusted pursuant to paragraph 6 of the Warrants).
Section 6.4. Required Exercise Rights on Warrants. The Company shall have
the right, at any time and from time to time, to the date that is the earlier to
occur of the date 30 days prior to (i) the expiration of the Warrants and (ii)
the date that is five (5) years following the Closing Date, to require that the
Investor exercise (each, a "Required Exercise") all or any portion of the
Warrants at the Adjusted Exercise Price (as defined below) therefor upon prior
written notice to the Investor specifying a closing date (the "Required Exercise
Closing Date") not sooner than ten (10) business days after such notice, the
specific Warrants required to be exercised and the number of shares of Common
Stock thereunder with respect to which the exercise is thereby required;
provided, however, that the Company shall not have the right to require an
exercise
26
<PAGE>
with respect to any Warrant (or any portion thereof) if the Current Market Price
(as defined in such Warrant) is less than two times the then respective Call
Amount (as defined below) per share for such Warrant. The giving of such notice,
unless it shall be withdrawn by the Company prior to the specified Required
Exercise Closing Date, shall be deemed for all purposes to be an irrevocable
election by the Investor to exercise such Warrants so specified on such
specified closing date with respect to such specified number of shares of Common
Stock at the Adjusted Exercise Price therefor on such closing date, provided
that the Investor shall have the right, if the Company shall have given and not
withdrawn a notice of Required Exercise with respect to any such Warrant, to
elect to exercise such Warrant as to such specified number of shares of Common
Stock on a "net issuance exercise" basis (as defined in such Warrant) by giving
the Company written notice of such election within five (5) business days after
such notice of Required Exercise is given. On the Required Exercise Closing Date
specified in the Company's notice to the Investor, the Investor shall deliver to
the Company the Warrant required to be exercised and, unless the Investor shall
have elected to exercise such Warrant on a "net issuance exercise" basis, an
amount in cash in immediately available funds equal to the product of the
Adjusted Exercise Price per share for such Warrant times the number of shares of
Common Stock as to which such exercise is required, and the Company shall
deliver to the Investor (x) if the Investor shall not have elected to exercise
such Warrant on a "net issuance exercise" basis, a certificate, registered in
the Investor's name, for the number of shares of Common Stock as to which such
Warrant is so exercised or (y) if the Investor shall have elected to exercise
such Warrant on a "net issuance exercise" basis, either (at the Company's
election) (m) a certificate, registered in the Investor's name, for such number
of shares of Common Stock as shall equal (i) the quotient of (A) the product of
(1) the amount by which the then Current Market Price per share exceeds the then
Adjusted Exercise Price per share, times (2) the number of shares of Common
Stock as to which such Warrant is to be exercised, divided by (B) the then
Current Market Price per share, or (n) an amount in immediately available funds
equal to the Current Market Price per share for such shares that would otherwise
have been issued upon a "net issuance exercise" basis as described in subpart
(y)(m) of this sentence. The "Adjusted Exercise Price" per share for a Warrant
at any time shall be the Current Market Price per share on the Required Exercise
Date (as defined in such Warrant) minus the then Call Amount per share for such
Warrant. For purposes of this Section 6.4, the "then Call Amount" of a Warrant
shall be equal to the amount set forth for the Warrant in Section 6.3 increased
at a semi-annually compounded rate of five percent (5%) on the date of Closing
and on each six-month anniversary of the Closing Date, except that the then Call
Amount for each Warrant for the six (6) month period ending on the fifth
anniversary of the Closing Date shall be as follows:
27
<PAGE>
Call Amount
-----------
Performance Warrant
(in the aggregate), consisting of: $39,704,227
Tranche A Performance Warrant $ 4,203,522
Tranche B Performance Warrant $24,674,571
Tranche C Performance Warrant $10,826,134
Further Warrant $20,303,108.
Section 6.5. Make-Whole for Put/Call Warrants.
(a) If the Investor notifies the Company in writing within 30 days of
its receipt of any of the shares pursuant to Sections 6.3 or 6.4 (the "Put/Call
Warrant Shares") that it intends to sell any or all of such Put/Call Warrant
Shares, the Company, within seven (7) days of receipt of such notice, may
purchase from the Investor such Put/Call Warrant Shares proposed to be sold by
the Investor. The Company may exercise such purchase right by paying the
Investor in cash, against receipt of such Put/Call Warrant Shares proposed to be
sold, the product of (x) the number of Put/Call Warrant Shares proposed to be
sold, multiplied by (y) the Current Market Price per share on the Put Closing
Date (for shares received pursuant to Section 6.3) or the Required Exercise
Closing Date (for shares received pursuant to Section 6.4).
(b) If the Company does not exercise the purchase right described in
Section (a) of this Section 6.5 and the Investor sells [ as added] (whether in a
market transaction, a privately negotiated transaction or otherwise) any of the
Put/Call Warrant Shares so proposed to be sold within 30 days (as extended by
any Black-Out Period Extension, if any) of the later of (i) the date a written
response by the Company to the notice is received by the Investor pursuant to
Section (a) of this Section 6.5 and (ii) the seven day period specified in
Section (a) of this Section 6.5, the Company shall, within three (3) trading
days of receiving notice of any such sale, pay the Investor cash in an amount
equal to the product of (x) the number of Put/Call Warrant Shares sold by the
Investor during such 30 day period (as extended by any Black-Out Period
Extension, if any) in arm's length transactions multiplied by (y) the amount by
which (i) the Current Market Price per share on the Put Closing Date (for shares
received pursuant to Section 6.3) or the Required Exercise Closing Date (for
shares received pursuant to Section 6.4) exceeds (ii) the price per share at
which the Investor actually sold such Put/Call Warrant Shares, less the Sales
Expense for such shares.
(c) [ as added] If, after using commercially reasonable efforts to do
so, the Investor is unable to sell any Put/Call Warrant Shares as to which it
has given notice pursuant to Section 6.5(a) within 30 days after giving such
notice, the Investor may, at any time until the expiration of seven days after
the conclusion of the 30-day period set forth in Section 6.5(b) (as such period
may be extended) notify the Company of its inability to sell the Put/Call
Warrant Shares and the Company shall, within three trading days of receipt of
such notice, pay the Investor a Make-Whole Amount calculated in accordance with
paragraph (b) as though such
28
<PAGE>
Put/Call Warrant Shares were sold for $.01 per share and the Investor shall,
upon receipt of such payment, surrender the Put/Call Warrant Shares to the
Company for cancellation.
Section 6.6. Registration of Put/Call Warrant Shares. Any Put/Call Warrant
Shares received by the Investor shall be subject to an effective resale
registration statement at the time of their issuance and shall be freely
tradable.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.1. Each Party's Obligations. The obligations of the Company and
the Investor to consummate the transactions contemplated to occur at the Closing
shall be subject to the satisfaction prior to the Closing of each of the
following conditions, each of which may be waived only if it is legally
permissible to do so:
(a) Approvals. All material authorizations, consents, orders or
approvals of, or regulations, declarations or filings with, or expirations of
applicable waiting periods imposed by, any Governmental Entity necessary for the
consummation of the transactions contemplated hereby, shall have been obtained
or filed or shall have occurred.
(b) No Litigation, Injunctions, or Restraints. No statute, rule,
regulation, executive order, decree, temporary restraining order, preliminary or
permanent injunction or other order enacted, entered, promulgated, enforced or
issued by any Governmental Entity or other legal restraint or prohibition
preventing the consummation of the transactions contemplated by this Agreement
and the Registration Rights Agreement shall be in effect.
(c) Amendment No. 3. Amendment Number 3 ("Amendment No. 3") to the
Telecommunications Marketing Agreement, dated as of February 22, 1997, by and
among the Company, Tel-Save, Inc. and the Investor, as heretofore corrected and
amended by letter, dated April 23, 1997, and amended by an Amendment No. 1,
dated January 25, 1998, and an Amendment No. 2, dated May 14, 1998 (as amended
from time to time, the "Telecommunications Marketing Agreement"), shall have
been executed by the parties thereto and shall have become effective in
accordance with the terms and conditions thereof.
(d) Nasdaq Listing. The Shares shall have been approved for listing on
the Nasdaq National Market System, subject only to official notice of issuance.
Section 7.2. Conditions to the Obligations of the Company. The obligations
of the Company to consummate the transactions contemplated to occur at the
Closing shall be subject to the satisfaction by the Investor or waiver by the
Company prior to the Closing of each of the following conditions:
29
<PAGE>
(a) Representations and Warranties. The representations and warranties
of the Investor that are qualified as to materiality shall be true and correct,
and those that are not so qualified shall be true and correct in all material
respects, as of the date of this Agreement and as of the time of the Closing as
though made at and as of such time, except to the extent such representations
and warranties expressly relate to an earlier date (in which case such
representations and warranties that are qualified as to materiality shall be
true and correct, and those that are not so qualified shall be true and correct
in all material respects, on and as of such earlier date) and the Company shall
have received a certificate signed by an authorized officer of the Investor to
such effect.
(b) Registration Rights Agreement. The Investor shall have executed
and delivered the Registration Rights Agreement.
Section 7.3. Conditions to the Obligations of Investor. The obligations of
the Investor to consummate the transactions contemplated to occur at the Closing
shall be subject to the satisfaction by the Company or waiver by the Investor
prior to the Closing of each of the following conditions:
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement that are qualified as to materiality
shall be true and correct, and those that are not so qualified shall be true and
correct in all material respects, as of the date of this Agreement and as of the
time of the Closing as though made at and as of such time, except to the extent
such representations and warranties expressly relate to an earlier date (in
which case such representations and warranties that are qualified as to
materiality shall be true and correct, and those that are not so qualified shall
be true and correct in all material respects, on and as of such earlier date),
and Purchaser shall have received a certificate signed by the president and
chief financial officer of the Company to such effect.
(b) Opinion of the Company's Counsel. The Investor shall have received
an opinion dated as of the Closing of the General Counsel of the Company, in
form and substance reasonably satisfactory to the Investor.
(c) Registration Rights Agreement. The Company shall have executed and
delivered the Registration Rights Agreement.
(d) Performance of Obligations of the Company. The Company shall have
performed or complied in all material respects with all obligations and
covenants required to be performed or complied with by the Company under this
Agreement and the Investor shall have received a certificate signed by the
president and chief financial officer of the Company to such effect.
(e) Corporate Proceedings. All corporate proceedings of the Company in
connection with the transactions contemplated by this Agreement and the
Registration Rights Agreement, and all documents and instruments incident
thereto, shall be satisfactory in form and
30
<PAGE>
substance to the Investor and its counsel, and the Investor and its counsel
shall have received all such documents and instruments, or copies thereof,
certified or requested, as may be reasonably requested.
(f) Board Resolutions. The Investor shall have received a certificate
of the Secretary of the Company certifying that the Board of Directors has duly
adopted resolutions by unanimous consent (i) approving the execution and
delivery of this Agreement and the transactions contemplated hereby, and (ii)
approving the execution and delivery of the Borislow Registration Rights
Agreement, the severance agreement entered into by the Company and Daniel
Borislow, the Exchange Agreement, the purchase agreement regarding the stock of
Emergency Transportation Corporation entered into by the Company and Jimlew
Capital, L.L.C., the agreement of purchase and sale of real property entered
into by TS Sub and Jimlew Capital, LLC and the lease by and between Jimlew
Capital, LLC and the Company and all of the transactions contemplated
thereunder, all of which resolutions are currently in effect and are in form and
substance reasonably satisfactory to the Investor.
(g) Guaranty. Daniel Borislow shall have executed an unconditional
guaranty of the Company's obligations under Sections 5.1, 5.3, 5.5, 6.3 and 6.5
of this Agreement (the "Guaranty"), which Guaranty shall be substantially in the
form of Exhibit B hereto.
(h) Battista Waiver. The Company shall have furnished evidence
satisfactory in form and substance to the Investor that Gabriel Battista waives
any provision in his employment agreement with the Company that he will
terminate his employment with the Company in the event that Daniel Borislow
fails to resign as an executive officer of the Company.
(i) Material Contracts. The Company shall have provided executed
copies of each of the Material Contracts set forth in Schedule 3.12 to the
Investor and the Investor shall have received a certificate of the Secretary of
the Company certifying that each of the Material Contracts received by the
Investor is a true and correct copy.
(j) Review of Information. The Company shall have made such deliveries
as are called for by this Agreement. The Investor shall be fully satisfied in
its sole discretion with the results of its review of all of the Schedules and
all of such deliveries, and its review of, and other due diligence
investigations with respect to, the business, operations, affairs, prospects,
properties, assets, existing and potential liabilities, obligations, profits and
condition (financial or otherwise) of the Company.
31
<PAGE>
ARTICLE VIII
TERMINATION
Section 8.1. Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by mutual written consent of the Investor and the Company;
(b) by the Investor or the Company;
(i) if there shall be any statute, law, regulation or rule that
makes consummating the transactions contemplated hereby illegal or if any
court or other Governmental Entity of competent jurisdiction shall have
issued a judgment, order, decree or ruling, or shall have taken such other
action restraining, enjoining or otherwise prohibiting the consummation of
the transactions contemplated hereby and such judgment, order, decree or
ruling shall have become final and non-appealable; or
(ii) if the Telecommunications Marketing Agreement shall have
terminated;
(c) by the Investor:
(i) if the Closing shall not have occurred prior to January 15,
1999, provided, that the right to terminate this Agreement pursuant to this
clause (i) shall not be available if the Investor's failure to fulfill any
obligation under this Agreement results in the failure of the Closing to
occur;
(ii) if the Company shall have failed to perform in any material
respect any of its obligations hereunder or shall have breached in any
respect any representation or warranty contained herein qualified by
materiality or shall have breached in any material respect any
representation or warranty not so qualified, and the Company has failed to
perform such obligation or cure such breach, within 15 days of its receipt
of written notice thereof from the Investor, and such failure to perform
shall not have been waived in accordance with the terms of this Agreement;
or
(iii) if any of the conditions set forth in Section 7.1 or 7.3
shall become impossible to fulfill (other than as a result of any breach by
the Investor of the terms of this Agreement) and shall not have been waived
in accordance with the terms of this Agreement;
(d) by the Company:
(i) if the Closing shall not have occurred prior to June 30,
1999, provided, that the right to terminate this Agreement pursuant to this
clause (i) shall not be
32
<PAGE>
available if the Company's failure to fulfill any obligation under this
Agreement results in the failure of the Closing to occur;
(ii) if the Investor shall have failed to perform in any material
respect any of its obligations hereunder or shall have breached in any
respect any representation or warranty contained herein qualified by
materiality or shall have breached in any material respect any
representation or warranty not so qualified, and the Investor has failed to
perform such obligation or cure such breach, within 15 days of its receipt
of written notice thereof from the Company, and such failure to perform
shall not have been waived in accordance with the terms of this Agreement;
or
(iii) if any of the conditions set forth in Section 7.1 or 7.2
shall become impossible to fulfill (other than as a result of any breach by
the Company of the terms of this Agreement) and shall not have been waived
in accordance with the terms of this Agreement.
Section 8.2. Effect of Termination. In the event of termination of this
Agreement by either the Company or the Investor as provided in Section 8.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of the Investor or the Company, other than the
provisions of this Section 8.2, Section 10.12 and Article IX and except to the
extent that such termination results from the willful and material breach by a
party of any of its representations, warranties, covenants or agreements set
forth in this Agreement.
ARTICLE IX
INDEMNIFICATION
Section 9.1. Indemnification of the Investor. The Company covenants and
agrees to defend, indemnify and hold harmless each of the Investor, its
Affiliates (other than the Company and any of its Subsidiaries), and their
respective officers, directors, partners, employees, agents, advisers and
representatives (collectively, the "Investor Indemnitees") from and against, and
pay or reimburse the Investor Indemnitees for, any and all claims, demands,
liabilities, obligations, losses, costs, expenses, fines or damages (whether
absolute, accrued, conditional or otherwise and whether or not resulting from
third party claims), including interest and penalties with respect thereto and
all expenses incurred in the investigation or defense of any of the same or in
asserting, preserving or enforcing any of their respective rights hereunder
(collectively, "Losses"), resulting from or based on (or allegedly resulting
from or based on) (1) any breach by the Company of any representation, warranty,
covenant or obligation of the Company hereunder or (2) any claim by any third
party arising out of any use or application of the proceeds of the investment of
the Investor pursuant to this Agreement. The Losses described in this Section
9.1 are herein referred to as "Investor Indemnifiable Losses". The Company shall
reimburse the Investor Indemnitees for any legal or other expenses incurred by
such Investor Indemnitees in connection with investigating or defending any such
Investor Indemnifiable Losses as such expenses are incurred.
33
<PAGE>
Section 9.2. Indemnification Procedures. Promptly after receipt by an
Investor Indemnitee of notice of the commencement of any action or the written
assertion of any claim, such Investor Indemnitee shall, if a claim in respect
thereof is to be made against the Company, as the case may be (the "Indemnifying
Person"), notify the Indemnifying Person in writing of the commencement or the
written assertion thereof. Failure by an Investor Indemnitee to so notify the
Indemnifying Person shall relieve the Indemnifying Person from the obligation to
indemnify such Investor Indemnitee only to the extent that the Indemnifying
Person suffers actual and material prejudice as a result of such failure but in
no event shall such failure to notify the Indemnifying Person (i) constitute
prejudice suffered by the Indemnifying Person if it has otherwise received
notice of the actions giving rise to such obligation to indemnify or (ii)
relieve it from any liability or obligation that it may otherwise have to such
Investor Indemnitee. In case any such action or claim shall be brought or
asserted against any Investor Indemnitee and it shall notify the Indemnifying
Person of the commencement or assertion thereof, the Indemnifying Person shall
be entitled to participate therein but the defense of such action or claim shall
be conducted by counsel to the Investor Indemnitee, provided, however, that the
Indemnifying Person shall not, in connection with any one such action or
proceeding or separate but substantially similar actions or proceedings arising
out of the same general allegations, be liable for the fees and expenses of more
than one separate firm of attorneys at any time for all Investor Indemnitees,
except to the extent that local counsel, in addition to regular counsel, is
required in order to effectively defend against such action or proceeding and
provided further that an Investor Indemnitee shall not enter into any settlement
of any such claim without the prior consent of the Company, such consent not to
be unreasonably withheld or delayed. In no event shall the Company be liable
under this Article IX, and the Company's obligation to defend, indemnify and
hold harmless the Investor Indemnitee shall not apply to: (a) any special,
incidental or consequential damages resulting from or based upon any breach by
the Company of any representation, warranty, covenant or obligation of the
Company hereunder and (b) any Investor Indemnifiable Losses until the aggregate
amount of such Losses exceeds $100,000. The remedies set forth in this Article
IX are cumulative and shall not be construed to restrict or otherwise affect any
other remedies that may be available to an Investor Indemnitee or a Party under
any other agreement, pursuant to statutory or common law or equity.
Notwithstanding anything to the contrary in this Agreement, any claim for
indemnification under this Article IX must be brought prior to September 30,
1999, except for claims relating to the representations and warranties in
Sections 3.2, 3.3 and 3.10 which can be brought any time prior to the expiration
of the applicable statute of limitations.
Section 9.3. Survival of Representations and Warranties. The
representations and warranties of the Company contained in this Agreement shall
expire for all purposes on September 30, 1999, except for the representations
and warranties contained in Sections 3.2, 3.3 and 3.10 which shall expire for
all purposes upon expiration of the applicable statute of limitations.
ARTICLE X
34
<PAGE>
MISCELLANEOUS
Section 10.1. Transfer and Other Taxes. The Company shall pay any and all
stamp, transfer and other similar taxes payable or determined to be payable in
connection with the execution and delivery of this Agreement or the acquisition
by Investor of the Shares. Notwithstanding the foregoing, the Company shall not
be responsible for any transfer taxes in connection with the transfer of the
Shares by Investor subsequent to their issuance to Investor.
Section 10.2. Brokers; Expenses. The Investor represents and warrants that
it has not utilized the services of any broker or finder in connection with the
transactions contemplated hereby and that it will bear all of its own expenses
incurred in connection with such transactions.
Section 10.3. No Waivers; Amendments.
(a) No failure or delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
(b) Any provision of this Agreement may be amended or waived if, but
only if, such amendment or waiver is in writing and is signed by the Company and
the Investor.
Section 10.4. Successors and Assigns. The rights and obligations of the
parties hereto under this Agreement may not be assigned to any other person and
this Agreement shall not be construed so as to confer any right or benefit upon
any person other than the parties to this Agreement; provided, however, that the
Investor may assign its rights hereunder to an Affiliate of the Investor and may
assign its rights hereunder to any person or entity who acquires all or
substantially all of the assets of the Investor, provided that such Affiliate or
such person or entity, as the case may be, agrees in writing to be bound by the
terms and conditions set forth herein. This Agreement shall be binding upon the
parties hereto and their respective successors and assigns.
Section 10.5. Severability. If any term or provision of this Agreement is
held by a court of competent jurisdiction to be invalid, void or unenforceable,
the remainder of the terms and provisions shall remain in full force and effect
and shall in no way be affected, impaired or invalidated.
Section 10.6. Notices. All notices, requests and other communications to
any party hereunder shall be given in writing (including on telecopier or
similar writing) and shall be given to such party at its address, or telecopier
number set forth on the signature pages hereof, or such other address, or
telecopier number as such party may hereafter specify for such purpose. Each
35
<PAGE>
such notice, request or other communication shall be effective (i) if given by
telecopy, when such telecopy is transmitted to the telex or telecopy number
specified on the signature page hereto and the appropriate answer back (i.e.,
machine confirmation or telephone confirmation) is received, (ii) if given by
mail, by registered mail only 72 hours after such communication is deposited in
the mail with first class postage prepaid, addressed as aforesaid, or (iii) if
given by any other means, when received at the address specified on the
signature page hereto.
Section 10.7. Entire Agreement. This Agreement (including the documents set
forth in the Exhibits and Schedules hereto) constitutes the entire agreement and
understanding among the parties hereto with respect to the transactions
contemplated hereby and supersedes any and all prior agreements and
understandings, written or oral, relating to the subject matter hereof.
Section 10.8. Governing Law. The laws of the State of New York shall govern
the interpretation, validity and performance of the terms of this Agreement,
regardless of the law that might be applied under applicable principles of
conflicts of laws.
Section 10.9. Counterparts. This Agreement may be executed in counterparts,
each of which shall be an original with the same effect as if the signatures
thereto and hereto were upon the same instrument.
Section 10.10. Cooperation. The Investor and the Company agree to take, or
cause to be taken, all such further or other actions as shall reasonably be
necessary to make effective and consummate the transactions contemplated by this
Agreement, including, without limitation, making all required filings under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, if any.
Section 10.11. Expenses and Remedies. Whether or not the Closing takes
place, all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be borne by the party incurring such
expense.
Section 10.12. No Third Party Beneficiaries. Nothing contained in this
Agreement is intended to confer upon any person or entity other than the parties
hereto and their respective successors and permitted assigns, any benefit, right
or remedies under or by reason of this Agreement; provided, however, that the
parties hereto hereby acknowledge and agree that the Investor Indemnitees (other
than the Investor) are third party beneficiaries of Article IX of this
Agreement.
36
<PAGE>
[Two Signature pages follow]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers or representatives, as of
the date first above written.
TEL-SAVE.COM, INC.
By: Address:
-------------------------- Tel-Save.com, Inc.
Name: 6805 Route 202
Title: New Hope, Pennsylvania 18938
Fax: 215-862-1515
Attention: Chief Financial Officer
AMERICA ONLINE, INC.
By: Address:
-------------------------- America Online, Inc.
Name: 22000 AOL Way
Title: Dulles, Virginia 20166
Fax: (703) 265-2208
Attention: General Counsel
With a copy to:
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Fax: (703) 265- 1202
Attention: Senior Vice President, Head of
Business Affairs
With respect to the waiver of rights in
Section 4.5, the Voting Trust Agreement
in Section 4.6 and with respect to the
condition in Section 7.3(g),
acknowledged and accepted by:
- - --------------------------------
Daniel Borislow
37
<PAGE>
With respect to Section 4.12, acknowledged and accepted by:
TEL-SAVE, INC.
By:
----------------------------
Name:
D&K GRANTOR RETAINED ANNUITY TRUST DATED JUNE 15, 1998
By:
----------------------------
Name: Mark Pavol, Trustee
38
TEL-SAVE.COM, INC.
EXHIBIT 10.42
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is entered into
as of January 5, 1999 by and among TEL-SAVE.COM, INC., a Delaware corporation
(the "Company"), and AMERICA ONLINE, INC., a Delaware corporation ("Investor").
RECITALS
WHEREAS, the Company and the Investor have entered into an Investment
Agreement of even date herewith (the "Investment Agreement"), pursuant to which
the Investor has agreed to purchase 2,894,737 shares (the "Purchased Shares") of
common stock, par value $.01 per share, of the Company ("Common Stock"), upon
the terms and conditions set forth therein;
WHEREAS, pursuant to the Investment Agreement, Investor shall exchange
5,076,016 warrants for 1,226,635 shares of Common Stock (the "Warrant Exchange
Shares");
WHEREAS, following the Closing of the Investment Agreement, Investor
will own warrants (the "Remaining Warrants") for a total of 2,721,984 shares of
Common Stock;
WHEREAS, pursuant to the terms of the Investment Agreement, Investor
shall have the right to put certain warrants and shares to the Company and the
Company shall have the right to elect to purchase such warrants and shares for
cash or shares of Common Stock (the "Additional Shares");
WHEREAS, in order to induce the Investor to enter into the Investment
Agreement, the Company has agreed to provide the registration rights set forth
in this Agreement for the benefit of Investor and its direct and indirect
transferees upon the terms and conditions set forth herein; and
WHEREAS, the execution and delivery of this Agreement is a condition to
the Investor's obligations pursuant to the Investment Agreement.
NOW, THEREFORE, in consideration of the mutual premises, covenants and
conditions set forth herein, the parties hereby agree as follows:
1. Definitions. For the purposes of this Agreement:
"Affiliate" means any individual or entity directly or indirectly
controlling, controlled by or under common control with, a party to this
Agreement. Without limiting the foregoing, the direct or indirect ownership of
50% or more of the outstanding voting securities of an entity, or the right to
receive 50% or more of the profits or earnings of an entity, shall be deemed to
constitute control.
<PAGE>
"Business Day" means a day other than a Saturday, Sunday or other day
on which commercial banks in New York City are authorized or required to close.
"Commission" means the U.S. Securities and Exchange Commission or any
other governmental authority from time to time administering the Securities Act.
"Common Stock" means the common stock, par value $.01 per share, of
the Company.
"DTC" means the Depository Trust Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor federal statute and the rules and the regulations of the
Commission promulgated thereunder, all as the same shall be in effect from time
to time.
"Holder" means any person owning or having the right to acquire
Registrable Securities, including an Affiliate or any successor, assignee or
transferee of Investor or a Holder that has received Registrable Securities in
accordance with Section 12 hereof.
"NASD" means the National Association of Securities Dealers, Inc.
"Person" means any natural person, firm, partnership, association,
corporation, company, trust, business trust, government entity, limited
liability company or other entity.
"Prospectus" means the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement with respect
to the terms of the offering or any portion of the Registrable Securities
covered by such Registration Statement and all other amendments and supplements
to the prospectus, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference in such
prospectus.
"Registrable Securities" means (a) the Purchased Shares, Warrant
Exchange Shares, the Warrant Shares and the Additional Shares, whenever
acquired, and (b) any capital stock or other securities of the Company issued or
issuable with respect to such shares (i) upon any conversion or exchange
thereof, (ii) by way of stock dividend or other distribution, stock split or
reverse stock split, or (iii) in connection with a combination of shares,
recapitalization, merger, consolidation, exchange offer or other reorganization.
As to any particular Registrable Securities, once issued such securities shall
cease to be Registrable Securities when (A) a Registration Statement with
respect to the sale of such securities shall have become effective under the
Securities Act and such securities shall have been disposed of in accordance
with such Registration Statement, (B) such securities shall have been
distributed to the public in reliance upon Rule 144 (or any successor provision)
under the Securities Act, provided that at the time such securities
<PAGE>
are proposed to be disposed of, they may be sold under Rule 144 without any
limitation on the amount of such securities which may be sold or (c) they shall
have ceased to be outstanding.
"Registration Expenses" means all fees and expenses incident to the
performance of or compliance with the provisions of this Agreement, whether or
not any Registration Statement is filed or becomes effective, including, without
limitation, all (a) registration and filing fees (including, without limitation,
(i) fees with respect to filings required to be made and other expenses
associated with the NASD and any other applicable exchange in connection with an
underwritten offering, and (ii) fees and expenses of compliance with state
securities or blue sky laws (including, without limitation, fees and
distributions of counsel for the underwriter or underwriters in connection with
blue sky qualifications of the Registrable Securities and determination of
eligibility of the Registrable Securities for investment under the laws of such
jurisdictions as are provided in Section 4(e)), (b) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities in a form eligible for deposit with DTC and expenses of
printing prospectuses), (c) fees and disbursements of all independent certified
public accountants referred to in Sections 4 and 5 (including, without
limitation, the reasonable expenses of any special audit and "cold comfort"
letters required by or incident to such performance), (d) the fees and expenses
of any "qualified independent underwriter" or other independent appraiser
participating in an offering pursuant to the NASD Rules of Conduct and the
corresponding rules of any other applicable exchange, (e) liability insurance
under the Securities Act or any other securities laws, if the Company desires
such insurance, (f) fees and expenses of all attorneys, advisers, appraisers and
other persons retained by the Company or any Subsidiary of the Company, (g)
internal expenses of the Company and its Subsidiaries (including, without
limitation, all salaries and expenses of officers and employees of the Company
and its Subsidiaries, other general overhead expenses of the Company and its
Subsidiaries, and other expenses for the performance of legal or accounting
duties), (h) the expense of any annual audit and the preparation of historical
and pro forma financial statements or other data normally prepared by the
Company in the ordinary course of business, (i) the expenses relating to
printing, word processing and distributing all Registration Statements,
underwriting agreements, securities sales agreements, and any other documents
necessary in order to comply with this Agreement, and (j) any fees and
disbursements of any other underwriters and broker-dealers customarily paid by
issuers or sellers of securities; provided, however, that in all cases in which
the Company is required to pay Registration Expenses hereunder, Registration
Expenses shall exclude any underwriting discounts, selling commissions or any
transfer taxes payable in respect of the sale of the Registrable Securities by
the Holders thereof.
"Registration Statement" means any registration statement of the
Company that covers any of the Registrable Securities pursuant to the provisions
of this Agreement, and all amendments and supplements to any such registration
statement, including post-effective amendments, in each case including the
Prospectus, all exhibits and all material incorporated by reference or deemed to
be incorporated by reference in such registration statement.
"Rule 144" means Rule 144 (or any successor provision) under the
Securities Act.
-3-
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect from time to time.
"Underwritten registration" or "underwritten offering" means a
registration in which Registrable Securities are sold to an underwriter for
reoffering to the public.
"Warrant Shares" means any shares issuable upon exercise of the
Remaining Warrants.
2. Registration.
(a) Immediate Registration. The Company shall as promptly as
practicable, but in no event later than forty-five (45) calendar days from the
date hereof, file a "shelf" Registration Statement pursuant to Rule 415 under
the Securities Act to permit the resale of the Purchased Shares, the Warrant
Exchange Shares, the Warrant Shares and an additional Six Million (6,000,000)
shares of Common Stock that may be issued from time to time pursuant to the
Investment Agreement. The Company shall use its best efforts to cause such
Registration Statement to become effective as promptly as practicable, but in no
event later than ninety (90) days from the date of this Agreement; provided,
however, that the Company shall not be required to file its report on Form 10-K
for the year ended December 31, 1998 prior to March 31, 1999. In any event and
notwithstanding anything to the contrary in this Agreement, the Company shall
file the Registration Statement no later than the date it files any registration
statement with respect to the sale of shares on its own behalf or on behalf of
any other Person and shall seek effectiveness of the Registration Statement
concurrent with any other registration statement.
(b) Registration Statement Form. Registrations under this
Section 2 shall be on such appropriate form of Registration Statement of the
Commission as shall be selected by the Company and available to it under the
Securities Act. The Company agrees to include in any such Registration Statement
all information which, in the opinion of counsel chosen by the Holders of a
majority of the Registrable Securities to be included in such Registration
Statement and counsel to the Company, is required to be included therein under
the Securities Act.
(c) Suspension. If the Board of Directors of the Company, in
its good faith judgment, determines that any registration under the Securities
Act of Registrable Securities should not be made or continued because it would
materially interfere with any material financing, acquisition, corporation
reorganization, merger, or other transaction involving the Company or any of its
subsidiaries (a "Valid Business Reason"), (i) the Company may postpone filing a
Registration Statement until such Valid Business Reason no longer exists, but in
no event for more than sixty (60) days, and (ii) in case a Registration
Statement has been filed, if the Valid Business Reason has not resulted from
actions taken by the Company, the Company may postpone amending or supplementing
such Registration Statement until such Valid Business Reason no longer exists,
but in no event for more than sixty (60) days (the "Postponement Period");
provided, however, that in no event shall the Company be permitted to postpone
filing, amending or supplementing a Registration Statement within one hundred
twenty (120) days after the
-4-
<PAGE>
expiration of any Postponement Period; and provided, further, that the Company
must comply with the provisions of Section 5.1(e) of the Investment Agreement in
connection with any such postponement.
(d) Incidental Registration. Each time that the Company shall
determine to engage in an underwritten offering (either for its own behalf or
for the behalf of any holder of any of the Company's Common Stock) of shares of
the Company's Common Stock, the Company shall give prompt written notice of its
determination to the Investor. Upon the written request of the Investor
delivered within thirty (30) days after its receipt of the Company's notice, the
Company shall use its best efforts to include the Registrable Securities that
the Investor has requested to be so included and registered, if necessary, in
such underwritten offering on the same terms and conditions as the shares
otherwise being sold through underwriters. If, in the good faith judgment of the
managing underwriter of such offering, the inclusion of all of the Registrable
Securities requested to be included and registered, if necessary, would
materially and adversely affect the successful marketing of the other shares
proposed to be offered, then the amount of the shares to be included in the
offering by each Person participating in the offering shall be reduced by
multiplying the number of shares each Person proposed to include in the offering
by a fraction, the numerator of which is the number of shares that the managing
underwriter, in its good faith judgment, determines can be included in such
offering without materially and adversely affecting the successful marketing of
the shares and the denominator of which is the total number of shares proposed
to be included in the offering.
3. Allocation of Expenses. The Company will pay all reasonable
Registration Expenses of all registrations under this Agreement; provided,
however, that in an underwritten offering in which the Holders receive net
proceeds of such offering in excess of $19.00 per share, the Holders
participating in such offering will pay the following fees and expenses: (a)
fees with respect to filings to be made and other expenses associated with the
NASD and any other applicable exchange, (b) fees and expenses of compliance with
state securities or blue sky laws, (c) fees and expenses of any "qualified
independent underwriter" or other independent appraiser participating in an
offering pursuant to the NASD Rules of Conduct and the corresponding rules of
any other applicable exchange; (d) the expenses relating to printing, word
processing and distributing underwriting agreements and securities sales
agreements; and (e) any fees and disbursements of underwriters and
broker-dealers customarily paid by sellers of securities.
4. Obligations of the Company. If and whenever the Company is required
to use best efforts to effect the registration under the Securities Act of any
Registrable Securities pursuant to this Agreement, the Company shall:
(a) file with the Commission, as promptly as practicable, a
Registration Statement with respect to such Registrable Securities and make all
required filings with the NASD and any other applicable exchange;
(b) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the Prospectus used in connection
therewith and such other
-5-
<PAGE>
documents as may be necessary to keep the Registration Statement continuously
effective until (i) the consummation of the disposition by the Holders of all
the Registrable Securities covered by such Registration Statement or (ii) the
date all Registrable Securities are freely salable by the Holders pursuant to
Rule 144(k);
(c) furnish to counsel (if any) selected by the Holders of a
majority of the Registrable Securities covered by such Registration Statement
and to counsel for the underwriters in any underwritten offering copies of all
documents proposed to be filed with the Commission in connection with such
registration (other than documents to be incorporated by reference) a reasonable
time prior to the proposed filing thereof and give reasonable consideration in
good faith to any comments of such Holders, counsel and underwriters;
(d) furnish to each Holder of such securities, without charge,
such number of conformed copies of such Registration Statement and of each such
amendment and supplement thereto (in each case, including all exhibits
(including all exhibits incorporated by reference), financial statements,
schedules, and all documents incorporated therein, deemed to be incorporated
therein by reference or filed therewith, except that the Company shall not be
obligated to furnish any Holder of securities with more than two copies of such
exhibits and documents), such numbers of copies of the Prospectus included in
such Registration Statement (including each preliminary prospectus) in
conformity with the requirements of the Securities Act, and such other
documents, as such Holder may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such Holder;
(e) use its best efforts to register or qualify and cooperate
with the Holders of Registrable Securities, the underwriters and their
respective counsels in connection with the registration or qualification (or
exemption from such registration or qualification) of the securities covered by
such Registration Statement under such other securities or blue sky laws of such
jurisdictions as each Holder shall request; provided, however, that where
Registrable Securities are offered other than through an underwritten offering,
the Company agrees to cause its counsel to perform blue sky investigations and
file registrations and qualification required to be filed pursuant to this
Section 4(e); keep each such registration or qualification (or exemption
therefrom) effective during the period such Registration Statement is required
to be effective hereunder and do any and all other acts and things which may be
necessary or advisable to enable such Holder to consummate the disposition in
such jurisdictions of the securities owned by such Holder, except that the
Company shall not for any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction wherein it is not so
qualified, subject itself to taxation in any jurisdiction wherein it is not so
subject, or take any action which would subject it to general service of process
in any jurisdiction wherein it is not so subject;
(f) notify each Holder of Registrable Securities subject to
such Registration Statement if a Prospectus included in such Registration
Statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading upon discovery by the Company of such material misstatement
or omission
-6-
<PAGE>
or upon the discovery by the Company of the happening of any event as a result
of which the Company believes that there would be a material misstatement or
omission, and, as promptly as is practicable, prepare and furnish to such Holder
a reasonable number of copies of a supplement to or an amendment of such
Prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such Prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(g) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an earnings statement of
the Company complying with the provisions of Section 11(a) of the Securities Act
and Rule 158 under the Securities Act (or any similar rule promulgated under the
Securities Act);
(h) promptly notify each Holder of Registrable Securities
covered by such Registration Statement, their counsel and the underwriters (i)
when such Registration Statement, or any post-effective amendment to such
Registration Statement, shall have become effective, or any amendment of or
supplement to the Prospectus used in connection therewith shall be filed, (ii)
of any request by the Commission to amend such Registration Statement or to
amend or supplement such Prospectus or for additional information, (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of
such Registration Statement or of any order preventing or suspending the use of
any preliminary prospectus or the initiation or threatening of any proceedings
for any of such purposes, (iv) of the suspension of the qualification of such
securities for offering or sale in any jurisdiction, or of the institution of
any proceedings for any of such purposes and (v) if, at any time when a
Prospectus is to be required by the Securities Act to be delivered in connection
with the sale of the Registrable Securities, the representations and warranties
of the Company contained in any the underwriting agreement contemplated in
Section 5(b) below, to the knowledge of the Company, cease to be true and
correct in any material respect;
(i) use its best efforts to prevent the issuance of any order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of a Prospectus or suspending the qualification
(or exemption from qualification) of any of the Registrable Securities covered
thereby for sale in any jurisdiction, and, if any such order is issued, to
obtain the withdrawal of any such order at the earliest possible moment;
(j) if requested by the managing underwriter, if any, or the
Holders of a majority of the Registrable Securities being sold in connection
with an underwritten offering, (i) promptly incorporate in a prospectus
supplement or post-effective amendment such information as the managing
underwriter, if any, or such Holders reasonably request to be included therein
to comply with applicable law, and (ii) make all required filings of such
prospectus supplement or such post-effective amendment as soon as practicable
after the Company has received notification of the matters to be incorporated in
such prospectus supplement or post-effective amendment;
-7-
<PAGE>
(k) use its best efforts to cause the Registrable Securities
covered by a Registration Statement to be registered with, and to obtain the
consent or approval of, each governmental agency or authority, whether federal,
state, local or foreign, which may be required to effect such registration or
the offering or sale in connection therewith or to enable the Holders to offer,
or to consummate the disposition of, the Registrable Securities subject to such
Registration Statement, except as may be required solely as a consequence of the
nature of such Holder's business, in which case the Company will cooperate with
all reasonable respects with the filing of the Registration Statement and the
granting of such approvals;
(l) cooperate with the Holders to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold pursuant to the Registration Statement and not bearing any Securities
Act legend, and cause certificates for such Registrable Securities to be issued
for such numbers of shares and registered in such names as the Holders may
reasonably request at least two (2) Business Days prior to any sale of
Registrable Securities;
(m) agree not to file or make any amendment to any
Registration Statement with respect to any Registrable Securities, or any
amendment of or supplement to the Prospectus used in connection therewith, which
refers to any Holder of any securities covered thereby by name, or otherwise
identifies such Holder as the holder of any securities of the Company, without
the consent of such Holder, such consent not to be unreasonably withheld, except
that no such consent shall be required for (i) any disclosure that is necessary
to comply with federal and state securities laws, (ii) any disclosure that is
necessary to avoid or correct a misstatement or omission in any Registration
Statement or Prospectus, (iii) the release of information that is ordered
pursuant to a subpoena or other order from a court or governmental body of
competent jurisdiction, or (iv) such other information as has been made
generally available to the public other than by violation of this agreement.
5. Underwritten Offerings. The provisions of this Section 5 do not
establish additional registration rights or give the Holders any right to
participate in any Company-initiated offering, underwritten or otherwise, but
instead set forth procedures applicable, in addition to those set forth in
Sections 2 and 4, to any registration that is an underwritten offering.
(a) Underwriting Agreement. If requested by the underwriters
for any underwritten offering by Holders, the Company shall enter into an
underwriting agreement with such underwriters for such offering, such agreement
to be reasonably satisfactory in substance and form to the Holders of a majority
of the Registrable Securities to be covered by such registration and to the
underwriters and to contain such representations and warranties by the Company
and such other terms and provisions as are customarily contained in agreements
of this type, including, but not limited to, indemnities to the effect and to
the extent provided in Section 9, provisions for the delivery of officers'
certificates, opinions of counsel and accountants' "cold comfort" letters, and
hold-back arrangements. The Holders of Registrable Securities to be distributed
by such underwriters shall be parties to such underwriting agreement and may, at
their option, require that
-8-
<PAGE>
any or all of the representations and warranties by, and the agreements on the
part of, the Company to and for the benefit of such underwriters be made to and
for the benefit of such Holders and that any or all of the conditions precedent
to the obligations of such underwriters under such underwriting agreements shall
also be conditions precedent to the obligations of such Holders. No such Holders
shall be required by the Company to make any representations or warranties to,
or agreements with, the Company or the underwriters other than representations,
warranties or agreements regarding such Holder and such Holder's intended method
of distribution.
(b) Selection of Underwriters. The Holders of a majority of
the Registrable Securities to be Registered pursuant to such offering shall have
the right to select one or more underwriters to administer the offering, subject
to the consent of the Company, which shall not be unreasonably withheld.
(c) Inclusion of Securities in an Underwritten Offering. No
securities of any selling stockholder (other than a Holder) shall be included in
an underwritten offering initiated by a Holder without the prior written consent
of Holders of not less than 75% of the Registrable Securities proposed to be
sold in such underwritten offering.
6. Preparation, Reasonable Investigation. In connection with the
preparation and filing of each Registration Statement registering Registrable
Securities under the Securities Act, upon receipt of reasonable assurances of
confidentiality, the Company shall give the Holders of Registrable Securities to
be so registered and their underwriters, if any, and their respective counsel
and accountants, the opportunity to participate in the preparation of such
Registration Statement, each Prospectus included therein (other than documents
to be incorporated by reference) or filed with the Commission, and each
amendment thereof or supplement thereto, and shall give each of them such access
to all pertinent financial, corporate, and other documents and properties of the
Company and its Subsidiaries, and such opportunities to discuss the business of
the Company with its officers, directors, employees and the independent public
accountants who have issued audit reports on its financial statements as shall
be necessary, in the opinion of such Holders' and such underwriters' respective
counsel, to conduct a reasonable investigation within the meaning of the
Securities Act.
7. Certain Obligations of Holders.
(a) The Company may require each Holder of any Registrable
Securities as to which any registration is being effected to furnish to the
Company such information regarding such Holder and the intended method of
disposition of such securities as the Company may from time to time reasonably
request in writing and as shall be required to effect the registration of such
Holder's Registrable Securities. Each such Holder agrees to furnish promptly to
the Company all information required to be disclosed in order to make the
information previously furnished to the Company by such Holder not materially
misleading.
-9-
<PAGE>
(b) Each Holder of Registrable Securities covered by a
Registration Statement agrees that, upon receipt of any notice from the Company
pursuant to Section 4(f), such Holder will promptly discontinue the disposition
of Registrable Securities pursuant to such Registration Statement until such
Holder shall have received either notice from the Company that (i) such
Registration Statement has been amended and has received copies of the
supplemented or amended Prospectus or (ii) use of the Prospectus or Prospectus
Supplement may be resumed. If so directed by the Company, each Holder will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, in such Holder's possession of the Prospectus covering
such Registrable Securities at the time of receipt of such notice.
8. Indemnification and Contribution.
(a) In the event of any registration of any of the Registrable
Securities under the Securities Act pursuant to this Agreement, the Company will
indemnify and hold harmless the Holder of such securities, its directors,
officers, and employees, each other Person who participates as an underwriter,
broker or dealer in the offering or sale of such securities, and each other
Person, if any, who controls such Holder, underwriter, broker, dealer or any
such participating Person within the meaning of the Securities Act or the
Exchange Act, against any losses, claims, damages, or liabilities, joint or
several, to which such Holder or any such director, officer, employee,
underwriter, broker, dealer, participating Person, or controlling Person may
become subject, insofar as such losses, claims, damages, or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement under which such Registrable Securities were
registered under the Securities Act or Prospectus contained in the Registration
Statement, or any amendment or supplement to such Registration Statement, or
arise out of or are based upon the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and the Company shall reimburse such Holder and each
such director, officer, employee, underwriter, broker, dealer, participating
Person, and controlling Person in connection with investigating or defending any
such loss, claim, damage, liability, action or proceeding as such expenses are
incurred; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon any untrue statement or omission made in such
Registration Statement or Prospectus, or any such amendment or supplement, in
reliance upon and in conformity with information furnished to the Company, in
writing, by or on behalf of such Holder, underwriter, participating Person or
controlling Person specifically for use in the preparation thereof; provided,
further, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or expense arises out of or is
based upon an untrue statement or alleged untrue statement of a material fact
contained in such Registration Statement or Prospectus contained therein or any
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading if (i) such untrue
statement or omission is corrected in an amendment or supplement to the
Prospectus or Prospectus supplement and the seller of the Registrable Securities
thereafter fails to deliver the Prospectus or Prospectus supplement as so
amended or supplemented prior to or concurrently with the sale of the
Registrable Securities to the person asserting such loss, claim, damage or
liability after the
-10-
<PAGE>
Company has furnished such seller with a sufficient number of copies of the same
or (ii) if the seller received written notice from the Company of the existence
of such an untrue statement or an omission and the seller continued to dispose
of Registrable Securities prior to the time of the receipt of either (A) an
amended or supplemented Prospectus or Prospectus supplement or (B) a notice from
the Company that the use of the existing Prospectus or Prospectus supplement may
be resumed.
(b) In the event of any registration of any of the Registrable
Securities under the Securities Act pursuant to this Agreement, each Holder of
such securities, severally and not jointly, will indemnify and hold harmless the
Company, each of its directors and officers and each underwriter (if any) and
each person, if any, who controls the Company or any such underwriter within the
meaning of the Securities Act or the Exchange Act, against any losses, claims,
damages, or liabilities, joint or several, to which the Company, such directors
and officers, underwriters, or controlling Persons may become subject, insofar
as such losses, claims, damages, or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement
under which such securities were registered under the Securities Act or
Prospectus contained in the Registration Statement, or any amendment or
supplement to the Registration Statement, or arise out of or are based upon any
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, if the
statement or omission was made in reliance upon and in conformity with
information relating to such Holder furnished in writing to the Company by or on
behalf of such Holder expressly for use in connection with the preparation of
such Registration Statement, Prospectus, amendment, or supplement; provided,
however, that the liability of each such Holder hereunder shall be in proportion
to and limited to the net amount received by such Holder (after deducting any
underwriting discount and expenses) from the sale of Registrable Securities sold
in connection with such registration.
(c) Promptly after receipt by a person entitled to
indemnification pursuant to this Section 8 ("Indemnitee") of notice of the
commencement of any action or the written assertion of any claim subject to
indemnification under this Section 8, the Indemnitee shall notify the Person
obligated to provide indemnification pursuant to this Agreement (the
"Indemnifying Person"), in writing of the commencement or the written assertion
thereof. Failure by an Indemnitee to so notify the Indemnifying Person shall
relieve the Indemnifying Person from the obligation to indemnify such Indemnitee
only to the extent that the Indemnifying Person suffers actual and material
prejudice as a result of such failure but in no event shall such failure to
notify the Indemnifying Person (i) constitute prejudice suffered by the
Indemnifying Person if it has otherwise received notice of the actions giving
rise to such obligation to indemnify or (ii) relieve it from any liability or
obligation that it may otherwise have to such Indemnitee. In case any such
action or claim shall be brought or asserted against any Indemnitee and it shall
notify the Indemnifying Person of the commencement or assertion thereof, the
Indemnifying Person shall assume the defense of such action or claim, including
employment of counsel to be chosen by the Indemnifying Party (which counsel
shall be reasonably satisfactory to the Indemnitee) and payment of expenses. The
Indemnitee shall be entitled to employ its own counsel in any such case, but the
-11-
<PAGE>
legal fees and expenses of such counsel shall be at the expense of the
Indemnitee, unless the employment of such counsel shall have been authorized in
writing by the Indemnifying Party in connection with the defense of such action,
or the Indemnifying Party shall not have employed counsel to take charge of the
defense of such action or the Indemnitee shall have reasonably concluded that
there may be defenses available to it or them which are different from or in
addition to those available to the Indemnifying Party, in any of which events
such fees and expenses shall be borne by the Indemnifying Party. Without the
prior consent of the Indemnitee, no Indemnifying Party shall enter into any
settlement of any such action or claim that does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnitee of a
release from all liability in respect to such claim or litigation.
(d) If for any reason the foregoing indemnity is unavailable,
or is insufficient to hold harmless an Indemnitee, other than by reason of the
exceptions provided in this Section 8, then the Indemnifying Person shall
contribute to the amount paid or payable by the Indemnifying Person as a result
of such losses, claims, damages liabilities or expenses in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person on the one
hand and the Indemnitee on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, or liabilities, as
well as any other relevant equitable considerations. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Holders of
Registrable Securities covered by the Registration Statement in question and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
(e) The Company and the Holders agree that it would not be
just and equitable if contribution pursuant to this Section 8 were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in Section 8(d). The amount
paid or payable by an Indemnitee as a result of the losses, claims, damages and
liabilities referred to in Section 8(d) shall be deemed to include, subject to
the limitations set forth above, any legal or other expenses reasonably incurred
by such Indemnitee in connection with investigating or defending any such claim
or litigation. Notwithstanding anything to the contrary in this Section 8, (A)
no such Holder will be required to contribute any amount in excess of the
proceeds it received from the sale of its Registrable Securities pursuant to
such Registration Statement, (B) no Person guilty of fraudulent
misrepresentation, within the meaning of Section 11(f) of the Securities Act,
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation and (c) no party shall be liable for contribution
under this Section 8 except to the extent and under such circumstances as such
party would have been liable to indemnify under this Section 8 if such
indemnification were enforceable under applicable law.
9. Indemnification with Respect to Underwritten Offering. In the event
that Registrable Securities are sold pursuant to a Registration Statement in an
underwritten offering, the Company agrees to enter into an underwriting
agreement containing customary representations
-12-
<PAGE>
and warranties with respect to the business and operations of an issuer of the
securities being registered and customary covenants and agreements to be
performed by such issuer, including without limitation customary provisions with
respect to indemnification by the Company of the underwriters of such offering.
10. Reports Under Securities Exchange Act of 1934. With a view to
making available to the Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the Commission that may at
any time permit a Holder to sell Registrable Securities of the Company to the
public without registration and to making Form S-3 under the Securities Act
available for the registration of Registrable Securities, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act;
(b) file with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act; and
(c) furnish to any Holder, so long as such Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 under
the Securities Act, any other such applicable reporting requirements under the
Securities Act and all applicable reporting requirements under the Exchange Act,
(ii) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested in availing any Holder of any rule or
regulation of the Commission which permits the selling of any such securities
without Registration or pursuant to such form.
11. Successors, Assigns and Transferees. This Agreement shall be
binding upon and shall inure to the benefit of each party hereto, and their
respective successors, assigns and transferees. The Investor or any other Holder
under this Agreement may assign its rights under this Agreement to any Affiliate
or to other successors, assigns and transferees of the Investor or any such
Holder; provided, however, that the Company is given written notice from the
Investor or any such Holder at the time of such transfer stating the name and
address of the transferee or assign and identifying the securities with respect
to which the rights hereunder are being transferred. As a condition to the
effectiveness of any transfer permitted hereunder (i) the transferee or assignee
shall agree, in writing, upon request of the Company, to be bound by the
provisions of this Agreement, and (ii) the Company shall be given written notice
at the time of or within a reasonable time after said transfer or assignment,
stating the name and address of said transferee or assign and identifying the
securities with respect to which such registration rights are being assigned.
This Agreement shall survive any transfer of Registrable Securities to and shall
inure to the benefit of an Affiliate or such other successors, assigns and
transferees of the Investor or any such Holder. In addition, and whether or not
any express transfer or assignment shall have been made, the provisions of this
Agreement which are for the benefits of the parties hereto other than the
Company shall also be for the benefit of and enforceable by any subsequent
Holder or Registrable Securities.
-13-
<PAGE>
12. Miscellaneous.
(a) Adjustments Affecting Registrable Securities. The Company
will not take any action, or permit any change to occur, with respect to its
securities that would adversely affect the ability of the Holders to include
such Registrable Securities in a registration undertaken pursuant to this
Agreement.
(b) No Waivers. No failure or delay on the part of any party
in exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided shall be cumulative and not exclusive of
any rights or remedies provided by law.
(c) Amendments. Any provision of this Agreement may be amended
or waived if, but only if, such amendment or waiver is in writing and is signed
by the Company and the Investor.
(d) Severability. If any term or provision of this Agreement
is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms and provisions shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
(e) Notices. All notices, requests and other communications to
any party hereunder shall be given in writing (including on telecopier or
similar writing) and shall be given to such party at its address, or telecopier
number set forth on the signature pages hereof, or such other address, or
telecopier number as such party may hereafter specify for such purpose. Each
such notice, request or other communication shall be effective (i) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified on
the signature page hereto and the appropriate answer back (i.e., machine
confirmation or telephone confirmation) is received, (ii) if given by mail, by
registered mail only 72 hours after such communication is deposited in the mail
with first class postage prepaid, addressed as aforesaid, or (iii) if given by
any other means, when received at the address specified on the signature page
hereto.
(f) Entire Agreement. This Agreement constitutes the entire
agreement and understanding among the parties hereto with respect to the
transactions contemplated hereby and supersedes any and all prior agreements and
understandings, written or oral, relating to the subject matter hereof.
(g) Governing Law. The laws of the State of New York shall
govern the interpretation, validity and performance of the terms of this
Agreement, regardless of the law that might be applied under applicable
principles of conflicts of laws.
-14-
<PAGE>
(h) Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original with the same effect as if the
signatures thereto and hereto were upon the same instrument.
(i) No Third Party Beneficiaries. Except as provided by
Sections 8 and 11, nothing in this Agreement shall confer any rights upon any
Person other than the parties hereto, each such party's respective successors
and permitted assigns and transferees.
[Signature page follows]
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their respective authorized officers or representatives,
as of the date first above written.
TEL-SAVE.COM, INC.
By: _________________________ Address:
Name: Tel-Save.com, Inc.
Title: 6805 Route 202
New Hope, Pennsylvania 18938
Fax: 215-862-1515
Attention: Chief Financial Officer
AMERICA ONLINE, INC.
By: _________________________ Address:
Name: America Online, Inc.
Title: 22000 AOL Way
Dulles, Virginia 20166
Fax: (703) 265-2208
Attention: General Counsel
with a copy to:
America Online, Inc.
22000 AOL Way
Dulles, Virginia 20166
Fax: (703) 265-1202
Attention: Senior Vice President, Head of
Business Affairs
16
EXHIBIT 10.43
SUBLEASE AGREEMENT
------------------
This Sublease made the ____ day of January, 1997 (this "Sublease") by and
between GEMINI AIR CARGO, LLC, a Delaware limited liability company, as
successor-in-interest to Potomac Financial Group, L.L.C. (hereinafter called
"Sublandlord"), and RMS INTERNATIONAL, INC., a Virginia corporation (hereinafter
called "Subtenant").
WITNESSETH:
WHEREAS, Sublandlord, as lessee, entered into that certain Lease dated as
of October 26, 1995 with Reston Plaza Office L.L.C., as successor-in-interest to
Aetna Life Insurance Company, as lessor (hereinafter called "Prime Landlord"),
for the lease of certain premises on the second floor of Prime Landlord's
building known as Reston Plaza II, located at 12020 Sunrise Valley Drive, Suite
250, Reston, Virginia 22091 containing approximately 3,723 square feet (the
"Premises") per Exhibit "B" attached to this agreement, to which lease
(hereinafter the "Prime Lease") reference is hereby made as if the same were
fully set forth herein:
WHEREAS, the parties to this Sublease have agreed that Sublandlord shall
sublet the Presmises to Subtenant.
NOW, THEREFORE, in consideration of the covenants set forth herein, the
parties covenant and agree as follows:
1. Premises: Term. Sublandlord hereby subleases the Premises to Subtenant
for a term ("Term") commencing on January 21, 1997 (the "Sublease Commencement
Date") and ending at 11:59 p.m. E.S.T. on November 30, 2000 (the "Sublease
Expiration Date"), unless sooner terminated in accordance herewith. Sublandlord
has painted the interior walls of the Premises, and agrees to shampoo and clean
the carpet; otherwise, Subtenant hereby accepts the Premises in their "as-is"
condition.
2. Termination. Upon the expiration or sooner termination of the Prime
Lease for any reason, or upon the surrender of the Prime Lease by Sublandlord to
the Prime Landlord, at Prime Landlord's option, this Sublease Agreement and
Subtenant's rights hereunder shall terminate as of the date of such expiration,
termination or surrender, as the case may be, and the Subtenant shall vacate the
Premises on such date.
3. Rent. Subtenant shall pay to Sublandlord an annual rental at the rate
of ________________ per annum ("Basic Rent"), in equal monthly installments of
______________ month ("Basic Monthly Rent"), plus the Additional Rent as
hereinafter defined in paragraph 4 below (the Additional Rent and the Basic Rent
hereinafter collectively referred to as "Rent"). The first installment of Basic
Monthly Rent shall be due and payable upon the execution hereof. On each
anniversary of the Sublease Commencement Date, the Basic Rent shall be increased
by an amount equal to three percent (3%) of the Basic Rent in effect during the
preceding Lease Year. Except as otherwise provided herein, Subtenant shall pay
the Rent in equal monthly installments in advance on the first day of each and
every month during the Term. In the event that at any time during the Term
Subtenant shall have a claim against Sublandlord,
<PAGE>
subtenant shall have no right to deduct the amount allegedly owed Subtenant from
the Rent or other sums payable to Sublandlord hereunder, it being understood and
agreed that Subtenant's sole remedy in such event shall be to institute an
independent action against Sublandlord therefor.
4. Additional Rent. Subtenant shall pay for (i) increase in Basic Rent as
set forth in paragraph 3, (ii) Tenant's Share of Property Taxes pursuant to
Article 10 of the Prime Lease, (iii) Tenant's Share of Operating Costs pursuant
to Article 9 of the Prime Lease, (iv) any other additional rent or other sums
charged to Sublandlord pursuant to the Prime Lease. If Subtenant procures any
additional services from the Prime Landlord, Subtenant shall pay for same at the
rates charged by the Prime Landlord and shall make such payments as Prime
Landlord may direct. All sums payable by Subtenant under this paragraph 4 shall
be deemed "Additional Rent" and shall be collectable as such.
5. Services. Except as otherwise provided herein, the only services or
rights to which Subtenant is entitled under this Sublease Agreement are those to
which Sublandlord is entitled as lessee under the Prime Lease and subtenant will
look solely to Prime Landlord for all such services and rights.
6. Permitted Uses. The Premises shall be used for general office purposes
and related uses only and for no other purpose. Subtenant shall not use or
occupy the Premises, nor permit the Premisaes to be used or occupied, for any
illegal purposes or in any unlawful or illegal manner nor in any manner to
create any nuisance or trespass.
7. Compliance: Indemnification. Subtenant shall neither cause nor suffer
any act or omission that would cause the Prime Lease to be terminated or
forfeited because of any right of termination or forfeiture reserved or vested
in the Prime Landlord, and Subtenant will indemnify, defend and hold sublandlord
harmless from and against all claims of any kind by reason of any breach or
default on the part of or by Subtenant or any of Subtenant's officers, agents,
employees, contractors, invitees or licensees, by reason of which the Prime
Lease may be terminated or forfeited. Subtenant represents that is has read and
is familiar with the terms of the Prime Lease.
8. Hold Harmless. Subtenant hereby agrees to indemnify, defend and hold
Prime Landlord and Sublandlord harmless from and against all costs, damages,
claims, liabilities and expenses (including, without limitation, attorneys'
fees) suffered by or claimed against Sublandlord, directly or indirectly, based
on, arising out of or resulting from (i) Subtenant's use and occupancy of the
Premises or the business conducted by Subtenant therein, (ii) any act or
omission by subtenant or Subtenant's agents, officers, employees, contractors,
invitees or licensees, or (iii) any breach or default by Subtenant in the
performance or observance of its covenants or obligations under this Sublease
(including the covenants and obligations of the Subtenant under the Prime Lease
as incorporated herein).
9. Assignment: Subletting. Subtenant shall not assign this Sublease or
sublet the Premises in whole or in part, and shall not permit Subtenant's
interest in this Sublease to be encumbered or vested in any third party by
operation of law or otherwise.
-2-
<PAGE>
10. Notices. Any notice or demand which either party may or must give to
the other under this Sublease Agreement shall be in writing and delivered
personally or sent by registered or certified mail addressed if to Sublandlord
as follows:
<TABLE>
<S> <C>
For U.S. Mail: For Federal Express and UPS:
Gemini Air Cargo, LLC Gemini Air Cargo, LLC
P.O. Box 16254 600 West Service Road
Washington Dulles International Airport Washington Dulles International Airport
Washington, D.C. 20041-6254 Washington, D.C. 20041
Attn: Donald M. Harwood Attn: Donald M. Harwood
and if to Subtenant, prior to the Sublease and if to Subtenant, after the Sublease
Commencement date, as follows: Commencement date, as follows:
RMS INTERNATIONAL, INC. RMS INTERNATIONAL, INC.
4506 Daly Drive, Suite 600 12020 Sunrise Valley Drive, Suite 250
Chantilly, VA 20151 Reston, VA 20191
Attn: Everett Holtz, President Attn: Everett Holtz, President
with a copy to:
Edward V. Gregorowicz
10565 Lee Highway, Suite 102
Fairfax, VA 22030
</TABLE>
Either party may, by notice in writing, direct that future notices or demands by
sent to a different address. Notice shall be deemed to have been given when
received by the party to whom addressed (on the date upon which delivery is
refused, as the case may be).
11. No Partnership. Nothing herein contained in this Sublease Agreement
shall be deemed or construed as creating the relationship of principal and agent
or of partnership or joint venture between the parties hereto; it being
understood and agreed that no act of the parties hereto shall be deemed to
create any relationship other than that of Sublandlord and Subtenant.
12. Insurance. Subtenant agrees to maintain casualty and liability
insurance coverage with respect to the Premises and with limits of liability and
deductibles as required under the Prime Lease. Prior to the Sublease
Commencement Date, Subtenant shall provide Sublandlord with a certificate of
insurance evidencing such insurance coverage.
13. Incorporation. Except as may be inconsistent with the terms of this
Sublease Agreement, which is subject and subordinate to the Prime Lease, all the
terms, covenants and conditions of the Prime Lease, excepting the provisions
contained therein with respect to (a) the Security Deposit, (b) any options to
renew the Term, or (c) any options to cancel the Prime Lease, shall be
applicable to this Sublease Agreement with the same force and effect as if
-3-
<PAGE>
Sublandlord were the lessor under the Prime Lease and Subtenant were the lessee
thereunder; and in case of any breach by Subtenant, Sublandlord shall have all
the rights against Subtenant as would be available to the lessor against the
lessee under the Prime Lease if such breach were by the lessee thereunder. In
addition to the rights and remedies set forth in the Prime Lease, Sublandlord
shall in addition, upon the occurrence of any breach by Subtenant and the
failure to cure the same on or before the expiration of three (3) days notice
thereof, be entitled to recover from Subtenant the cost of the removal of
Subtenant and Subtenant's property from the Premises.
14. Binding Agreement. The covenants and agreements herein contained shall
bind and inure to the benefit of Sublandlord, subtenant, and their respective
executors, administrators, successors and assigns; however, this provision shall
not be deemed to authorize any violation of Section 9 thereof.
15. Complete Agreement. All prior understandings and agreements between the
parties are merged within this Sublease Agreement (including the attached
Exhibit A), which alone fully and completely sets forth the understanding of the
parties, and this Sublease may not be changed or terminated orally or in any
manner other than by an agreement in writing and signed by the party against
whom enforcement of the change or termination is sought.
16. Security Deposit. Upon the execution hereof, Subtenant shall deliver to
Sublandlord a security deposit in the amount of Seventeen Thousand Two Hundred
Eighteen and 88/100 Dollars ($17,218.88) (the "Security Deposit") as security
for the payment and performance by Subtenant of all of its obligations,
covenants, conditions and agreements hereunder. The Security Deposit shall not
be considered a prepayment of rent or a limit on Subtenant's liability under the
Sublease or as liquidated damages. If there is an event of default by Subtenant
hereunder, Sublandlord shall have the right, but shall not be obligated, to
apply the Security Deposit as is reasonably necessary to cure such default, in
which event Subtenant shall be obligated to promptly deliver to Sublandlord the
cash amount necessary to restore the Security Deposit to its original amount,
and Subtenant's failure to do so within ten (10) days after notice of demand
therefor from Sublandlord shall constitute an Event of Default under the Lease
entitling Sublandlord without further notice of all of its remedies under the
Lease; provided, however, such default and Subtenant's liability under the Lease
shall thereby be discharged only pro tanto and Subtenant shall remain liable for
any amounts that said Security Deposit shall be insufficient to pay. Sublandlord
agrees to return the Security Deposit to Subtenant within fifteen (15) days of
the Sublease Expiration Date. In addition, Sublandlord agrees to pay Subtenant
all accrued interest collected on the Security Deposit, net of taxes.
17. Brokers. Upon execution of this Sublease by both parties, Sublandlord
shall pay Julien J. Studley and The Carey Winston Company a commission as set
forth in a separate agreement between Sublandlord and said brokers, for
brokerage services rendered to Sublandlord in this transaction. Except as
aforesaid, the parties represent and warrant to each other that they have dealt
with no other broker or finders in connection with this transaction.
18. Prime Landlord's Consent. It is understood and agreed by the parties
hereto that acceptance of this Sublease by the Sublandlord shall be subject to
the consent of the Prime Landlord pursuant to Section 20 of the Prime Lease.
Subtenant shall use best efforts to
-4-
<PAGE>
cooperate with Sublandlord to provide the information required by Prime Landlord
with respect to this Sublease. Sublandlord hereby acknowledges to Prime Landlord
that, notwithstanding this Sublease, Sublandlord shall in no way be released or
relieved, in whole or part, from Sublandlord's covenants as "Tenant" under the
Prime Lease. In the event Prime Landlord refuses to consent to this Sublease,
then upon ten (10) days following written notice thereof from Sublandlord,
Subtenant shall vacate the Premises. Notwithstanding the foregoing, in the event
that Subtenant fails to vacate the Premises, within such ten (10) days period
(i) Prime Landlord or Sublandlord may forthwith re-enter and take possession of
said Premises, and (ii) Subtenant shall pay Landlord an amount equal to twice
the monthly payment of Basic Monthly Rent in effect immediately prior to the
expiration of the Term, for the period in which Subtenant occupies the Premises
after the expiration of such notice; provided, however, the foregoing shall not
be deemed to limit Subtenant's liability arising from any wrongful holding
over.
- 5 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be
executed as of the day and year first above written.
WITNESS: SUBLANDLORD:
GEMINI AIR CARGO, LLC
By: [Seal]
- - -------------------------- ---------------------
Its: President~
ATTEST: SUBTENANT:
RMS INTERNATIONAL, INC.
By: By:
------------------------- ---------------------------
Its: Vice President Its:
--------------- -------------------
[Corporate Seal]
-6-
<PAGE>
CONSENT OF PRIME LANDLORD
Reston Plaza Office L.L.C., owner of the Premises hereinabove subleased and
Prime Landlord under the Prime Lease, in accordance with the provisions of
Section 20 of the Prime Lease hereby consents to this Sublease Agreement upon
the terms stated herein, and such approval is being issued on the condition that
Gemini air Cargo L.L.C. will not be relieved from primary liability for all
obligations of the Tenant under the Prime Lease Agreement and on the condition
that this approval does not amend or modify the actual terms of the Prime Lease
in any manner.
WITNESS: PRIME LANDLORD:
RESTON PLAZA OFFICE, L.L.C.
By: LaSalle Advisors Limited
Partnership, Advisor and Duly
Authorized Agent
By:
- - ------------------------------ ---------------------------------
Name: David L. Reahl
-------------------------
Title: Vice President
-------------------------
By:
- - ------------------------------ ---------------------------------
Name: ___________ W. Duke
-------------------------
Title: Principal
-------------------------
EXHIBIT 10.44
SUBLEASE AGREEMENT
This Sublease made the 20th day of January, 1999 (this "Sublease") by and
between RMS INTERNATIONAL, INC., now doing business as VISTARMS, INC.
(hereinafter called "Sublandlord") and TEL-SAVE, INC., a Pennsylvania
Corporation (hereinafter called "Subtenant").
WITNESSETH:
WHEREAS, GEMINI AIR CARGO, INC., as successor-in-interest to POTOMAC
FINANCIAL GROUP, L.L.C., entered into that certain Lease dated as of October 26,
1995 with Reston Plaza Office L.L.C, as successor-in-interest to Aetna Life
Insurance Company, as lessor (hereinafter called "Prime Landlord"), for the
lease of certain premises on the second floor of Prime Landlord's building know
as Reston Plaza II, located at 12020 Sunrise Valley Drive, Suite 250, Reston,
Virginia 22091 containing approximately 3,723 square feet (the "Premises") per
Exhibit "A" attached to this agreement, to which lease (hereinafter the "Prime
Lease") reference is hereby made as if the same were fully set forth herein;
WHEREAS, RMS INTERNATIONAL, INC., entered into that certain Sublease
commencing on January 21, 1997 with GEMINI AIR CARGO, INC., as
successor-in-interest to POTOMAC FINANCLAL GROUP, L.L.C. ("First Sublandlord")
for the sublease of the Premises per Exhibit "B" attached to this agreement, to
which sublease (hereinafter the "First Sublease") reference is hereby made as if
the same were fully set forth herein;
WHEREAS, the parties to this Sublease have agreed that Sublandlord shall
sublet the premises to Subtenant.
NOW, THEREFORE, in consideration of the covenants set forth herein, the
parties covenant agree as follows:
1. Premises: Term. Sublandlord hereby subleases the Premises to Subtenant
for term ("Term") commencing on or about the earlier of occupancy by Subtenant
of the Premises or February 1, 1999 (the "Sublease Commencement Date") and
ending at 11:59 p.m. E.S.T. on November 30, 2000 (the "Sublease Expiration
Date'), unless sooner terminated in accordance herewith. Sublandlord has agreed
to paint the interior walls of the Premises, and agrees to shampoo and clean the
carpet before the Sublease Commencement Date; otherwise, Subtenant hereby
accepts the Premises in their "as-is" condition.
Sublandlord shall make available to Subtenant all parking spaces made
available to it under the First Sublease, being thirteen (13) parking spaces,
two (2) of which are covered, subject to the terms of Section 45 of the Prime
Lease.
2. Termination. Upon the expiration or sooner termination of the Prime
Lease for any reason, or upon the surrender of the Prime Lease by Sublandlord to
the Prime Landlord, at Prime Landlord's option, this Sublease Agreement and
Subtenant's rights hereunder shall
<PAGE>
terminate as of the date of such expiration, termination or surrender, as the
case may be, and the Subtenant shall vacate the Premises on such date.
3. Rent. Subtenant shall pay the Sublandlord an annual rental at the rate
of Ninety Four Thousand Five and 75/100 Dollars ($94,005.75) per annum ("Basic
Rent"), in equal monthly installments of Seven Thousand Eight Hundred Thirty
Three and 81/100 Dollars ($7,833.81) per month ("Basic Monthly Rent"), plus the
Additional Rent as hereinafter defined in Paragraph 4 below (the Additional Rent
and the Basic Rent hereinafter collectively referred to as "Rent"). The first
installment of Basic Monthly Rent shall be due and payable upon the execution
hereof. On each anniversary of the Sublease Commencement Date, the Basic Rent
shall be increased by an amount equal to five percent (5%) of the Basic Rent in
effect during the preceding Lease Year. Except as otherwise provided herein,
Subtenant shall pay the Rent in equal monthly installments in advance on the
first day of each and every month during the Term. In the event that at any time
during the Term, Subtenant shall have a claim against Sublandlord, Subtenant
shall have no right to deduct the amount allegedly owed Subtenant from the Rent
or other sums payable to Sublandlord hereunder, it being understood and agreed
that Subtenant's sole remedy in such event shall be to institute and independent
action against Sublandlord therefor.
Subtenant shall receive a rent abatement of its rent under this Sublease to
the extent the First Sublandlord is entitled to a rent abatement under Article 8
and 13 of the Prime Lease. Subtenant shall have a right to terminate the
Sublease to the extent the First Sublandlord is entitled to terminate the Prime
Lease pursuant to Article 13 of the Prime Lease.
4. Additional Rent. Subtenant shall not pay Tenant's Share of Property
Taxes pursuant to Section 10 of the Prime Lease or Tenant's Share of Operating
Costs pursuant to Section 9 of the Prime Lease. With respect to any other
additional rent or other sums charged to Sublandlord, Subtenant shall pay for it
at the rates charged by Prime Landlord under the Prime Lease. If Subtenant
procures any additional services from the Prime Landlord, Subtenant shall pay
for it at the same rates charged by the Prime Landlord and shall make such
payments as Prime Landlord may direct. All sums payable by the Subtenant under
this paragraph 4 shall be deemed "Additional Rent" and shall be collectable as
such.
5. Services. Except as otherwise provided herein, the only services or
rights to which Subtenant is entitled under this Sublease Agreement are those to
which Sublandlord is entitled as lessee under the Prime Lease and Subtenant will
look solely to Prime Landlord for all such services and rights, but (at
Subtenant's request) Sublandlord shall assist Subtenant with obtaining such
services and rights.
6. Permitted Uses. The Premises shall be used for general office purposes
and related uses only and for no other purpose. Subtenant shall not use or
occupy the Premises, nor permit the Premises to be used or occupied, for any
illegal purposes or in any unlawful or illegal manor nor in any manner to create
any nuisance or trespass.
-2-
<PAGE>
7. Compliance: Indemnification. Subtenant shall neither cause nor suffer
any act or omission that would cause the Prime Lease to be terminated or
forfeited because of any right of termination or forfeiture reserved or vested
in the Prime Landlord, and Subtenant will indemnify, defend and hold Sublandlord
harmless against all claims of any kind by reason of any breach or default on
the part of or by Subtenant's officers, agents, employees, contractors, invitees
or licensees, by reason on which the Prime Lease may be terminated or forfeited.
Subtenant represents that it has read and is familiar with the terms of the
Prime Lease.
Sublandlord agrees that Sublandlord will not (i) take any action or omit to
take any action which would constitute a voluntary surrender under the First
Sublease or a default thereunder resulting in the termination of this Sublease
and/or Subtenant's eviction hereunder or (ii) amend the First Sublease without
the consent of Subtenant. Sublandlord agrees to pay in a timely fashion the base
rent, additional rent and any other charges payable by Sublandlord to First
Sublandlord under the First Sublease and to comply with all other obligations
under the First Sublease and the Prime Lease.
8. Hold Harmless. Subtenant hereby agrees to indemnify, defend and hold
Prime Landlord and Sublandlord harmless against all costs, damages, claims,
liabilities and expenses (including, without limitation, attorneys' fees)
suffered by or claimed against Sublandlord, directly or indirectly, based on,
arising out of or resulting from (i) Subtenant's use and occupancy of the
Premises or the business conducted by Subtenant therein, (ii) any act of
omission by Subtenant or Subtenant's agents, officers, employees, contractors,
invitees or licensees, or (iii) any breach or default by Subtenant in the
performance or observance of its covenants or obligations under this Sublease
(including the covenants and obligations of the Subtenant under the Prime Lease
as incorporated herein).
9. Assignment: Subletting. Subtenant shall not assign this Sublease or
sublet the Premises in whole or in part, and shall not permit Subtenant's
interest in this Sublease to be encumbered or vested in any third party by
operation of law or otherwise, unless prior written approval is obtained by
Sublandlord, First Sublandlord and Prime Landlord.
Notwithstanding anything contained herein to the contrary, Subtenant shall
have the right (upon written notice to Sublandlord, First Sublandlord and Prime
Landlord), without the requirement of obtaining any of such parties' consent,
(i) to assign this Sublease or sublease all or any portion of the Premises to an
entity which is the parent of Subtenant, subsidiary of Subtenant, affiliate of
Subtenant, or shall directly or indirectly control, be controlled by or be under
common control with Subtenant and (ii) to assign this Sublease in connection
with the sale of all or substantially all of Subtenant's business or a merger or
consolidation of Subtenant (or its parent) into or with another company to such
acquirer or succeeding entity.
-3-
<PAGE>
10. Notices. Any notice or demand which either party may or must give to
the other under this Sublease Agreement shall be in writing and delivered
personally or sent by registered or certified mail addressed if to Sublandlord
as follows:
VistaRMS
950 Herndon Parkway
Suite 360
Herndon, Virginia 20170
Attn: Carrie Turley, Office Manager
AND IF TO SUBTENANT, PRIOR TO THE SUBLEASE AND TO SUBTENANT AFTER THE SUBLEASE
COMMENCEMENT DATE, AS FOLLOWS: COMMENCEMENT DATE, AS FOLLOWS:
Tel-Save, Inc. Tel-Save, Inc.
6805 Route 202 12020 Sunrise Valley Drive
New Hope, Pennsylvania 18938 Suite 250
Attn: Gabriel Battista, CEO Reston, Virginia 20191
Attn: Gabriel Battista, CEO
with a copy in both cases to:
Arnold & Porter
555 12th Street, N.W.
Washington, D.C. 20004
Attn: Jennifer Perkins
Either party may, by notice in writing, direct that future notices or demand be
sent to a different address. Notice shall be deemed to have been given when
received by the parry to whom addressed (or the date which delivery is refused,
as the case may be).
11. No Partnership. Nothing herein contained in this Sublease Agreement
shall be deemed or construed as creating the relationship of principal and agent
or of partnership or joint venture between the parties hereto; it being
understood and agreed that no act of the parties hereto shall be deemed to
created any relationship other than that of Sublandlord and Subtenant.
12. Insurance. Subtenant agrees to maintain casualty and liability
insurance coverage with respect to the Premises and with limits of liability and
deductibles as required under the Prime Lease. Prior to the Sublease
Commencement Date, Subtenant shall provide Sublandlord with a certificate of
insurance evidencing such insurance coverage.
13. Incorporation. Except as may be inconsistent with the terms of this
Sublease Agreement, which is subject and subordinate to the Prime Lease, all the
terms, covenants and conditions of the Prime Lease, excepting the provisions
contained therein with respect to (a) the Security Deposit, (b) any options to
renew the Term, or (c) any options to cancel the Prime Lease
-4-
<PAGE>
(excluding the option to terminate pursuant to Section 13 of the Prime Lease),
shall be applicable to this Sublease Agreement with the same force and effect as
if Sublandlord were the lessor under the Prime Lease and Subtenant were the
lessee thereunder; and in case of any breach by Subtenant, Sublandlord shall
have all the rights against Subtenant as would be available to the lessor
against the lessee under the Prime Lease, Sublandlord shall in addition, upon
the occurrence of any breach by Subtenant and the failure to cure the same on or
before the expiration of three (3) days notice thereof, be entitled to recover
from Subtenant the cost of the removal of Subtenant and Subtenant's property
from the Premises.
14. Binding Agreement. The covenants and agreements herein contained shall
bind and insure to the benefit of Sublandlord, Subtenant, and their respective
executors, administrators, successors and assigns; however, this provision shall
not be deemed to authorize any violation of Section 9 hereof.
15. Complete Agreement. All prior understandings and agreements between the
parties are merged within this Sublease Agreement, which alone fully and
completely sets forth the understanding of the parties, and this Sublease may
not be changed or terminated orally or in any manner other than by an agreement
in writing and signed by the party against whom enforcement of the change or
termination is sought.
Sublandlord represents and warrants to Subtenant that the Prime Lease
attached hereto as Exhibit A and the First Sublease attached hereto as Exhibit B
are true, correct and complete copies thereof. Sublandlord represents and
warrants to Subtenant that, to Sublandlord's knowledge, (i) there is no default
by either Prime Landlord or First Sublandlord under the Prime Lease or by either
First Sublandlord or Sublandlord under the First Sublease and (ii) the Prime
Lease and the First Sublease are in full force and effect.
16. Security Deposit. Upon the execution hereof, Subtenant shall deliver to
Sublandlord a security deposit in the amount of Seven Thousand Eight Hundred
Thirty-Three and 81/100 Dollars ($7,833.81) (the "Security Deposit") as security
for the payment and performance by Subtenant of all of its obligations,
covenants, conditions and agreements hereunder. The Security Deposit shall not
be considered a prepayment of rent or a limit on Subtenant's liability under the
Sublease or as liquidated damages. If there is an event of default by Subtenant
hereunder, Sublandlord shall have the right, but shall not be obligated, to
apply the Security Deposit as is reasonably necessary to cure such default, in
which event Subtenant shall be obligated to promptly deliver to Sublandlord the
cash amount necessary to restore the Security Deposit to its original amount,
the Subtenant's failure to do so within ten (10) days after notice of demand
therefor from Sublandlord shall constitute an event of default under the
Sublease entitling Sublandlord without further notice to all of its remedies
under the Sublease; provided, however, such defaults and Subtenant's liability
under the Sublease shall thereby be discharged only pro tanto and Subtenant
shall remain liable for any amounts that said Security Deposit shall be
insufficient to pay. Sublandlord agrees to return the Security Deposit to
Subtenant within fifteen (15) days of the Sublease Expiration Date. In addition,
Sublandlord agrees to pay Subtenant all accrued interest collected on the
Security Deposit, net of taxes.
-5-
<PAGE>
17. Brokers. Upon execution of this Sublease by both parties, Sublandlord
shall pay to Grubb and Ellis a commission as set forth in a separate agreement
between Sublandlord and said brokers, for brokerage services rendered to
Sublandlord in this transaction. Except as aforesaid, the parties represent and
warrant to each other that they have dealt with no other broker or finder in
connection with this transaction.
18. Prime Landlord's and First Sublandlord's Consent. It is understood and
agreed by the parties hereto that acceptance of this Sublease by the Sublandlord
shall be subject to the consent of the Prime Landlord pursuant to Section 20 of
the Prime Lease and of the First Sublandlord pursuant to the First Sublease.
Sublandlord shall not be liable in any manner to Subtenant should Prime Landlord
or First Sublandlord reject the Sublandlord's request for approval of this
Sublease. Subtenant shall use reasonable efforts to cooperate with Sublandlord
to provide the information required by Prime Landlord with respect to this
Sublease. Sublandlord hereby acknowledges to First Sublandlord that,
notwithstanding this Sublease, Sublandlord shall in no way be released or
relieved, in whole or part, from Sublandlord's covenants as "Subtenant" under
the First Sublease. In the event Prime Landlord or First Sublandlord refuses to
consent to this Sublease, then upon ten (10) days following written notice
thereof from Sublandlord, Subtenant shall vacate the Premises. Notwithstanding
the foregoing, in the event that Subtenant fails to vacate the Premises, within
such ten (10) day period (i) Prime Landlord or Sublandlord may forthwith reenter
and take possession of said Premises, and (ii) Subtenant shall pay Sublandlord
an amount equal to twice the monthly payment of Basic Monthly Rent in effect
immediately prior to the expiration of the Term, however, the foregoing shall
not be deemed to limit Subtenant's liability arising from any wrongful holding
over. This Sublease may be executed in two or more counterparts, each of which
when incorporated together shall constitute an original.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be
executed as of the day and year first above written:
WITNESS: SUBLANDLORD:
VistaRMS, Inc.
By: By: [Seal]
---------------------------- ----------------------------
Its: President
WITNESS: SUBTENANT::
Tel-Save, Inc.
By: By: [Seal]
---------------------------- ----------------------------
Its:
------------------------
-7-
<PAGE>
CONSENT OF PRIME LANDLORD
Reston Plaza Office L.L.C. (the "Prime Landlord"), owner of the Premises
hereinabove subleased and Prime Landlord under the Prime Lease, in accordance
with the provision of Section 20 of the Prime Lease, hereby consents to this
Sublease Agreement upon the terms stated herein, and such approval is being
issued on the condition that neither Gemini Air Cargo, L.L.C. nor RMS
International, Inc. (dba Vistarms, Inc.) shall be relieved from primary
liability for all obligations of the Tenant under the Prime Lease and on the
condition that this approval does not amend or modify the actual terms of the
Prime Lease in any manner.
In accordance with Section 20 of the Prime Lease, Tel-Save, Inc. shall be
directly liable to Prime Landlord for all obligations of Gemini Air Cargo,
L.L.C. under the Prime Lease and Tel-Save, Inc. by executing the Sublease
Agreement, hereby assumes all such obligations. Tel-Save, Inc. acknowledges that
such obligations include, without limitation, the obligation under Section 20 of
the Prime Lease to pay directly to Prime Landlord, as "Additional Rent," fifty
percent (50%) of the excess of (i) the "Basic Rent" payable under the Sublease
Agreement over (ii) the "Basic Rent" payable under the Prime Lease.
PRIME LANDLORD:
RESTON PLAZA OFFICE, L.L.C.
WITNESS: By: LASALLE ADVISORS
LIMITED
PARTNERSHIP, Advisor and
Duly Authorized Agent
By:
- - ------------------------------ ---------------------------------
Name: David L. Reahl
-------------------------------
Title: Vice President
------------------------------
<PAGE>
CONSENT OF GEMINI AIR CARGO
Gemini Air Cargo, Inc., First Sublandlord of the Premises hereinabove
subleased in accordance with the terms of the First Sublease hereby consents to
this Sublease Agreement upon the terms stated herein, and such approval is being
issued on the condition that RMS International, Inc., now doing business under
VistaRMS, Inc., will not be relieved from primary liability for all obligations
of the Subtenant under the First Sublease Agreement and on the condition that
this approval does not amend or modify the actual terms of the First Sublease in
any manner.
The undersigned agrees that it will not be relieved from primary liability
for all obligations of the Tenant under the Prime Lease.
FIRST SUBLANDLORD:
GEMINI AIR CARGO, INC.
WITNESS:
By:
- - ------------------------------ ---------------------------------
Name:
-------------------------------
Title:
------------------------------
EXHIBIT 10.45
LEASE
BY AND BETWEEN
AETNA LIFE INSURANCE COMPANY
("Landlord")
AND
POTOMAC FINANCIAL GROUP, L.L.C.
("Tenant")
Multi-tenant Office Lease
12020 Sunrise Valley Drive
Reston, Virginia
<PAGE>
TABLE OF CONTENTS
-----------------
1. TERMS................................................ 1
-----
2. DELIVERY OF POSSESSION............................... 2
----------------------
3. PAYMENT OF RENT...................................... 2
---------------
4. SECURITY DEPOSIT..................................... 2
----------------
5. USES................................................. 3
----
6. LATE CHARGES......................................... 5
------------
7. REPAIRS AND MAINTENANCE.............................. 5
-----------------------
8. UTILITIES AND SERVICES............................... 5
----------------------
9. COST OF SERVICES AND UTILITIES....................... 6
------------------------------
10. PROPERTY TAXES....................................... 11
--------------
11. LIABILITY AND CASUALTY INSURANCE..................... 13
--------------------------------
12. FIRE INSURANCE - FIXTURES AND EQUIPMENT.............. 14
---------------------------------------
13. DAMAGE OR DESTRUCTION................................ 14
---------------------
14. ALTERATIONS AND ADDITIONS: REMOVAL OF FIXTURES....... 16
----------------------------------------------
15. ACCEPTANCE OF PREMISES............................... 17
----------------------
16. TENANT IMPROVEMENTS.................................. 18
-------------------
17. ACCESS............................................... 18
------
18. WAIVER OF SUBROGATION................................ 18
---------------------
19. INDEMNIFICATION...................................... 19
---------------
20. ASSIGNMENT AND SUBLETTING............................ 19
-------------------------
21. ADVERTISING.......................................... 21
-----------
22. LIENS................................................ 21
-----
<PAGE>
23. DEFAULT.............................................. 21
-------
24. SUBORDINATION AND ATTORNMENT......................... 24
----------------------------
25. SURRENDER OF POSSESSION.............................. 25
-----------------------
26. NON-WAIVER........................................... 25
----------
27. HOLDOVER............................................. 25
--------
28. CONDEMNATION......................................... 26
------------
29. NOTICES.............................................. 26
-------
30. MORTGAGEE PROTECTION................................. 26
--------------------
31. COSTS AND ATTORNEYS' FEES............................ 27
-------------------------
32. BROKERS.............................................. 27
-------
33. LANDLORD'S LIABILITY................................. 27
--------------------
34. ESTOPPEL CERTIFICATES................................ 28
---------------------
35. FINANCIAL STATEMENTS................................. 28
--------------------
36. TRANSFER OF LANDLORD'S INTEREST...................... 29
-------------------------------
37. RIGHT TO PERFORM..................................... 29
----------------
38. SUBSTITUTED PREMISES................................. 29
--------------------
39. SALES AND AUCTIONS................................... 30
------------------
40. NO ACCESS TO ROOF.................................... 30
-----------------
41. SECURITY............................................. 30
--------
42. AUTHORITY OF TENANT.................................. 30
-------------------
43. NO ACCORD OR SATISFACTION............................ 31
-------------------------
44. MODIFICATIONS FOR LENDER............................. 31
------------------------
45. PARKING.............................................. 31
-------
<PAGE>
46. GENERAL PROVISIONS................................... 31
------------------
47. RULES AND REGULATIONS................................ 33
---------------------
48. NO WARRANTIES OR REPRESENTATIONS BY LANDLORD......... 34
--------------------------------------------
49. LANDLORD'S CONSENT OR APPROVAL....................... 34
------------------------------
50. WAIVER OF TRAIL BY JURY.............................. 35
-----------------------
EXHIBIT A - LOCATION AND DIMENSIONS OF PREMISES
EXHIBIT B - SPECIAL STIUPLATIONS
EXHIBIT C - WORK LETTER
EXHIBIT D - RULES AND REGULATIONS
EXHIBIT E - CLEANING SPECIFICATIONS
<PAGE>
LEASE SUMMARY SHEET
1. LANDLORD: Aetna Life Insurance Company
c/o Trammell Crow Real Estate Services, Inc.
1115 30th Street, N.W.
Washington, D.C. 20007
2. TENANT: Potomac Financial Group, L.L.C., a Virginia
limited liability company
3. TENANT'S ADDRESS
PRIOR TO OCCUPANCY: 12020 Sunrise Valley Drive
Suite 100
Reston, Virginia 22091
4. TENANT'S ADDRESS
UPON OCCUPANCY: 12020 Sunrise Valley Drive
Suite 250
Reston, Virginia 22091
5. PREMISES: Approximately 3,723 square feet on the second
floor of the Building known as Suite 250
6. TERM OF LEASE: YEARS: Five (5)
BEGINNING: December 1, 1995
ENDING: November 30, 2000
7. RENT: MINIMUM (BASE) MONTHLY RENT:
ADDITIONAL RENT: Increases in Operating Costs
and Property Taxes over a
1996 Base Year
ESCALATION: Three percent (3%) per annum
8. SECURITY DEPOSIT: (See Special Stipulation No. 3)
- FOR INFORMATIONAL PURPOSES ONLY -
<PAGE>
LEASE
THIS LEASE (the "Lease") is made this ____ day of October, 1995, by and
between AETNA LIFE INSURANCE COMPANY, a Connecticut corporation ("Landlord"),
c/o Trammell Crow Real Estate Services, Inc., and POTOMAC FINANCIAL GROUP,
L.L.C., a Virginia limited liability company, ("Tenant"), having an address of
12020 Sunrise Valley Drive, Suite 100, Reston, Virginia 22091.
Landlord, for and in consideration of the rents and all other charges and
payments hereunder and of the covenants, agreements, terms, provisions and
conditions to be kept and performed hereunder by Tenant, demises and leases to
Tenant, and Tenant hereby hires and takes from Landlord, the premises described
below ("Premises"), subject to all matters hereinafter set forth and upon and
subject to the covenants, agreements, terms, provisions and conditions of this
Lease for the term hereinafter stated.
1. TERMS.
1.1 PREMISES. The Premises demised by this Lease are approximately
three thousand seven hundred twenty-three (3,723) square feet located on the
second (2nd) floor in Reston Plaza II (the "Building") at 12020 Sunrise Valley
Drive, Reston, Virginia, together with a nonexclusive right to use parking and
other common areas (the "Property"). The rentable square footage of the Premises
has been determined by Landlord in accordance with WDCAR (89) standards. The
location and dimensions of the Premises are shown on EXHIBIT A, attached hereto
and incorporated herein by reference. No easement for light or air is included
in this Lease.
1.2 AGREED AREAS.The parties agree that the total rentable area of the
Building, the area of the Premises, and Tenant's percentage of the Building are
as follows:
Total rentable area of the Building: 48,832 sq. ft.;
Area of Premises: 3,723 sq. ft.; and
Tenant's percentage of the Building: 7.62%.
1.3 LEASE TERM. The parties agree that the Lease Commencement Date and
the Lease Expiration Date are as follows:
Lease Commencement Date: December 1, 1995.
Lease Expiration Date: 12:00 midnight on the last day of the sixtieth
(60th) full calendar month after the Lease
Commencement Date.
1.4 BASE RENT. The basic rent ("Base Rent") is $5,506.94 per month for
the five (5) years of the term hereof and thereafter shall increase as may be
set forth in EXHIBIT B attached hereto and incorporated herein by reference. In
addition to the Base Rent, Tenant shall pay all amounts designated as Additional
Rent ("Additional Rent") under this Lease, including but not limited to charges
for additional services under Section 8.2, increases in Operating Costs
<PAGE>
of under Article 9, and increases in Property Taxes under Article 10, all of
which shall be deemed rent ("Rent") due under this Lease.
1.5 INITIAL PAYMENT. Tenant shall pay Landlord upon execution of this
Lease _______ and _______ Dollars ______ representing:
(a) the first month's Base Rent of ______ and
(b) the security deposit of $______
2. DELIVERY OF POSSESSION. If Landlord is unable to deliver possession of
the Premises to Tenant on the Lease Commencement Date this Lease shall not be
void or voidable, nor shall Landlord be liable to Tenant for any loss or damage
resulting therefrom, nor shall the expiration date of the term be extended, but
in such event Tenant shall not be liable for any Rent or other charges due under
this lease until such time as Landlord tenders delivery of possession of the
Premises to Tenant in accordance with the terms of the Tenant Work Letter
attached hereto. If Landlord is unable to deliver possession of the Premises to
Tenant by January 15, 1996, Tenant shall have the option to terminate this Lease
immediately upon written notice to Landlord and Landlord shall return all
prepaid rent, security deposit and all other sums paid by Tenant within five (5)
business days of such notice. Should Landlord tender possession of the Premises
to Tenant prior to the date specified as the Lease Commencement Date, and Tenant
elects to accept such prior tender, such prior occupancy shall be subject to all
terms, covenants and conditions of this Lease, including the payment of Rent.
3. PAYMENT OF RENT. Except as otherwise provided in this Lease, Tenant
shall pay Landlord the Rent and any other payments due under this Lease without
prior notice, deduction or offset, in lawful money of the United States in
advance on or before the first day of each month, except that the first month's
Base Rent shall be paid upon the execution hereof, at the address noted in
Section 29, or to such other party or at such other place as Landlord may
hereafter from time to time designate in writing. Rent and other amounts due
under this Lease for any partial month at the beginning or end of the Lease term
shall be prorated, on a per diem basis.
4. SECURITY DEPOSIT. As security for its full and faithful performance of
this Lease, Tenant shall pay Landlord a security deposit of Dollars ( ) upon
execution of this Lease. If Tenant defaults with respect to any covenant or
condition of this Lease beyond any applicable notice, grace and cure periods,
including but not limited to the payment of Rent or any other payment due under
this Lease, Landlord upon written notice to Tenant may apply all or any part of
the security deposit to the payment of any sum in default or any other sum which
Landlord may be required to or deem necessary to spend or incur by reason of
Tenant's default. In such event, Tenant shall, upon demand, deposit with
Landlord the amount so applied to replenish the security deposit. Within thirty
(30) days of the expiration or sooner termination of this Lease, Landlord will
refund Tenant the security deposit less any amounts necessary to cure any
existing default of Tenant at the time of expiration under this Lease.
2
<PAGE>
5. USES.
5.1 Permitted Uses. The Premises are to be used only for general
office purposes ("Permitted Uses") and for no other business or purpose without
the prior written consent of Landlord. No act shall be done in or about the
Premises that is unlawful or that will increase the existing rate of insurance
on the Building. In the event of a breach of this covenant, Tenant shall
immediately cease the performance of such unlawful act or such act that is
increasing or has increased the existing rate of insurance and shall pay to
Landlord any and all reasonable increases in insurance premiums resulting from
such breach. Tenant shall not commit or allow to be committed any affirmative
waste upon the Premises, or any public or private nuisance or other act or thing
which disturbs the quiet enjoyment of any other tenant in the Building. If any
of Tenant's office machines or equipment disturb any other tenant in the
Building, then Tenant shall provide adequate insulation, or take such other
action as may be necessary to eliminate the noise or disturbance at its sole
cost and expense. Tenant shall not, without Landlord's prior consent, install
any equipment, machine, device, tank or vessel which is subject to any federal,
state or local permitting requirement. Tenant, at its expense, shall comply with
all laws, statutes, ordinances and governmental rules, regulations or
requirements governing the installation, operation and removal of any such
equipment, machine, device, tank or vessel. Tenant, at its expense, shall comply
with all laws, statutes, ordinances, governmental rules, regulations or
requirements, and the provisions of any recorded documents now existing or
hereafter in effect relating to its use, operation or occupancy of the Premises
and shall observe such reasonable rules and regulations as may be adopted and
made available to Tenant by Landlord from time to time for the safety, care and
cleanliness of the Premises or the Building and for the preservation of good
order therein.
5.2 HAZARDOUS MATERIALS.
5.2.1 As used in this Lease, the term "Hazardous, Materials"
shall mean and include any substance that is or contains petroleum, asbestos,
polychlorinated biphenyls, lead, or any other substance, material or waste which
is now or is hereafter classified or considered to be hazardous or toxic under
any federal, state or local law, rule, regulation or ordinance relating to
pollution or the protection or regulation of human health, natural resources or
the environment (collectively "Environmental Laws") or poses or threatens to
pose a hazard to the health or safety of persons on the Premises or any adjacent
property.
5.2.2 Tenant agrees that during its use and occupancy of the
Premises it will not permit Hazardous Materials to be present on or about the
Premises except in a manner and quantity necessary for the ordinary performance
of Tenant's business and that it will comply with all Environmental Laws
relating to the use, storage or disposal of any such Hazardous Materials.
5.2.3 If Tenant's use of Hazardous Materials on or about the
Premises results in a release, discharge or disposal of Hazardous Materials on,
in, at, under, or emanating from, the Premises or the property in which the
Premises are located, Tenant agrees to investigate, clean up, remove or
remediate such Hazardous Materials in full compliance with (a) the requirements
of (i) all Environmental Laws and (ii) any governmental agency or authority
responsible for the enforcement of any Environmental Laws; and (b) any
additional requirements
3
<PAGE>
of Landlord that are reasonably necessary to protect the value of the Premises
or the property in which the Premises are located. Landlord shall also have the
right, but not the obligation, to take whatever action with respect to any such
Hazardous Materials that it deems reasonably necessary to protect the value of
the Premises or the property in which the Premises are located. All costs and
expenses paid or incurred by Landlord in the exercise of such right shall be
payable by Tenant upon demand.
5.2.4 Upon reasonable notice to Tenant, Landlord may inspect the
Premises for the purpose of determining whether there exists on the Premises any
Hazardous Materials or other condition or activity that is in violation of the
requirements of this Lease or of any Environmental Laws. The right granted to
Landlord herein to perform inspections shall not create a duty on Landlord's
part to inspect the Premises, or liability on the part of Landlord for Tenant's
use, storage or disposal of Hazardous Materials, it being understood that Tenant
shall be solely responsible for all liability in connection therewith.
5.2.5 Tenant shall surrender the Premises to Landlord upon the
expiration or earlier termination of this Lease free of debris, waste or
Hazardous Materials placed on or about the Premises by Tenant or its agents,
employees, contractors or invitees, and in a condition which complies with all
Environmental Laws.
5.2.6 Tenant agrees to indemnify and hold harmless Landlord from
and against any and all claims, losses (including, without limitation, loss in
value of the Premises or the property in which the Premises are located),
liabilities and expenses (including reasonable attorney's fees) sustained by
Landlord attributable to (i) any Hazardous Materials placed on or about the
Premises by Tenant or its agents, employees, contractors or invitees or (ii)
Tenant's breach of any provision of this Section 5.2.
5.2.7 The provisions of this Section 5.2 shall survive the
expiration or earlier termination of this Lease.
6. LATE CHARGES. Tenant hereby acknowledges that late payment to Landlord
of Rent or other sums due hereunder will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. If any Rent or other sum due from Tenant is not received
within ten (10) days of written notice of non-payment to Tenant past its due
date, then Tenant shall pay to Landlord immediately upon Landlord's demand
therefor a late charge in an amount equal to five percent (5%) of such overdue
amount, plus any reasonable attorneys' fees and costs incurred by Landlord by
reason of Tenant's failure to pay Rent and other charges when due hereunder.
7. REPAIRS AND MAINTENANCE. Landlord shall maintain, or cause, to be
maintained, in a first class condition the common areas of the Building, such as
lobbies, elevators, stairs, and corridors, the roof, foundations, and exterior
walls of the Building, and the underground utility and sewer pipes outside the
exterior walls of the Building, if any, except any of such repairs rendered
necessary by the negligence or willful misconduct of Tenant, its agents,
customers, employees, independent contractors, guests or invitees, the repair of
which shall be paid for by Tenant within ten (10) days of Landlord's written
demand. Subject to Landlord's
4
<PAGE>
right of access pursuant to Article 17, Tenant shall be exclusively responsible
for the interior of the Premises, which shall be maintained by Tenant in good
order and repair, and Landlord shall be under no obligation to inspect the
Premises or, except as otherwise expressly provided in this Lease, repair the
Premises. Tenant shall promptly report in writing to Landlord any defective
condition known to it which Landlord is required to repair. Tenant hereby waives
the right to make repairs at Landlord's expense under any law, statute or
ordinance now or hereafter in effect.
8. UTILITIES AND SERVICES.
8.1 SERVICE. From 8:00 a.m. to 6:00 p.m. on weekdays ("Normal Business
Hours") and from 9:00 a.m. to Noon on Saturday ("Saturday Mornings") (excluding
legal holidays), Landlord shall furnish to the Premises electricity for lighting
and operation of low-power usage office machines, including without limitation,
copiers, fax machines, printers and personal computers, water, heat. and air
conditioning, and elevator service. During all other hours, Landlord shall
furnish such services except for heat and air conditioning.
8.2 ADDITIONAL SERVICES. If requested by Tenant, Landlord shall
furnish heat and air conditioning at times other than Normal Business Hours and
Saturday Mornings and the cost of such services as established by Landlord shall
be paid by Tenant as Additional Rent, payable promptly upon receipt of Landlord
invoice. Currently, the overtime rate for utilities in the Building is $25.00
per hour. Landlord shall also provide toilet room supplies, window washing at
reasonable intervals, and customary Building janitorial service which shall
include the responsibilities set forth in EXHIBIT E attached hereto and by this
reference made a part hereof. Other types of services provided or caused to be
provided by Landlord to Tenant which are in addition to the services ordinarily
provided Building tenants shall be payable as provided in Section 9.1.1.2 of
this Lease. Landlord shall not be liable for any loss, injury or damage to
property caused by or resulting from any variation, interruption, or failure of
such services due to any cause whatsoever, or from failure to make any repairs
or perform any maintenance. In the event of any interruption of such services
for more than forty-eight (48) hours and such services are within Landlord's
control, Tenant shall be entitled to an abatement of Rent during the period of
such interruption. In no event shall Landlord be liable to Tenant for any damage
to the Premises or for any loss, damage or injury to any property therein or
thereon occasioned by bursting, rupture, leakage or overflow of any plumbing or
other pipes or other similar cause in, above, upon or about the Premises or the
Building. If additional tenants request overtime services on a day when Tenant
requests such services, the actual cost thereof shall be pro rated among all
such tenants.
9. COST OF SERVICES AND UTILITIES.
9.1 DEFINITIONS. In addition to the Base Rent and other Additional
Rent as set forth in this Lease, Tenant shall pay to Landlord as Additional Rent
increases under this Article 9. Said increases shall be made as provided herein,
using the following definitions:
9.1.1 "OPERATING COSTS" Shall include Costs of Utilities and
other Operating Costs.
5
<PAGE>
9.1.1.1 "COSTS OF UTILITIES" shall mean all expenses paid or
incurred by Landlord, including any surcharges imposed, for electricity, water,
gas, sewers, oil and utility services for the Building, land and parking and
other common areas.
9.1.1.2 "OTHER OPERATING COSTS" shall mean all other
expenses paid or incurred by Landlord for maintaining, operating, replacing,
repairing, and managing (i) the Building, (ii) the personal property used in
conjunction therewith, (iii) the Building roof, or (iv) the land upon which the
Building is situated, including all curbs and sidewalks adjacent to the same.
Such costs shall include, without limitation, supplies, cleaning services,
garbage and trash collection, personal property taxes, replacement lighting,
maintenance and service contracts, wall and window washing, towel service,
machinery, equipment, a reasonable management fee in an amount not in excess of
that prevailing in similar buildings in the Reston, Virginia area, window glass
replacement and repair, landscaping services of independent contractors
(including, without limitation, ice and snow removal), compensation (including
employment taxes and fringe benefits) of on-site employees up to the level of
Building Manager who perform regular and recurring duties in connection with the
management, operation, maintenance, replacement and repair of the Building, the
personal property and equipment used in conjunction therewith and the land upon
which the Building is situated and all curbs and sidewalks adjacent to the same,
capital improvements to the Building which are required by local or governmental
authorities or which are reasonably expected to reduce Operating Costs,
insurance premiums, repair, replacement and maintenance costs required by any
applicable federal, state or local law now or hereafter in affect, permits and
inspection fees, reasonable legal fees and costs incurred in connection with
contesting the amounts or the imposition of any Property Taxes (as defined in
Article 10) , and accounting fees and any other expense or charge whether or not
hereinbefore described which, in accordance with generally accepted accounting
and management practices, would be considered an expense of maintaining,
operating, replacing or repairing the Building, the personal property and
equipment used in conjunction therewith, and the land upon which the Building is
situated and all curbs and sidewalks adjacent to the same, excluding: (a) costs
of any special services rendered to individual tenants (including Tenant), for
which a special, separate charge shall be made (and which shall be payable by
such tenant [including Tenant], as Additional Rent within ten (10) days of
written demand therefor); (b) Property Taxes; and (c) depreciation or
amortization of costs required to be capitalized in accordance with generally
accepted accounting practices (except that Operating Costs shall include
amortization of any energy management system or other capital improvements which
are made pursuant to the requirement of any local or governmental authority or
which are reasonably expected to reduce operating Costs).
9.1.1 In addition to the foregoing, "Operating Costs" shall not
include any of the following:
(i) Any cost which would have been reimbursed if Landlord had
maintained the insurance customarily maintained by landlords
of comparable properties;
(ii) Costs of alterations or improvements of the leased promises
of any tenant in the Building;
6
<PAGE>
(iii) Costs of correcting defects in the initial construction of
the Building;
(iv) Real estate brokers' commissions, advertising or
promotional/marketing expenses incurred in leasing or
procuring tenants of space in the building (including, but
not limited to, any rent or other expenses or any on-site
leasing office);
(v) Deprecation of the Building or any equipment, fixtures or
improvements therein;
(vi) Any bad debt loss or rent loss;
(vii) Deductible amounts paid by Landlord in connection with
claims made by Landlord under insurance policies (including,
but not limited to, expenses for repairs occasioned by a
casualty);
(viii) Expenses for the operation of parking areas or other
concessions, or expenses incurred in connection with any
other areas of the Building which are not devoted
exclusively to office purposes (including, but not limited
to, expenses incurred in connection with the operation,
maintenance or repair of any retail areas);
(ix) Costs associated with the formation or maintenance of any
legal entity constituting Landlord from time to time
(including, but not limited to, trustee's fee(s), annual
franchise fees, organizational or administrative expenses or
accounting fees (other than with respect to Building
operations));
(x) General overhead or general administrative expenses of
Landlord not specifically relating to the Property;
(xi) Costs associated with the acquisition, confirmation, or
defense of Landlord's title to or interest in the Property;
(xii) Costs associated with financing, refinancing, pledging,
selling, granting or otherwise transferring or encumbering
ownership interests in the Property (including, but not
limited to, prepayment of indebtedness, mortgaging, or
ground leasing of the Building);
(xiii) Any costs incurred in obtaining or renewing a certificate
of occupancy;
(xiv) Acquisition or rental of fine art;
(xv) Costs of sewer or water tap or connection fees;
7
<PAGE>
(xvi) Costs of renovating the lobbies or other common areas of
the Building;
(xvii) Any costs or expenses related to or in connection with a
dispute with any holder of a mortgage on or loan in
connection with the Building;
(xviii) Construction of all or any part of the Building or the
Property;
(xix) Reserves for repairs, maintenance or replacements;
(xx) Costs of Building services provided to other tenants outside
of normal Building hours; or
(xxi) Exceeding the level of services, utilities and/or
facilities which are generally provided without cost to
tenants in comparable buildings in the Northern Virginia
area which are substantially tenanted by unrelated parties.
9.1.2 "LEASE YEAR" shall mean the twelve-month period commencing
January 1 and ending December 31.
9.1.3 "BASE SERVICES YEAR" shall mean calendar year 1996.
9.1.4 "ACTUAL COSTS" shall mean the actual expenses paid or
incurred by Landlord for Operating Costs during any Lease Year of the term
hereof.
9.1.5 "ACTUAL COSTS ALLOCABLE TO THE PREMISES" shall mean
Tenant's share of the Actual Costs determined by multiplying Tenant's percentage
of the Building described in Section 1.2 by the Actual Costs.
9.1.6 "ESTIMATED COSTS ALLOCABLE TO THE PREMISES" shall mean
Landlord's estimate or Actual Costs Allocable to the Premises for the following
Lease Year to be given by Landlord to Tenant pursuant to Section 9.3.
9.2 BASE AMOUNT. Operating Costs allocable to the Premises for
the Base Services Year shall be deemed the "Base Amount".
9.3 ADDITIONAL RENT. Prior to the commencement of each Lease Year
(except the Base Services Year) during the term hereof, Landlord shall furnish
Tenant a written statement or the Estimated Costs Allocable to the Premises for
such Lease Year and a calculation of the portion of Estimated Costs Allocable to
the Premises payable by Tenant as Additional Rent in accordance with this
Section. In advance of or before the first day of each month during the term
hereof commencing on the first day of the first Lease Year following the Base
Services Year, Tenant shall pay as Additional Rent for each month during each
such Lease Year: one-twelfth (1/12th) of the amount, if any, by which the
Estimated Costs Allocable to the Premises exceed the Base Amount. If at any time
or times during any such Lease Year, it appears to Landlord that the Estimated
Costs Allocable to the Premises will vary from Landlord's
8
<PAGE>
estimate by more than five percent (5%) on an annualized basis, Landlord may, by
written notice to Tenant, revise its estimate for such Lease Year and the
portion of the Estimated Costs Allocable to the Premises payable by Tenant as
Additional Rent as provided herein for such Lease Year shall be accordingly
adjusted based on such revised estimate.
9.4 ACTUAL COSTS. Within ninety (90) days after the close of each
Lease Year during the term hereof, Landlord shall deliver to Tenant a written
statement setting forth the Actual Costs Allocable to the Premises during the
preceding Lease Year. If such costs for any Lease Year less the Base Amount
exceed the amounts paid by Tenant to Landlord pursuant to Section 9.3, Tenant
shall pay the amount of such excess to Landlord as Additional Rent within thirty
(30) days after receipt of such statement by Tenant. If such statement shows
such costs to be less than the amount paid by Tenant to Landlord pursuant to
Section 9.3, then the amount of such overpayment by Tenant shall be credited by
Landlord to the next Rent payable by Tenant. In the event such overpayment can
not be fully credited by Landlord to the next Rent payable by Tenant due to the
expiration of the term of this Lease, any remaining overpayment shall be
credited by Landlord to any other charges due under this Lease and, to the
extent no such charges are due, shall be refunded to Tenant by Landlord within
thirty (30) days of the Lease Expiration Date.
9.5 END OF TERM. If this Lease terminates on a day other than the last
day of a Lease Year, the amount of any adjustment to Estimated Costs Allocable
to the Premises with respect to the Lease Year in which such termination occurs
shall be prorated on the basis which the number of days from the commencement of
such Lease Year to and including such termination date bears to 365; and any
amount payable by Landlord to Tenant or Tenant to Landlord with respect to such
adjustment shall be payable within thirty (30) days after delivery by Landlord
to Tenant of the statement of Actual Costs Allocable to the Premises with
respect to such Lease Year.
9.6 FURTHER ADJUSTMENT. In the event the average occupancy level of
the Building for the Base Services Year and/or any subsequent Lease Year was not
ninety-five percent (95%) or more of full occupancy, then the Actual Costs for
such year shall be adjusted and apportioned among the tenants by Landlord to
reflect those costs which would have occurred had the Building been ninety-five
percent (95%) occupied during such year.
10. PROPERTY TAXES.
10.1 CONTRIBUTION TO TAXES. In addition to the Base Rent and other
Additional Rent, Tenant shall pay to Landlord, as Additional Rent, its share of
the increase in Property Taxes under this Article 10. Tenant's share of the
increase of such taxes shall be determined as provided herein, utilizing the
following definitions:
10.1.1 "Property Taxes" shall mean any form of assessment,
license, fee, rent tax, excise, imposition, charge, levy, or tax (other than net
income, estate, succession, inheritance, transfer or franchise taxes),
including, without limitation, all ad valorem, sales and use, value added,
single business, gross receipts, transactions, sewer, privilege or similar
taxes, imposed by any authority having the direct or indirect power to tax, or
by any city, county, state
9
<PAGE>
or federal government or any improvement or other district or division thereof,
on the Building or any part thereof, the land, the parking area, or any other
legal or equitable interest of Landlord in the same.
10.1.2 The Term "Lease Year" shall mean the period defined in
Section 9.1.2.
10.1.3 The term "Base Tax Year" shall mean the calendar year
1996.
10.1.4 The term "Tenant's Share of Property Taxes" shall mean the
amount of Property Taxes payable during any Lease Year by Landlord multiplied by
Tenant's percentage of the Building described in section 1.2.
10.2 ADDITIONAL RENT FOR ESTIMATED INCREASES IN TENANT'S SHARE OF
PROPERTY TAXES. Prior to the commencement of each Lease Year (except the Base
Tax Year), Landlord shall furnish Tenant with a written statement setting forth
the estimate of Tenant's Share of Property Taxes for such Lease Year.
One-twelfth (1/12th) of the amount, if any, by which such estimated Tenant's
Share of Property Taxes exceeds Tenant's Share of Property Taxes for the Base
Tax Year shall be Additional Rent payable by Tenant as provided in Article 3.
10.3 ACTUAL PROPERTY TAXES. Within ninety (90) days after the close of
each Lease Year during the term hereof, Landlord shall deliver to Tenant a
written statement setting forth Tenant's Share of Property Taxes during the
preceding Lease Year. If such amount less Tenant's Share of Property Taxes for
the Base Tax Year ("Tenant's Actual Share") exceeds the amount of Property Taxes
actually paid by Tenant to Landlord pursuant to Section 10.2 hereof, Tenant
shall pay the amount of such excess to Landlord as Additional Rent within thirty
(30) days after receipt of such statement by Tenant. If such statement shows
Tenant's Actual Share to be less than the amounts paid by Tenant to Landlord
pursuant to Section 10.2, then the amount of such overpayment shall be credited
by Landlord to the next Rent payable by Tenant. In the event such overpayment
can not be fully credited by Landlord to the next monthly Rent or subsequent
monthly Rent payable by Tenant due to the expiration of the term of this Lease,
any remaining overpayment shall be credited by Landlord, until such credit is
used up, to any other charges due under this Lease and, to the extent no such
charges are due, shall be refunded to Tenant by Landlord within thirty (30) days
of the Lease Expiration Date.
10.4 TAXES ON PERSONAL PROPERTY PAID FOR BY TENANT AND NOT REIMBURSED
BY LANDLORD. Tenant shall pay, prior to delinquency, all personal property taxes
payable with respect to all property of Tenant located on the Premises or the
Building and shall provide promptly, upon request of Landlord, written proof of
such payment.
10.5 END OF TERM. If this Lease terminates on a day other than the
last day of a Lease Year, the amount of any adjustment between the estimated and
actual Tenant's Share of Property Taxes with respect to the Lease Year in which
such termination occurs shall be prorated on the basis of a 365-day year; and
any amount payable by Landlord to Tenant or Tenant to Landlord with respect to
such adjustment shall be payable within thirty (30) days after delivery
10
<PAGE>
by Landlord to Tenant of the statement of Tenant's Share of Property Taxes with
respect to such Lease Year.
10.6 FURTHER ADJUSTMENT. In the event the average occupancy level of
the Building for the Base Services Year and/or any subsequent Lease Year was not
ninety-five percent (95%) or more of full occupancy, then the Property Taxes for
such year shall be proportionately adjusted among the tenants by Landlord to
reflect those costs which would have occurred had the Building been ninety-five
percent (95%) occupied during such year.
11. LIABILITY AND CASUALTY INSURANCE. Tenant shall, at Tenant's expense,
obtain and keep in force during the term of this Lease a policy of comprehensive
general liability insurance, including personal injury liability and contractual
liability, insuring Landlord and Tenant against any liability arising out of the
use, occupancy or maintenance of the Premises. Such insurance shall be in the
amount of not less than One Million and No/100ths Dollars ($1,000,000.00) for
bodily injury and property damage for any one accident or occurrence. Fire and
casualty insurance with extended coverage in an amount of not less than Fifty
Thousand and No/100ths Dollars ($50,000.00) shall also be obtained and kept in
force during the term of this Lease at Tenant's expense. The limit of any of
such insurance shall not limit the liability of Tenant hereunder. If Tenant
fails to procure and maintain such insurance, Landlord may, but shall not be
required to, procure and maintain the same, at Tenant's expense to be reimbursed
by Tenant as Additional Rent within ten (10) days of written demand. All
insurance required to be obtained by Tenant hereunder shall be issued by
companies acceptable to Landlord. Thirty (30) days prior to the Lease
Commencement Date, Tenant shall deliver to Landlord certificates of liability
insurance required herein with loss payable clauses satisfactory to Landlord.
Any deductible under such insurance policy in excess of One Thousand and
No/100ths Dollars ($1,000.00) must be approved by Landlord in writing prior to
issuance of such policy. No policy shall be cancelable, allowed to lapse and/or
expire and/or be subject to reduction of coverage except upon thirty (30) days'
prior written notice to Landlord. All such policies shall name Landlord as an
additional insured and shall be written as primary policies not contributing
with and not in excess of coverage which Landlord may carry. The policy limits
set forth herein shall be subject to periodic review, and Landlord reserves the
right to require that Tenant increase the liability coverage limits if, in the
reasonable opinion of Landlord, the coverage becomes inadequate and is less than
commonly maintained by tenants making similar uses in the area of similar
buildings. Tenant shall obtain any revised or increased coverage required by
Landlord within thirty (30) days of any such notification from Landlord.
12. FIRE INSURANCE - FIXTURES AND EQUIPMENT. Tenant shall maintain in full
force and effect on all Tenant's trade fixtures, equipment and personal property
on the Premises, a policy of all risk property insurance covering the full
replacement value of such property. During the term of this Lease, the proceeds
from any such policy of insurance shall be used for the repair or replacement of
the fixtures and equipment so insured. Landlord shall have no interest in the
insurance upon Tenant's equipment and fixtures and will sign all documents
reasonably necessary or proper in connection with the settlement of any claim or
loss by Tenant. Landlord will not carry insurance on Tenant's possessions other
than leasehold improvements. Tenant shall furnish Landlord with a certificate of
insurance evidencing that the requirements set forth herein are in full force
and effect. Any deductible in excess of Two Thousand Five Hundred and No/100ths
Dollars ($2,500.00) under such insurance must be approved in writing
11
<PAGE>
by Landlord prior to issuance of such policy. Upon demand, Tenant shall provide
Landlord, at Tenants expense, with such increased amount of existing insurance,
and such other insurance as Landlord or Landlord's lender may reasonably
require, to afford Landlord and Landlord's lender adequate protection. Tenant
shall provide Landlord with notice of loss or damage to property immediately
after such loss or damage occurs. Tenant shall provide and keep in force with
companies satisfactory to Landlord, business interruption insurance in an amount
equivalent to six (6) months Rent and Additional Rent which shall not contain a
deductible greater than One Thousand Dollars ($1,000.00). Tenant shall furnish
Landlord with certificates of insurance naming Landlord as an additional
insured. No policy shall be cancelable, allowed to lapse and/or expire and/or be
subject to reduction of coverage except upon thirty (30) days' prior written
notice to Landlord.
13. DAMAGE OR DESTRUCTION.
13.1 CASUALTY DAMAGE - Insured. If the Building or Premises is damaged
by fire or other perils covered by extended coverage insurance the following
provisions shall apply:
13.1.1 TOTAL DESTRUCTION. In the event of total destruction of
the Building, Landlord shall elect either promptly to commence repair and
restoration of the Building and prosecute the same diligently to completion, in
which event this Lease shall remain in full force and effect, or not to repair
or restore the Building, in which event this Lease shall terminate. In either
case, Landlord shall give Tenant written notice of its intention within ninety
(90) days after the occurrence of such destruction. If Landlord elects not to
restore the Building, this Lease shall be deemed to have terminated as of the
date of such total destruction. In the event that the repair or restoration
cannot be completed within one hundred eighty (180) days after the date of the
casualty, Tenant shall have the right to terminate this Lease within ten (10)
days after Tenant's receipt of Landlord's notice of intent to repair or restore.
13.1.2 PARTIAL DESTRUCTION. In the event of a partial destruction
of the Building to an extent not exceeding twenty-five percent (25%) of the
value thereof and if the damage thereto is such that the Building may be
repaired or restored within ninety (90) days from the date of such destruction
and Landlord will receive insurance proceeds sufficient to cover the cost of
such repairs, Landlord shall commence and proceed diligently with the work of
repair and restoration, in which event this Lease shall continue in full force
and effect; or if such repair and restoration requires longer than ninety (90)
days or the cost thereof exceeds twenty-five percent (25%) of the value thereof
or if the insurance proceeds payable to Landlord will not be sufficient to cover
such cost, Landlord may elect either to so repair and restore, in which event
this Lease shall continue in full force and effect, or not to repair or restore,
in which event this Lease shall terminate. In either case, Landlord shall give
written notice to Tenant of its intention within ninety (90) days after the
destruction occurs. If Landlord elects not to repair or restore the Building,
this Lease shall be deemed to have terminated as of the date of such partial
destruction. In the event that the repair or restoration cannot be completed
within one hundred eighty (180) days after the date of the casualty, Tenant
shall have the right to terminate this Lease within ten (10) days after Tenant's
receipt of Landlord's notice of intent to repair or restore.
12
<PAGE>
13.2 TERMINATION. Upon any termination of this Lease under any of the
provisions of this Article, Tenant shall surrender the Premises in accordance
with the provisions of Article 25.
13.3 RENT ABATEMENT. In the event of repair and restoration as herein
provided, the monthly installments of Rent shall be equitably abated based on
the amount of Tenant's loss of use of the Premises occasioned thereby; provided,
however, if the damage is due, directly or indirectly, to the fault or neglect
of Tenant, its officers, contractors, licensees, agents, servants, employees,
guests, invitees or visitors, there shall be no abatement of Rent, except to the
extent Landlord receives proceeds from any applicable insurance policy of Tenant
to compensate Landlord for loss of Rent. Tenant shall not be entitled to any
compensation or damages for loss of use of the whole or any part of said
Premises and/or any inconvenience or annoyance occasioned by such damage, repair
or restoration.
13.4 DELAY. Tenant shall not be released from any of its obligations
under this Lease except to the extent and upon the conditions expressly stated
in this Article. Notwithstanding anything to the contrary contained in this
Article, if Landlord has elected to repair or restore and is thereafter delayed
or prevented from repairing or restoring within one hundred eighty (180) days
after the occurrence of such damage or destruction by reason of acts of God,
war, governmental restrictions, inability to procure the necessary labor or
materials, or other causes beyond the control of Landlord, Landlord shall, at
Landlord's option, be relieved of its obligation to make such repair or
restoration and Tenant shall be released from its obligations under this Lease
as of the end of such one (1) year period.
13.5 UNINSURED DAMAGE. Notwithstanding anything to the contrary
contained in this Article, if damage to the Building or the Premises is due to
any cause other than fire or other peril covered by extended coverage insurance,
Landlord may elect to terminate this Lease.
13.6 REPAIR OBLIGATION. If Landlord is obligated to or elects to
repair or restore as herein provided, Landlord shall repair or restore only
those portions of the Building and Premises which were originally provided at
Landlord's expense; and the repair and restoration of areas or items not
provided at Landlord's expense shall be the obligation of Tenant.
13.7 END OF TERM. Notwithstanding anything to the contrary contained
in this Article, Landlord may elect to terminate this Lease in the event of
damage to the Building or the Premises occurring during the last (12) months of
the term of the Lease or any extension thereof; and Landlord shall not have any
obligation to repair or restore the Premises or the Building during the last
twelve (12) months of the term of this Lease or any extension thereof.
14. ALTERATIONS AND ADDITIONS: REMOVAL OF FIXTURES.
14.1 CONSENT REQUIRED. Tenant shall not make or allow to be made any
alterations, additions or improvements (collectively "Alterations") to or on the
Premises (except for non-structural interior alterations in an amount less than
$10,000) without first obtaining the written consent of Landlord, which consent
shall not be unreasonably withheld, delayed or conditioned.
13
<PAGE>
14.2 REQUEST FOR ALTERATIONS. Any request for Alterations to be made
to the Premises by Tenant shall be made in writing, which shall include detailed
plans and specifications of the proposed Alterations prepared by an architect
approved by Landlord and licensed in the jurisdiction in which the Premises is
located, together with the names and addresses of the proposed contractors and
subcontractors, all of whom shall be approved and licensed as aforesaid. Tenant
shall upon demand reimburse Landlord as Additional Rent for all reasonable cost
and expense actually incurred in reviewing the plans and specifications and
inspecting the work on behalf of Landlord (by persons other than employees of
Landlord) including without limitation, the cost of any engineers and/or
architects retained by Landlord to review same and inspect the work on behalf of
Landlord.
14.3 NATURE OF ALTERATIONS. Any Alterations, including, but not
limited to, wall covering, paneling and built-in cabinet work (but excepting
moveable furniture and trade fixtures), shall be made at Tenant's sole expense,
according to plans and specifications approved in writing by Landlord, in
compliance with all applicable laws, by a licensed contractor, and in a good and
workmanlike manner conforming in quality and design with the Premises existing
as of the Lease Commencement Date, shall not diminish the value of the Building
or the Premises and shall at once become a part of the realty and shall be
surrendered with the Premises (unless otherwise required by Landlord as set
forth in Section 14.5 below).
14.4 REPAIRS. Tenant shall be responsible for making any and all
repairs and replacements to the Alterations during the term of this Lease (as
same may be extended) and maintaining the same in good order and condition.
Notwithstanding anything to the contrary contained in this Lease, should there
be a fire or other casualty to the Premises, it is agreed by the parties that
Landlord shall not be responsible to restore any Alterations made by Tenant
regardless of whether such Alterations were approved by Landlord and Tenant
shall be responsible to restore the same at its sole cost and expense.
14.5 EXPIRATION/TERMINATION OF LEASE. Upon the expiration or sooner
termination of the term hereof, Tenant shall, upon written demand by Landlord,
at Tenant's sole expense, with due diligence, remove any alterations, additions,
or improvements made by Tenant, designated by Landlord to be removed at the time
of Landlord's approval of such request, and repair any damage to the Premises
caused by such removal. Tenant shall remove all of Tenant's moveable property
and trade fixtures which can be removed without damage to the Premises at the
termination of this Lease, either by expiration of the term or other cause, and
shall pay Landlord any damages for injury to the Premises or Building resulting
from such removal. If Tenant shall fail to remove any of its property of any
nature whatsoever (other than moveable property and trade fixtures) from the
Premises or Building at the termination of this Lease or when Landlord has the
right of reentry, such property shall be deemed to have been abandoned by Tenant
and Landlord may, in accordance with the provisions of applicable statutes
governing commercial landlord and tenant matters, without liability for the loss
thereof or damage thereto, either remove and store such property, such storage
to be for the account and at the expense of Tenant, or otherwise dispose of such
property in Landlord's sole and absolute discretion, all at the expense of
Tenant. If Landlord elects to store such property and Tenant fails to pay the
cost of storing any such property within thirty (30) days of demand therefor,
Landlord may sell any or all such property at public or private sale, without
notice to Tenant, and shall apply the proceeds of such sale to the following
costs in the following order: (i) the cost and
14
<PAGE>
expense of such sale, including reasonable attorneys' fees, (ii) the payment of
the costs or charges for storing any such property, and (iii) the payment of any
other sum which may then be or thereafter become due Landlord from Tenant under
any of the terms of this Lease. The balance, if any, shall be paid to Tenant.
15. ACCEPTANCE OF PREMISES. Unless Landlord has expressly agreed in
this Lease to perform certain tenant improvement work in the Premises, Tenant
shall be deemed to have accepted the Premises on the Lease Commencement Date in
their "AS IS" condition. If tenant improvements are to be constructed by
Landlord in the Premises, the acceptance of the Premises by Tenant shall be
deemed to have occurred five (5) days after receipt by Tenant of an architect's
certificate of readiness certifying that the premises are ready for occupancy;
at such time, Tenant shall be deemed to have accepted the Premises in their then
condition except for any "punch list" items (as that term is used in the
construction industry) noted by Tenant in writing to Landlord within such five
(5) day period pursuant to any inspection of the Premises made by Tenant within
such five (5) day period. Landlord shall complete the punch list items within a
reasonable period following the expiration of such five (5) day period. The
existence of such punch list items shall not postpone the Lease Commencement
Date of this Lease nor the obligation of Tenant to pay Rent or any other charges
due under this Lease.
16. TENANT IMPROVEMENTS. If Landlord has agreed to make any
improvement to the Premises the provisions governing the planning, construction,
scope of work and terms of payment shall be set forth in EXHIBIT C, which, if
attached hereto, is incorporated herein by this reference.
17. ACCESS. Tenant shall permit Landlord and its agents to enter the
Premises at all reasonable times upon prior notice (except in case of emergency)
to inspect the same; to show the Premises to prospective tenants (within six (6)
months of the expiration of the term of this Lease), or interested parties such
as prospective lenders and purchasers; to exercise its rights under this Lease;
to clean, repair, alter or improve the Premises or the Building; to discharge
Tenant's obligations when Tenant has failed to do so within the time required
under this Lease; to post notices of nonresponsibility and similar notices and
"For Sale" signs at any time and to place "For Lease" signs upon or adjacent to
the Building or the Promises at any tine within six (6) months of the expiration
of the term of this Lease. Tenant shall permit Landlord and its agents to enter
the Premises at any time in the event of an emergency. When reasonably
necessary, Landlord may temporarily close entrances, doors, corridors, elevator
or other facilities without liability to Tenant by reason of such closure.
18. WAIVER OF SUBROGATION.
18.1 TENANT'S WAIVER. Whether due to the negligence of Landlord or
Landlord's agents or employees, or any other cause, Tenant hereby releases
Landlord and Landlord's agents and employees from responsibility for and waives
its entire claim of recovery for (i) any loss or damage to the personal property
of Tenant located in the Building, including the Building itself, arising out of
any of the perils which are (or could have been) covered by Tenant's property
insurance policy, with extended coverage endorsements, or (ii) loss resulting
from business interruption or loss of rental income, at the Premises, arising
out of any of the perils which are (or could have been) covered by the business
interruption or by the loss of rental
15
<PAGE>
income insurance policy held by Tenant. Tenant shall cause its insurance
carrier(s) to consent to such waiver of all rights of subrogation against
Landlord.
18.2 LANDLORD'S WAIVER. Whether due to the negligence of Tenant or
Tenant's agents or employees, or any other cause, Landlord hereby releases
Tenant and Tenant's agents and employees from responsibility for and waives its
entire claim of recovery for (i) any loss or damage to the personal property of
Landlord located in the Building, including the Building itself, arising out of
any of the perils which are (or could have been) covered by Landlord's property
insurance policy, with extended coverage endorsements, or (ii) loss resulting
from business interruption or loss of rental income, at the Premises, arising
out of any of the perils which are (or could have been) covered by the business
interruption or by the loss of rental income insurance policy held by Landlord.
Landlord shall cause its insurance carrier(s) to consent to such waiver of all
rights of subrogation against Tenant.
19. INDEMNIFICATION. Tenant shall defend, indemnify and hold harmless
Landlord, its agents, employees, officers, directors, partners and shareholders
from and against any and all liabilities, judgments, demands, causes of action,
claims, losses, damages, costs and expenses, including reasonable attorneys'
fees and costs, arising out of the use, occupancy, conduct, operation, or
management of the Premises by, or the willful misconduct or negligence of,
Tenant, its officers, contractors, licensees, agents, servants, employees,
guests, invitees, or visitors in or about the Building or Premises or arising
from any breach or default under this Lease by Tenant, or arising from any
accident, injury, or damage, howsoever and by whomsoever caused, to any person
or property, occurring in or about the Building or Premises. This
indemnification shall survive termination of this Lease. This provision shall
not be construed to make Tenant responsible for loss, damage, liability or
expense resulting from injuries to third parties caused by the sole negligence
or willful misconduct of Landlord, or its officers, contractors, licensees,
agents, employees, or invitees.
20. ASSIGNMENT AND SUBLETTING.
20.1 LANDLORD'S CONSENT. Tenant shall not assign this Lease, or
sublease all or any part of the Premises, or permit the use of the Premises by
any party other than Tenant and Gemini Air Cargo, L.L.C., without the prior
written consent of Landlord which consent shall not be unreasonably, withheld,
delayed or conditioned. When Tenant requests Landlord' consent to such
assignment or sublease, it shall notify Landlord in writing of (i) the name and
address of the proposed assignee or subtenant; (ii) the nature and character of
the business of the proposed assignee or subtenant; (iii) financial information
including financial statements of the proposed assignee or subtenant; and (iv) a
copy of the proposed sublet or assignment agreement. Tenant shall thereafter
immediately provide to Landlord any and all other information and documents
reasonably requested by Landlord in order to assist Landlord with its
consideration of Tenant's request hereunder. Landlord shall have the option (to
be exercised within twenty (20) days from the submission of Tenant's request and
receipt of all other information requested hereunder) to cancel this Lease as it
affects the portion of the Premises to be subleased or assigned as of the
commencement date stated in the proposed sublease or assignment. If Landlord
shall not exercise its option within the time set forth above, Landlord's
consent to any proposed assignment or sublease shall not be unreasonably
withheld.
16
<PAGE>
20.2 APPROVED SUBLEASES AND ASSIGNMENTS. If Landlord approves an
assignment or sublease as herein provided, Tenant shall pay to Landlord, as
Additional Rent due under this Lease, as applicable fifty percent (50%) of the
following: (i) in the case of a sublease, an overage amount equal to the
difference, if any, between the Rent allocable to that part of the Premises
affected by such sublease pursuant to this Lease, and the rent paid by the
subtenant to Tenant, less any reasonable and customary expenses incurred by
Tenant in connection with the sublease which are approved by Landlord in its
reasonable discretion, and (ii) in the case of an assignment, an overage amount
equal to the consideration, if any, received by Tenant for such assignment, less
any reasonable and customary expenses incurred by Tenant in connection with the
sublease which are approved by Landlord in its reasonable discretion. Such
overage amounts shall be due and payable by Tenant to Landlord within ten (10)
days of Tenant's receipt of payment from the subtenant or assignee. Overage
amounts in the case of a sublease shall be calculated and adjusted (if
necessary) on a Lease Year (or partial Lease Year) basis, and there shall be no
cumulative adjustment for the term. No consent to any assignment or sublease
shall constitute a further waiver of the provisions of this Section, and all
subsequent assignments or subleases may be made only with the prior written
consent of Landlord not to be unreasonably withheld, delayed or conditioned. An
assignee of Tenant, at the option of Landlord, shall become directly liable to
Landlord for all obligations of Tenant hereunder and shall assume all such
obligations in writing in a form satisfactory to Landlord in its sole and
absolute discretion, but no sublease or assignment by Tenant shall relieve
Tenant of any liability hereunder. Any assignment or sublease without Landlord's
consent shall be void, and shall, at the option of Landlord, constitute a
default under this Lease. In the event that Tenant requests that Landlord
consider a sublease or assignment hereunder, Tenant shall pay Landlord's
reasonable fees, not to exceed Five Hundred and 00/100 Dollars ($500.00) per
transaction, incurred in connection with the consideration of such request,
inclusive of reasonable attorneys' fees and costs incurred by Landlord in
connection with the consideration of such request or such sublease or
assignment.
21. ADVERTISING. Tenant shall not display any sign, graphics, notice,
picture, or poster, or any advertising matter whatsoever, anywhere in or about
the Premises or the Building at places visible from anywhere outside or at the
entrance to the Premises without first obtaining Landlord's written consent
thereto, such consent to be at Landlord's sole discretion. Tenant shall be
responsible to maintain any permitted signs and remove the same at Lease
termination. If Tenant shall fail to do so, Landlord may do so at Tenant's
expense and Tenant's reimbursement to Landlord for such amount shall be deemed
Additional Rent and shall be due within ten (10) days of Landlord's demand
therefor. Tenant shall be responsible to Landlord for any damage caused by the
installation, use, maintenance or removal of any such signs.
22. LIENS. Tenant shall keep the Premises and the Building free, from any
liens, including but not limited to liens filed against the Premises by any
governmental agency, authority or organization, arising out of any work
performed, materials ordered or obligations incurred by or on behalf of Tenant,
and Tenant hereby agrees to indemnify and hold Landlord, its agents, employees,
independent contractors, officers, directors, partners, and shareholders
harmless from any liability, cost or expense for such liens. Tenant shall cause
any such lien imposed to be released of record by payment or posting of the
proper bond acceptable to Landlord within ten (10) days after the earlier of
imposition of the lien or written request by Landlord. Tenant shall give
Landlord written notice of Tenant's intention to perform work on the Premises
which might result in any claim of lien, at least ten (10) days prior to the
17
<PAGE>
commencement of such work to enable Landlord to post and record a notice of
nonresponsibility or other notice deemed proper before commencement of any such
work. If Tenant fails to remove any lien within the prescribed ten (10) day
period, then Landlord may do so at Tenant's expense and Tenant's reimbursement
to Landlord for such amount, including attorneys' fees and costs, shall be
deemed Additional Rent. Tenant shall have no power to do any act or make any
contract which may create or be the foundation for any lien, mortgage or other
encumbrance upon the reversion or other estate of Landlord, or of any interest
of Landlord in the Premises.
23. DEFAULT.
23.1 TENANT'S DEFAULT A default under this Lease by Tenant shall exist
if any of the following occurs:
23.1.1 If Tenant fails to pay Rent or any other sum required to
be paid hereunder within ten (10) days of written notice of nonpayment on the
date when due; provided, however, that if Tenant fails to pay any sum required
to be paid hereunder when due, on two (2) or more occasions in a twelve (12)
month period, no notice by Landlord shall be required and Tenant shall be deemed
in default, as further stated in Section 23.1.5 of this Lease; or
23.1.2 If Tenant fails to perform any term, covenant or condition
of this Lease except those requiring the payment of money, and Tenant fails to
cure such breach within thirty (30) days after written notice from Landlord
where such breach could reasonably be cured within such thirty (30) day period,
provided, however, that where such failure could not reasonably be cured within
the thirty (30) day period, that Tenant shall not be in default if it commences
such performance within the thirty (30) day period and diligently thereafter
prosecutes the same to completion, or if Tenant shall fail to perform or observe
any of the provisions required to be performed or observed by Tenant under any
other agreement relating to the Premises; or
23.1.3 If, to the extent permitted by applicable law, there shall
be filed by or against Tenant, in any court pursuant to any statute either of
the United States or any state, a petition in bankruptcy or insolvency or for
the reorganization of or for the appointment of a receiver, trustee or
liquidator for all or any portion of the assets of Tenant, and, within sixty
(60) days thereafter, Tenant fails to secure a discharge thereof, or if Tenant
makes an assignment for the benefit of creditors, or if Tenant admits in writing
its or their inability to pay its or their debts; or
23.1.4 If Tenant shall fail to take possession of and/or occupy
the Premises within the thirty (30) days following the Lease Commencement Date
or if Tenant shall desert or abandon the Premises for a period of thirty (30)
days at any time following the Lease Commencement Date; or
23.1.5 The chronic delinquency by Tenant in the payment of
monthly Rent, or any other periodic payments required to be paid by Tenant under
this Lease, shall constitute a default. "Chronic delinquency" shall mean failure
by Tenant to pay Rent, or any other periodic payments required to be paid by
Tenant under this Lease within ten (10) days after written notice thereof for
any two (2) months (consecutive or nonconsecutive) during any twelve
18
<PAGE>
(12) month period. In the event of a chronic delinquency, at Landlord's option,
Landlord shall have the additional right to require that Rent be paid by Tenant
quarter-annually, in advance.
23.2 REMEDIES. Upon a default, Landlord shall have the following
remedies, in addition to all other rights and remedies provided by law or
otherwise provided in this Lease, to which Landlord may resort cumulatively or
in the alternative:
23.2.1 Landlord may continue this Lease in full force and effect,
and this Lease shall continue in full force and effect as long as Landlord does
not terminate this Lease, and Landlord shall have the right to collect Rent and
other charges when due.
23.2.2 Landlord may terminate Tenant's right to possession of the
Premises at any time by giving written notice to that effect, and relet the
Premises or any part thereof. On the giving of the notice, all of Tenant's
rights in the Premises, shall terminate. Upon such termination, Tenant shall
surrender and vacate the Premises in the condition required by Article 25, and
Landlord may re-enter and take possession of the Premises and all the remaining
leasehold improvements, but not Tenant's personal property and eject Tenant or
any of Tenant's subtenants, assignees or other person or persons claiming any
right under or through Tenant or eject same and not others or eject none. This
Lease may also be terminated by a judgment specifically providing for
termination. Any termination under this Section shall not release Tenant from
the payment of any sum then due Landlord or from any claim for damages or Rent
or other sum previously accrued or then accruing against Tenant. Upon such
termination Tenant shall be liable immediately to Landlord for all costs
Landlord incurs in reletting the Premises or any part thereof, including,
without limitation, broker's commissions, expenses of cleaning and redecorating
the Premises required by the reletting and like costs. Reletting may be for a
period shorter or longer than the remaining term of this Lease. No act by
Landlord other than giving written notice to tenant shall terminate this Lease.
Acts of maintenance, efforts to relet the Premises or the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination of Tenant's right to possession. In the
event that Tenant does not remove its personal property from the Premises within
twenty (20) days after Landlord notifies Tenant in writing that this Lease or
Tenant's right to possession hereunder has been terminated, Tenant's personal
property shall be deemed abandoned and may be removed by Landlord from the
Premises or stored on Tenant's behalf at Landlord's reasonable discretion.
Landlord and Tenant hereby acknowledge that in the event of such a termination,
actual damages to Landlord may be difficult to ascertain and, accordingly,
hereby agree that in such event, the net present value of the Base Rent due from
the date of such termination to the Lease Expiration Date, discounted at ten
percent (10%) per annum, less the fair rental value of the Premises as
reasonably determined by Landlord, which determination shall be deemed
conclusive, from the date of such termination until the Lease Expiration Date,
discounted at ten percent (10%) per annum, shall thereupon be immediately due
and payable to Landlord to compensate Landlord for Tenant's default and such
termination. Tenant waives redemption or relief from forfeiture under any other
present or future law, in the event Tenant is evicted or Landlord takes
possession of the Premises by reason of any default of Tenant hereunder beyond
applicable notice, grace and cure periods.
23.2.3 Landlord may terminate this Lease, re-enter the Premises
and remove all persons and property from the Premises; such property shall be
deemed to have been
19
<PAGE>
abandoned by Tenant, if Tenant does not remove such property within twenty (20)
days after written notice from Landlord and may be removed and stored in a
public warehouse or elsewhere or otherwise disposed of in Landlord's reasonable
discretion, all at the cost of Tenant. The parties hereby agree that Landlord
shall not be liable for the loss of such property or any damages thereto unless
due to Landlord's negligence or willful misconduct. No re-entry or taking
possession of the Premises by Landlord pursuant to this section shall be
construed as an election to terminate this Lease unless a written notice of such
intention is given to Tenant. A re-entry or taking possession of the Premises
may, however, be construed as a termination of Tenant's right of possession of
the Promises.
23.2.4 Landlord's rights pursuant to this Article, including
without limitation, Landlord's rights to collect Base Rent, Additional Rent and
other charges due under this Lease, shall survive any termination of the Lease,
whether such termination is affected pursuant to this Article or otherwise.
Notwithstanding anything to the contrary contained herein, Landlord and Tenant
hereby expressly agree that Landlord shall use reasonable efforts to mitigate or
to offset any damages which are or may be suffered by Landlord as a result of
any default of Tenant under the Lease. Any payment by Tenant of a sum of money
less than the entire amount due Landlord at the time of such payment shall be
applied to the obligations of Tenant then furthest in arrears. No endorsement or
statement on any check or accompanying any payment shall be deemed an accord and
satisfaction and any payment accepted by Landlord shall be without prejudice to
Landlord's right to obtain the balance due or pursue any other remedy available
to Landlord both in law and in equity.
24. SUBORDINATION AND ATTORNMENT. Landlord hereby represents and warrants
to Tenant that there are no mortgages or deeds of trust currently encumbering
the Building. Upon request of Landlord, Tenant will, in writing, subordinate its
rights hereunder to the lien of any mortgage, deed of trust, ground lease or
underlying lease now or hereafter in force against the Premises, and to all
advance made or hereafter to be made upon the security thereof provided the
holder thereof agrees in writing in a form reasonably satisfactory to the
parties not to disturb Tenant's possession in the event of a foreclosure or
deed-in-lieu of foreclosure. Tenant shall execute and return to Landlord any
such subordination documents within ten (10) business days of Landlord's written
request. If Tenant does not provide Landlord with such subordination documents
within ten (10) business days of Landlord's written request, then Tenant hereby
authorizes Landlord to execute such subordination documents acting as duly
authorized agent for Tenant provided the same is not inconsistent with the terms
hereof. In the event any proceedings are brought for foreclosure, or in the
event of the exercise of the power of sale under any mortgage or dead of trust
made by Landlord covering the Premises, Tenant shall attorn to the purchaser at
any such foreclosure, or to the grantee of a deed in lieu of foreclosure, and
recognize such purchaser or grantee as Landlord under this Lease provided such
party agrees in writing in a form reasonably satisfactory to the parties not to
disturb Tenant's possession so long as Tenant is not in default hereunder past
any applicable notice and cure period. The provisions of this Article to the
contrary notwithstanding, and so long as Tenant is not in default hereunder,
this Lease shall remain in full force and effect for the full term hereunder.
25. SURRENDER OR POSSIESSION. Upon expiration of the term of this Lease or
as otherwise provided hereunder, Tenant shall Promptly and peacefully surrender
the Premises to Landlord in as good condition as when received by Tenant from
Landlord or as thereafter
20
<PAGE>
improved, reasonable use and wear and tear and damage by storm, fire, lightning,
earthquake or other casualty excepted, all to the reasonable satisfaction of
Landlord. If the Premises are not surrendered in accordance with the terms of
this Lease, Tenant shall indemnify Landlord and its agents, employees,
independent contractors, officers, directors, partners, and shareholders against
any loss or liability including reasonable attorneys' fees and costs, and
including liability to succeeding tenants, resulting from delay by Tenant in so
surrendering the Premises. This indemnification shall survive termination of
this Lease.
26. NON-WAIVER. Waiver by Landlord of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of such term,
covenant, or condition(s); or any subsequent breach of the same or any other
term, covenant or condition of this Lease, other than the failure of Tenant to
pay the particular rental so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of acceptance of such Rent. No provision of
this Lease shall be deemed to have been waived or modified by Landlord or Tenant
unless such waiver or modification shall be in writing and signed by the party
against whom such waiver or modification is sought to be enforced.
27. HOLDOVER. If Tenant shall, without the written consent of Landlord,
hold over after the expiration of the term of this Lease such tenancy shall be
deemed a month-to-month tenancy, which tenancy may be terminated by either party
upon thirty (30) days written notice to the other party. During such tenancy,
Tenant agrees to pay to Landlord, each month, one hundred fifty percent (150%)
of the Rent Payable by Tenant for the last month of the term of this Lease.
28. CONDEMNATION. If twenty percent (20%) or more of the Premises or of
such portions of the Building as may be required for the reasonable use of the
Premises, are taken by eminent domain or sale under threat of condemnation by
eminent domain, this Lease shall automatically terminate as of the date title
vests in the condemning authority, and all Rent and other payments shall be paid
to that date. Landlord reserves all rights to damages to the Premises for any
partial or entire taking by eminent domain, and Tenant hereby assigns to
Landlord any right Tenant may have to such damages or award, and Tenant shall
make no claim against Landlord or the condemning authority for damages for
termination of the leasehold interest. Tenant shall have the right to claim and
recover from the condemning authority compensation for any loss which Tenant may
incur for Tenant's moving expenses, business interruption or taking of Tenant's
personal property (not including Tenant's leasehold interest).
29. NOTICES. All notices and demands which may be required or permitted to
be given to either party hereunder shall be in writing, and shall be sent by
overnight courier or United States mail, postage prepaid, certified or
registered with return receipt requested, to the addresses set forth below, or
to such other person or place as each party may from time to time designate in a
notice to the other. Notice shall be deemed received upon delivery, if sent by
overnight courier, or upon the earlier of, it sent by mail, actual receipt or
the third day after deposit in the United States mail, postage prepaid. Notices
shall be addressed as follows:
If to Landlord: If to Tenant:
Trammell Crow Real Estate Potomac Financial Group, L.L.C.
21
<PAGE>
Services, Inc. 12020 Sunrise Valley Drive
1115 30th Street, N.W. Suite 250
Washington, D. C. 20007 Reston, Virginia 22091
Attn: Property Manager Attn: Mr. Dan Upham
30. MORTGAGEE PROTECTION. Tenant agrees to give any mortgagee(s) and/or
trust deed holder(s), by overnight, courier or certified or registered mail,
return receipt requested, a copy of any notice of default served upon Landlord,
provided that prior to such notice Tenant has been notified in writing (by way
of notice of assignment of rents and leases, or otherwise) of the addresses of
such mortgagee(s) and/or trust deed holder(s). Tenant further agrees that if
Landlord shall have failed to cure such default within the time provided for in
this Lease, then the mortgagee(s) and/or trust deed holder(s) shall have an
additional thirty (30) days within which to cure such default or if such default
cannot be cured within that time, then such additional time as may be necessary
if within such thirty (30) days any mortgagee and/or trust deed holder(s) notify
Tenant that it will, and, has commenced and is diligently pursuing the remedies
necessary to cure such default (including but not limited to commencement of
foreclosure proceedings, if necessary to effect such cure), in which event this
Lease shall not be terminated while such remedies are being so diligently
pursued.
31. COSTS AND ATTORNEYS' FEES. If Tenant or Landlord shall employ an
attorney with regard to any act, omission or activity of the other with regard
to this Lease, including any suit by Landlord for the recovery of Rent or other
payments due hereunder or possession of the Premises, the losing party shall pay
the prevailing party a reasonable sum for attorneys' fees and costs, including
without limitation those incurred in connection with any litigation, at trial
and on appeal, and such attorneys' fees and costs shall be deemed to have
accrued on the commencement of such action.
32. BROKERS. Tenant represents and warrants to Landlord that neither it nor
its officers or agents nor anyone acting on its behalf has dealt with any real
estate broker other than Trammell Crow Real Estate Services, Inc. representing
Landlord and Julian J. Studley, Inc. representing Tenant in the negotiating or
making of this Lease, and each agrees to indemnify and hold the other, its
agents, employees, partners, directors, shareholders and independent contractors
harmless from all liabilities, costs, demands, judgments, settlements, claims,
and losses, including reasonable attorneys fees and costs, incurred by the other
in conjunction with any such claim or claims of any other broker or brokers
claiming to have interested Landlord or Tenant in the Building or Premises or
claiming to have caused Landlord or Tenant to enter into this Lease.
33. LANDLORD'S LIABILITY.
33.1 Anything in this Lease to the contrary notwithstanding,
covenants, undertakings and agreements herein made on the part of Landlord are
made and intended not for the purpose of binding Landlord personally or the
assets of Landlord but are made and intended to bind only Landlord's interest in
the Premises and Building, as the same may, from time to time, be encumbered and
no personal liability shall at any time be asserted or enforceable against
Landlord or its stockholders, officers or partners or their respective heirs,
legal representatives,
22
<PAGE>
successors and assigns on account of the Lease or on
account of any covenant, undertaking or agreement of Landlord in this Lease.
33.2 Landlord shall not be liable for any damage or injury which may
be sustained by Tenant or any other person from water by reason of the breakage,
leakage or obstruction of the roof, roof drains, sprinkler systems, water or
soil pipes or any other leakage in or about the Premises, or resulting from the
sole negligence or willful misconduct on the part of any of Landlord's other
tenants, their agents or employees. Landlord shall not be liable for any loss of
property from any cause whatsoever, including not by way of limitation, theft,
vandalism or burglary from the Premises, and Tenant covenants and agrees to make
no claim for any such loss at any time.
34. ESTOPPEL CERTIFICATES. Tenant shall, from time to time, within ten (10)
business days of Landlord's written request, execute, acknowledge and deliver to
Landlord or its designee a written statement stating: the date the Lease was
executed and the date it expires; the date Tenant entered occupancy of the
Premises; the amount of Base Rent, Additional Rent and other charges due
hereunder and the date to which such amounts have been paid; that this Lease is
in full force and effect has not been assigned, modified, supplemented or
amended in any way (or specifying the date and terms of any agreement so
affecting this Lease); that this Lease represents the entire agreement between
the parties as to this leasing; that all conditions under this Lease to be
performed by Landlord have been satisfied (or specifying any such conditions
that have not been satisfied); that all required contributions by Landlord to
Tenant on account of Tenant's improvements have been received (or specifying any
such contributions that have not been received); that on the date of such
statement there are no existing defenses or offset which Tenant has against the
enforcement of this Lease by Landlord (or if so, specifying the same); that no
Rent has been paid more than one (1) month in advance; that no security has been
deposited with Landlord (or, if so, the amount thereof); or any other matters
evidencing the status of the Lease, as may be required either by a lender making
a loan to Landlord to be secured by a deed of trust or mortgage against the
Building, or a purchaser of the Building. It is intended that any such statement
delivered pursuant to this Article may be relied upon by a prospective purchaser
of Landlord's interest or a mortgagee of Landlord's interest or assignee of any
mortgage upon Landlord's interest in the Building. If Tenant fails to respond
within ten (10) business days of receipt by Tenant of a written request by
Landlord as herein provided, Tenant shall be deemed to have given such
certificate as above provided without modification and shall be deemed to have
admitted the accuracy of any information supplied by Landlord to a prospective
purchaser or mortgagee.
35. FINANCIAL STATEMENTS. Not more than once each Lease Year, within thirty
(30) days after Landlord's request, Tenant shall deliver to Landlord the current
financial statements of Tenant, and financial statements of each of the two (2)
years prior to the current financial statements year, to the extent existing,
certified by the Tenant, including a balance sheet and profit and loss statement
for the most recent prior year, all prepared in accordance with generally
accepted accounting principles consistently applied. Tenant also agrees, within
thirty (30) days of Landlord's request, to provide such further financial
information (such as quarterly statements) as Landlord may request.
23
<PAGE>
36. TRANSFER OF LANDLORD'S INTEREST. In the event of any transfer(s) of
Landlord's interest in the Premises or the Building, other than a transfer for
security purposes only, the transferor shall be automatically relieved of any
and all obligations and liabilities on the part of Landlord accruing from and
after the date of such transfer, provided the transferee agrees in writing to
assume the same and Tenant agrees to attorn to the transferee.
37. RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money, other
than Rent, required to be paid by it hereunder, or if Tenant shall fail to
perform any other act on its part to be performed hereunder which such failure
shall continue for thirty (30) days after written notice from Landlord, then, in
addition to a default if provided by Section 23.1, Landlord may, but shall not
be obligated so to do, and without waiving or releasing Tenant from any
obligations of Tenant, make any such payment or perform any such other act on
Tenant's part to be made or performed as provided in this Lease. Notwithstanding
the foregoing, in the event of an emergency, if Tenant shall fail to pay any sum
of money, other than Rent, required to be paid by it hereunder or shall fail to
perform any other act on its part to be performed hereunder, Landlord may, but
shall not be obligated so to do, and without waiving or releasing Tenant from
any obligations of Tenant, immediately make any such payment or perform any such
other act on Tenant's part to be made or performed as provided in this Lease.
Landlord shall have (in addition to any other right or remedy of Landlord) the
same rights and remedies in the event of the nonpayment of sums due under this
Article as in the case of default by Tenant in the payment of Rent. All sums
paid by Landlord and all penalties, interest and costs in connection therewith,
shall be due and payable by Tenant as Additional Rent on the next Basic Rent
payment date after such payment by Landlord, together with interest thereon at
the maximum rate of interest permitted by law from such date to the date of
payment.
38. SUBSTITUTED PREMISES. Landlord shall have the right at any time, upon
giving Tenant not less than sixty (60) days' prior notice in writing, to provide
and furnish Tenant with space elsewhere in the Building (the "New Space") of
approximately the same size as the Premises and to place Tenant in such space.
If the total rentable square footage of the New Space should exceed the total of
the original Premises, Tenant's Rent and Tenant's percentage of the Building
share shall not be increased proportionately. If, however, such total rentable
square footage shall be less, Tenant's Rent and Tenant's percentage of the
Building shall be decreased proportionately. In the event of any such relocation
of Tenant, Landlord shall pay for Tenant's reasonable moving costs including
without limitation, new stationery, business cards, printing expenses, moving
expenses, phone and utility transfer charges, computer system relocation,
cabling, mailing announcements and reasonable advertising of the address of the
New Space; provided, however, Tenant shall not be entitled to any compensation
for damages for any interference with or interruption of its business during or
resulting from such relocation. However, Landlord shall make reasonable efforts
to minimize such interference. Landlord shall have the right to reasonably
approve all contractors and vendors associated with Tenant' s relocation. If
Tenant shall notify Landlord within twenty (20) days of receipt of notice from
Landlord required above that Tenant does not want to relocate to the New Space,
Landlord may, at its option, cancel this Lease by sending thirty (30) days
written notice thereof to Tenant, and upon such date specified in Landlord's
notice, the term of this Lease shall expire as fully and completely as if such
date were the date set forth above for the termination of this Lease and there
shall be no liability between the parties except such liability accruing up to
the date of termination of the Lease. If Landlord moves Tenant to such New
Space, this Lease and each and
24
<PAGE>
all of its terms, covenants and conditions shall remain in full force and effect
and be deemed applicable to such new space, and such new space shall thereafter
be deemed to be the "Premises". Landlord shall relocate or replace all of
Tenant's leasehold improvements in the Premises with leasehold improvements of
equal or greater quality in the New Space. The layout of the New Space,
including the ratio of windows to office space, shall be substantially similar
to the Premises. All construction and Tenant improvements in the New Space shall
be substantially completed prior to relocation to the New Space. Landlord shall
use commercially reasonable efforts to perform the relocation of the Premises
over a weekend. Rent shall abate for any period of interruption of Tenant's
operations as a result of the relocation.
39. SALES AND AUCTIONS. No retail sales may be conducted at, upon or in the
Premises. Tenant may not use the exterior walls and doorways of the Premises for
storage. Tenant agrees not to install any exterior lighting, amplifiers or
similar devices in or about the Premises. Tenant shall not conduct or permit to
be conducted any sale by auction in, upon or from the Premises whether said
auction be voluntary, involuntary, pursuant to any assignment for the payment of
creditors or pursuant to any bankruptcy or other insolvency proceeding.
40. NO ACCESS TO ROOF. Tenant shall have no right of access to the roof of
the Premises or the Building.
41. SECURITY. Tenant hereby agrees to the exercise by Landlord and its
agents and employees, within their sole discretion, of such security measures as
it deems necessary for the Building.
42. AUTHORITY OF TENANT. Tenant warrants to Landlord that Tenant, if other
than an individual, is a validly existing legal entity under the laws of the
state of its formation, that it is duly qualified to do business in the State in
which the Premises are located, that its entry into and performance of this
Lease has been duly authorized, that, if Tenant is not an individual, the
officer(s), partner(s) or trustee(s), as applicable, executing this Lease on
Tenant's behalf are duly authorized to do so, and that this Lease is binding
upon Tenant.
43. NO ACCORD OR SATISFACTION. No payment by Tenant or receipt by Landlord
of a lesser amount than the Rent and other sums due hereunder shall be deemed to
be other than on account of the earliest Rent or other sums due, nor shall any
endorsement or statement on any check or accompanying any check or payment be
deemed an accord and satisfaction; and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such Rent or
other sum and to pursue any other remedy provided in this Lease.
44. MODIFICATIONS FOR LENDER. If in connection with obtaining financing for
the Building or any portion thereof, Landlord's lender shall request reasonable
modifications to this Lease as a condition to such financing, Tenant shall not
unreasonably withhold, delay, or defer its consent to such modification provided
such modifications do not materially adversely affect Tenant's rights hereunder
or increase Tenant's obligations.
45. PARKING. Tenant's occupancy of the Premises shall include the use of
thirteen (13) parking spaces, of which two (2) shall be covered spaces and for
which Landlord will
25
<PAGE>
provide free of charge to Tenant for the duration of Tenant's occupancy. Tenant
shall have the right to park in the Building parking facilities in common with
other tenants of the Building. Tenant agrees not to overburden the parking
facilities and agrees to cooperate with Landlord and other tenants in use of the
parking facilities. Landlord reserves the right in its absolute discretion to
determine whether the parking facilities are becoming overburdened and to
allocate and assign parking spaces among Tenant and other tenants, and to
reconfigure the parking area and modify the existing ingress to and egress from
the parking area as Landlord shall deem appropriate provided that the number of
covered and uncovered parking spaces provided to Tenant shall not be reduced.
46. GENERAL PROVISIONS.
46.1 ACCEPTANCE. The submission of this Lease by Landlord does not
constitute an offer by Landlord or other option for, or restriction of, the
Premises, and this Lease shall only become effective and binding upon Landlord,
upon full execution hereof by Landlord and delivery of a signed copy to Tenant.
46.2 JOINT OBLIGATION. If there be more than one Tenant, the
obligations hereunder imposed shall be joint and several.
46.3 MARGINAL HEADINGS, ETC. The marginal headings, Table of Contents,
lease summary sheet and titles to the articles and sections of this Lease are
not a part of the Lease and shall have no effect upon the construction or
interpretation of any part hereof.
46.4 CHOICE OF LAW. This Lease shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia.
46.5 SUCCESSORS AND ASSIGNS. The covenants and conditions herein
contained, subject to the provisions as to assignment, inure to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
46.6 RECORDATION. Neither landlord nor Tenant shall record this Lease,
but a short-form memorandum hereof may be recorded at the request of Landlord or
Tenant. The requesting party shall bear all costs associated with the recording
of such short-form memorandum. Tenant shall, promptly upon the expiration or
earlier termination of this Lease, execute all documents necessary to cancel or
terminate of record such short-form memorandum and in the event that Tenant does
not so execute such document(s) within thirty (30) days after written request by
Landlord, Tenant hereby appoints Landlord as its authorized agent and
attorney-in-fact solely for the purpose of execution, on Tenant's behalf, of all
such document(s).
46.7 QUIET POSSESSION. Upon Tenant's paying the Rent and other charges
due hereunder and observing and performing all of the covenants, conditions and
provisions on Tenant's part to be observed and performed hereunder, Tenant shall
have quiet possession of the Premises for the term hereof, subject to all the
provisions of this Lease.
46.8 PARTIAL INVALIDITY. Any provision of this Lease which shall prove
to be invalid, void, or illegal shall in no way affect, impair or invalidate any
other provision hereof and such other provision(s) shall remain in full force
and affect.
26
<PAGE>
46.9 CUMULATIVE REMEDIES. No remedy or election hereunder shall be
deemed exclusive but shall, whenever possible, be cumulative with all other
remedies at law or in equity.
46.10 ENTIRE AGREEMENT. This Lease contains the entire agreement of
the parties hereto and no representations, inducements, promises or agreements,
oral or otherwise, between the parties, not embodied herein, shall be of any
force or effect.
46.11 LABOR DISPUTES. Tenant agrees that it will not at any time,
either directly or indirectly, employ or permit the employment of any
contractor, mechanic or laborer, or permit any materials in the Premises, in
connection with any services, provisions, alterations or maintenance, if the use
of such contractor, mechanic or laborer or such materials may create any
difficulty, strike or jurisdictional dispute with other contractors, mechanics
or laborers engaged by Landlord or others, or would disturb the constructing
maintenance, cleaning, janitorial services, repair, management, security or
operation of the Building or any part thereof . In the event of any interference
or conflict, Tenant, upon demand of Landlord, shall cause all contractors,
mechanics or laborers, or all materials causing such interference, difficulty or
conflict, to leave or be removed from the Building immediately.
46.12 WAIVER OF COUNTERCLAIM. Tenant hereby waives the right to
interpose any non-compulsory counterclaim of whatever description in any summary
proceeding.
46.13 TIME IS OF THE ESSENCE. Time is of the essence of this Lease.
Unless specifically provided otherwise, all references to terms of days or
months shall be construed as references to calendar days or calendar months,
respectively.
46.14 EXECUTION. This Lease may be executed in any number of
counterparts , each of which shall be deemed an original and any of which shall
be deemed to be complete in itself and may be introduced into evidence or used
for any purpose without the production of the other counterparts.
46.15 FORCE MAJEURE. A party to this Lease shall be excused from the
performance of its duties and obligations under this Lease, except obligations
for the payment of money such as Base Rent, for the period of delay, but in no
event longer than ninety (90) days, caused by labor disputes, governmental
regulations, riots, war, insurrection, acts of God or other causes beyond the
control of the party whose performance is being excused (but such causes shall
not include insufficiency of funds).
46.16 NO JOINT VENTURE. This Lease does not and shall not be construed
to create a partnership, joint venture or any other relationship other than that
of landlord and tenant.
47. RULES AND REGULATIONS. Tenant agrees to comply with such reasonable
rules and regulations as Landlord may adopt from time to time for the orderly
and proper operation of the Building and parking and other common areas provided
that any future rules and regulations shall not materially increase Tenant's
obligations or decrease Tenant's rights hereunder. Such rules may include but
shall not be limited to the following: (i) restricting of employee parking to a
limited, designated area or areas; and (ii) regulation of the removal, storage
and disposal of Tenant's refuse and other rubbish at the sole cost and expense
of Tenant.
27
<PAGE>
The rules and regulations shall be binding upon Tenant upon delivery of a copy
of them to Tenant. Landlord shall not be responsible to Tenant for the
nonperformance of any of said rules and regulations by any other tenants or
occupants of the Building.
48. NO WARRANTIES OR REPRESENTATIONS BY LANDLORD. Tenant acknowledges and
agrees that, except as expressly set forth in this Lease, neither Landlord nor
any agent or representatives of Landlord have made, and Landlord is not liable
or responsible for or bound in any manner by any express or implied
representations, warranties, covenants, agreements, obligations, guarantees,
statements, information or inducements pertaining to the Premises or any part
hereof, the title and physical condition thereof, the quantity, character,
fitness and quality thereof, merchantability, fitness for particular purpose,
the income, expenses or operation thereof, the value and profitability thereof,
the uses which can be made thereof or any other matter or thing whatsoever with
respect thereto. Tenant acknowledges, agrees, represents and warrants that it
has had the opportunity and has in fact inspected the Premises, and that it has
had access to information and data relating to all of same as Tenant has
considered necessary, prudent, appropriate or desirable for the purposes of this
transaction and, without limiting the foregoing, that Tenant and its agents and
representatives have independently inspected, examined, analyzed and appraised
all of same, including the condition, value and profitability thereof. Without
limiting the foregoing, Tenant acknowledges and agrees that, except as expressly
set forth in this Lease, Landlord is not liable or responsible for or bound in
any manner by (and Tenant has no relief upon) any oral or supplied guarantees,
statements, information or inducements pertaining to the Premises or any part
hereof, such condition and such operation and any other information respecting
same furnished by or obtained from Landlord or any agent or representative of
Landlord. Without limiting the foregoing, except as expressly set forth in this
Lease, Tenant acknowledges and agrees that Tenant is leasing the Premises "AS
IS" at the Lease Commencement Date.
49. LANDLORD'S CONSENT OR APPROVAL.
49.1 With respect to any provision of this Lease which provides that
Tenant shall obtain Landlord's prior consent or approval, Landlord may withhold
such consent or approval for any reason at its sole discretion, unless the
provision specifically states that the consent or approval will not be
unreasonably withheld delayed or conditioned.
49.2 With respect to any provision of this Lease which provides that
Landlord shall not unreasonably withhold or unreasonably delay any consent or
any approval, Tenant, in no event, shall be entitled to make, nor shall Tenant
make, any claim for, and Tenant hereby waives any claim for money damages; nor
shall Tenant claim any money damages by way of setoff, counterclaim or defense,
based upon any claim or assertion by Tenant that landlord has unreasonably
withheld or unreasonably delayed any consent or approval; but Tenant's sole
remedy shall be an action or proceeding to enforce any such provision, or for
specific performance, injunction or declaratory judgment.
50. WAIVER OF TRIAL BY JURY. LANDLORD AND TENANT WAIVE THE RIGHT TO A TRIAL
BY JURY IN ANY ACTON OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJCT MATTER
OF THIS LEASE. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY
TENANT AND
28
<PAGE>
TENANT ACKNOWLEDGES THAT NEITHER LANDLORD NOR ANY PERSON ACTING ON BEHALF OF
LANDLORD HAS MADE ANY RPERESENTATIONS OF FACT TO INDUCE THIS WAIVER OR TRIAL BY
JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. TENANT FURTHER ACKNOWLEDGES
THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORUTNITY TO BE REPRESENTED) IN
THE SIGNING OF THIS LEASE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL
COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO
DISUCSS THIS WAIVER WITH COUNSEL. TENANT FURTHER ACKNOWLEDGES THAT IT HAS READ
AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION AND AS
EVIDENCE OF SAME HAS EXECUTED THIS LEASE.
Initials:
Landlord: _______ Tenant: _______
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease, in
triplicate, on the day and year first above written
TENANT: LANDLORD
- - ------- --------
POTOMAC FINANCIAL GROUP, AETNA LIFE INSURANCE COMPANY,
L.L.C., a Virginia limited liability company a Connecticut corporation
By: By:
-------------------------- --------------------------
Printed Name: Printed Name:
---------------- ----------------
Its: Its:
------------------------- ------------------------
29
<PAGE>
EXHIBIT A
---------
LOCATION AND DIMENSIONS OF PLANS
--------------------------------
30
<PAGE>
Exhibit B
---------
Special Stipulations
--------------------
These Special Stipulations are hereby incorporated into this Lease and in
the event that they conflict with any provision of this Lease, these Special
Stipulations shall control.
1. Base Rent. During the Term of the Lease, Tenant shall pay Base Rent as
follows:
Year of the Base Rent Rate per Rentable Monthly Base
Lease Term Square Foot per Annum Rent Payment
- - ---------- --------------------- ------------
1 $17.75 $5,506.94
2 $18.28 $5,671.37
3 $18.83 $5,842.01
4 $19.40 $6,018.85
5 $19.98 $6,198.80
2. Entry Sign. Landlord shall also provide Tenant with one (1) suite entry
sign at Landlord's sole cost and expense. Landlord hereby acknowledges that
Tenant shall be permitted to install a second suits entry sign on behalf of an
affiliate of Tenant, at Tenant's expense.
3. Security Deposit. Tenant hereby agrees to pay Landlord a security
deposit in the amount of Twenty-Two Thousand and no/100 Dollars ($22,000.00) for
years one (1) through three (3) during the Term of the Lease. The security
deposit for years four (4) through five (5) shall be reduced to Twelve Thousand
Thirty-Seven and 70/100 Dollars ($12,037.70), provided, however, Tenant does not
exercise its option to terminate this Lease. At any time during the term of this
Lease after the first (1st) anniversary of the Lease Commencement Date, Tenant
shall have the right to substitute a letter of credit (the "Letter of Credit")
in lieu of the amount of the security deposit as set forth above. Such Letter of
Credit shall be in the form of an unconditional, irrevocable standby letter of
credit naming Landlord as beneficiary and payable upon presentation of a sight
draft (accompanied by a statement by an authorized officer of Landlord
certifying that an Event of Default has occurred and that Landlord is entitled
to draw on the Security Deposit for such sum as is stated in the sight draft) at
a federally-insured national bank approved by Landlord (the "Issuer") and having
such other form and content as Landlord shall reasonably require. The Letter of
Credit may be replaced by a substitute letter of credit otherwise satisfying the
terms of this paragraph in the reduced amount set forth above or the Letter of
Credit may reduce in amount automatically.
4. Renewal Option. Provided that (i) both at the time of the exercise of
the option hereinafter set forth and at the time of commencement of the Renewal
Term (as hereinafter
31
<PAGE>
defined) this Lease is in full force and effect and provided further that Tenant
is not then in monetary default or material non-monetary default hereunder
beyond the expiration of any applicable notice and cure period provided for in
this Lease and (ii) Tenant is in occupancy of at least fifty percent (50%) of
the Premises for the purpose of conducting its own business, Tenant is hereby
granted the option to renew the Lease Term for one (1) additional period of
sixty (60) months (the "Renewal Term"), such Renewal Term to commence at the
expiration of the initial Lease Term. Tenant shall exercise its option to renew
by delivering notice of such election (the "Renewal Notice'") to Landlord not
less than six (6) months prior to the expiration of the initial Lease Term. In
the event that Landlord does not receive the Renewal Notice prior to the
expiration of such time period (time being of the essence with respect thereto),
then such option to renew the Lease Term shall, upon the expiration of such time
period, become null and void and be of no further force or effect and Tenant
shall, at the request of Landlord, execute an instrument in form and substance
acceptable to Landlord confirming such facts. The Renewal Term shall be upon the
same terms and conditions of this Lease except that the Base Rent during the
Renewal Term shall be at an annual rate equal to the then current fair market
rental rate for leases comparable to this Lease for space comparable to the
Premises in the Building taking into account such factors as tenant improvement
allowances, rent concessions, and rental escalations (the "FMR"). The FMR shall
be determined by Landlord and Tenant by mutual agreement; however, if Landlord
and Tenant cannot agree in writing on the FMR within thirty (30) days after
Tenant's notice of its election to renew, the Renewal Notice shall be deemed
null and void, unless Tenant, within ten (10) days after the expiration of said
thirty (30) day period, elects, by notifying Landlord in writing, to have the
FMR determined by the Three Broker Method set forth below. Tenant shall have no
option to renew this Lease beyond the expiration of the Renewal Term, and the
Premises shall be delivered in their existing condition (on an "as is" basis) at
the time the Renewal Term commences.
The "Three Broker Method" shall operate as follows: The FMR shall be based
upon the current fair market rental rate expressed in terms of rent per square
of rentable area of the Premises for comparable space in comparable buildings in
the Reston, Virginia area, (taking into account concessions which are being
offered in the marketplace for renewals) which shall be determined by a board of
three (3) licensed real estate brokers, one of whom shall be named by Landlord,
one by Tenant, and the two so appointed shall select a third broker. Each member
of the board of brokers shall be licensed in Virginia as a real estate broker,
specializing in the field of commercial office leasing in the Reston area of
Virginia, having no less than ten (10) years' experience in such field, and
recognized as ethical and reputable within the field. Landlord and Tenant agree
to make their appointments promptly after Landlord and Tenant are unable to
agree upon the FMR. The two (2) brokers selected by Landlord and Tenant shall
Select the third broker within ten (10) days after they both have been
appointed, and each broker, within fifteen (15) days after the third broker is
elected, shall submit his or her determination of the FMR. The FMR shall be the
determination of the broker that is not the highest or the lowest (or, if two
brokers reach an identical determination, the determination of such two
brokers). Landlord and Tenant shall each pay the fee of the broker selected by
it, and they shall equally share the payment of the fee of the third broker.
The FMR shall be the Base Rent with respect to the Premises during the
first year of the Renewal Term and shall thereafter escalate during the
remainder of the Renewal Term at three percent (3%) per annum over the prior
year's Base Rent.
32
<PAGE>
5. Cancellation Option. Notwithstanding anything to the contrary contained
in this Lease, provided Tenant is not in default hereunder beyond any applicable
notice and cure period or in the event that Tenant is in default, if Tenant
shall cure such default, Tenant shall have the one (1) time option to terminate
this Lease, effective upon the completion of the third (3rd) Lease Year (the
"Cancellation Date") by providing Landlord with written notice of such option
election (the "Cancellation Notice"). Such Cancellation Notice shall be
effective only if it is given to Landlord at least six (6) months prior to the
Cancellation Date (the "Cancellation Notice Deadline"); accordingly, if Tenant
has not given its Cancellation Notice to Landlord prior to a Cancellation Notice
Deadline, the respective Cancellation Option shall terminate and be of no
further force or effect. As a condition precedent to any cancellation of this
Lease pursuant to the provisions of this paragraph, Tenant must have delivered
to Landlord, together with its Cancellation Notice, an amount as a cancellation
fee equal to the sum of Thirty-Eight Thousand Three Hundred Fifteen and 98/100
Dollars ($38,315.98), which represents (i) an amount equal to the unamortized
portion of any tenant improvement allowance, leasing commissions and free rent,
if any, plus (ii) an amount equal to three (3) months of the then current rental
rate. It is hereby acknowledged that any such amount required to be paid by
Tenant in connection with such early termination is not a penalty but a
reasonable pre-estimate of the loss incurred by Landlord as a result of such
early termination of this Lease (which loss is impossible to calculate more
precisely) and, in that regard, constitutes liquidated damages with respect to
such loss. Tenant shall continue to be liable for its obligations under this
Lease to and through the Cancellation Date, including, without limitation,
Additional Rent that accrues pursuant to the terms of the Lease, with all of
such pre-Cancellation Date obligations surviving the early termination of the
Term of this Lease to the extent that such obligations remain unfulfilled as of
the Cancellation Date. The rights granted to Tenant under this paragraph are
personal to Tenant, and in the event of any assignment of this Lease or sublease
by Tenant, this Cancellation Option shall thenceforth be void and of no further
force or effect.
33
<PAGE>
Exhibit C
---------
Tenant Work Letter
------------------
Landlord agrees that it shall construct the tenant improvements for the
Premises in a good and workmanlike manner substantially in accordance with the
construction drawings and plans prepared by ______________________ dated
September 26, 1995 which Tenant has and does hereby approve (the "Approved
Drawings") and the Buildings standard specifications for the quantity and
quality of materials to be used in the construction of the tenant improvements.
Landlord shall pay for all costs of construction of the tenant improvements as
shown on the Approved Drawings. Landlord shall have the right to approve all
changes, modifications, substitutions or additions to the Approved Drawings.
Landlord shall paint and re-carpet the entire Premises with Building
standard carpet and colors to be selected by Tenant and repair all water damage
in the Premises.
Additionally, Landlord's architect shall provide services for Approved
Drawings at Landlord's sole cost and expense.
34
<PAGE>
Exhibit D
---------
Rules and Regulations
---------------------
1. The sidewalks in front of Premises shall not be obstructed by Tenant or
used by Tenant for any purpose other than ingress and egress from and to
Tenant's offices. Tenant shall remove promptly, at its own expense, without
the use of chemical agents, any debris from the sidewalks in front of
Premises. Landlord shall in all cases obtain the right to control or
prevent access thereto by any person whose presence, in Landlord's
judgment, would be prejudicial to the safety, peace, character or
reputation of the Building or of any Tenant of the Property.
2. The toilet rooms, water closets, sinks, faucets, plumbing and other service
apparatus of any kind shall not be used by Tenant for any purpose other
than those for which they were installed, and no sweepings, rubbish, rags,
ashes, chemicals or other refuse or injurious substances shall be placed
therein or used in connection therewith by Tenant.
3. No skylight, window, door or transom of the Building shall be covered or
obstructed by Tenant, and no storm window, awning or other similar material
shall be installed or placed on any window or in any window space, except
as approved in writing by Landlord, which approval shall not be
unreasonably withheld, delayed or conditioned. If Landlord has installed or
hereafter installs any shade, blind or curtain in the Premises, Tenant
shall not remove it without first obtaining Landlord's written consent
thereto, which approval shall not be unreasonably withheld, delayed or
conditioned.
4. No sign, lettering, insignia, advertisement, notice or other thing shall be
inscribed, painted, installed, erected or placed in any portion of the
Premises which may be seen from outside the Building, or on any window,
space or other part of the exterior or interior of the Building, unless
first approved in writing by Landlord, which approval shall not be
unreasonab1y withheld, delayed or conditioned. Names on suite entrances
shall be provided by and only Landlord and at Tenant's expense, using in
each instance lettering of a design and in a form consistent with the other
lettering in the Building, and first approved in writing by Landlord, which
approval shall not be unreasonably withheld, delayed or conditioned. Tenant
shall not erect any stand, booth or showcase or other article or matter in
or upon the Premises and/or the Building without first obtaining Landlord's
written consent thereto, which approval shall not be unreasonably withheld,
delayed or conditioned.
5. Tenant shall not place any additional lock upon any door within the
Premises or elsewhere upon the Property, without Landlord's prior written
approval, such approval not to be unreasonably withheld, and shall
surrender all keys for all such locks, at the end of the Term. Landlord
shall provide Tenant with one set of keys to the Premises when Tenant
assumes possession thereof.
6. Tenant shall not do or permit to be done anything which materially
obstructs or interferes with the rights of any other tenant or the
Property. Tenant shall not keep anywhere
35
<PAGE>
within the Property any matter having an offensive odor, or any kerosene,
gasoline, benzine, camphene, fuel or other explosive or highly flammable
material except for small amounts of chemicals used in Tenant's ordinary
course of business, stored in a safe manner meeting all regulations and
standards including, but not limited to, fire marshall codes/environmental
protection agency rules, regulations and standards and OSHA requirements
and for which Tenant is reasonably insured. No bird, fish or other animal
shall be brought into or kept in or about the Premises.
7. If Tenant desires to install signalling, telegraphic, telephonic,
protective alarm or other wires, apparatus or devices within the Premises,
Tenant shall need Landlord's prior written approval, such approval shall
not be unreasonably withheld. After thirty (30) days prior written notice
to Tenant, Landlord shall have the right (a) to prevent or interrupt the
transmission of excessive, dangerous or annoying current of electricity or
otherwise into or through the Building or the Premises, (b) to require the
changing or wiring connections or layout at Tenant's expense, to the extent
that Landlord may reasonably deem necessary, (c) to require compliance with
such reasonable rules as Landlord may establish relating thereto, and (d)
in the event of noncompliance with such requirements or rules, immediately
to do whatever else it considers reasonably necessary to remove the danger,
annoyance or electrical interference with apparatus in any part of the
Building. Each wire installed by Tenant must be clearly tagged at each
distributing board and junction box and elsewhere where required by
Landlord with the number of the office to which such wire leads and the
purpose for which it is used, together with the name of Tenant or other
concern, if any, operating or using it.
8. Without Landlord's prior written consent, which shall not be unreasonably
withheld, delayed or conditioned (a) no connection shall be made to any
electrical wire for running any fan, motor or other apparatus, device or
equipment, (b) no machinery of any kind other than customary small business
machinery shall be allowed in the Premises, and (c) no switchboard or
telephone wiring or equipment shall be placed anywhere other than where
reasonably designated by Landlord.
9. Tenant shall have access to the Premises at all times. Landlord shall in no
event be responsible for admitting or excluding any person from the
Premises. In case of invasion, hostile attack, insurrection, mob violence,
riot, public excitement or other commotion, explosion, fire or any
casualty, landlord shall have the right to bar or limit access to the
Building to protect the safety of occupants or the Property, or any
property within the Property.
10. Tenant and its employees, agents and invitees shall observe and comply with
the driving and parking signs and markers on the Premises surrounding the
Building.
11. Landlord shall have the right to rescind, suspend or modify the Rules and
Regulations and to promulgate such other Rules or Regulations as, in
Landlord's reasonable judgment, are from time to time needed for the
safety, care, maintenance, operation or cleanliness of the Building, or for
the preservation of good order therein provided such other Rules and
Regulations do not interfere with Tenant's use and occupancy of the
Premises or materially increase Tenant's obligations or materially diminish
Tenant's
36
<PAGE>
rights hereunder. Upon Tenant's having been given notice to the taking of
any such action, the Rules and Regulations as so rescinded, suspended,
modified or promulgated shall have the same force and effect as if in
effect at the time at which Tenant's Lease was entered into (except that
nothing in the Rules and Regulations shall be deemed in any way to alter or
impair any provision of such Lease).
12. The use of any room within the Building as sleeping quarters is strictly
prohibited at all times.
13. Nothing in these Rules and Regulations shall give any Tenant any right or
claim against Landlord or any other person if Landlord does not enforce any
of them against any other Tenant or person (whether or not Landlord has the
right to enforce them against such Tenant or person), and no such
nonenforcement with respect to any tenant shall constitute a waiver of the
right to enforce them as to Tenant or any other Tenant person.
Notwithstanding anything above to the contrary, Landlord will enforce the
Rules and Regulations uniformly with all tenants.
37
<PAGE>
Exhibit E
---------
CLEANING SPECIFICATIONS
-----------------------
Cleaning services provided five (5) days per week unless otherwise specified.
Cleaning hours Monday through Friday between 6:00 p.m. and before 8:00 a.m. of
the following day.
On the last day of the week the work will be done after 6:00 p.m., Friday, but
before 8:00 a.m., Monday.
No cleaning on holidays.
Lavatories
- - ----------
All lavatory floors to be swept and washed with disinfectant nightly.
Tile walls and dividing partitions to be washed and disinfected weekly.
Basins, bowls, urinals to be washed and disinfected daily.
Mirrors, shelves, plumbing work, bright work, and enamel surfaces cleaned
nightly.
Waste receptacles will be emptied and cleaned and wash dispensaries to be filled
with appropriate tissues, towels, soap nightly.
Main Lobby, Elevators, Building Exterior and Corridors
- - ------------------------------------------------------
Wipe and wash all floors in Main Lobby nightly.
Wipe and/or vacuum elevator floors nightly.
Office Area
- - -----------
Furniture and fixtures within reach will be dusted and desk tops will be wiped
clean. However, desks with loose papers on the top will not be cleaned.
Ash trays to be emptied and cleaned.
Window sills and baseboards to be dusted and washed when necessary.
Office wastepaper baskets will be emptied nightly.
38
<PAGE>
Cartons or refuse in excess of that which can be placed in wastebaskets will not
be removed. Tenants are required to place such unusual refuse in trash area.
Cleaner will not remove or clean tea or coffee cups or similar containers; also;
if such liquids are spilled in wastebaskets, the wastebaskets will be emptied
but not otherwise cleaned.
Hard floors will be swept daily and washed and waxed monthly.
Carpet will be vacuumed nightly.
Wipe clean all glass, brass and other bright work weekly.
Dust all pictures, charts, wall hangings monthly that are not reached in nightly
cleaning.
EXHIBIT 10.46
AGREEMENT
This agreement (this "Agreement") is entered into as of March __, 1999,
effective as of February 28, 1999 (the "Effective Date"), by and among
COMMUNICATION TELESYSTEMS INTERNATIONAL, d.b.a. WorldxChange Communications, a
California corporation ("CTS"), TEL-SAVE.com, INC., a Delaware corporation
("Tel-Save"), TEL-SAVE, INC., a Pennsylvania corporation and a subsidiary of
Tel-Save (the "Subsidiary"), MARK PAVOL, as Trustee of that certain D&K Grantor
Retained Annuity Trust dated June 15, 1998 (the "Trust"), ROGER B. ABBOTT AND
ROSALIND ABBOTT, individuals residing in San Diego, California (collectively,
the "Abbotts"), and EDWARD SOREN, an individual residing in San Diego,
California ("Soren").
RECITALS
A. CTS is the maker of three subordinated promissory notes, each dated
August 25, 1998, in favor of Gerard Klauer Mattison & Co., Inc. ("GKM") in the
aggregate initial principal amount of $55,000,000 (collectively, the "Notes").
B. CTS is the maker of a subordinated promissory note, dated August 25,
1998, in favor of Tel-Save in the initial principal amount of $1,200,000 (the
"Accrued Interest Note").
C. CTS and GKM entered into that certain Security Agreement dated August
25, 1998 (the "Security Agreement"), pursuant to which CTS provided security for
repayment of the Notes and of the Accrued Interest Note, among other things.
D. The Abbotts and GKM entered into that certain Pledge Agreement dated
August 25, 1998 (the "Abbott Pledge Agreement"), pursuant to which the Abbotts
granted a limited guaranty of the Notes and of the Accrued Interest Note,
pledged certain shares of CTS stock (the "Abbott Pledged Shares") as security
for such limited guaranty, and delivered appropriate stock certificates and
stock powers pursuant to such pledge.
E. Soren and GKM entered into that certain Pledge Agreement dated August
25, 1998 (the "Soren Pledge Agreement"), pursuant to which Soren granted a
limited guaranty of the Notes and of the Accrued Interest Note, pledged certain
shares of CTS stock (the "Soren Pledged Shares") as security for such limited
guaranty, and delivered appropriate stock certificates and stock powers pursuant
to such pledge.
F. GKM assigned to Tel-Save all of the rights, title, and interest of GKM
in the Notes, the Security Agreement, the Abbott Pledge Agreement, the Abbott
Pledged Shares, the Soren Pledge Agreement, the Soren Pledged Shares, and all
related stock certificates and stock powers.
1
<PAGE>
G. CTS consented to such assignment from GKM to Tel-Save and acknowledged
Tel-Save as the payee of the Notes and the Secured Party under (and as defined
in) the Security Agreement.
H. The Abbotts consented to such assignment from GKM to Tel-Save and
acknowledged Tel-Save as the Secured Party under (and as defined in) the Abbott
Pledge Agreement.
I. Soren consented to such assignment from GKM to Tel-Save and acknowledged
Tel-Save as the Secured Party under (and as defined in) the Soren Pledge
Agreement.
J. Pursuant to that certain Exchange Agreement dated January 2, 1999 (the
"Exchange Agreement"), Tel-Save granted to the Trust a participation interest in
all of the rights, title, and interest of Tel-Save in the Notes, the Accrued
Interest Note, the Security Agreement, the Abbott Pledge Agreement, the Soren
Pledge Agreement, the Abbott Pledged Shares, the Soren Pledged Shares, all
related stock certificates and stock powers, that certain Intercreditor
Agreement dated as of August 25, 1998, between Foothill Capital Corporation, a
California corporation, Tel-Save, and GKM, and the Financing Statement that was
filed in connection with the Security Agreement and that showed CTS as the
Debtor and Tel-Save as the Secured Party (such documents, other than the
Exchange Agreement, to be referred to hereinafter collectively as the "Note
Documents").
K. CTS desires to sell equity securities in an amount not less than
$30,000,000, and desires to enter into this Agreement in connection with that
proposed sale.
L. The parties hereto acknowledge and agree that the aggregate principal
balance owing on the Notes at the date hereof is $50,000,000.
M. The parties hereto acknowledge and agree that the principal balance
owing on the Accrued Interest Note at the date hereof is $1,200,000.
N. The parties hereto desire to modify certain of the covenants and
provisions of the Accrued Interest Note and the Notes and to enter into certain
other agreements as hereinafter set forth.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree that:
1. INCORPORATION OF RECITALS. CTS represents and warrants that Recital
K of this Agreement is true, complete, and correct. All other Recitals to this
Agreement are hereby incorporated by this reference herein and constitute
agreements among the parties hereto.
2. MODIFICATION OF CALL RIGHTS UNDER THE NOTES. Each of the Notes
contains certain "Call Rights" (as defined in the Notes). As of the Effective
Date, the second paragraph (unnumbered) of each Note shall be amended to read in
full as follows:
"In the event that the Maker shall close a private placement or public
offering of its Common Stock (an "Equity Offering"), the
2
<PAGE>
Holder shall have the right (the "Call Right") to require the Maker to
use up to an amount (the "Amount") of the net proceeds received by the
Maker from the Equity Offering to repay any accrued but unpaid
interest and any unpaid principal balance under this Note; provided,
however, the Holder shall have, within ten business days from receipt
of a written notice by the Maker of a proposed Equity Offering,
notified the Maker in writing of the exercise of its Call Right with
respect to such proposed Equity Offering. The Amount shall be
expressed herein as an aggregate amount to be applicable to this Note
and two other notes issued by Maker concurrently herewith, which three
promissory notes are in the initial aggregate principal amount of
$55,000,000. The Amount shall be divided among such three promissory
notes pro rata based on the initial principal amount of each such
promissory note. The Maker shall provide the Holder with reasonable
written notice of any proposed Equity Offering.
"(a) In the event that, after February 28, 1999, Maker closes an
Equity Offering in which net proceeds to the Maker are at least
$6,000,000 (the "First Equity Offering"), the Amount shall be limited
to an amount equal to the greater of: (i) 20% of the net proceeds
received by the Maker from the First Equity Offering or (ii)
$6,000,000.
"(b) With respect to any Equity Offering after the date of the
First Equity Offering, the Amount shall be limited to an amount equal
to 35% of the net proceeds received by the Maker from such Equity
Offering.
"(c) With respect to any Equity Offering after the Effective Date
of this Agreement but prior to the First Equity Offering, the Amount
shall be limited to an amount equal to 25% of the net proceeds
received by the Maker from such Equity Offering.
"(d) Multiple closings under one agreement for the private
placement of Common Stock of the Maker shall be deemed to be part of
the same Equity Offering."
3. POSSIBLE ONE YEAR EXTENSION OF THE TERM OF THE ACCRUED INTEREST
NOTE AND THE NOTES. In the event that, on or before November 30, 2000: (i) the
Accrued Interest Note and the Notes have not been repaid in full; and (ii) CTS
has made payments of principal on the Accrued Interest Note or the Notes after
the Effective Date of an aggregate amount of at least $12,250,000 (excluding any
and all payments described in subsection (a) contained in the amendment quoted
in Section 2 of this Agreement), then the due date of the Accrued Interest Note
and each of the Notes shall be extended from November 30, 2000, to November 30,
2001.
4. POSSIBLE TWO YEAR EXTENSION OF THE TERM OF THE ACCRUED INTEREST
NOTE AND THE NOTES. In the event that, on or before November 30, 2001: (i) the
Accrued
3
<PAGE>
Interest Note and the Notes have not been repaid in full; and (ii) CTS has made
payments of principal on the Accrued Interest Note or the Notes after the
Effective Date of an aggregate amount of at least $21,000,000 (excluding any and
all payments described in subsection (a) contained in the amendment quoted in
Section 2 of this Agreement), then the due date of the Accrued Interest Note and
each of the Notes shall be extended from November 30, 2000, or, if the due dates
have already been extended pursuant to Section 3 hereof, from November 30, 2001,
to November 30, 2002.
5. CERTAIN CONSENTS AND WAIVERS.
(a) Each of CTS, the Abbotts, and Soren (collectively, the "CTS
Parties") acknowledges and consents to each of the assignments and transfers
referred to in this Agreement, including without limitation the assignments and
transfers referred to in the Recitals to this Agreement.
(b) Each of the CTS Parties acknowledges and certifies that, as
of the date hereof, no default or Event of Default exists under any of the Note
Documents, nor would a default or Event of Default exist thereunder with notice
or the passage of time or both.
(c) CTS acknowledges and agrees that it has waived the effect of
Section 4.10 of the Security Agreement and that such Section is of no further
force or effect.
(d) Each of the CTS Parties represents and warrants to, and
agrees with, each of Tel-Save, the Trust, and the Subsidiary (collectively, the
"Other Parties") that, at the date hereof: (i) none of the Other Parties is in
default under any of the Note Documents; (ii) none of the CTS Parties has
suffered any damage under any of the Note Documents, and none of the CTS Parties
has, under any of the Note Documents, any cause of action, right of set-off or
counterclaim, or any other claim of any nature whatsoever under any of the Note
Documents against any of the Other Parties or any director, officer, attorney,
agent, employee, or affiliate of any of the Other Parties (collectively, "CTS
Parties' Claims"); and (iii) each of the CTS Parties hereby waives and
relinquishes any and all CTS Parties' Claims.
(e) Each of the Other Parties represents and warrants to, and
agrees with, each of the CTS Parties that, at the date hereof: (i) none of the
CTS Parties is in default under any of the Note Documents; (ii) none of the
Other Parties has suffered any damage under any of the Note Documents, and none
of the Other Parties has, under any of the Note Documents, any cause of action,
right of set-off or counterclaim, or any other claim of any nature whatsoever
under any of the Note Documents against any of the CTS Parties or any director,
officer, attorney, agent, employee, or affiliate of any of the CTS Parties
(collectively, "Other Parties' Claims"); and (iii) each of the Other Parties
hereby waives and relinquishes any and all Other Parties' Claims.
(f) CTS agrees that the Security Agreement remains in full force
and effect on the date hereof and that its force and effect will not be affected
by any of the transactions contemplated hereby, subject only to the express
confirmation of the prior modification of the Security Agreement by this
Agreement, and that the Security Agreement provides collateral security for the
Accrued Interest Note and for the Notes.
4
<PAGE>
(g) Each of the Abbotts agrees that the Abbott Pledge Agreement
remains in full force and effect on the date hereof and that its force and
effect will not be affected by any of the transactions contemplated hereby, and
that it provides collateral security for the Accrued Interest Note and for the
Notes.
(h) Soren agrees that the Soren Pledge Agreement remains in full
force and effect on the date hereof and that its force and effect will not be
affected by any of the transactions contemplated hereby, and that it provides
collateral security for the Accrued Interest Note and for the Notes.
(i) CTS acknowledges and agrees that it may not reduce or offset
against any of its obligations under any of the Notes or the Accrued Interest
Note for any reason whatsover. Without limiting the generality of the foregoing,
nothing in this Agreement shall be deemed or construed to create such a right of
offset.
6. CERTAIN AGREEMENTS.
(a) Tel-Save represents and warrants to the Trust and CTS that,
except for the transfer to the Trust referred to herein, Tel-Save has not
transferred or assigned any of the Note Documents, or any interest therein, to
any other person or entity.
(b) The Trust represents and warrants to Tel-Save and CTS that
the Trust has not transferred or assigned any of the Note Documents, or any
interest therein, to any other person or entity.
(c) None of the Other Parties shall have any obligation or
responsibility with regard to the offer, purchase, or sale of any Equity
Offering. Without limiting the generality of the foregoing, and except for the
agreements of the Other Parties expressly set forth in this Agreement, none of
the Other Parties makes any representation, warranty, or covenant regarding CTS,
any Equity Offering, or such offer, purchase, or sale, and expressly disclaims
any such representation, warranty, or covenant, express or implied.
7. ADDITIONAL COVENANTS. Within 10 days following the receipt by
Tel-Save of a minimum of $6,000,000 from CTS as payment under subsection (a)
contained in the amendment quoted in Section 2 hereof, provided that such amount
is received by Tel-Save on or prior to May 31, 1999:
(a) Tel-Save, the Subsidiary, and the Trust shall enter into that
certain Modification of the Exchange Agreement, substantially in the form
attached hereto as Exhibit A, pursuant to which: (i) The Trust shall release and
discharge Tel-Save and the Subsidiary from all of their future individual and
joint obligations and responsibilities under the Exchange Agreement, including
without limitation the obligation of the Subsidiary to perform under its limited
guaranty set forth in the Exchange Agreement; (ii) Tel-Save shall sell to the
Trust the participation interest of Tel-Save in the Note Documents; (iii)
Tel-Save shall assign and deliver the Note Documents to the Trust; (iv) the
Subsidiary shall waive any guaranty fee payable under Section 4 of the Exchange
Agreement; and (v) Tel-Save and the Trust shall agree that Sections 3.4-3.18
(inclusive), 4, and 5 of the Exchange Agreement are terminated and are of no
further force or effect.
5
<PAGE>
(b) Tel-Save and the Trust shall execute and deliver to each
other and to the other parties thereto a Modification of the Registration Rights
Agreement substantially in the form of Exhibit B hereto, and the Trust shall
cause the other parties to such Modification of the Registration Rights
Agreement to execute and deliver such document to each other and to Tel-Save and
the Trust.
(c) CTS shall pay up to $10,000 of the reasonable costs and fees
incurred by Tel-Save, the Subsidiary, and the Trust in connection with this
Agreement and the transactions contemplated hereby, including without limitation
the reasonable fees of legal counsel incurred by such entities.
(d) The Trust shall deliver to CTS the Accrued Interest Note and
the Notes in exchange for an Amended and Restated Accrued Interest Note and
Amended and Restated Notes that shall be of identical terms as the promissory
notes exchanged therefor except that the payee of such Amended and Restated
promissory notes shall be the Trust.
(e) At the time of the transactions identified in this Section 7,
each of the Abbotts and Soren shall reconfirm in writing that their respective
Pledge Agreements remain in full force and effect.
8. TERMINATION. If, on or before May 31, 1999, Tel-Save has not
received a minimum of $6,000,000 from CTS as payment under subsection (a)
contained in the amendment quoted in Section 2 hereof: (a) Sections 2, 3, 4, and
7 of this Agreement shall be of no further force or effect; and (b) the
provisions set forth in Sections 2, 3, and 4 hereof amending the Accrued
Interest Note and the Notes shall be rescinded as of the Effective Date, shall
be of no further force or effect, and the Accrued Interest Note and the Notes
shall revert to their forms as they existed prior to such amendments.
9. BINDING EFFECT; TRANSFER. This Agreement is binding upon and inures
to the benefit of the successors and assigns of each of the parties. This
Agreement is also binding upon any transferees of the Accrued Interest Note or
any of the Notes. Each of the Other Parties agrees not to assign or transfer the
Accrued Interest Note or any of the Notes without first: (i) informing the
assignee or transferee of the terms of this Agreement; (ii) providing such
assignee or transferee with a copy of this Agreement; and (iii) notifying CTS in
writing of the proposed transfer. The possible modifications and possible
extensions in Sections 2, 3, and 4 hereof shall apply only to the provisions and
periods specifically referred to therein and no other, further, or broader
modifications or possible extensions, or any waiver or consent, is inferred or
shall be implied.
10. GOVERNING LAW. This Agreement is and shall be deemed to be a
contract entered into and made pursuant to the laws of the State of New York and
shall in all respects be governed, construed, applied, and enforced in
accordance with the laws of the State of New York without regard to choice of
law principles. The parties hereby agree that the venue of any legal action or
proceeding with respect to this Agreement and the rights and obligations of the
parties hereto shall lie in any state or federal court in the State of New York.
Each of the parties further consents to and hereby submits itself to the
jurisdiction of the above-mentioned courts situated in the State of New York.
6
<PAGE>
11. FULL FORCE AND EFFECT OF CERTAIN DOCUMENTS. Each of the parties
hereto agrees that, at the date hereof each of the Note Documents is in full
force and effect except as modified by this Agreement and the Exhibits hereto.
12. FURTHER COOPERATION. Each of the parties hereto agrees to
cooperate with each of the other parties hereto, including without limitation by
executing and delivering appropriate documents, to more fully effectuate the
purposes of this Agreement.
13. EXHIBITS. Exhibits A and B hereto are, by this reference,
incorporated herein.
14. LEGEND. On or before the date of this Agreement, the Other Parties
shall cause the following legend to be stamped or otherwise imprinted (while in
the presence of an officer of CTS) on the Accrued Interest Note and each of the
Notes:
"THIS NOTE AND THE INDEBTEDNESS EVIDENCED BY THIS NOTE ARE SUBJECT TO
AN AGREEMENT, DATED AS OF MARCH __, 1999, BY AND BETWEEN THE MAKER (AS
DEFINED HEREIN), TEL-SAVE.com, INC., AND TEL-SAVE, INC., AND OTHER PARTIES,
COPIES OF WHICH AGREEMENT MAY BE OBTAINED FROM THE SECRETARY OF THE MAKER
(AS DEFINED HEREIN)."
IN WITNESS WHEREOF, CTS, Tel-Save, the Subsidiary, and the Trust have
caused this Agreement to be executed by their respective officers, thereunto
duly authorized, and the Abbotts and Soren have executed this Agreement, as of
the date first above written to be effective as of the Effective Date.
COMMUNICATIONS TELESYSTEMS
INTERNATIONAL, d.b.a.
WORLDXCHANGE
COMMUNICATIONS, a California
corporation
By:
---------------------------
Name:
-------------------------
Title:
------------------------
7
<PAGE>
TEL-SAVE.com, INC., a Delaware
corporation
By:
---------------------------
Name:
-------------------------
Title:
------------------------
TEL-SAVE, INC., a Pennsylvania
corporation
By:
---------------------------
Name:
-------------------------
Title:
------------------------
8
<PAGE>
MARK PAVOL, as Trustee of that certain
D&K Grantor Retained Annuity Trust
dated June 15, 1998
- - ------------------------------------
ROGER B. ABBOTT
- - ------------------------------------
ROSALIND ABBOTT
- - ------------------------------------
EDWARD S. SOREN
- - ------------------------------------
9
<PAGE>
LIST OF EXHIBITS
A. Modification of the Exchange Agreement
B. Modification of Registration Rights Agreement
10
As of February __, 1999
Mr. Emmanuel Demaio
Dear Manny:
We are writing to confirm our agreements and understandings regarding your
status under your Employment Agreement, dated as of October 13, 1998 (the
"Employment Agreement"), among you, as "Employee", Tel-Save, Inc., as "Company",
and Tel-Save.com, Inc. (formerly, Tel-Save Holdings, Inc.), as "Holdings", from
and after May 15, 1999 (the "Change Date") (except as otherwise defined herein,
capitalized terms shall be defined as in the Employment Agreement):
1. From and after the Change Date, you, as "Employee" under the
Employment Agreement, will cease to be an employee of Company. The
Company agrees that you terminated your employment under the
Employment Agreement for "Good Reason" as defined in Section 5.4 of
such Agreement and that you are entitled to be compensated (or
continue to be compensated) as provided in Section 6.1 of the
Employment Agreement.
2. Except as specifically provided in paragraphs 4 and 5 of this letter
agreement and except for your entitlement, if any, to indemnification
and reimbursement by Company or Holdings arising out of your having
been an officer or director thereof, provided that you hereby agree to
cooperate with Company or Holdings to the extent reasonably requested
by Company or Holdings in any proceeding that may give rise to any
such indemnification, neither you nor your estate or beneficiaries
shall be entitled to any other payments, compensation, perquisites or
other benefits, from Company or Holdings or any subsidiary thereof,
under or by reason of the Employment Agreement or otherwise and all
such other payments, compensation, perquisites or other benefits are
hereby expressly waived by you (for yourself and for your estate and
your beneficiaries). Company shall withhold any state, federal or
other taxes that it may be required to withhold from or with respect
to any such payments, compensation, perquisites or other benefits.
3. You will be entitled to no additional compensation for serving as a
director of Holdings. While you may, of course, resign as a director
of Holdings at any time, you hereby agree to resign as a director of
Holdings as and when requested by the Chairman of the Board of
Holdings, but not earlier than ______ __, 1999. Furthermore, you agree
that you will, prior
<PAGE>
to your resignation as a director, vote in favor of the election or
nomination of your successor as a director or such other person as
shall have been designated as a nominee for director by Company's
Chairman of the Board.
4. You will make yourself available and shall cooperate, in each case to
the extent reasonably requested by Company or Holdings, in respect of
any litigation or other proceedings that arise out of or by reason of
the conduct of Company's or Holding's business or operations during
any time that you were a director or officer thereof, without further
compensation or payment except the payment of your reasonable
out-of-pocket costs and expenses in connection therewith.
5. Except as specifically provided herein, the Employment Agreement shall
continue in full force and effect.
If the foregoing correctly sets forth our agreements and understandings,
please so acknowledge by signing the enclosed copy of this letter agreement in
the space provided and returning it to us, whereupon this shall be a valid and
binding agreement by and among us.
Very truly yours,
Tel-Save, Inc.
By:
------------------------
Name
Title
Tel-Save.com, Inc.
By:
------------------------
Name
Title
Accepted and agreed as of the date first above written:
- - ---------------------------------
Emmanuel DeMaio
EXHIBIT 11.1
TEL-SAVE.COM, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------------
1998 1997 1996
- - ------------------------------------------------------------- ------------- ------------- --------------
<S> <C> <C> <C>
Income (loss) before extraordinary gain $ (308,436) $ (20,945) $20,168
Extraordinary gain 87,110 -- --
---------- --------- ---------
Net income (loss) $ (221,326) $ (20,945) $20,168
========== ========= =========
BASIC
Weighted average common shares outstanding - Basic: 59,283 64,168 52,650
========== ========= =========
Income (loss) before extraordinary gain $ (5.20) $ (0.33) $ 0.38
Extraordinary gain 1.47 -- --
---------- --------- ---------
Net income (loss) $ (3.73) $ (0.33) $ 0.38
========== ========= =========
DILUTED
Weighted average common and common equivalent shares
outstanding - Diluted:
Weighted average shares 59,283 64,168 52,650
Weighted average equivalent shares -- -- 4,352
---------- --------- ---------
Weighted average common and common equivalent shares -
Diluted 59,283 64,168 57,002
========== ========= =========
Income (loss) before extraordinary gain $ (5.20) $ (0.33) $ 0.35
Extraordinary gain 1.47 -- --
---------- --------- ---------
Net income (loss) $ (3.73) $ (0.33) $ 0.35
========== ========= =========
</TABLE>
EXHIBIT 21.1
List of Subsidiaries of the Company
Tel-Save, Inc.
Compco, Inc.
Tel-Save Holdings of Virginia, Inc.
ADS Holding Corporation
American Digital Switching, Inc.
EXHIBIT 23.1
CONSENT TO INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Tel-Save.com, Inc.
New Hope, Pennsylvania
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statements on Forms S-8. Nos.
333-04479, 333-05923, 333-42111 and 333-71025 and Forms S-3, Nos. 333-14549,
333-23193, 333-16787, 333-49825, 333-65397, 333-55287, 333-69737 and 333-72357
of our reports dated February 22, 1999, except for Note 8, which is as of March
26, 1999 relating to the consolidated financial statements and schedule of
Tel-Save.com, Inc. and subsidiaries (the "Company") appearing in the Company's
Annual Report on Form 10-K for year ended December 31, 1998.
We also consent to the reference to us under the caption "Experts" in the
Prospectuses.
BDO Seidman, LLP
New York, New York
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 OF TEL-SAVE .COM, INC.
AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,063,000
<SECURITIES> 89,649,000
<RECEIVABLES> 48,256,000
<ALLOWANCES> 1,669,000
<INVENTORY> 0
<CURRENT-ASSETS> 149,769,000
<PP&E> 64,267,000
<DEPRECIATION> 7,564,000
<TOTAL-ASSETS> 136,708,000
<CURRENT-LIABILITIES> 272,560,000
<BONDS> 000
0
0
<COMMON> 669,000
<OTHER-SE> (137,454,000)
<TOTAL-LIABILITY-AND-EQUITY> 272,560,000
<SALES> 0
<TOTAL-REVENUES> 448,600,000
<CGS> 0
<TOTAL-COSTS> 361,957,000
<OTHER-EXPENSES> 343,516,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,184,000
<INCOME-PRETAX> (264,048,000)
<INCOME-TAX> 40,388,000
<INCOME-CONTINUING> (308,436,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 87,110,000
<CHANGES> 0
<NET-INCOME> (221,326,000)
<EPS-PRIMARY> (3.73)
<EPS-DILUTED> (3.73)
</TABLE>
