-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IXwBqLMLzLyqY7cO5X1EoYh7exS6xfhGJeduZyX1wCfsJYYoSXVaVb8z7iPu669o gEwTP/BgVglsV/r1f7PXAQ== 0000950123-97-002307.txt : 19970321 0000950123-97-002307.hdr.sgml : 19970321 ACCESSION NUMBER: 0000950123-97-002307 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19970320 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELEPASSPORT INC CENTRAL INDEX KEY: 0001030480 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-20977 FILM NUMBER: 97559651 BUSINESS ADDRESS: STREET 1: 1212 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 2123023365 MAIL ADDRESS: STREET 1: 1212 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10036 S-1/A 1 AMENDMENT #1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1997 REGISTRATION NO. 333-20977 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ TELEPASSPORT INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 4813 13-3923895 (STATE OR OTHER (PRIMARY STANDARD JURISDICTION OF INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) IDENTIFICATION NO.)
------------------------ 1212 AVENUE OF AMERICAS NEW YORK, NEW YORK 10036-9998 TELEPHONE: (212) 302-3365 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ JAMES D. PEARSON, PRESIDENT AND CHIEF EXECUTIVE OFFICER TELEPASSPORT INC. 1212 AVENUE OF AMERICAS NEW YORK, NEW YORK 10036-9998 TELEPHONE: (212) 302-3365 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: STANLEY E. BLOCH, ESQ. KRIS F. HEINZELMAN, ESQ. BAER MARKS & UPHAM LLP CRAVATH, SWAINE & MOORE 805 THIRD AVENUE WORLDWIDE PLAZA NEW YORK, NEW YORK 10022 825 EIGHTH AVENUE TEL: (212) 702-5700 NEW YORK, NEW YORK 10019 FAX: (212) 702-5941 TEL: (212) 474-1000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
=================================================================================================================== PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) FEE - ------------------------------------------------------------------------------------------------------------------- Class B Common Stock, $.01 par value....................... 5,750,000(2) $16.00 $92,000,000 $27,878.79(3) ===================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 promulgated under the Securities Act of 1933, as amended. (2) Includes 750,000 shares of Class B Common Stock which may be issued upon exercise of an over-allotment option granted to the U.S. Underwriters and the Managers. See "Underwriting." (3) Of this amount, $22,727.27 was previously paid. ------------------------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ 2 EXPLANATORY NOTE THIS REGISTRATION STATEMENT CONTAINS TWO FORMS OF PROSPECTUS: ONE TO BE USED IN CONNECTION WITH AN UNDERWRITTEN OFFERING IN THE UNITED STATES AND CANADA (THE "U.S. PROSPECTUS") AND ONE TO BE USED IN A CONCURRENT INTERNATIONAL OFFERING (THE "INTERNATIONAL PROSPECTUS") OF THE CLASS B COMMON STOCK, PAR VALUE $.01 PER SHARE, OF TELEPASSPORT INC. THE U.S. PROSPECTUS FOR THE OFFERING IN THE UNITED STATES AND CANADA FOLLOWS IMMEDIATELY AFTER THIS EXPLANATORY NOTE. AFTER THE U.S. PROSPECTUS ARE THE ALTERNATE PAGES FOR THE INTERNATIONAL PROSPECTUS: A FRONT COVER PAGE, AN INSIDE FRONT COVER PAGE AND A "SUBSCRIPTION AND SALE" SECTION. A COPY OF THE COMPLETE U.S. PROSPECTUS AND INTERNATIONAL PROSPECTUS IN THE EXACT FORMS IN WHICH THEY ARE TO BE USED AFTER EFFECTIVENESS WILL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 424(B). 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MARCH 20, 1997 5,000,000 Shares TelePassport Inc. [LOGO] Class B Common Stock ($0.01 par value) ------------------ All the shares of Class B Common Stock, par value $0.01 per share (the "Class B Common Stock"), of TelePassport Inc. ("TelePassport" or the "Company") offered hereby are being sold by the Company. Of the 5,000,000 shares of Class B Common Stock being offered, 4,000,000 shares (the "U.S. Shares") are initially being offered by the U.S. Underwriters (as defined herein) in the United States and Canada (the "U.S. Offering") and 1,000,000 shares (the "International Shares" and together with the U.S. Shares, the "Shares") are initially being concurrently offered by the Managers (as defined herein) outside the United States and Canada (the "International Offering" and together with the U.S. Offering, the "Offering"). The initial price to public and the underwriting discounts and commissions of the U.S. Offering and the International Offering are identical. See "Underwriting." The Company's common stock has been designated into two classes, consisting of Class A Common Stock, par value $0.01 per share (the "Class A Common Stock") and the Class B Common Stock (collectively, the "Common Stock"). The Class B Common Stock and the Class A Common Stock are substantially identical, except for disparity in voting power, transferability and convertibility. The Class B Common Stock is entitled to one vote per share and is not convertible into Class A Common Stock. The Class A Common Stock is entitled to ten votes per share and is convertible at any time on a share-for-share basis into Class B Common Stock. Except as otherwise required by law, under the Company's Amended and Restated Certificate of Incorporation, shares of Class A Common Stock and Class B Common Stock will vote together on all matters submitted to a vote of stockholders, including the election of directors. Upon completion of the Offering and after giving effect to certain acquisitions, the Company's current stockholders collectively will own 100% of the outstanding Class A Common Stock, which will represent 92.7% of the combined voting power of the Company. Accordingly, the holders of the Class A Common Stock will have the ability to elect all of the Company's Board of Directors. See "Description of Capital Stock." Prior to the Offering, there has been no public market for the Class B Common Stock. It is anticipated that the initial public offering price will be between $14.00 and $16.00 per share. For information relating to the factors to be considered in determining the initial public offering price, see "Underwriting." Application has been made for quotation of the shares of Class B Common Stock on The Nasdaq Stock Market's National Market ("NNM") under the symbol "TEPP." ------------------ THE CLASS B COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE CLASS B COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 10 HEREIN. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting Price Discounts and Proceeds to to Public Commissions Company(1) --------------------------------------------------- Per Share....................................... $ $ $ Total (2)....................................... $ $ $
(1) Before deduction of expenses payable by the Company estimated at $ . (2) The Company has granted to the U.S. Underwriters and the Managers an option, exercisable by Credit Suisse First Boston Corporation for 30 days from the date of this Prospectus, to purchase a maximum of 750,000 additional shares to cover over-allotments of shares. If such option is exercised in full, the total Price to Public will be $ , Underwriting Discounts and Commissions will be $ and Proceeds to Company will be $ . ------------------ The U.S. Shares are offered by the several U.S. Underwriters when, as and if issued by the Company, delivered to and accepted by the U.S. Underwriters and subject to their right to reject orders in whole or in part. It is expected that the U.S. Shares will be ready for delivery on or about , 1997, against payment in immediately available funds. Credit Suisse First Boston Smith Barney Inc. The date of this Prospectus is , 1997. 4 [MAP INSERTED ON INSIDE FRONT COVER FOLDOUT] MAP -- reflecting the various locations in the United States, Europe and Asia in which the Company has existing switching facilities and intends to locate additional switching facilities over the next three years. The map also reflects United States Air Force -- Europe bases where the Company has installed and is installing telecommunications systems. 5 [LARGE TELEPASSPORT LOGO] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." TelePassport(R) is a registered trademark of the Company. Certain other trademarks of the Company and other companies, including MasterCall(TM), are used in this Prospectus. 2 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by and should be read in conjunction with the more detailed information and Consolidated Financial Statements and other financial data appearing elsewhere in this Prospectus. Except as otherwise indicated, all information in this Prospectus (i) assumes no exercise of the overallotment option and (ii) has been adjusted to give effect to the Reorganization (as defined herein). As used herein unless the context otherwise indicates, the terms "Company" and "TelePassport" refer to the TelePassport Companies (as defined herein) as of dates and periods prior to the closing of the Reorganization and, thereafter, collectively, TelePassport Inc. and its subsidiaries. See "Business--Reorganization." See "Glossary of Terms" for definitions of certain technical terms used in this Prospectus. THE COMPANY GENERAL TelePassport is a provider of international telecommunications services. The Company conducts business on a global basis with a principal focus on small and medium-sized businesses and residential customers with significant international long distance traffic in the United Kingdom, Germany, Austria, Switzerland and other targeted areas of Europe, in Japan and other targeted Asian countries and in certain countries of southern Africa. The Company has also commenced efforts to sell national telecommunications services in certain of these areas. The Company is developing a digital switch-based telecommunications network connected by leased fiber optic transmission facilities (the "TelePassport Network"). The TelePassport Network currently has international gateway switching centers in New York and Tokyo and has switching facilities in London and Vienna. The Company intends to use a significant portion of the net proceeds of the Offering to expand and upgrade the TelePassport Network. The construction of a state-of-the-art international gateway switching center and network management facility in New Jersey is substantially completed and will replace the New York international gateway switching center. The Company intends to further develop the TelePassport Network by upgrading existing facilities and by adding switching facilities in up to 30 cities over the next three years. These switching facilities will be located principally in primary markets where the Company has an established customer base or has existing key contracts, as well as in secondary markets in proximity to the Company's primary markets. Switching facilities are expected to be installed in Frankfurt, Milan, Naples, Paris and Zurich by the end of 1997. In areas in which the Company believes it is not optimal to own network facilities, the Company typically enters into agreements to resell the facilities of other operators in order to enhance the TelePassport Network. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company provides international long distance services with value-added features, primarily under the "TelePassport" brand. The Company believes its services are typically competitively priced below those of the incumbent telecommunications operators ("ITOs"), which are often government-owned or protected telephone companies. Customer access to the TelePassport Network and the Company's services may be obtained through customer-paid local access, domestic and international toll-free access, direct digital access through dedicated lines for high volume business users, equal access through automated routing from the public switched telephone network ("PSTN"), or call reorigination. The availability of a particular access method in any geographic area is governed by local laws and regulations, customer size and the degree to which the Company has infrastructure to support the access method in such area. The Company's services include virtual private network ("VPN") services, customized calling cards and prepaid debit cards. The Company also offers value-added features such as itemized billing and multiple payment methods. In addition, the Company provides application platform services and resells switched minutes on a wholesale basis to other telecommunications providers and carriers. The Company believes that Japan and certain other Asian countries provide the Company with significant opportunities for growth. In order to facilitate entry into the Japanese telecommunications market, the Company has established strategic relationships with certain Japanese telecommunications providers. In March 1995, the Company and Asahi Telecom Co., Ltd. ("Asahi Telecom") began operating a joint venture that provided international long distance services in Japan. Asahi Telecom is owned 33.5% by Japan Telecom 3 7 Co., Ltd. ("Japan Telecom") and 9.0% by NEC Corporation ("NEC"), and is an agent for Japan Telecom's long distance services and a distributor of NEC PBXs in Japan. Asahi Telecom recently commenced the construction of a nationwide network and began offering one of Japan's first integrated national and international long distance telecommunications services through its wholly owned subsidiary, A.T. NET K.K. ("A.T. NET"). In an effort to enhance its presence in the Japanese telecommunications market, in March 1997, the Company, together with A.T. NET and Asahi Telecom, entered into a series of agreements (the "A.T. NET Agreements") pursuant to which the Company, in replacement of the joint venture, became the carrier of international long distance traffic for A.T. NET, Asahi Telecom and their respective affiliates, the Company sold its interest in the joint venture to Asahi Telecom and purchased certain equipment and other assets of the joint venture, including the rights to the joint venture's non-Japanese and private line customers, which accounted for approximately 10% of its revenues, and the Company became entitled to receive preferential pricing as a reseller of A.T. NET's national long distance services in Japan. To the extent allowed by applicable regulations, the Company intends to resell A.T. NET's national long distance services and offer, along with its own international long distance services, an integrated TelePassport national and international long distance service primarily to non-Japanese companies located in Japan, a significant customer segment that A.T. NET does not currently target. The A.T. NET Agreements also provide that, to the extent A.T. NET offers customized calling cards and prepaid debit cards for its customers, the Company will provide such cards and will supply the related national and international long distance services to such cardholders, and that A.T. NET and Asahi Telecom are required to enter into arrangements to provide to the Company's customers those services permitted by A.T. NET's Special Type II registration, which would effectively permit the Company to provide additional telecommunications services in Japan. In addition, the Company has exercised an option to acquire a 10% ownership interest in A.T. NET and the Company is entitled to designate one representative to A.T. NET's board of directors. The Company believes that its relationship with Asahi Telecom and ownership interest in A.T. NET provide the Company with both a greater opportunity to competitively penetrate the Japanese market and advance the TelePassport brand and an added competitive advantage with respect to its wholesale business by allowing it to originate and terminate international traffic cost effectively from and to major metropolitan areas of Japan. The Company intends to utilize the TelePassport brand recognition that it is creating in Japan as a platform from which to expand into other targeted Asian countries. In addition to targeting small and medium-sized businesses and residential customers, the Company markets its services to supra-national and governmental organizations. The Company believes that contracts to provide services to such entities are strategically important because they present the Company with the opportunity to establish a high profile in the regions surrounding the locality of each contract, enhancing opportunities for new customer development. In addition, contracts of this type will usually require the Company to establish switching facilities and other infrastructure which the Company can then utilize to expand its customer base in the region. In May 1996, the Company was awarded a contract to provide, on a ten-year basis, local exchange and national and international telecommunications services to the temporary lodging facilities on currently up to 14 United States Air Force--Europe ("USAFE") bases (the "USAFE Contract"). Under the terms of the USAFE Contract, the Company, to date, has received delivery orders for two bases in Germany and one base in Italy and has received requests for pricing ("RFPs") for nine bases: two in Germany, five in the United Kingdom, one in Spain and one in Turkey. The Company has completed the installation of telecommunications systems providing voice and data service to temporary lodging facilities at the Ramstein and Rhein Main Air Force Bases in Germany. The Company expects to complete the installation of systems at nine additional bases by the end of 1997. The Company believes that the USAFE Contract will also provide an opportunity to expand its services to the permanent dormitories at USAFE bases. In addition, pursuant to the terms of the USAFE Contract, certain agencies within the other branches of the United States armed forces in Europe have the option to designate the Company as a supplier of telecommunications services and to present delivery orders for certain of their facilities. The Company intends to take advantage of these contractual terms by actively pursuing delivery orders from other United States military facilities in Europe. Further, the Company is a supplier of call reorigination services for offices of certain United Nations ("UN") agencies and their affiliates in over 100 countries and for other supra-national food, health, fiscal and labor organizations (collectively, the "UN Arrangements"). The Company believes 4 8 that the services it provides to these organizations help to develop its customer base by establishing a high profile in local regions surrounding their offices. The Company typically relies on local independent sales agents for distribution of its services. In locations the Company deems strategic, the Company generally seeks to integrate distribution and interface directly with its customers by acquiring independent agents, establishing country managers, and/or creating direct sales organizations. The Company believes that the integration of its distribution network will give it greater control over its sales and marketing functions and provide a higher level of service to its customers. Accordingly, in March 1997, the Company entered into agreements to acquire all the capital stock of each of Telepassport GmbH ("TelePassport Germany"), its independent agent in Germany, and TelePassport Telekom GmbH ("TelePassport Austria"), its independent agent in Austria (collectively, the "Agent Acquisitions"). The Agent Acquisitions are expected to be consummated concurrently with the closing of the Offering. An important element of the Company's business plan is the pursuit of strategic acquisitions, investments and alliances. In January 1997, the Company entered into an agreement with Intelenet, Inc. ("Intelenet"), a reseller of telecommunications services, pursuant to which Intelenet granted the Company an option to purchase Intelenet's customer accounts principally in Naples and Milan, Italy, as well as telecommunications equipment (the "Intelenet Agreement"). The acquisition of these assets (the "Intelenet Acquisition") will provide the Company with an immediate customer base in the Milan and Naples markets, which should enable the Company thereafter to expand the TelePassport Network into additional cities in Italy. Also, in March 1997, the Company entered into an agreement (the "HCL Agreement") to acquire all the capital stock of Hercules Consultants, Limited ("HCL"), an alternative network access consultant and installer of PBXs in the United Kingdom. The Company anticipates that the acquisition of HCL (the "HCL Acquisition;" and together with the Agent Acquisitions, the "Acquisitions") will expand the Company's existing customer base in the United Kingdom through the marketing of TelePassport services to HCL's customers, and will enable the Company to offer an integrated package of PBXs and TelePassport services in the United Kingdom. The Company has achieved significant growth since its inception in 1993 with revenues increasing from $2.1 million in 1993 to $12.8 million in 1994, $27.6 million in 1995 and $36.6 million in 1996. The number of customers (at the end of the period) and billable minutes, respectively, increased from 9,118 and 11.9 million in 1994 to 12,378 and 32.8 million in 1995 and 15,683 and 53.5 million in 1996. STRATEGY The Company seeks to capitalize on the fundamental changes occurring in the telecommunications industry as a result of increasing demand for international telecommunications services, rapid advances in technology and a growing worldwide trend toward deregulation. The Company believes that these factors have created opportunities for alternative network operators to effectively compete with ITOs and major global commercial carriers. The Company believes it is strategically positioned to take advantage of these fundamental changes for the following reasons: - The Company's services are sold in over 100 countries, primarily under the "TelePassport" brand, which the Company can leverage as it expands into new locations and introduces additional services; - The development of the TelePassport Network in the United Kingdom, Germany, Austria, Switzerland, Italy and other targeted areas of Europe, and in Japan and other targeted Asian countries, will enable the Company to take advantage of deregulation in these markets; - The unique relationship with Asahi Telecom and A.T. NET provides the Company with competitive advantages in accessing the Japanese market and a platform from which to expand to other targeted Asian countries; - Contracts and arrangements with governmental and supra-national organizations, such as the USAFE Contract and the UN Arrangements, present the Company with long-term revenue potential and opportunities to enhance its reputation and profile in underserved markets; 5 9 - The Company's call reorigination business enables it to gain low-cost entry into numerous markets, to establish distribution networks, to build customer bases and to identify opportunities prior to significant investment; and - The Company's management team, with its substantial combined telecommunications and related businesses experience and strong entrepreneurial leadership, provides the Company with the managerial skills to exploit available market opportunities. The Company's objective is to become a leading provider of switch-based international and national telecommunications services in its target markets. The Company's business strategy includes the following key elements: (i) development of the TelePassport Network in primary markets where the Company has an established customer base or has existing key contracts and into secondary markets in proximity to the Company's primary markets; (ii) maximizing operating efficiency by achieving economies of scale in the operation of the TelePassport Network and enhancing its information systems; (iii) integrating its distribution and interfacing directly with customers by acquiring independent agents, establishing country managers, and/or creating direct sales organizations in strategic locations; (iv) focusing on small and medium-sized businesses, and providing those customers with a wide range of services; (v) expanding the government services and supra-national sectors; (vi) expanding distribution, customer bases and brand recognition through the use of call reorigination; (vii) expanding wholesale services to increase the utilization of the TelePassport Network; and (viii) pursuing acquisitions, investments and strategic alliances. ------------------------ TelePassport was organized in Delaware on December 9, 1996 to acquire and continue the various businesses conducted by USFI, Inc., USFI-Japan, L.L.C. and TelePassport L.L.C. and its operating subsidiaries (collectively, the "TelePassport Companies"). USFI, Inc., the Company's principal operating subsidiary, was incorporated in New York in January 1993. Prior to the effective date of the registration statement of which this Prospectus is a part, the Company will complete the Reorganization pursuant to which TelePassport L.L.C. will be merged with TelePassport Inc. and all the outstanding shares and interests in USFI, Inc. and USFI-Japan, L.L.C. will be contributed to TelePassport Inc. From and after the date of the Reorganization, all the assets and business of USFI, Inc. and USFI-Japan, L.L.C. will be owned and conducted by TelePassport Inc. and such entities will become wholly owned subsidiaries of TelePassport Inc. The Company's executive offices are located at 1212 Avenue of the Americas, New York, New York, 10036-9998, and its telephone number is (212) 302-3365. 6 10 THE OFFERING Class B Common Stock offered hereby: U.S. Offering...................... 4,000,000 shares International Offering............. 1,000,000 shares --------- Total Offering.................. 5,000,000 shares ========= Common Stock to be outstanding after the Offering: Class A Common Stock............... 7,350,000 shares Class B Common Stock............... 5,340,000 shares(1) Voting Rights........................ The Class A Common Stock and the Class B Common Stock will vote together as a single class on all matters, except as otherwise required by law, with each share of Class B Common Stock having one vote and each share of Class A Common Stock having ten votes. Upon completion of the Offering and after giving effect to the Acquisitions, the Company's current stockholders will own 100% of the outstanding Class A Common Stock, which will represent 92.7% of the combined voting power of the shares of Class A Common Stock and Class B Common Stock. See "Principal Stockholders" and "Description of Capital Stock." Use of Proceeds...................... To upgrade and expand the TelePassport Network; to integrate distribution through acquisitions (including the Agent Acquisitions); to acquire businesses or invest in joint ventures or strategic alliances (including A.T. NET and HCL); for research and development and general corporate and working capital purposes. See "Risk Factors--Substantial Capital Requirements; Need for Additional Financing to Complete Network Expansion; Uncertainty of Additional Financing; Broad Discretion Over Use of Proceeds" and "Use of Proceeds." Proposed NNM Symbol.................. TEPP
- --------------- (1) Includes: (i) 66,667 shares of Class B Common Stock to be issued in connection with the HCL Acquisition; (ii) 253,333 shares of Class B Common Stock to be issued in connection with the acquisition of TelePassport Germany, including 80,000 shares of Class B Common Stock to be issued and held in escrow subject to vesting over 36 months; and (iii) 20,000 shares of Class B Common Stock to be issued in connection with the acquisition of TelePassport Austria and held in escrow subject to vesting over 36 months (in each case, assuming that the initial public offering price of the Class B Common Stock is the mid-point of the range indicated on the front cover of this Prospectus). Excludes: an aggregate of 1,903,500 shares of Class B Common Stock, consisting of (i) 886,390 shares of Class B Common Stock reserved for issuance upon exercise of options outstanding as of the date of this Prospectus under the Company's Long Term Incentive Plan (the "Long Term Incentive Plan"); and (ii) 1,017,110 shares of Class B Common Stock reserved for issuance pursuant to options to be issued in the future under the Long Term Incentive Plan. In the event the over-allotment option is exercised in full, the total number of shares of Class B Common Stock to be outstanding after the Offering would be 6,090,000. See "Business--Acquisitions," "Management," "Shares Eligible for Future Sale" and "Underwriting." RISK FACTORS Prospective investors should carefully consider all the information set forth in this Prospectus and, in particular, should evaluate the specific factors set forth under "Risk Factors" before purchasing shares of Class B Common Stock. 7 11 SUMMARY FINANCIAL DATA The summary Statement of Operations Data, Other Financial Data and Balance Sheet Data as of and for the years ended December 31, 1994, 1995 and 1996 have been derived from the Consolidated Financial Statements of the Company included elsewhere in this Prospectus, which were audited by Ernst & Young LLP, independent auditors. The summary Statement of Operations Data, Other Financial Data and Balance Sheet Data for the period from February 12, 1993 (Inception) to December 31, 1993 have been derived from unaudited Consolidated Financial Statements of the Company which are not included herein. This information should be read in conjunction with "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements included elsewhere in this Prospectus.
FEBRUARY 12, 1993 FISCAL YEAR ENDED (INCEPTION) TO DECEMBER 31, DECEMBER 31, -------------------------------------------- 1993 1994 1995 1996 ----------------- ------------ ----------- ----------- (in thousands, except share, per share and other operating data) STATEMENT OF OPERATIONS DATA: Telecommunications revenue............................ $ 2,085 $ 12,775 $ 27,643 $ 36,550 Costs and expenses: Cost of telecommunications services................. 1,367 8,907 20,075 29,880 Selling expenses.................................... 349 1,687 2,579 3,800 General and administrative expenses................. 2,848 5,173 5,349 8,804 Non cash compensation............................... -- -- -- 2,718 Depreciation and amortization....................... 32 100 395 714 -------- -------- -------- -------- Total costs and expenses.............................. 4,596 15,867 28,398 45,916 -------- -------- -------- -------- Loss from operations.................................. (2,511) (3,092) (755) (9,366) Other income (expense) and minority interest(1)....... -- (315) 57 14 Equity in net loss of foreign joint venture(2)........ -- -- (703) (1,453) -------- -------- -------- -------- Net loss.............................................. $ (2,511) $ (3,407) $ (1,401) $ (10,805) ======== ======== ======== ======== Net loss per common share(3).......................... $ (0.33) $ (0.45) $ (0.19) $ (1.43) Weighted average common shares and equivalents........ 7,546,805 7,546,805 7,546,805 7,546,805 OTHER FINANCIAL DATA: EBITDA(4)............................................. $ (2,479) $ (3,307) $ (1,006) $ (10,091) Net cash (used in) operating activities............... (1,529) (1,669) (74) (1,620) Net cash (used in) investing activities............... (293) (318) (2,219) (3,754) Net cash provided by financing activities............. 1,875 2,252 2,396 6,045 Capital expenditures and investments.................. 293 304 2,080 3,537 OTHER OPERATING DATA: Billable minutes(5)................................... -- 11,930,671 32,758,910 53,501,247 Customers(6).......................................... 4,107 9,118 12,378 15,683 Switching facilities.................................. 1 1 3 4
AS OF DECEMBER 31, 1996 AS OF --------------------------- DECEMBER 31, AS 1995 ACTUAL ADJUSTED(7) ------------ ----------- ----------- BALANCE SHEET DATA: Working capital (deficit)............................. $ (2,584) $ (6,504) $ 57,588 Property and equipment, net........................... 1,974 5,194 5,598 Total assets.......................................... 7,003 13,880 87,670 Stockholders' (deficit) equity........................ (1,838) (2,338) 68,972
(footnotes on following page) 8 12 NOTES TO SUMMARY FINANCIAL DATA (1) The expense reported for the year ended December 31, 1994 is primarily the result of an arbitration award paid by the Company in connection with a 1994 contract dispute. See note 5 to the Consolidated Financial Statements. (2) This item represents the Company's equity in the net loss of its joint venture with Asahi Telecom. In March 1997, pursuant to the A.T. NET Agreements, the Company sold its interest in the joint venture to Asahi Telecom. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Japan and Asahi Telecom." (3) Net loss per common and common equivalent share is based on the weighted average number of shares of common stock outstanding during each period, as adjusted for the effects of the application of Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 83. Pursuant to SAB No. 83, options granted within one year of the Company's initial public offering which have an exercise price less than the initial public offering price are treated as outstanding for all periods presented (using the treasury method at the initial public offering price) even though the effect is to reduce the loss per share. (4) As used herein, "EBITDA" consists of earnings before interest, income taxes, depreciation and amortization. EBITDA is a measure commonly used in the telecommunications industry to analyze companies on the basis of operating performance. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as a measure of performance nor as an alternative to cash flow as a measure of liquidity. (5) Billable minutes are those minutes of call traffic for which a customer of record is billed by the Company. The number of billable minutes for the period from February 12, 1993 (Inception) to December 31, 1993 is not available. (6) Information presented as of the end of the period indicated. (7) As adjusted to give effect to the Offering and the application of the estimated net proceeds therefrom and the issuance of 340,000 shares of Class B Common Stock in connection with the Acquisitions. See "Use of Proceeds," "Capitalization" and "Business -- Acquisitions." 9 13 RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Class B Common Stock offered hereby. The discussion in this Prospectus contains forward looking statements that involve risks and uncertainties. Statements contained in this Prospectus that are not historical facts are forward looking statements. A number of important factors could cause the Company's actual results to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. LIMITED OPERATING HISTORY; HISTORY OF NEGATIVE EBITDA; ACCUMULATED DEFICIT AND INCREASING OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company commenced operations in 1993 and has only a limited operating history upon which potential investors may base an evaluation of its performance. Accordingly, the Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early development. To date, the Company has incurred negative EBITDA and substantial and increasing net losses. EBITDA for the years ended December 31, 1996, 1995 and 1994 was negative $10.5 million, negative $1.0 million and negative $3.3 million, respectively. The Company has accumulated net losses from inception in February 1993 through December 31, 1996, of $19.3 million. Losses have resulted principally from operating losses including costs incurred in the development and expansion of the TelePassport Network and the infrastructure necessary for the anticipated growth of the Company's business. The Company expects to continue to incur losses and development and expansion costs at least through the year 2000 while it further develops the TelePassport Network. There can be no assurance that the Company will ever achieve profitability. In addition, none of the operating losses that have accumulated prior to the date of this Prospectus are available to be carried forward to offset profits, if any, in future periods for Federal income tax purposes. The Company's future operating results will be subject to annual and quarterly fluctuations due to several factors, certain of which are outside the control of the Company. These factors include the effects of governmental regulation and regulatory changes, the introduction of new products and services by the Company and its competitors, the mix of products and services sold and the mix of channels through which those products and services are sold, general economic conditions, specific economic conditions in the telecommunications industry, user demand, the cost of developing and expanding the TelePassport Network (including any unanticipated costs associated therewith), pricing strategies for competitive products and services and changes in technology. As a result of the foregoing factors, the Company may in the future experience materially adverse results. In such event, the price of the Company's Class B Common Stock would likely be materially adversely affected. As a strategic response to a changing competitive environment, the Company may elect from time to time to make certain pricing, service or marketing decisions or enter into acquisitions, investments and strategic alliances that could have a material adverse effect on the Company's business, financial condition and results of operations. See "--Risks Associated with Acquisitions, Investments and Strategic Alliances," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Services." SUBSTANTIAL CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING TO COMPLETE NETWORK EXPANSION; UNCERTAINTY OF ADDITIONAL FINANCING; BROAD DISCRETION OVER USE OF PROCEEDS In the future, the Company will require capital significantly in excess of historical levels to fund the upgrade and expansion of the TelePassport Network, the acquisition of businesses or investment in joint ventures and strategic alliances and working capital and general corporate purpose requirements, including general and administrative expenses and the funding of operating losses. The exact amount of the Company's future capital requirements, however, will depend upon many factors, including the cost, timing and extent of upgrading and expanding the TelePassport Network, the expansion of existing services and the development of 10 14 new services, the Company's ability to penetrate new markets, regulatory changes, the status of competing services, the magnitude of potential acquisitions, investments and strategic alliances; and the Company's results of operations. Individually or collectively, variances in these and other factors could cause material changes in the Company's actual capital requirements. The Company currently estimates that the net proceeds of the Offering, together with equipment financing, will be sufficient to finance its capital requirements through the end of 1998. The Company plans to install up to 30 additional switching facilities during the next three years. The net proceeds of the Offering, however, will not be sufficient to fund all 30 planned switching facilities. After the end of 1998, or sooner if conditions make it necessary, the Company will be required to seek additional debt or equity financing to fund its capital requirements. Such financing potentially includes equity financing which may be dilutive to stockholders. It is likely that any debt financing would restrict the Company's ability to make acquisitions, borrow from other sources and pay dividends to stockholders, in certain cases. The Company does not currently have any commitments for any additional equity or debt financing and there can be no assurance that any financing will be available to the Company or, if available, that it can be obtained on terms acceptable to the Company. To the extent unexpected expenditures arise or the Company's estimates of its capital requirements prove to be inaccurate, the Company may require such additional financing sooner than anticipated and in amounts greater than current expectations. Failure to obtain additional financing will require the Company to delay, reduce the scope of, or stop the expansion of the TelePassport Network and otherwise materially reduce its operations, and would likely have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Approximately $23.5 million, 34.4% of the estimated net proceeds of the Offering, have been allocated for general corporate and working capital purposes. Due to the number and variability of factors that will be analyzed before the Company determines how to use such net proceeds, the Company will have broad discretion in allocating a significant portion of the net proceeds from the Offering without any action or approval of the Company's stockholders. Accordingly, investors will not have the opportunity to evaluate the economic, financial and other relevant information which will be considered by the Company in determining the application of such net proceeds. See "Use of Proceeds." SUBSTANTIAL GOVERNMENT REGULATION General The international telecommunications industry is subject to international treaties and agreements, and to laws and regulations which vary from country to country. Enforcement and interpretation of these laws and regulations can be unpredictable and are often subject to informal views of government officials and ministries that regulate telecommunications in each country. In some cases, such government officials and ministries are subject to influence by the ITO. In some countries where the Company operates or plans to operate, local laws or regulations limit provision of basic international telecommunications service in competition with state-authorized carriers. There can be no assurance that future regulatory, judicial, legislative or political changes will permit the Company to offer to residents of such countries all or any of its services or will not have a material adverse effect on the Company, that regulators or third parties will not raise material issues regarding the Company's compliance with applicable laws or regulations, or that regulatory decisions will not have a material adverse effect on the Company. If the Company is unable to provide the services which it presently provides or intends to provide or to use its existing or contemplated transmission methods due to its inability to obtain or retain the requisite governmental approvals for such services or transmission methods, or for any other reason related to regulatory compliance or lack thereof, such developments could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has pursued and expects to continue to pursue a strategy of providing its services to the fullest extent it believes is permissible under current applicable laws and regulations. For example, the Company provides call reorigination services in certain countries based upon its interpretation that such 11 15 services are not specifically prohibited by the applicable laws and regulations of such countries or that such laws and regulations are unclear or are unenforced. If the Company's interpretation of a country's laws or regulations is found to be incorrect, if a country's laws or regulations are changed or if a country changes its policy regarding enforcement of laws and regulations, the Company may seek to modify its operations in such country so as to comply with its laws or regulations, or it may discontinue provision of service in that country. There can be no assurance that the Company will not be subject to fines or other sanctions as a result of violations of a country's laws or regulations, even if such violations have been or are subsequently corrected. In addition, an incorrect interpretation of a country's applicable laws or regulations, or an incorrect assessment of the likelihood of enforcement of a country's laws or regulations, could cause the Company to lose, or be unable to obtain, regulatory approvals to provide certain of its services or to use certain transmission methods in such country. There can be no assurance that the Company has correctly interpreted or that it will correctly interpret applicable laws and regulations, or that the Company has correctly assessed, or that it will correctly assess in the future, the likelihood of enforcement of applicable laws and regulations, in all countries in which it operates or plans to operate. See "Regulation of the International Telecommunications Industry." Since June 1995, 18 countries have formally notified the Federal Communications Commission (the "FCC") that call reorigination services violate their laws. FCC policy provides that foreign governments that satisfy certain conditions may request FCC assistance in enforcing their laws against call reorigination providers based in the United States. Of these 18 countries, two countries have requested assistance from the FCC in enforcing their prohibitions on call reorigination within their respective territories. The Company has customers in 17 of these countries, including one country that has requested that the FCC take action against the Company. The customers in these 17 countries accounted for an aggregate of approximately 6.0% of telecommunications revenues in 1996. While the FCC has not initiated any action to date, there can be no assurance that it will not take action in the future. The FCC has held that it would consider enforcement action against companies based in the United States engaged in call reorigination by means of uncompleted call signalling in countries where such services are expressly prohibited. Enforcement action could range from an order to cease providing call reorigination services in such country, to the imposition of one or more restrictions on the Company's FCC 214 Authorizations (as defined herein). See "Regulation of the International Telecommunications Industry." In February 1997, the World Trade Organization ("WTO") announced that 69 countries, including the United States, Japan, Switzerland, South Africa and all of the member states of the European Union ("EU"), reached an agreement (the "WTO Agreement") to facilitate competition in telecommunications services. Under the WTO Agreement, beginning in 1998, such countries are expected to allow access to their domestic and international markets to competing telecommunications providers, allow foreign ownership interests in existing telecommunications providers and establish regulatory schemes to develop and implement policies to accommodate telecommunications competition. To join the WTO Agreement, each country submitted a written offer to the WTO agreeing to implement certain changes, which offer was subject to the acceptance by the WTO. Although each of these countries has agreed to make certain changes to increase competition in its respective markets, there can be no assurance that these countries will enact the legislation required to implement the changes set forth in the offers, or implement any legislation which may be enacted, in a timely manner or at all. See "Risk Factors -- Competition" and "Regulation of the International Telecommunications Industry." United States The Company owns and operates an international gateway switching center in New York. The London switching facility and the Tokyo international gateway switching facility are connected to the New York international gateway switching center by international private line circuits ("IPLC") leased from other carriers. In accordance with FCC policy described below, the IPLCs between London and New York are used to provide international switched telecommunications services and the IPLCs between Tokyo and New York are limited to the transmission of signalling information used to initiate call reorigination. The Company's provision of international long distance service between the United States and foreign points is subject to regulation by the FCC. The Company was required to obtain authorizations from the FCC (the "FCC 214 12 16 Authorizations") under Section 214 ("Section 214") of the Communications Act of 1934 (the "Communications Act"). The Company has been granted FCC 214 Authorizations to: (i) provide switched international telecommunications services through the resale of switched services of United States carriers; (ii) provide global facilities-based service between the United States and all international points, except Cuba (currently excluded by the FCC); and (iii) resell international private lines interconnected with the PSTNs in the United States and those countries determined by the FCC to afford resale opportunities equivalent to those available under United States law. To date, such interconnected private line resale has been permitted by the FCC only to four countries: Canada, the United Kingdom, Sweden and New Zealand. The FCC may expand the number of countries to which the Company may provide such services if the FCC determines that additional countries afford equivalent resale opportunities to those available under United States law. The Company has no control over when, or with respect to which countries, the FCC will make any such determinations. The Company's business plan provides for the installation of switching facilities in certain countries which are currently deemed "non-equivalent" by the FCC. The Company plans to connect these facilities, including the Vienna and Japan switching facilities, via IPLCs to its international gateway switching facility in New Jersey (once it becomes operational in mid-1997), interconnecting with PSTNs at both ends. The successful implementation of such a plan depends on the determination by the FCC to classify these countries as equivalent countries. Until such time, the Company will be able to provide service between the United States and those (and all other) non-equivalent countries only through the resale of international switched services or "switched hubbing." Switched hubbing would require the Company to transmit that portion of the call between the non-equivalent country (e.g., Germany) and an equivalent country (e.g., the United Kingdom) via a resold, tariff-based switched service, rather than by IPLC. To the extent that the Company is restricted from carrying traffic over private lines, it will not be able to take advantage of the economies of scale achievable through utilization of fixed-cost private lines. See "Regulation of the Telecommunications Industry." The grant of the Company's FCC 214 Authorization to resell international switched services permits the Company to offer service by means of call reorigination using uncompleted call signalling, subject to certain relevant FCC decisions. The FCC has determined that call reorigination service using uncompleted call signalling does not violate United States or international law, but has held that United States companies providing such services must do so in compliance with the laws of the countries in which they operate. The FCC reserves the right to condition, modify or revoke any FCC 214 Authorization and impose fines for violations of the Communications Act or the FCC's regulations, rules or policies promulgated thereunder, or for violations of the telecommunications laws of certain other countries. The Company believes that it has obtained all authorizations from the FCC required for the conduct of its current operations in the United States, but that it may need additional FCC authorizations in the future. No assurance can be given that the Company will be able to obtain or retain the authorizations necessary to conduct its business in the future. The revocation of any authorization or the denial of, or inability to obtain, additional authorizations could have a material adverse effect on the Company's business, financial condition and results of operations. See "Regulation of the International Telecommunications Industry." The Company is also required to file with the FCC a tariff containing the rates, terms and conditions applicable to its international telecommunications services. The Company has filed a tariff with the FCC. If the Company charges rates other than those set forth in, or otherwise violates, its tariff, the FCC or a third party could bring an action against the Company, which could result in a fine, a judgment or other penalties. The Company is subject to additional regulation under various federal and state laws regarding, among other things, occupational safety, environmental protection and hazardous substance control. The laws and regulations administered by governmental agencies are subject to change and varying interpretation. No assurance can be given that an agency might not assert a claim of noncompliance against the Company. Unanticipated changes in laws or adverse interpretations of regulations could have a material adverse effect on the Company's business, financial condition and results of operations. 13 17 European Union Historically, European countries have prohibited the provision of voice telephony services except by the ITO. The regulation of the telecommunications industry is governed at a supra-national level by the EU. The EU has adopted several pro-competition directives requiring the liberalization of voice telephony and the freedom to create alternative telecommunications infrastructures within the EU member states (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom). The EU has set January 1, 1998, as the deadline for such mandatory liberalization and each EU member state is required to enact its own laws to implement such directives by such time, subject to extensions granted to certain members. There can be no assurance that each EU member state will enact laws that implement the EU directives within the allotted time frame or at all. To the extent the directives are not implemented, or not properly or fully implemented, in a particular member state, the Company will not be able to offer its full range of services or utilize certain transmission or access methods in that country. Each EU member state in which the Company currently conducts business has a different national regulatory scheme and regulatory variations among the member states are expected to continue for the foreseeable future. The requirements for the Company to obtain necessary approvals to offer the full range of telecommunications services, including voice telephony, vary considerably from country to country and there can be no assurance that the Company has received all necessary approvals, filed applications for such approvals, received comfort letters or obtained all necessary licenses from the applicable regulatory authorities, or that it will do so in the future. The Company's failure to obtain necessary approvals could have a material adverse effect on the Company's business, financial condition and results of operations. See "Regulation of the International Telecommunications Industry." In March 1997, the EU's Telecommunications Council approved a directive setting forth general rules regarding the granting of telecommunications licenses. At the request of certain countries, the EU agreed to issue a declaration allowing member states to base their respective license fees on present, as well as estimated future, administrative costs incurred in the management, control and enforcement of individual licenses. As a result of authorizing member states to consider such future administrative costs, license fees in those states that include such expenses may be higher than typical license fees currently charged. To the extent such fees are substantially higher than typical licensing fees, the Company may be required to divert funds originally designated for other uses to the payment of such fees. Alternatively, the Company could curtail its operations in those member states that charge excessive fees. The curtailment of all or a portion of the Company's existing or planned operations in the EU could have a material adverse effect on the Company's business, financial condition and results of operations. See "Regulation of the International Telecommunications Industry." United Kingdom The Company owns and operates a switching facility in London that is connected to the New York international gateway by IPLCs leased by the Company from third parties. In the United Kingdom, the Company offers direct access, call reorigination and services to closed user groups ("CUGs"), as well as customized calling card and prepaid debit card services, and acts as a wholesaler of switched minutes providing international call termination services for other telecommunications carriers and resellers. The Company expects to commence 1-XXX service from the United Kingdom during the second quarter of 1997. The Company's services are subject to the Telecommunications Act 1984 (the "UK Telecommunications Act"). The Secretary of State for Trade and Industry (the "TI Secretary") is responsible for granting telecommunications licenses and the Director General of Telecommunications ("DGT") and his staff, known as the Office of Telecommunications ("Oftel"), the United Kingdom's telecommunications regulatory authority, are responsible for enforcing the conditions of such licenses. In October 1995, the TI Secretary granted to the Company an international simple resale ("ISR") license which allows the Company to offer certain international and national long distance services via connection to the PSTN by leased lines. The loss of the Company's license or the placement of significant restrictions thereon could have a material adverse effect on the Company's operations, financial condition and results of operations. See "Business--Services" and "Regulation of the International Telecommunications Industry." 14 18 To reduce transmission costs associated with leasing IPLCs owned by third parties and to provide additional capacity between the United States and United Kingdom, the Company is exploring the acquisition of one or more indefeasible rights of use ("IRU") in digital undersea fiber optic cable for the transmission of traffic between its London switching facility and its international gateway switching center, which is currently under construction in New Jersey. The Company is required to apply to the TI Secretary to obtain an International Facilities License ("IF License") that would permit it to run international facilities-based voice services over cables in which it has an IRU. The British government has not placed any limit on the number of IF Licenses it will issue, but there can be no assurance that the Company will be granted an IF License. The Company's failure to obtain an IF License would prevent the Company from providing facilities-based services to and from the United Kingdom through its own facilities (e.g., by IRU), would adversely affect the Company's plans and ability to expand its operations and could have a material adverse effect on the Company's operations, financial condition and results of operations. Germany The Company plans to install a switching facility in Frankfurt, Germany, by the end of 1997. The Company intends, subject to FCC rules, to connect this facility by leased IPLCs to its international gateway switching center in New Jersey when it becomes fully operational later this year. The Company presently offers call reorigination and services to CUGs in Germany, as well as customized calling card and prepaid debit card services. Germany is an EU member state and is governed by the EU directives mandating liberalization by January 1998. Upon full deregulation of the German telecommunications market and subject to FCC rules, the Company intends to install additional switching facilities in other metropolitan areas in Germany. The Company plans to connect such additional facilities by IPLCs to its New Jersey international gateway switching center when it becomes fully operational later this year, to provide to the German public international and national long distance telecommunications services, including Voice Telephony, with switched and dedicated access. See "Business--Services." The regulation of the telecommunications industry in Germany is governed by Telekommunikations-gesetz, the Telecommunications Act of 1996 ("TKG"), which, with respect to most of its provisions, became effective in August 1996. Under the TKG, a license ("TKG License") is generally required by any person that: (i) operates transmission facilities for the provision of telecommunications services to the public; or (ii) offers Voice Telephony services to the public through telecommunications networks operated by such provider. While the TKG represents the final phase of the reform of the German telecommunications industry, the law will continue to protect the monopoly rights of Deutsche Telecom AG ("DT") over the provision of Voice Telephony until January 1, 1998. In order to provide the services to the public that the Company intends to provide and expand its network switching facilities in Germany, the Company will be required to obtain a TKG License. Under the TKG, an applicant is entitled to the grant of a license subject to certain public policy considerations set forth in the statute. A license may be revoked if, among other things, continued effectiveness would be contrary to statutory public policy considerations. There can be no assurance that the Company will be able to obtain, or, if granted, thereafter maintain, a TKG License. The failure to obtain, or the loss of, a TKG License or the placement of significant restrictions thereon could have a material adverse effect on the Company's operations, financial condition and results of operations. In addition, there can be no assurance that any future changes in, or additions to, any existing or future German laws, regulations, government policy, court or administrative rulings regarding telecommunications will not have a material adverse effect on the Company's operations, financial condition and results of operations. See "Regulation of the International Telecommunications Industry." Switzerland The Company presently offers call reorigination, services to CUGs and customized calling card and debit card services in Switzerland. The Company's services are subject to the Federal Law on Telecommunications of June 21, 1991 ("LTC"). Under the LTC, the Company is not required to obtain a permit to offer telephone services for CUGs. Although Switzerland is not an EU member state, the Swiss government has expressed its intention to maintain Swiss telecommunications regulations in line with EU directed liberalization. Towards 15 19 that end, on October 1, 1996, the Swiss federal government published a draft law (the "Draft Law") designed to increase competition in the telecommunications industry and to guarantee "universal" services for the entire Swiss population at reasonable prices. The Company plans to install a switching facility in Zurich by the end of 1997. Upon deregulation of the Swiss telecommunications market and subject to FCC rules, the Company plans to expand operations in Switzerland through the installation of additional switching facilities in other metropolitan areas of Switzerland and connect these and the Zurich facility via IPLCs to its international gateway switching center in New Jersey, when it becomes fully operational later this year, to provide international and national long distance services with switched and dedicated access. Under the Draft Law, the Company would not be required to obtain a license unless it controls the infrastructure over which its services are carried. Accordingly, the Company's provision of its existing and intended services would require the Company only to deliver notification of such services to the government. If the Company were to "control" its own infrastructure, as such term may be defined and interpreted, the Draft Law, should it become effective in its current form, would require the Company to obtain a license. The Draft Law requires the government to grant a license if the applicant possesses the technical abilities to offer the services and is able to offer sufficient guarantees that it will comply with Swiss law and regulations. It is anticipated that licenses granted will have a perpetual duration but will be revocable by the government based on a licensee's non-compliance with Swiss telecommunications law. If the Company is required to obtain a license, there can be no assurance it will be able to satisfy the required conditions. If the Company does obtain a license, the loss of such license or the placement of significant restrictions thereon due to the Company's failure to comply with applicable law and regulations, could materially adversely affect the Company's operations, financial condition and results of operations. The Draft Law is currently being reviewed by the Swiss Parliament and there can be no assurance that the Draft Law as currently proposed will be adopted. In addition, there can be no assurance that any future changes in or additions to existing or future Swiss laws, regulations, government policy or administrative rulings regarding telecommunications will not have a material adverse effect on the Company's operations, financial condition and results of operations. See "Business--Services" and "Regulation of the International Telecommunications Industry." Austria The Company owns and operates a switching facility in Vienna, Austria, and presently offers call reorigination in Austria. The Company intends to connect via IPLCs the switching facility in Vienna to the international switching facility in New Jersey when it becomes fully operational later this year, subject to FCC rules. The provision of telecommunications services in Austria is currently subject to the Fernmeldegesetz of 1993, as amended (the "Austrian Telecommunications Act"). In general, the Austrian Telecommunications Act requires a license for the construction and operation of any telecommunications equipment. A license may be refused on the basis of certain public policy rules. The Austrian ITO generally maintains a monopoly over the fixed public telecommunications network and voice telephony. Austria is an EU member state and is governed by EU directives mandating liberalization by 1998. The government is currently considering a new statute incorporating the EU directives to liberalize the provision of Voice Telephony services and infrastructure by January 1998 (the "Austrian Proposed Legislation"). Upon deregulation of the Austrian telecommunications market, the Company intends to expand its switching facility in Vienna to provide international long distance services with switched and dedicated access. Under the Austrian Proposed Legislation, in order to provide the services that the Company intends to provide, the Company would be required to obtain a license (the "Austrian Telecommunications License"). No assurance can be given that the Company would be able to obtain an Austrian Telecommunications License, or that such license would not be revoked or modified. There can be no assurance that the statute as currently proposed will be adopted. In addition, there can be no assurance that any new statute or any future changes in or additions to existing or future Austrian laws, regulations, government policy or administrative rulings regarding telecommunications will not have a material adverse effect on the Company's operations, financial condition and results of operations. See "Business--Services" and "Regulation of the International Telecommunications Industry." 16 20 Japan The Company owns and operates an international gateway switching center in Tokyo that is connected to the New York international gateway switching center by IPLCs leased by the Company currently for the purpose of transmitting signals from Japan to the United States to trigger call reorigination service. In Japan, the Company offers direct access and call reorigination services, as well as customized calling card and debit card services, and acts as a wholesaler of switched minutes providing international call termination services to other telecommunications carriers and resellers. The Company intends to install switching facilities in additional metropolitan areas in Japan connected via leased private lines to provide international and national long distance services with switched and dedicated access. In addition, to reduce transmission costs associated with leasing private lines and to provide additional capacity between the United States and Japan, the Company is exploring the acquisition of one or more IRUs for the transmission of international traffic between its Tokyo switching facility and the Company's international gateway switching center in New Jersey, when it becomes fully operational later this year, subject to FCC rules. The Company's services in Japan are subject to regulation by the Ministry of Posts and Telecommunications (the "Japanese Ministry") under the Telecommunications Business Law (the "Japanese Law"). The Company, through its Japanese subsidiary, has filed notice with the Japanese Ministry as a General Type II carrier which permits it to provide its current international long distance services, customized calling cards and debit cards and to act as a wholesaler. The Company is in the process of seeking a Special Type II registration which will permit the Company to provide additional national and international services in Japan. In addition, the A.T. NET Agreements provide that A.T. NET and Asahi Telecom will enter into arrangements to provide to the Company's customers those services permitted by A.T. NET's Special Type II registration. There can be no assurance that the Company will be able to register with the Japanese Ministry as a Special Type II carrier. The Company's failure to obtain registration as a Special Type II carrier, or any failure to enter into arrangements with A.T. NET and Asahi Telecom, could have an adverse effect on the Company's ability to expand its operations in Japan and could adversely affect the Company's operations, financial condition and results of operations. See "Business--Services; and --Japan and Asahi Telecom" and "Regulation of the International Telecommunications Industry." South Africa The Company presently provides call reorigination and customized calling card and debit card services in South Africa. The Company does not own any switching facilities and does not intend in the near future to provide any facilities-based services in South Africa. The telecommunications industry in South Africa is principally regulated by the Post Office Act of 1958 (the "SA Post Office Act") and the recently enacted Telecommunications Act of 1996 (the "SA Telecommunications Act"). Section 78 of the Post Office Act confers a statutory monopoly on Telkom SA Limited ("Telkom"), a state-owned company, for the construction, maintenance and use of any telecommunications line ("fixed line telephony"). It is anticipated that the government will promulgate regulations during 1997 that will provide for the repeal of Section 78 of the Post Office Act pursuant to Section 106 of the SA Telecommunications Act. Accordingly, while the SA Telecommunications Act ultimately envisages the liberalization of telecommunications in South Africa, Telkom continues to exercise at least a temporary monopoly over fixed line telephony. The Company believes that the SA Post Office Act and the SA Telecommunications Act allow the Company to provide its call reorigination services and that such laws do not require the Company to obtain a license for the provision of such services. A license to operate any telecommunications apparatus must, however, be obtained from the Department of Posts and Telecommunications. The Company believes that its agents in South Africa that supply customers with automatic dialing devices for the provision of the Company's call reorigination services have obtained the required licenses. The loss or limitation of such licenses by the Company's agents could have a material adverse effect on the Company's operations, financial condition and results of operations. No assurance can be given that any future changes in or additions to laws, regulations, government policy or administrative rulings will not have a material adverse effect on the Company's operations, financial condition and results of operations. In addition, if, after the repeal of Section 78 of the SA Post Office Act becomes effective, the Company determines it is required to obtain a license, there can be no assurance that 17 21 the Minister of Posts, Telecommunications and Broadcasting would take the required action of inviting the Company to make a license application. In that case, the Company's failure to obtain a license could have a material adverse effect on the Company's ability to expand its operations in South Africa and could materially adversely affect the Company's operations, financial condition and results of operations. See "Business--Services" and "Regulation of the International Telecommunications Industry." COMPETITION The international telecommunications industry is highly competitive. Competition for customers in the international telecommunications industry is primarily based upon pricing, the type and quality of services offered and customer relationships. Other providers of international long distance telecommunications services include: (i) the ITO in each country; (ii) major international carriers and their global alliances; (iii) secondary alliances of nontraditional carriers which own infrastructure; and (iv) alternative carriers. Other potential competitors include cable television companies, wireless telephone companies, Internet access providers and large end users which have dedicated circuits or private networks. Many of the Company's current or potential competitors have substantially greater financial, marketing and other resources than the Company. If the Company's competitors were to devote significant additional resources to the provision of international long distance telecommunications services to the Company's target customer base of small and medium-sized businesses in the Company's targeted geographic markets, the Company's business, financial condition and results of operations could be materially adversely affected, and there can be no assurance that the Company would be able to compete successfully against such new or existing competitors. The Company believes that competition will continue to intensify as the number of new service providers increases due to the overall growth in the industry and the global trend toward deregulation. In February 1997, the WTO announced that 69 countries, including the United States, Japan, Switzerland, South Africa and all of the member states of the EU, entered into the WTO Agreement, which is expected to result in greater competition from new market entrants and existing telecommunications service providers in such markets. See "-- Substantial Government Regulation" and "Regulation of the International Telecommunications Industry." The Company prices its services primarily by discounting against the prices charged by the ITOs. The Company has no control over the prices set by the ITOs, and some may be able to use their financial resources to cause severe price competition in the geographic markets in which the Company operates. Further, the Company has experienced, and expects to continue to experience, declining revenue per billable minute in many product segments, in part as a result of increasing worldwide competition within the telecommunications industry. If price competition intensifies significantly, the Company's business, financial condition and results of operations could be materially adversely affected. The Company believes that the ITOs generally have certain competitive advantages due to their control over local connectivity and because, in many instances, the ITOs themselves are governmental entities. The Company believes that from time to time it has encountered anti-competitive behavior on the part of certain ITOs. If the Company encounters anti-competitive behavior in countries in which it operates or if the ITO in any country in which the Company operates uses its competitive advantages to the fullest extent, the Company's business, financial condition and results of operations could be materially adversely affected. The major international carriers and the global alliances generally offer their lowest rates and best services primarily to larger, higher-volume businesses and less frequently to the small and medium-sized businesses targeted by the Company's marketing strategy. Secondary alliances generally target their services to compete directly with the global alliances and ITOs and not with the Company. The Company's TelePassport Direct and TelePassport VPN services are targeted, however, primarily at larger volume businesses which may also be targeted by the global and secondary alliances. Furthermore, the Company's marketing efforts toward supra-national and governmental organizations may also compete directly with major international carriers. There can be no assurance that the Company will be able to compete successfully against major international carriers and global alliances and any significant direct competition with such 18 22 carriers and alliances could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Services." In addition, the Company's pricing as a reseller is largely dependent upon the pricing strategy of larger carriers, who supply the Company with switched minutes. To the extent such larger carriers target customers similar to those targeted by the Company, such carriers are also direct competitors of the Company. Accordingly, the business success of a reseller is significantly tied to the pricing policies established by potential competitors. There can be no assurance that favorable pricing policies will be continued by these larger carriers. See "--Reliance on Third Parties for Leased Capacity." Many of the newly emerging competitors are smaller carriers, most of which specialize in offering international telephone services utilizing call reorigination and other alternative access methods. Some of these alternative carriers have begun to build networks which are similar to, or more extensive than, the TelePassport Network. Competition for customers among these small carriers is primarily based on the carrier's reputation and the ability of a carrier to provide quality service at low prices. There can be no assurance that the Company will be able to successfully compete against its competitors in this market segment. See "Business--Business Strategy; and --Competition." POTENTIAL DIFFICULTIES ASSOCIATED WITH IMPLEMENTING TELEPASSPORT NETWORK EXPANSION STRATEGY The successful implementation of its switched access expansion strategy will require the Company, among other things, to continue to expand and develop the TelePassport Network. Expansion and development of the TelePassport Network are necessary to enable the Company to meet customer requirements and to increase the volume of traffic, which is fundamental to achieving economies of scale on the TelePassport Network and to the Company's overall financial success. The Company plans to upgrade existing facilities and add switching facilities in up to 30 cities during the next three years. By the end of 1997, the Company plans to upgrade existing and install additional switching facilities in the New York metropolitan area, the United Kingdom, Austria and Japan and install switching facilities in Frankfurt, Milan, Naples, Paris and Zurich. The expansion of the TelePassport Network and the number of cities in which the Company actually installs switching facilities will depend upon many factors, including the availability of additional capital, cost, regulatory developments, the Company's ability to penetrate new markets, competition and the Company's results of operations. There can be no assurance that the Company will be able to add services, upgrade or install switching facilities in all 30 cities as currently planned or expand its geographic markets to include all or any of such locations, that existing regulatory barriers to its current or future operations will be reduced or eliminated or that the Company will be able to expand and develop the TelePassport Network successfully. The Company may be required to decrease the number or change the mix of locations presently targeted for expansion of the TelePassport Network. See "--Substantial Government Regulation; and --Substantial Capital Requirements; Need for Additional Financing to Complete Network Expansion; Uncertainty of Additional Financing; Broad Discretion Over Use of Proceeds," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." To originate and terminate calls on the TelePassport Network, the Company requires "interconnection" with one or more carriers that provide access and egress into and from the PSTN in those cities in which the Company owns switching facilities. Although the Company has been successful to date in obtaining interconnect agreements, there can be no assurance that the Company will be able to maintain such agreements or obtain additional agreements as the Company expands the TelePassport Network into additional countries. See "--Competition." In addition, concurrently with its anticipated expansion, the Company may from time to time experience general problems affecting the quality of the voice and voice band data transmission of some calls transmitted over the TelePassport Network, which could result in poor quality voice transmission and interruptions in service. To provide redundancy in the event of technical difficulties with the TelePassport Network, the Company relies upon other carriers' networks. To the extent that such difficulties occur and calls are 19 23 transmitted over other carriers' networks rather than over the TelePassport Network, these calls will be more costly to the Company. Failure to implement successfully the Company's switched access expansion strategy, which is a key element of its overall business strategy, or future problems with interconnection, quality of service or redundancy, would have a material adverse effect on the Company's business, financial condition and results of operations. See "--Substantial Government Regulation," "--Competition," "--Risks Associated with International Operations" and "Business--Business Strategy; --The TelePassport Network; and --Competition." RAPID CHANGES IN TECHNOLOGY AND CUSTOMER REQUIREMENTS The telecommunications industry is characterized by rapid and significant technological advancements and introductions of new products and services utilizing new technologies. As new technologies develop, the Company may be placed at a competitive disadvantage, and competitive pressures may force the Company to implement such new technologies at substantial cost. In addition, competitors may implement new technologies before the Company is able to implement such technologies, allowing such competitors to provide enhanced services and quality, or services at more competitive costs, compared with that which the Company is able to provide. There can be no assurance that the Company will be able to respond to such competitive pressures and implement such technologies on a timely basis or at an acceptable cost. One or more of the technologies currently utilized by the Company, or which it may implement in the future, may not be preferred by its customers or may become obsolete. If the Company is unable to respond to competitive pressures, implement new technologies on a timely basis, penetrate new markets in a timely manner in response to changing market conditions or customer requirements, or if new or enhanced services offered by the Company do not achieve a significant degree of market acceptance, the Company's business, financial condition and results of operations could be materially adversely affected. RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND IMPLEMENTATION OF GROWTH STRATEGY The Company's rapid growth has placed, and is expected to continue to place, a significant strain on the Company's administrative, operational and financial resources and has increased demands on its systems and controls. The Company's strategy is to continue its growth by expanding its service offerings and principal geographic markets in the United Kingdom, Germany, Austria, Switzerland and other targeted areas of Europe, in Japan and other targeted Asian countries and in certain countries of southern Africa. If the Company is successful in increasing its services and expanding its markets, there will be additional demands on the Company's customer support, marketing, distribution and other operational and administrative resources and systems and the Company's network infrastructure. To accommodate its growth strategy, the Company will be required to invest additional capital and resources to enhance its information systems by replacing or upgrading certain existing systems and integrating new systems. In addition, the Company will be required to hire a substantial number of additional management and other employees in the United States and abroad. There can be no assurance that the Company's administrative, operational, infrastructure and financial resources and systems will be adequate to maintain and effectively monitor future growth. There can also be no assurance that the Company will be successful in hiring qualified personnel to implement its growth strategy or that it will be able to rapidly and efficiently integrate its new personnel with its existing workforce. The failure to continue to upgrade the Company's information services and infrastructure or the occurrence of unexpected expansion difficulties could have a material adverse effect on the Company's business, financial condition and results of operations. See "--Potential Difficulties Associated With Implementing TelePassport Network Expansion Strategy" and "--Dependence on Effective Information Systems." RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES As part of its growth strategy, the Company pursues acquisitions of businesses, agents or customer bases, and investments in, and strategic alliances with, entities that complement or expand the Company's current operations or capabilities. In March 1997, the Company entered into the A.T. NET Agreements governing its strategic relationship with Asahi Telecom and investment in A.T. NET. There can be no assurance that the 20 24 A.T. NET Agreements will result in increased sales or an expanded customer base for the Company or enable the Company to effectively penetrate its targeted markets in Asia. In addition, the Company has entered into agreements to acquire TelePassport Germany and TelePassport Austria concurrently with the closing of the Offering. There can be no assurance that the Agent Acquisitions will result in increased sales or an expanded customer base for the Company. Pursuant to the Intelenet Agreement, the Company acquired an option to purchase the customer accounts and certain telecommunications equipment from a reseller of telecommunications services principally in Milan and Naples, Italy. The Company has also entered into an agreement to acquire HCL, an alternative network access consultant and installer of PBXs in the United Kingdom. There can be no assurance that such acquisitions will enable the Company to effectively penetrate the Italian market or result in increased sales in the United Kingdom. Further, the Company is continuously evaluating other potential investment opportunities but no assurance can be given that the Company will enter into any additional understandings, commitments or agreements with respect to any acquisition, investment, strategic alliance or related effort. Any acquisitions, investments, strategic alliances or related efforts will be accompanied by the risks commonly encountered in such transactions or efforts. Such risks include, among others, the identification of appropriate candidates, the assimilation of operations and personnel of the respective entities, the potential disruption of the Company's ongoing business, the inability of management to capitalize on the opportunities presented by acquisitions, investments, strategic alliances or related efforts, the failure to successfully incorporate licensed or acquired technology and rights into the Company's services, the inability to maintain uniform standards, controls, procedures and policies and the impairment of relationships with employees and customers as a result of changes in management or otherwise. Further, to the extent that any such transaction involves operations located outside the United States, the transaction would involve the risks associated with international operations, including regulatory obstacles. There can be no assurance that the Company would be successful in overcoming these risks or any other difficulties encountered with respect to such acquisitions, investments, strategic alliances or related efforts. See "--Potential Difficulties Associated With Implementing TelePassport Network Expansion Strategy," "--Risks Associated with International Operations" and "Business--Business Strategy; and --Acquisitions." RELIANCE ON THIRD PARTIES FOR LEASED CAPACITY The Company does not currently own any of the telecommunications transmission lines that connect the TelePassport Network. As a result, the Company must lease its transmission facilities from facilities-based carriers, all of which are potential competitors of the Company. The Company currently leases IPLCs from MCI Communications Corporation ("MCI"), British Telecommunications plc ("BT"), International Digital Communications Inc. ("IDC") and the respective ITO in each country in which the Company has a switching facility. The Company's profitability depends, in part, on its ability to obtain and utilize leased capacity on a cost-effective basis. Generally, the Company leases lines pursuant to one-year leases. Because rates for international transmission lines are continuing to fall, the Company has not made, and has no current intention to make, leases of longer duration with any providers. Although the Company believes that it has and will continue to enjoy favorable arrangements with the facilities-based carriers from which it leases transmission lines, there can be no assurance that such arrangements will continue or that leased capacity will continue to be available at cost-effective rates. See "Business--Services; and --The TelePassport Network." FOREIGN EXCHANGE RATE RISKS The Company currently bills primarily in United States Dollars and generally is paid by customers outside of the United States either in United States Dollars or in local currency at predetermined exchange rates. As the Company's business develops and expands, the Company anticipates that in many countries it may bill and receive payment in local currency at prevailing exchange rates. Substantially all of the costs of acquisition and upgrade of the Company's switching facilities and expansion of the TelePassport Network have been, and will continue to be, denominated in United States Dollars. Any appreciation of the value of the United States Dollar relative to the local currency may place the Company at a competitive disadvantage by effectively making its services more expensive as compared to those of its competitors located in such country, including the ITO. Any depreciation of the value of the United States Dollar relative to the local currency may adversely affect the Company by effectively increasing the cost of the Company's capital expenditures 21 25 made in such local currency. While the Company monitors exposure to currency fluctuations, and may, as appropriate, use certain financial hedging instruments in the future, there can be no assurance that the use of financial hedging instruments will successfully offset exchange rate risks, or that such fluctuations will not have a material adverse effect on the Company's business, results of operations and financial condition. See "--Risks Associated with International Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS ASSOCIATED WITH IMPOSITION OF VAT ON COMPANY'S SERVICES The Company believes it is not currently required to charge value-added taxes ("VAT") on telecommunications services provided to its EU customers. VAT is a tax on goods and services designed to be borne by the ultimate consumer end user of such goods and services. The rate of VAT varies among EU member states but is typically between 15% and 20% of the cost of the goods or services. In general, under VAT rules, most businesses are permitted to offset the VAT charged to them with the VAT that they charge to their customers, while residential customers and certain categories of businesses, such as banks and insurance companies, cannot offset the VAT and therefore must bear the cost of the tax. Pursuant to the Sixth EC VAT Directive adopted in 1977 (the "VAT Directive"), providers of telecommunications services in the EU are liable for VAT in the EU member state where the supplier of the services is established. The Company believes that, as a supplier located in the United States, its services are not currently subject to VAT. Many of the Company's EU based competitors, however, including the ITOs, are required to charge VAT. As a result, the Company has had a competitive price advantage over competitors in the EU who are required to charge VAT for telecommunications services with respect to residential customers, certain categories of businesses that are not permitted to offset VAT and businesses that are unable to offset the entire VAT for which they are liable. The EC has proposed legislation, to be followed no later than 1999 by an amendment to the VAT Directive, to specifically impose VAT on telecommunications services supplied within the EU by carriers based outside of the EU. Until such time as the final legislation is adopted, the EC has proposed interim rules allowing EU member states to make the European purchasers of the services liable for the VAT and to collect VAT directly from such users, which, in almost all cases, is expected to be businesses. Under the interim rules, EU based businesses that purchase telecommunications services from non-EU based carriers will be required to self-account for VAT on such services and pay VAT directly to the authorities, except to the extent that businesses can offset the VAT. Germany has already begun to collect VAT from users of such services effective January 1, 1997. After the amendment to the VAT Directive is adopted, all EU member states will be required to adopt rules implementing the amended VAT directive and all non-EU based carriers supplying services to users located in the EU will be required to register in one or more EU member states and collect and pay the VAT themselves. To the extent that the Company's services are, and in the future become, subject to VAT, the Company's competitive price advantage with respect to those EU businesses and other customers required to pay VAT will be reduced. Such reduction could have an adverse effect on the Company's business, financial condition and results of operations. See "--Substantial Government Regulation" and "Regulation of the International Telecommunications Industry." RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS There are certain risks inherent in an international business, including regulatory limitations restricting or prohibiting the offering of the Company's services, unexpected changes in regulatory requirements, tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, political risks, fluctuations in currency exchange rates, foreign exchange controls which restrict or prohibit repatriation of funds, technology export and import restrictions or prohibitions, delays from customs brokers or government agencies, seasonal reductions in business activity in certain parts of the world and potentially adverse tax consequences resulting from operating in multiple jurisdictions with differing tax laws. Depending on the countries involved, any or all of the foregoing factors could have a material adverse effect on the Company's business, financial condition and results of operations. 22 26 In addition, there can be no assurance that laws or administrative practices relating to telecommunications, taxation, foreign exchange or other matters in countries in which the Company operates will not change. Any such change could have a material adverse effect on the Company's business, financial condition and results of operations. See "--Substantial Government Regulation," "--Competition," "--Risks Associated with Imposition of VAT on Company's Services," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Regulation of the International Telecommunications Industry." DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS While the Company believes that its information systems are sufficient for its current operations, such systems will require enhancements, replacements and additional investments to continue their effectiveness in the future, particularly to enable the Company to manage an expanded TelePassport Network. There can be no assurance that the Company will not encounter difficulties in enhancing its systems or integrating new technology into its systems. The inability of the Company to implement any required system enhancement, to acquire new systems or to integrate new technology in a timely and cost effective manner could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Business Strategy; and --Information Systems." PROTECTION OF PROPRIETARY TECHNOLOGY AND INFORMATION The Company relies on trade secrets, know-how and continuing technological advancements to maintain its competitive position. Although the Company has entered into confidentiality and invention agreements with certain of its employees and consultants, no assurance can be given that such agreements will be honored or that the Company will be able to effectively protect its rights to its unpatented trade secrets and know-how. Moreover, no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets and know-how. See "Business--The TelePassport Network; and --Information Systems." DEPENDENCE ON QUALIFIED PERSONNEL The success of the Company is dependent upon its ability to hire and retain qualified management, technical, marketing, financial and other personnel. The Company competes for such personnel with companies that have greater financial and other resources. Accordingly, no assurance can be given that the Company will be successful in hiring additional or retaining qualified personnel. Further, the Company's business is currently managed by a small number of key management and operating personnel. The loss of the services of such personnel as a group could have a material adverse impact on the Company's business. The Company does not maintain, nor is it currently contemplating obtaining, "key man" life insurance policies on any of its employees. See "Management." CONTROL BY PRINCIPAL STOCKHOLDERS The Company's Class A Common Stock is entitled to ten votes per share and the Company's Class B Common Stock, which is being sold in the Offering, is entitled to one vote per share. Upon completion of the Offering, the Company's current stockholders collectively will own 100% of the outstanding Class A Common Stock, which will represent 92.7% of the combined voting power of the Company (91.8% if the over-allotment option is exercised in full). Accordingly, the holders of the Class A Common Stock will have the ability to elect all of the Company's directors and to control the outcome of substantially all other issues submitted to the Company's stockholders. See "Principal Stockholders" and "Description of Capital Stock." IMMEDIATE SUBSTANTIAL DILUTION The Company's present stockholders acquired their shares of the Company's Common Stock at costs substantially below the anticipated offering price of the Class B Common Stock to be sold in the Offering. Therefore, investors purchasing Class B Common Stock in the Offering will incur an immediate and substantial dilution in net tangible book value per share. See "Dilution." 23 27 NO DIVIDENDS The Company has not paid dividends on the Class A or the Class B Common Stock since inception and does not anticipate paying any dividends to its stockholders in the foreseeable future. The declaration and payment of any dividends in the future will be determined by the Board of Directors, in its discretion, and will depend upon the Company's earnings, capital requirements, financial condition and other relevant factors. In addition, any future bank or other financing may restrict the Company's ability to declare and pay dividends. See "--Substantial Capital Requirements; Uncertainty of Additional Financing; Broad Discretion Over Use of Proceeds; A.T. NET's Future Capital Requirements" and "Dividend Policy." SHARES ELIGIBLE FOR FUTURE SALE Future sales of shares of Common Stock by existing stockholders pursuant to Rule 144 ("Rule 144") promulgated under the Securities Act of 1933 (the "Securities Act"), or otherwise, could have an adverse effect on the price of the shares of Class B Common Stock. Upon completion of the Offering and after giving effect to the Acquisitions, the Company will have 12,690,000 shares of Common Stock outstanding (13,440,000 shares if the over-allotment option is exercised in full). In addition, the Company has reserved for issuance 886,390 shares of Class B Common Stock upon exercise of options granted under the Long Term Incentive Plan. The 5,000,000 shares of Class B Common Stock offered in the Offering (5,750,000 if the over-allotment option is exercised in full) will be freely transferable without restriction or further registration under the Securities Act except for any shares purchased by an "affiliate" of the Company within the meaning of Rule 144. The 7,350,000 outstanding shares of Class A Common Stock will be "restricted securities," as that term is defined in Rule 144, and may only be sold pursuant to a registration statement under the Securities Act or an applicable exemption from registration thereunder, including exemptions provided by Rule 144. No prediction can be made as to the effect that future sales of Class A or Class B Common Stock, or the availability of shares of Class A or Class B Common Stock for future sales, will have on the market price of the Class B Common Stock prevailing from time to time. Sales of substantial amounts of Class A or Class B Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Class B Common Stock and could impair the Company's ability to raise capital through the future sale of equity securities. The Company, its officers, directors and all existing holders of Common Stock have agreed that, for a period of 180 days after the date of this Prospectus, they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any shares of Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock, or disclose the intention to make any such offer, sale, pledge, disposal or filing, without the prior written consent of Credit Suisse First Boston Corporation, except, in the case of the Company, issuances pursuant to the Long Term Incentive Plan. See "Management," "Principal Stockholders," "Shares Eligible for Future Sale" and "Underwriting." ANTI-TAKEOVER CONSIDERATIONS The voting rights contained in the Class A Common Stock, which grant the holders thereof ten votes per share, are intended to enhance the likelihood of continuity and stability in the composition of the Company's Board of Directors and may have the effect of delaying, deterring or preventing a future takeover or change in control of the Company unless such takeover or change in control is approved by the Company's Board of Directors, even though such a transaction may offer the holders of Class B Common Stock the opportunity to sell such shares of Class B Common Stock at a price above the then prevailing market price. Such voting rights may also render the removal of directors and management more difficult. In addition, the Company's Amended and Restated Certificate of Incorporation authorizes the issuance of 1,000,000 shares of undesignated preferred stock issuable by the Board of Directors (the "Preferred Stock") in such series, and with such designations, rights and preferences, as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without obtaining stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Common Stock. The issuance of such Preferred Stock, depending upon the rights, designations, preferences, qualifications, limitations and 24 28 restrictions thereof, may have the effect of delaying, deterring or preventing a change in control of the Company or may otherwise adversely affect the interests of holders of Common Stock. The issuance of Preferred Stock, for example, could decrease the amount of earnings or assets available for distribution to holders of Common Stock or could adversely affect the rights and powers, including voting rights, of the holders of the Common Stock. In addition, certain provisions of the Delaware General Corporation Law prevent certain stockholders from engaging in business combinations with the Company, subject to certain exceptions. See "Description of Capital Stock--Common Stock; --Preferred Stock; and --Delaware Law and Certain Charter and By-Law Provisions." Further, the new employment agreement to be executed with Mr. Pearson will contain provisions which will require the Company to make certain payments to Mr. Pearson in certain instances if his employment is terminated following a "Change in Control" (as defined therein). In the event of a Change of Control of the Company (as defined in the Long Term Incentive Plan), all Incentive Awards (as defined therein) under the Long Term Incentive Plan will become immediately vested and exercisable. The employment agreement and Long Term Incentive Plan provisions may have the effect of delaying, deterring or preventing a change of control of the Company, may discourage bids for outstanding shares of Class B Common Stock and may adversely affect the market price of the Class B Common Stock. See "Management--Employment Agreements; and -- Long Term Incentive Plan." ABSENCE OF PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public trading market for the Class B Common Stock and there can be no assurance that an active public market for the Class B Common Stock will develop or continue following the Offering. The initial public offering price of the Class B Common Stock will be determined by negotiation between the Company and Credit Suisse First Boston Corporation and may not necessarily bear any relationship to the Company's assets, book value, revenues or other established criteria of value, and should not be considered indicative of the price at which the Class B Common Stock will trade after completion of the Offering. There can be no assurance that the market price of the Class B Common Stock will not decline below the initial public offering price. See "Underwriting." Trading volume and prices for the Class B Common Stock could be subject to wide fluctuations in response to quarterly variations in operations, financial results, announcements with respect to sales and earnings, technological innovations, new product developments, the sale or attempted sale of a large amount of securities in the public market, regulatory developments and other events or factors which cannot be foreseen or predicted by the Company. In addition, various factors affecting companies in the international telecommunications industry generally may have a significant impact on the market price of the Class B Common Stock, as well as price and volume volatility affecting such companies, in general, and not necessarily related to the operating performance of such companies. 25 29 USE OF PROCEEDS The net proceeds to the Company from the Offering are estimated to be approximately $68.3 million ($78.7 million if the over-allotment option is exercised in full) after deducting underwriting discounts and commissions and estimated expenses of the Offering payable by the Company. The Company intends to use approximately $40 million of the net proceeds for network upgrade and expansion, including the installation of switching facilities and investments in fiber optic cable, and $5 million for integration of distribution through acquisitions, for acquisitions of businesses or for investments in joint ventures or strategic alliances (including the Acquisitions and $3.0 million for the acquisition of a 10% interest in A.T. NET). Although the Company is continuously evaluating other potential investment opportunities, it does not have, nor can any assurance be given that it will have, any understanding, commitment or agreement with respect to any other acquisition, investment, strategic alliance or related effort. In addition, $1.0 million of the net proceeds will be used for research and development, and the balance of the net proceeds ($23.3 million) will be used to fund working capital requirements and for other general corporate purposes including general and administrative expenses and the funding of operating losses. If the over-allotment option is exercised in full, additional net proceeds ($10.4 million) will be added to the Company's working capital. Pending application of the net proceeds described herein, such amounts will be invested in short-term investment grade securities. See "Risk Factors--Substantial Capital Requirements; Uncertainty of Additional Financing; Broad Discretion Over Use of Proceeds; and --Potential Difficulties Associated With Implementing TelePassport Network Expansion Strategy." For a discussion of the Company's future capital requirements and the sources of funds therefor over the next three years, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DIVIDEND POLICY The Company has never declared or paid cash dividends on its Class A or Class B Common Stock and currently intends to retain future earnings, if any, to finance the development and continued expansion of its business. Accordingly, the Company does not anticipate paying any cash dividends in the foreseeable future. Any future determination with respect to the payment of dividends will be within the sole discretion of the Company's Board of Directors and will depend upon, among other things, the Company's financial condition, results of operations and such other factors as the Board of Directors deems relevant. In addition, any future bank or other financing may restrict the Company's ability to declare and pay dividends. 26 30 DILUTION Dilution is the amount by which the initial public offering price paid by the purchasers of shares of Class B Common Stock in the Offering exceeds the net tangible book value per share of Common Stock after the Offering. The net tangible book value per share of Common Stock is determined by subtracting the total liabilities of the Company from the total book value of the tangible assets of the Company and dividing the difference by the number of shares of Common Stock deemed to be outstanding on the date as of which such book value is determined. As of December 31, 1996, the Company had a (deficit in) net tangible book value of $(3.0) million, or $(.41) per share of Common Stock. Assuming that the sale of the shares of Class B Common Stock hereunder had occurred on December 31, 1996 and without taking into account any change in net tangible book value after December 31, 1996, other than the sale of the shares of Class B Common Stock in the Offering, the pro forma net tangible book value of the Company as of December 31, 1996 would have been approximately $65.2 million or $5.28 per share of Common Stock (assuming that the initial public offering price of the Class B Common Stock is the mid-point of the range indicated on the front cover of this Prospectus). See "Capitalization." This represents an immediate increase in tangible book value of $5.69 per share of Common Stock held by existing holders of shares of Common Stock and an immediate dilution of $9.72 per share of Class B Common Stock to new investors. The following table illustrates this dilution per share of Common Stock (assuming that the initial public offering price of the Class B Common Stock is the mid-point of the range indicated on the front cover of this Prospectus): Assumed initial public offering price per share of Class B Common Stock............................................................. $15.00 (Deficit in) net tangible book value per share of Common Stock at December 31, 1996................................................. $(.41) Increase in net tangible book value per share of Class B Common Stock attributable to the Offering................................ 5.69 ----- Pro forma net tangible book value per share of Common Stock after the Offering...................................................... 5.28 ------ Dilution per share of Common Stock to new investors................. $ 9.72 ======
If the over-allotment option is exercised in full, the pro forma net tangible book value per share of Common Stock after giving effect to the Offering would be $5.78 per share, the increase in net tangible book value per share would be $6.19 and the dilution to persons who purchase shares of Class B Common Stock in the Offering would be $9.22 per share (assuming that the initial public offering price of the Class B Common Stock is the mid-point of the range indicated on the front cover of this Prospectus). The following table sets forth, on a pro forma basis as of December 31, 1996, the differences between the existing stockholders and the new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid, and the percentage of equity interest in the Company represented thereby (assuming that the initial public offering price of the Class B Common Stock is the mid-point of the range indicated on the front cover of this Prospectus):
SHARES PURCHASED TOTAL CONSIDERATION ---------------------- ----------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders...... 7,350,000 59.5% $13,074,000 14.8% $ 1.78 New investors.............. 5,000,000 40.5 75,000,000 85.2 15.00 ---------- ----- ----------- ----- Total.................... 12,350,000 100.0% $88,074,000 100.0% ========== ===== =========== =====
The foregoing table excludes the exercise of all stock options issued prior to the date of this Prospectus under the Long Term Incentive Plan and the issuance of shares in connection with the Acquisitions. To the extent that any options granted or to be granted are exercised in the future at prices which are below the initial public offering price, there will be further dilution to new investors. See "Management--Long Term Incentive Plan." 27 31 CAPITALIZATION The following table sets forth the actual capitalization of the Company as of December 31, 1996, and as adjusted to give effect to the Offering and the application of the estimated net proceeds therefrom (assuming that the initial public offering price of the Class B Common Stock is the mid-point of the range indicated on the front cover of this Prospectus). See "Use of Proceeds." The information set forth below should be read in conjunction with "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements included elsewhere in this Prospectus.
AS OF DECEMBER 31, 1996 --------------------------------------- ACTUAL AS ADJUSTED ----------------- ----------------- (dollars in thousands) Cash...................................... $ 1,088 $ 65,888 ========= ========= Current portion of capital lease obligations............................. $ 61 $ 61 ========= ========= Long-term portion of capital lease obligations............................. $ 289 $ 289 Stockholders' equity (deficit): Preferred stock $.01 par value, zero and 1,000,000 shares authorized; zero and zero issued and outstanding, respectively(1)...................... -- -- Class A Common Stock $.01 par value, 9,000,000 shares authorized; 7,350,000 issued and outstanding(1)....................... 74 74 Class B Common Stock $.01 par value, 20,000,000 shares authorized; zero and 5,260,000 issued and outstanding, respectively(1)(2)................... -- 53 Additional paid-in-capital(3)........... 15,718 70,126 Accumulated deficit(3).................. (18,124) -- Deferred compensation................... -- (1,275) Cumulative translation adjustment....... (6) (6) --------- --------- Total stockholders' equity (deficit)...... (2,338) 68,972 --------- --------- Total capitalization................. $ (2,049) $ 69,261 ========= =========
- --------------- (1) See "Description of Capital Stock." (2) Includes: (i) 66,667 shares of Class B Common Stock to be issued in connection with the HCL Acquisition; (ii) 253,333 shares of Class B Common Stock to be issued in connection with the acquisition of TelePassport Germany, including 80,000 shares of Class B Common Stock to be issued and held in escrow subject to vesting over 36 months; and (iii) 20,000 shares of Class B Common Stock to be issued in connection with the acquisition of TelePassport Austria and held in escrow subject to vesting over 36 months (in each case, assuming that the initial public offering price of the Class B Common Stock is the mid-point of the range indicated on the front cover of this Prospectus). Excludes: an aggregate of 1,903,500 shares of Class B Common Stock, consisting of (i) 886,390 shares of Class B Common Stock reserved for issuance upon exercise of options outstanding as of the date of this Prospectus under the Company's Long Term Incentive Plan (the "Long Term Incentive Plan"); and (ii) 1,017,110 shares of Class B Common Stock reserved for issuance pursuant to options to be issued in the future under the Long Term Incentive Plan. In the event the over-allotment option is exercised in full, the total number of shares of Class B Common Stock to be outstanding after the Offering would be 6,090,000. See "Business--Acquisitions," "Management," "Shares Eligible for Future Sale" and "Underwriting." (3) Reflects an adjustment to additional paid-in-capital and accumulated deficit upon termination of the "S" corporation election of USFI, Inc. and certain of the TelePassport Companies in connection with the Reorganization. 28 32 SELECTED FINANCIAL DATA The selected Statement of Operations Data, Other Financial Data and Balance Sheet Data as of and for the fiscal years ended December 31, 1994, 1995 and 1996 have been derived from the Consolidated Financial Statements of the Company included elsewhere in this Prospectus, which were audited by Ernst & Young LLP, independent auditors. The selected Statement of Operations Data, Other Financial Data and Balance Sheet Data for the period from February 12, 1993 (Inception) to December 31, 1993 have been derived from unaudited Consolidated Financial Statements of the Company which are not included herein. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements included elsewhere in this Prospectus.
FEBRUARY 12, 1993 FISCAL YEAR ENDED DECEMBER 31, (INCEPTION) TO -------------------------------------------- DECEMBER 31, 1993 1994 1995 1996 ----------------- ------------ ------------ ---------- (in thousands, except share, per share and other operating data) STATEMENT OF OPERATIONS DATA: Telecommunications revenue........................ $ 2,085 $ 12,775 $ 27,643 $ 36,550 Costs and expenses: Cost of telecommunications services............. 1,367 8,907 20,075 29,880 Selling expenses................................ 349 1,687 2,579 3,800 General and administrative expenses............. 2,848 5,173 5,349 8,804 Non cash compensation........................... 2,718 Depreciation and amortization................... 32 100 395 714 ----------- ----------- ---------- --------- Total costs and expenses.......................... 4,596 15,867 28,398 45,916 ----------- ----------- ---------- --------- Loss from operations.............................. (2,511) (3,092) (755) (9,366) Other income (expense) and minority interest(1)... -- (315) 57 14 Equity in net loss of foreign joint venture(2).... -- -- (703) (1,453) ----------- ----------- ---------- --------- Net loss.......................................... $ (2,511) $ (3,407) $ (1,401) $ (10,805) =========== =========== ========== ========= Net loss per common share(3)...................... $ (0.33) $ (0.45) $ (0.19) $ (1.43) Weighted average common shares and equivalents.... 7,546,805 7,546,805 7,546,805 7,546,805 OTHER FINANCIAL DATA: EBITDA(4)......................................... $ (2,479) $ (3,307) $ (1,006) $ (10,091) Net cash (used in) operating activities........... (1,529) (1,669) (74) (1,620) Net cash (used in) investing activities........... (293) (318) (2,219) (3,754) Net cash provided by financing activities......... 1,875 2,252 2,396 6,045 Capital expenditures and investments.............. 293 304 2,080 3,537 OTHER OPERATING DATA: Billable minutes(5)............................... -- 11,930,671 32,758,910 53,501,247 Customers(6)...................................... 4,107 9,118 12,378 15,683 Switching facilities.............................. 1 1 3 4
AS OF DECEMBER 31, 1996 AS OF --------------------------- DECEMBER 31, AS 1995 ACTUAL ADJUSTED(7) ------------ ------------ ---------- BALANCE SHEET DATA: Working capital (deficit)......................... $ (2,584) $ (6,504) $ 57,588 Property and equipment, net....................... 1,974 5,194 5,598 Total assets...................................... 7,003 13,880 87,670 Stockholders' (deficit) equity.................... (1,838) (2,338) 68,972
(footnotes on following page) 29 33 NOTES TO SELECTED FINANCIAL DATA (1) The expense reported for the year ended December 31, 1994 is primarily the result of an arbitration award paid by the Company in connection with a 1994 contract dispute. See note 5 to the Consolidated Financial Statements. (2) This item represents the Company's equity in the net loss of its joint venture with Asahi Telecom. In March 1997, pursuant to the A.T. NET Agreements, the Company sold its interest in the joint venture to Asahi Telecom. See "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Business--Japan and Asahi Telecom." (3) Net loss per common and common equivalent share is based on the weighted average number of shares of common stock outstanding during each period, as adjusted for the effects of the application of Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 83. Pursuant to SAB No. 83, options granted within one year of the Company's initial public offering which have an exercise price less than the initial public offering price are treated as outstanding for all periods presented (using the treasury method at the initial public offering price) even though the effect is to reduce the loss per share. (4) As used herein "EBITDA" consists of earnings before interest, income taxes, depreciation and amortization. EBITDA is a measure commonly used in the telecommunications industry to analyze companies on the basis of operating performance. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as a measure of performance nor as an alternative to cash flow as a measure of liquidity. (5) Billable minutes are those minutes of call traffic for which a customer of record is billed by the Company. The number of billable minutes for the period from February 12, 1993 (Inception) to December 31, 1993 is not available. (6) Information presented as of the end of the period indicated. (7) As adjusted to give effect to the Offering and the application of the estimated net proceeds therefrom and the issuance of 340,000 shares of Class B Common Stock in connection with the Acquisitions. See "Use of Proceeds," "Capitalization" and "Business--Acquisitions." 30 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the other financial data included elsewhere in this Prospectus. OVERVIEW The Company is a provider of international telecommunications services. The Company conducts business on a global basis with a principal focus on small and medium-sized businesses and residential customers with significant international long distance traffic in the United Kingdom, Germany, Austria, Switzerland and other targeted areas of Europe, in Japan and other targeted Asian countries and in certain countries of southern Africa. The Company has also commenced efforts to sell national telecommunications services in certain of these areas. The Company's principal operating subsidiary, USFI, Inc., was incorporated in January 1993. The Company has been principally funded through the date of this prospectus by an aggregate of $17.3 million in equity capital contributed by the founders of the Company, Stephen E. Myers, Michael C. Anderson and James D. Pearson (the "Principals"). The Company has incurred losses from operating activities in each year of operations since its inception, and expects to continue to incur operating losses for the next several years. To date, the Company has incurred negative EBITDA and substantial net losses. EBITDA for the years ended December 31, 1994, 1995 and 1996 was negative $3.3 million, negative $1.0 million and negative $10.1 million, respectively. The Company has accumulated net losses from inception in February 1993 through December 31, 1996, of $18.1 million and had working capital deficits of $2.3 million, $2.6 million and $6.5 million as of December 31, 1994, 1995 and 1996, respectively. Losses have resulted principally from operating losses including costs incurred in the development and expansion of the TelePassport Network and the infrastructure necessary for the anticipated growth of the Company's business. The Company expects to continue to incur operating losses and development and expansion costs at least through the year 2000 while it further develops the TelePassport Network. There can be no assurance that the Company will ever achieve profitability. The Company was organized in Delaware on December 9, 1996 to acquire and continue the various businesses conducted by USFI, Inc., USFI-Japan, L.L.C. and TelePassport L.L.C. and its operating subsidiaries. Prior to the effective date of the registration statement of which this Prospectus is a part, TelePassport L.L.C. will be merged with TelePassport Inc. and the Principals will contribute to TelePassport Inc. all the outstanding shares and interests in USFI, Inc. and USFI-Japan, L.L.C. From and after the closing date of this Offering, all the assets and business of USFI, Inc. and USFI-Japan, L.L.C. will be owned and conducted by TelePassport Inc. Currently, USFI, Inc. and certain other TelePassport Companies are taxed as "S" corporations and, as such, any income or loss of such companies has been reported directly to their equity owners for inclusion in their tax returns. After completion of the Reorganization, such companies will no longer be taxed as "S" corporations and deferred taxes will be recorded in the Company's consolidated financial statements. In addition, TelePassport Inc. will be the common parent of a consolidated group for Federal income tax purposes that includes the TelePassport Companies, and each member of such group will be subject to corporate level tax on its share of the consolidated group's income. Any net operating losses, as defined in Section 172(c) of the Internal Revenue Code of 1986, as amended (the "Code"), incurred by the TelePassport Companies prior to the completion of the Reorganization will be unavailable to the Company to offset taxable income earned, if any, after the closing of the Offering for Federal income tax purposes. Since its inception in 1993, the Company has invested substantial resources in developing the TelePassport Network and related business operations. In February 1993, the Company installed its international gateway switching center in New York, commenced offering TelePassport call reorigination services and began marketing TelePassport international long distance calling cards. The Company installed its international gateway switching center in Tokyo in April 1995 and in December 1995 installed the London switching facility. Due to the rapid and significant technological advancements which are characteristic of the telecommunications industry, the Company may be required to make additional investments to replace or 31 35 upgrade its equipment to implement new technologies as they become available. The Company began selling TelePassport services on a wholesale basis to other carriers in late 1994. In 1995, the Company introduced several additional TelePassport services, including prepaid debit cards for the European market in early 1995, TelePassport VPN in August 1995 and TelePassport direct access services for the London market in November 1995. The Company has also established strategic relationships with several supra-national and governmental organizations, as well as with telecommunications service providers in Japan. In June 1993, the Company became a supplier of call reorigination services for the offices of certain United Nations agencies and their affiliates in over 100 countries and has since entered into service contracts with other supra-national organizations. In May 1996, the Company was awarded the USAFE Contract in Germany. In March 1995, the Company formed a joint venture with Asahi Telecom to provide international long distance services in Japan. In March 1997, the Company, Asahi Telecom and A.T. NET entered into the A.T. NET Agreements, which supersede the joint venture. The Company has exercised its option to acquire a 10% ownership interest in A.T. NET for approximately $3.0 million. The Company's ownership interest in A.T. NET will be accounted for under the cost method. After giving effect to the sale of the Company's interest in the joint venture to Asahi Telecom and exercise of the option, upon payment of the option exercise price, the Company's equity in the accumulated net loss of the joint venture, net of investment and long term advances ($1.8 million as of December 31, 1996), will be recorded as a reduction of its investment in A.T. NET. The Company's telecommunications revenue is derived from the number of minutes of use billed by the Company and is recorded upon completion of calls. The Company believes its services are typically competitively priced below those of the ITO in each country in which the Company offers its services. Customer access to the TelePassport Network and the Company's services may be obtained through customer-paid local access, domestic and international toll-free access, direct digital access through dedicated lines for high volume business users, equal access through automated routing from the PSTN, or call reorigination. The Company's services include VPN services, customized calling cards and prepaid debit cards. The Company also offers value-added features such as itemized billing and multiple payment methods. In addition, the Company provides application platform services and resells switched minutes on a wholesale basis to other telecommunications providers and carriers. For the year ended December 31, 1996, call reorigination revenue represented $23.8 million, or 65.0%, of the Company's telecommunications revenue and wholesale services represented $12.2 million, or 33.3%, of telecommunications revenue. The remainder of the Company's telecommunications revenue during the year, $0.6 million, or 1.7%, was derived from a VPN contract with certain UN organizations which is expected to terminate in the first quarter of 1997. During the year ended December 31, 1996, telecommunications revenue was derived from services provided in the following locations: Europe 47.4%; North America 23.4%; southern Africa 17.9%; Japan 9.9%; and South America 1.4%. Predominantly all of the revenue generated in North America was derived from wholesale services. Telecommunications revenue in all other areas was derived primarily from services accessed through call reorigination. The Company intends to generate telecommunications revenue through the expansion of the TelePassport Network, as well as through the continued use of call reorigination in markets that do not justify the capital commitments associated with establishing switching facilities or where the Company is prohibited from providing switched services. As additional markets are deregulated and the Company expands the TelePassport Network into those markets, the Company will seek to transfer its customers to facilities-based services, and, as a result, the Company anticipates that the percentage of telecommunications revenue derived from dedicated or switched access services will increase and the percentage of telecommunications revenue from call reorigination services will decrease. The Company believes, however, that call reorigination services will continue to be a significant source of revenue. The Company intends to continue to focus on providing telecommunications services to small and medium-sized businesses and residential customers with significant international long distance traffic, as well as expanding the resale of switched minutes to other telecommunications carriers and resellers on a wholesale basis. In addition, the Company intends to continue targeting supra-national and governmental organizations. Prices in the international long distance telecommunications industry in many of the countries in which the Company provides its services have declined in recent years due to increased competition and 32 36 deregulation, and the Company believes that prices are likely to continue to decrease. Additionally, to the extent EU member states impose VAT on telecommunications services provided to EU customers by telecommunications providers located outside of the EU, such as the Company, the Company may need to further reduce prices of services offered to certain customer segments in order to remain competitive. See "Risk Factors--Risks Associated with Imposition of VAT on Company's Services." In addition, the Company believes that the deregulatory trends in many foreign markets will result in greater competition which could reduce telecommunications revenue per minute and the Company's operating margins. For example, 69 countries recently entered into the WTO Agreement with the goal of increasing competition among telecommunications providers in those markets beginning in 1998. The Company believes, however, that any decreases in prices as a result of deregulation and increased competition will be at least partially offset by increased telecommunications usage and decreased costs that the Company anticipates will be realized as the percentage of traffic transmitted over the TelePassport Network increases. See "Regulation of the International Telecommunications Industry." Cost of telecommunications services is comprised of costs associated with the origination, transmission and termination of voice and voice band data telecommunications services, and with owning and maintaining switching facilities. Currently, a substantial portion of the Company's telecommunications revenue is derived from services that are accessed through call reorigination or are not otherwise transmitted over the TelePassport Network. Accordingly, a significant portion of the Company's cost of telecommunications services is variable, based on the number of minutes of use, with transmission and termination costs being the Company's most significant expense. The Company is seeking to originate, transport and terminate a larger portion of traffic over the TelePassport Network in order to bypass, to the greatest extent possible, the higher costs associated with traditional international settlement policies. As the Company increases the percentage of traffic transmitted over the Telepassport Network, cost of telecommunications services will increasingly consist of fixed costs associated with leased lines and the ownership and maintenance of the TelePassport Network, and the Company expects that the cost of telecommunications services as a percent of telecommunications revenue will decline. The Company seeks to lower cost of telecommunications services through: (i) increasing volume on the TelePassport Network, thereby allocating fixed costs over a larger number of minutes; (ii) continuing to negotiate favorable rates with the ITOs; and (iii) optimizing the routing of calls over the TelePassport Network. See "Business--Business Strategy." As is typical in the long distance telecommunications industry, the Company generally realizes higher margins from its retail services than from its wholesale services. Wholesale services, however, provide a source of additional revenue and add significant minutes originating and terminating on the TelePassport Network, thus enhancing the Company's purchasing power for leased lines and switched minutes. The Company also generally realizes higher margins from direct access services than from services accessed through call reorigination. The Company's overall margins may fluctuate in the future based on its mix of wholesale and retail long distance services and the percentage of calls using direct access as compared to call reorigination. Selling expenses are primarily derived from commissions paid to independent agents, and payroll and other benefit costs. Selling expenses have increased over the past three years as the Company's business has expanded and the number of agents and the size of the direct sales and marketing forces have increased. The Company expects that selling expenses will continue to increase as the business grows and the TelePassport Network expands. In addition, as the Company begins to integrate its distribution network in selected strategic locations by acquiring independent agents or establishing country managers or direct sales organizations, it will incur added selling expenses associated with the transition which is likely to result, initially, in an increase in selling expenses as a percent of telecommunications revenue. The Company anticipates, however, that as sales networks become fully integrated and economies of scale are realized, selling expenses ultimately will decline as a percent of telecommunications revenue. The Company also believes that the integration of its distribution network will give it greater control over its sales and marketing functions, which would enable it to provide a higher level of service to its customers. See "Business--Market Opportunity" and "Business Strategy." General and administrative expenses includes salary and benefits and other overhead costs associated with headquarters and network operations. These costs have increased due to the development and expansion of the TelePassport Network and corporate infrastructure. The Company expects that general and administra- 33 37 tive expenses will, initially, continue to increase as a percentage of revenue as the Company puts into place the infrastructure necessary to support the continued growth of the Company and expansion of the TelePassport Network. Once the infrastructure has been installed and the traffic routed over the TelePassport Network grows, the Company expects to realize economies of scale and anticipates that general and administrative expenses will decrease as a percentage of revenues. The Company currently bills primarily in United States Dollars and generally is paid by customers outside of the United States either in United States Dollars or in local currency at predetermined exchange rates. As the Company's business develops and expands, the Company anticipates that in many countries it may bill and receive payment in local currency at prevailing exchange rates. While the Company does not presently use financial hedging instruments to offset exchange rate risk, it may elect to do so in the future. Substantially all of the costs of acquisition and upgrade of the Company's switching facilities and expansion of the TelePassport Network have been, and will continue to be denominated in United States Dollars. See "Risk Factors--Foreign Exchange Rate Risks." Inflation is not a material factor affecting the Company's business and has not had a significant effect on the Company's operations to date. The Company has historically experienced, and expects to continue to experience, decreases in revenues in the months of August and December due to extended vacation time typically taken by Europeans during these months. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Telecommunications revenue. Telecommunications revenue increased $8.9 million, or 32.3%, to $36.6 million for the year ended December 31, 1996 from $27.6 million for the year ended December 31, 1995. This increase was attributable primarily to the increase in billable minutes, which increased 20.7 million, or 63.1%, to 53.5 million billable minutes for the year ended December 31, 1996 from 32.8 million billable minutes for the year ended December 31, 1995. Telecommunications revenue derived from retail customers increased approximately $3.0 million, or 14.4%, to $23.8 million for the year ended December 31, 1996 from $20.8 million for the year ended December 31, 1995, while telecommunications revenue derived from wholesale customers increased $5.3 million, or 76.8%, to $12.2 million for the year ended December 31, 1996 from $6.9 million for the year ended December 31, 1995. The remainder of the Company's telecommunications revenue during the year ended December 31, 1996, $0.6 million, was derived from a VPN contract with certain UN organizations. The increase in telecommunications revenue during the year ended December 31, 1996 was achieved despite declining prices in both the retail and wholesale sectors as a result of increased competition and deregulation of certain foreign markets. Cost of telecommunications services. Cost of telecommunications services increased $9.8 million, or 48.8%, to $29.9 million for the year ended December 31, 1996 from $20.1 million for the year ended December 31, 1995, and, as a percent of telecommunications revenue, increased to 81.8% for year ended December 31, 1996 from 72.6% for the year ended December 31, 1996. The increase in cost of telecommunications services was attributable primarily to increased traffic being handled by the Company and increased costs associated with the expansion of the TelePassport Network. The increase in cost of telecommunications services as a percent of telecommunications revenue was attributable primarily to the greater increase in the wholesale business, as compared to the increase in the retail business. Although the wholesale business generates lower margins than those derived from the retail business, it provides a source of additional revenue and adds significant minutes originating and terminating on the TelePassport Network, thus enhancing the Company's purchasing power for leased lines and switched minutes. Selling expenses. Selling expenses increased $1.2 million, or 47.3%, to $3.8 million for the year ended December 31, 1996 from $2.6 million for the year ended December 31, 1995, and as a percent of telecommunications revenue, increased to 10.4% for the year ended December 31, 1996 from 9.3% for the year ended December 31, 1995. For the years ended December 31, 1996 and 1995, selling expenses were primarily comprised of commissions paid to independent agents, payroll and other benefit costs and travel costs associated with the sales and marketing department. The increase in selling expenses was primarily 34 38 attributable to increased commissions of $0.8 million associated with the increase in telecommunications revenue for year ended December 31, 1996 as compared to the year ended December 31, 1995. The increase in selling expenses as a percent of telecommunications revenue during 1996 was attributable to increased commission rates payable to certain agents in connection with increases in telecommunications revenue generated by those agents. General and administrative expenses. General and administrative expenses increased $3.5 million, or 64.6%, to $8.8 million for the year ended December 31, 1996 from $5.3 million for year ended December 31, 1995, and, as a percentage of telecommunications revenue, increased to 24.1% for the year ended December 31, 1996 from 19.4% for the year ended December 31, 1995. For the years ended December 31, 1996 and 1995, general and administrative expenses were primarily comprised of salary and benefit costs, consulting expenses and other overhead costs associated with headquarters and network operations. The increase in general and administrative expenses (both actual and as a percentage of telecommunications revenue) was attributable primarily to an increase in personnel costs associated with servicing a larger number of customers and increases in business development expenses required to prepare for expansion of the TelePassport Network and evaluation of prospective new markets. Non cash compensation. The Company incurred compensation expenses in connection with its incentive plans of $2.7 million for the year ended December 31, 1996. There was no noncash compensation charge in 1995. Depreciation and amortization. Depreciation and amortization increased to $0.7 million for year ended December 31, 1996 from $0.4 million for the year ended December 31, 1995. The increase was due primarily to depreciation of switched equipment and computers and other equipment placed in service during the beginning of fiscal year 1996. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Telecommunications revenue. Telecommunications revenue increased $14.9 million, or 116.4%, to $27.6 million for the year ended December 31, 1995 from $12.8 million for the year ended December 31, 1994. This increase was attributable primarily to the increase in billable minutes which increased 20.9 million, or 175.6%, to 32.8 million billable minutes for the year ended December 31, 1995 from 11.9 million billable minutes for the year ended December 31, 1994. Telecommunications revenue derived from retail customers increased $10.3 million, or 98.1%, to $20.8 million for the year ended December 31, 1995 from $10.5 million for the year ended December 31, 1994, while telecommunications revenue derived from wholesale customers increased $4.6 million, or 200.0%, to $6.9 million for the year ended December 31, 1995 from $2.3 million for the year ended December 31, 1994. The increase in telecommunications revenue for the year ended December 31, 1995 was achieved despite declining prices in both the retail and wholesale sectors as a result of increased competition and deregulation of certain foreign markets. Cost of telecommunications services. Cost of telecommunications services increased $11.2 million, or 125.4%, to $20.1 million for the year ended December 31, 1995 from $8.9 million for the year ended December 31, 1994, and, as a percent of telecommunications revenue, increased to 72.6% for the year ended December 31, 1995 from 69.7% for the year ended December 31, 1994. The increase in cost of telecommunications services was attributable primarily to increased traffic being handled by the Company and increased costs associated with the expansion of the TelePassport Network. The increase in cost of telecommunications services as a percent of telecommunications revenue was attributable primarily to the greater increase in the wholesale business as compared to the retail business. The wholesale business generates lower margins than those derived from retail business. Selling expenses. Selling expenses increased $0.9 million, or 52.9%, to $2.6 million for the year ended December 31, 1995 from $1.7 million for year ended December 31, 1994, and, as a percent of telecommunications revenue, decreased to 9.3% for the year ended December 31, 1995 from 13.2% for the year ended December 31, 1994. For the years ended December 31, 1995 and 1994, selling expenses were primarily comprised of commissions paid to independent agents and payroll and other benefit costs. The increase in 35 39 selling expenses was attributable primarily to increased commissions of $1.0 million associated with the increase in telecommunications revenue for the year ended December 31, 1995, as compared to the year ended December 31, 1994. The decrease in selling expenses as a percent of telecommunications revenue was primarily the result of the increase in the wholesale business in 1995 on which the Company does not pay commissions. General and administrative expenses. General and administrative expenses increased to $5.3 million for the year ended December 31, 1995 from $5.2 million for the year ended December 31, 1994, and as a percent of telecommunications revenue, decreased to 19.4% for the year ended December 31, 1995 from 40.5% for the year ended December 31, 1994. For the years ended December 31, 1995 and 1994, general and administrative expenses were primarily comprised of salary and benefit costs, consulting expenses and other overhead costs associated with headquarters and network operations. The increase in general and administrative expenses was due primarily to increased salary expense associated with the increase in number of employees. The significant decrease in general and administrative expenses as a percent of telecommunications revenue in 1995, as compared to 1994, was attributable primarily to the increase in telecommunications revenue to $27.7 million in 1995 from $12.8 million in 1994. Depreciation and amortization. Depreciation and amortization increased to $0.4 million for the year ended December 31, 1995 from $0.1 million for the year ended December 31, 1994. The increase resulted primarily from additions to switching equipment in 1995 associated with the expansion of the TelePassport Network. LIQUIDITY AND CAPITAL RESOURCES The Company has incurred operating losses in each year since its inception and expects that such losses will increase as the Company continues to build the TelePassport Network and increase its customer base. Through December 31, 1996, losses since inception totaled $18.1 million, and were $2.5 million, $3.4 million, $1.4 million and $10.8 million in 1993, 1994, 1995 and 1996, respectively. Since inception, the Company has financed its working capital, operating losses and capital expenditures primarily through capital contributions from its founding stockholders, vendor lease financing and a bank line of credit in its Japanese joint venture. Contributions from stockholders totaled $13.1 million through December 31, 1996 and are $17.3 million through the date of this Prospectus. In June 1995, a consortium of five Japanese banks extended a $5 million line of credit (the "Joint Venture Loan") to TelePassport Japan Co., Ltd. ("TelePassport Japan"). The Joint Venture Loan is without recourse to the Company, bears interest at the Japanese prime rate and is payable on demand. As of December 31, 1996, the outstanding principal balance of the Joint Venture Loan was $3.5 million and the applicable interest rate was 1.6%. Pursuant to the A.T. NET Agreements, the Company sold its interest in TelePassport Japan to Asahi Telecom and Asahi Telecom assumed the outstanding obligations of TelePassport Japan, including the Joint Venture Loan. In the fourth quarter of 1996, the Company acquired PBXs and related equipment from a major European equipment distributor. In connection therewith, such distributor provided $0.4 million (based on the foreign currency exchange rate from the Deutsche Mark to the United States Dollar in effect on December 31, 1996) of lease financing which is repayable in 60 equal monthly payments terminating in 2002 at an effective annual rate equal to 6.45%. Net cash (used in) operating activities was ($1.7) million in 1993, ($1.7) million in 1994, ($0.1) million in 1995 and ($1.6) million in 1996. Net cash provided by financing totaled $1.9 million in 1993, $2.3 million in 1994, $2.4 million in 1995, and $6.0 million in 1996. Net cash used in investing activities was $0.3 million in each of 1993 and 1994, all of which was for capital expenditures, $2.2 million in 1995, of which $1.7 million was for capital expenditures, and $3.8 million in 1996, of which $3.5 million was for capital expenditures. A substantial portion of the investing activity to date has consisted of the purchase and deployment of switching equipment and the cost of developing management information systems. The significant increase in capital expenditures from 1994 to 1995 was attributable primarily to the increase in expenditures associated with the 36 40 expansion of the TelePassport Network in 1995. During 1996, investment activity also included the cost of the development of infrastructure for services to be provided under the USAFE Contract. As of December 31, 1996, the Company had $1.1 million in cash, although the Company had a working capital deficit of $6.5 million. The Company had working capital deficits of $2.3 million and $2.6 million as of December 31, 1994 and 1995. The Company estimates that it will require approximately $135 million to fund its anticipated capital requirements over the next three years. This amount includes an estimated $65 million in capital expenditures, $5 million for the acquisition of businesses or for investment in joint ventures and strategic alliances (including the Acquisitions and $3.0 million for the acquisition of a 10% interest in A.T. NET) and $65 million for working capital requirements and general corporate purposes including general and administrative expenses and the funding of operating losses. The exact amount of the Company's future capital requirements, however, will depend upon many factors, including the cost, timing and extent of upgrading and expanding the TelePassport Network, the expansion of existing services and the development of new services, the Company's ability to penetrate new markets, regulatory changes, the status of competing services, the magnitude of potential acquisitions, investments and strategic alliances and the Company's results of operations. Variances in these and other factors could cause material changes in the Company's actual capital requirements. Of the $135 million of capital required, approximately $68.3 million ($78.7 million if the overallotment option is exercised in full) will be funded by the Offering (assuming an initial public offering price of the Class B Common Stock at the mid-point of the range indicated on the front cover of this Prospectus) and approximately $15 million is expected to be funded by equipment financing. The Company currently estimates that the net proceeds of the Offering, together with the equipment financing, will be sufficient to finance its capital requirements through the end of 1998. For the balance of the capital required, the Company will be required to seek additional debt or equity financing. The Company does not currently have any commitments for any additional debt or equity financing and there can be no assurance that any financing will be available to the Company or, if available, that it can be obtained on terms acceptable to the Company. To the extent unexpected expenditures arise or the Company's estimates of its capital requirements prove to be inaccurate, the Company may require such additional financing sooner than anticipated and in amounts greater than currently expected. See "Risk Factors--Substantial Capital Requirements; Need for Additional Financing to Complete Network Expansion; Uncertainty of Additional Financing; Broad Discretion Over Use of Proceeds; and - --Potential Difficulties Associated with Implementing TelePassport Network Expansion Strategy." 37 41 THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY OVERVIEW The international telecommunications industry provides voice and data transmission from one national telephone network to another. The industry has experienced dramatic changes during the past decade that have resulted in significant growth in the use of services and in enhancements to technology. Whether in terms of revenue or traffic volume, the industry is expecting similar growth in the foreseeable future. According to the International Telecommunications Union ("ITU"), a worldwide telecommunications organization under the auspices of the United Nations, the international telecommunications industry accounted for $55 billion in revenues and 60.3 billion minutes of use in 1995, up from $21.7 billion in revenues and 16.7 billion minutes of use in 1986, representing compound annual growth rates of 11% and 15%, respectively. Based on recent trends, TeleGeography, Inc., an independent research and publishing company, projects that revenues will approach $75.5 billion by the year 2000 with the volume of traffic expanding to 107.3 billion minutes of use. The market for telecommunications services is highly concentrated, with Europe and the United States accounting for approximately 43% and 26%, respectively, of the industry's worldwide minutes of use in 1995. AT&T Corp. ("AT&T"), DT, MCI, BT and France Telecom S.A. ("France Telecom") generated approximately 40% of the aggregate international long distance outgoing traffic minutes in 1995. Austria, Germany, Switzerland, the United Kingdom and Japan, the Company's core target markets, accounted for approximately 1.5%, 8.7%, 2.9%, 6.7% and 2.7%, respectively, of the international long distance outgoing traffic minutes in 1995. Growth and change in the international telecommunications industry have been fueled by a number of factors, including greater consumer demand, globalization of the industry, increases in international business travel, privatization of ITOs, and growth of computerized transmission of voice and data information. These trends have sharply increased the use of, and reliance upon, telecommunications services throughout the world. The Company believes that at the same time, businesses and residential customers have encountered higher prices with poorer quality and service which were, and in some cases still are, characteristic of many ITOs. Demand for improved service has created opportunities for private industry to compete in the international telecommunications market. Increased competition, in turn, has spurred a broadening of products and services, and new technologies have contributed to improved quality and increased transmission capacity and speed. Consumer demand and competitive initiatives have also acted as a catalyst for government deregulation, especially in developed countries. Deregulation began in the United States in 1984 with the divestiture of AT&T and the spin-off of the Regional Bell Operating Companies ("RBOCs"). Equal access to customers followed thereafter for all United States carriers. Deregulation began in the United Kingdom with the privatization of BT, also in 1984. Deregulation spread to Europe with the adoption of the EU "Directive on Competition in the Markets for Telecommunication Services" in 1990. A series of subsequent EU directives, reports and actions are expected to result in substantial deregulation of the telecommunications industries in most EU countries by 1998. A similar movement toward deregulation is taking place in Japan. Other governments have begun to allow competition for value-added and selected other telecommunications services and features, including data and facsimile services and certain restricted voice services. In February 1997, 69 countries, including the United States, Japan, Switzerland, South Africa and all of the member states of the EU, entered into the WTO Agreement with the goal of increasing competition among telecommunications providers in such markets beginning in 1998. In many countries, however, the rate of change and emergence of competition remain slow and the timing and extent of future deregulation is uncertain. See "Regulation of the International Telecommunications Industry." TRADITIONAL INTERNATIONAL LONG DISTANCE SETTLEMENT MECHANICS An international long distance telephone call consists of three parts: origination, transport and termination. Generally, an international long distance call originates on a local exchange and is transported to the network of an international long distance carrier in the originating country and then to an international long distance carrier in the terminating country. The first international long distance carrier transports the call from 38 42 the country of origination, and the second international long distance carrier transports the call to a local exchange in the country of termination. Traditionally, international long distance traffic is exchanged pursuant to bilateral correspondent agreements among international carriers. Correspondent agreements provide for the termination of traffic in, and return traffic to, the carriers' respective countries at a negotiated rate per minute referred to as the Total Accounting Rate ("TAR"). Correspondent agreements typically provide that a carrier will return to its correspondent a percentage of the minutes received from such correspondent ("return traffic"). In the United States, the FCC's International Settlement Policy states that United States carriers must receive inbound return traffic in exchange for each outbound minute sent to a correspondent carrier. The proportionate return traffic that a United States carrier receives is based upon the carrier's market share. Typically, a United States carrier's market share, for the purpose of calculating proportionate inbound return traffic, is derived by comparing the carrier's volume of outbound minutes sent to a correspondent with the total volume of outbound minutes sent by all United States carriers to the same correspondent over a period of time. For example, if during a particular month United States carrier A sends 100,000 minutes of outbound traffic to a correspondent and all United States carriers as a group send 1,000,000 minutes of outbound traffic to the same correspondent, then carrier A's market share is said to be 10%. Carrier A would then expect to receive, as proportionate return inbound traffic, 10% of the total volume of minutes that the correspondent has to send to all United States carriers for termination in the United States. A call made from the United States to a foreign country is referred to as outbound traffic for the United States carrier and inbound traffic for the foreign carrier. Outbound traffic from the United States is significantly higher than inbound return traffic. In the United States, inbound return traffic is generally more profitable than outbound traffic because the margin between the inbound settlement rate per minute and the carrier's cost to terminate calls in the United States is higher than the margin between the collection rate (the rate charged by the carrier to its customer) and the outbound settlement rate per minute. Correspondent agreements also provide for network coordination and accounting and settlement procedures between carriers. Settlement costs, which typically equal one-half of the TAR, are the fees owed to another international carrier for transporting traffic on its network. Settlement costs are reciprocal between each party to a correspondent agreement at a negotiated rate. The FCC mandates that United States based carriers must charge the foreign carrier the same rate to terminate a call in the United States as that foreign carrier charges the United States carrier to terminate a call in the foreign country. Further, while all United States carriers must have the same TAR with a given carrier, the TAR varies from country to country. As a result, a United States carrier could have a different TAR than a United Kingdom carrier for exchanging similar traffic into a third country. Settlement costs arise because carriers pay each other on a net basis determined by the difference between the inbound and outbound traffic between them. Under the settlement process, a carrier which originates more traffic than it receives will make net payments to the corresponding carrier, while a carrier which receives more traffic than it originates will receive payments from the corresponding carrier. If the incoming and outgoing flows of traffic are equal in the number of minutes, there is no net settlement payment. The profitability of an international long distance company with correspondent agreements that provide for return traffic will be a function of the volume of its outbound traffic and its end user billing rates, as well as the relative volume of its outbound and inbound traffic minutes. Thus, an important factor that can influence the profitability of an international carrier is the proportion of high margin inbound minutes. A carrier which does not have a correspondent agreement with a carrier in a particular country is able to provide international service to that country by leasing transmission facilities or reselling switched minutes from a carrier which does. The profitability of these calls for such a carrier is determined by the difference between the carrier's end user billing rates and the rates it must pay another carrier to transport and terminate such traffic. The Company currently has no correspondent agreements with any country. Rather, it both leases transmission facilities and resells switched minutes from carriers that have correspondent agreements. By aggressively negotiating resale agreements, the Company exploits the economic incentive of a carrier with a correspondent agreement to increase incoming traffic. The resold call volume increases the market share for the correspondent agreement carrier to a particular country, thereby increasing such carrier's proportionate 39 43 return traffic under the TAR settlement process. The Company may in the future, however, enter into correspondent agreements if such agreements would improve the Company's profitability over these routes. COMPETITIVE OPPORTUNITIES AND ADVANCES IN TECHNOLOGY The combination of a continually expanding global telecommunications market, consumer demand for lower prices with improved quality and service and ongoing deregulation has created competitive opportunities in many countries. Further, as more small and medium-sized businesses and residential customers have come to rely on international telecommunications services for their business and personal needs, an increasingly diverse and sophisticated customer base has generated demand for a far greater variety of products and services. Increased competition has also resulted in improved quality of service at lower prices. Similarly, new technologies, including fiber optic cable and improvements in digital compression, have improved quality and increased transmission capacities and speed, with transmission costs decreasing as a result. Overall, these changes have resulted in a trend towards bypassing traditional international long distance settlement mechanics as international long distance companies seek to operate more efficiently. Advances in technology have created multiple ways for telecommunications carriers to provide customer access to their networks and services. These include customer-paid local access, domestic and international toll-free access, direct digital access through a dedicated line, equal access through automated routing from the PSTN and call reorigination. The type of access offered depends on the proximity of switching facilities to the customer, the needs of the customer, and the regulatory environment in which the carrier competes. In a deregulated country such as the United States, carriers can establish switching facilities, own or lease fiber optic cable, enter into operating agreements with foreign carriers and, accordingly, provide direct access service. In markets that have not deregulated or are slow in implementing deregulation, such as South Africa, international long distance carriers have used advances in technology to develop innovative alternative access methods, such as call reorigination. In other countries, such as Japan and most EU member states, where deregulation is imminent but not complete, carriers are permitted to offer facilities-based data and facsimile services, as well as limited voice services including those to CUGs, but are as yet precluded from offering full voice telephony. As countries deregulate, the demand for alternative access methods typically decreases as carriers are permitted to offer a wider range of facilities-based services. The most common form of alternative access, call reorigination, avoids the high international rates offered by the ITO in a particular regulated country by providing dial tone from a deregulated country, typically the United States. To place a call using call reorigination, a user dials a unique phone number to an international carrier's switching center and then hangs up after it rings. The user then receives an automated callback to a pre-programmed number providing dial tone which enables the user to place a call. Technical innovations, ranging from inexpensive dialers to sophisticated in-country switching platforms, have enabled telecommunications carriers to offer a "transparent" form of call reorigination. The customer dials the international number in the usual fashion, without the "hang-up" and "callback," and the international call is automatically and swiftly processed. The fundamental changes occurring in the worldwide telecommunications market and the related growth in the worldwide customer base have created a large and diverse international telecommunications market. The market is increasingly served by a wide range of telecommunications providers, many of which seek to focus on only a limited segment of the overall market. ITOs and major global carriers typically concentrate their efforts on multinational companies and other high volume long distance telephone users that demand high quality and service and which are often less cost sensitive. These providers typically invest substantial capital to construct and operate high quality networks throughout the world. Given the scale of their operations, these large carriers are economically discouraged from effectively serving small or medium-sized businesses. Many smaller entrepreneurial carriers, such as the Company, concentrate on serving the international long distance needs of small and medium-sized business and residential customers who have significant international long distance traffic. Many of these smaller carriers work in cooperation with, and/or rely upon facilities and services provided by, larger carriers, but do not generally compete directly against them in their primary markets. 40 44 BUSINESS OVERVIEW TelePassport is a provider of international telecommunications services. The Company conducts business on a global basis with a principal focus on small and medium-sized businesses and residential customers with significant international long distance traffic in the United Kingdom, Germany, Austria, Switzerland and other targeted areas of Europe, in Japan and other targeted Asian countries and in certain countries of southern Africa. The Company has also commenced efforts to sell national telecommunications services in certain of these areas. The Company is developing the TelePassport Network, a digital switch-based telecommunications network connected by leased fiber optic transmission facilities. The TelePassport Network currently has international gateway switching centers in New York and Tokyo and switching facilities in London and Vienna. The Company intends to use a significant portion of the net proceeds of the Offering to expand and upgrade the TelePassport Network. The construction of a state-of-the-art central switching center and network management facility in New Jersey is substantially completed and will replace the New York international gateway switching center. The Company intends to further develop the TelePassport Network by upgrading existing facilities and by adding switching facilities in up to 30 cities over the next three years. These switching facilities will be located principally in primary markets where the Company has an established customer base or has existing key contracts, as well as in secondary markets in proximity to the Company's primary markets. Switching facilities are expected to be installed in Frankfurt, Milan, Naples, Paris and Zurich by the end of 1997. In areas in which the Company believes it is not optimal to own network facilities, the Company typically enters into agreements to resell the facilities of other operators to enhance the TelePassport Network. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "--The TelePassport Network." The Company provides international long distance services with value-added features primarily under the "TelePassport" brand. The Company believes its services are typically competitively priced below those of the ITOs. Customer access to the TelePassport Network and the Company's services may be obtained through customer-paid local access, domestic and international toll-free access, direct digital access through dedicated lines for high volume business users, equal access through automated routing from the PSTN, or call reorigination. The availability of a particular access method in any geographic area is governed by local laws and regulations, customer size and the degree to which the Company has infrastructure to support the access method in such area. The Company's services include VPN services, customized calling cards and prepaid debit cards. The Company also offers value-added features such as itemized billing and multiple payment methods. In addition, the Company provides application platform services and resells switched minutes on a wholesale basis to other telecommunications providers and carriers. See "--Services." The Company believes that Japan and certain other Asian countries provide the Company with significant opportunities for growth. In order to facilitate entry into the Japanese telecommunications market, the Company has established strategic relationships with certain Japanese telecommunications providers. In March 1995, the Company and Asahi Telecom began operating a joint venture that provided international long distance services in Japan. Asahi Telecom is owned 33.5% by Japan Telecom and 9.0% by NEC, and is an agent for Japan Telecom's long distance services and a distributor of NEC PBXs in Japan. Asahi Telecom recently commenced the construction of a nationwide network and began offering one of Japan's first integrated national and international long distance telecommunications services through its wholly owned subsidiary, A.T. NET. In an effort to enhance its presence in the Japanese telecommunications market, in March 1997, the Company, together with A.T. NET and Asahi Telecom, entered into the A.T. NET Agreements pursuant to which the Company, in replacement of the joint venture, became the carrier of international long distance traffic for A.T. NET, Asahi Telecom and their respective affiliates, the Company sold its interest in the joint venture to Asahi Telecom and purchased certain equipment and other assets of the joint venture, including the rights to the joint venture's non-Japanese and private line customers, which accounted for approximately 10% of its revenues, and the Company became entitled to receive preferential pricing as a reseller of A.T. NET's national long distance services in Japan. To the extent allowed by applicable regulations, the Company intends to resell A.T. NET's national long distance services and offer, 41 45 along with its own international long distance services, an integrated TelePassport national and international long distance service primarily to non-Japanese companies located in Japan, a significant customer segment that A.T. NET does not currently target. The A.T. NET Agreements also provide that, to the extent A.T. NET offers customized calling cards and prepaid debit cards for its customers, the Company will provide such cards and will supply the related national and international long distance services to such cardholders, and that A.T. NET and Asahi Telecom are required to enter into arrangements to provide to the Company's customers those services permitted by A.T. NET's Special Type II registration, which would effectively permit the Company to provide additional telecommunications services in Japan. In addition, the Company has exercised an option to acquire a 10% ownership interest in A.T. NET and the Company is entitled to designate one representative to A.T. NET's board of directors. The Company believes that its relationship with Asahi Telecom and ownership interest in A.T. NET provide the Company with both a greater opportunity to competitively penetrate the Japanese market and advance the TelePassport brand and an added competitive advantage with respect to its wholesale business by allowing it to originate and terminate international traffic cost effectively from and to major metropolitan areas of Japan. The Company intends to utilize the TelePassport brand recognition that it is creating in Japan as a platform from which to expand into other targeted Asian countries. See "--Japan and Asahi Telecom" and "Regulation of the International Telecommunications Industry." In addition to targeting small and medium-sized businesses and residential customers, the Company markets its services to supra-national and governmental organizations. The Company believes that contracts to provide services to such entities are strategically important because they present the Company with the opportunity to establish a high profile in the regions surrounding the locality of each contract, enhancing opportunities for new customer development. In addition, contracts of this type will usually require the Company to establish switching facilities and other infrastructure which the Company can also utilize to expand its customer base in the region. In May 1996, the Company was awarded the USAFE Contract to provide, on a ten-year basis, local exchange and national and international telecommunications services to the temporary lodging facilities on currently up to 14 USAFE bases. Under the terms of the USAFE Contract, the Company, to date, has received delivery orders for two bases in Germany and one base in Italy and has received RFPs for nine bases: two in Germany, five in the United Kingdom, one in Spain and one in Turkey. The Company has completed the installation of telecommunications systems providing voice and data service to the temporary lodging facilities at the Ramstein and Rhein Main Air Force Bases in Germany. The Company expects to complete the installation of systems at nine additional bases by the end of 1997. The Company believes that the USAFE Contract will also provide an opportunity to expand its services to the permanent dormitories at USAFE bases. In addition, pursuant to the terms of the USAFE Contract, certain agencies within the other branches of the United States armed forces in Europe have the option to designate the Company as a supplier of telecommunications services and to present delivery orders for certain of their facilities. The Company intends to take advantage of this provision by actively pursuing delivery orders from other United States military facilities in Europe. Further, the Company is a supplier of call reorigination services for offices of certain UN agencies and their affiliates in over 100 countries and for other supra-national food, health, fiscal and labor organizations. The Company believes that the services it provides to these organizations help to develop its customer base by establishing a high profile in local regions surrounding their offices. See "--The USAFE Contract; and --The UN Arrangements." The Company typically relies on local independent sales agents for distribution of its services. In locations the Company deems strategic, the Company generally seeks to integrate distribution and interface directly with its customers by acquiring independent agents, establishing country managers, and/or creating direct sales organizations. The Company believes that the integration of its distribution network will give it greater control over its sales and marketing functions and provide a higher level of service to its customers. Accordingly, in March 1997, the Company entered into agreements to acquire all the capital stock of each of TelePassport Germany, its independent agent in Germany, and TelePassport Austria, its independent agent in Austria. The Agent Acquisitions are expected to be consummated concurrently with the closing of the Offering. An important element of the Company's business plan is the pursuit of strategic acquisitions, investments and alliances. In January 1997, the Company entered into the Intelenet Agreement pursuant to which 42 46 Intelenet granted the Company an option to purchase Intelenet's customer accounts principally in Naples and Milan, Italy and telecommunications equipment. The Intelenet Acquisition will provide the Company with an immediate customer base in the Milan and Naples markets which should enable the Company thereafter to expand the TelePassport Network into additional cities in Italy. Also, in March 1997, the Company entered into the HCL Agreement to acquire all the capital stock of HCL, an alternative network access consultant and installer of PBXs in the United Kingdom. The Company anticipates that the HCL Acquisition will expand the Company's existing customer base in the United Kingdom through the marketing of TelePassport services to HCL's customers, and will enable the Company to offer an integrated package of PBXs and TelePassport services in the United Kingdom. MARKET OPPORTUNITY The Company seeks to capitalize on the fundamental changes occurring in the telecommunications industry. The Company believes it is strategically positioned to take advantage of these fundamental changes for the following reasons: - The Company's services are sold in over 100 countries, primarily under the "TelePassport" brand, which the Company can leverage as it expands into new locations and introduces additional services; - The development of the TelePassport Network in the United Kingdom, Germany, Austria, Switzerland, Italy and other targeted areas of Europe, and in Japan and other targeted Asian countries, will enable the Company to take advantage of deregulation in these markets; - The unique relationship with Asahi Telecom and A.T. NET provides the Company with competitive advantages in accessing the Japanese market and a platform from which to expand to other targeted Asian countries; - Contracts and arrangements with governmental and supra-national organizations, such as the USAFE Contract and the UN Arrangements, present the Company with long-term revenue potential, and opportunities to enhance its reputation and profile in underserved markets; - The Company's call reorigination business enables it to gain low-cost entry into numerous markets, to establish distribution networks, to build customer bases and to identify opportunities prior to significant investment; and - The Company's management team, with its substantial combined telecommunications and related businesses experience and strong entrepreneurial leadership, provides the Company with the managerial skill to exploit available market opportunities. BUSINESS STRATEGY The Company's objective is to become a leading provider of switch-based international and national telecommunications services in its target markets. The Company's business strategy includes the following key elements: - Expanding the TelePassport Network. The Company seeks to deliver high quality, reliable telecommunications services using its developing state-of-the-art TelePassport Network. The Company has substantially completed the construction of an advanced international gateway switching center and network management facility in New Jersey to replace its international gateway switching center in New York. The Company intends to further develop the TelePassport Network by upgrading existing facilities and by adding switching facilities in up to 30 cities over the next three years. These will be located principally in primary markets where the Company has an established customer base or has existing key contracts, as well as in secondary markets in proximity to the Company's primary markets. The Company believes that competition will be slower to develop in the regional secondary markets as other larger carriers will likely concentrate on larger metropolitan areas. Switching facilities are expected to be installed in Frankfurt, Milan, Naples, Paris and Zurich by the end of 1997. The Company also plans to invest in digital undersea fiber optic cable and lease IPLCs in order to cost effectively interconnect the expanding TelePassport Network switching facilities. See "Risk Factors--Substantial Capital Requirements; Need For Additional Financing to Complete Network 43 47 Expansion; Uncertainty of Additional Financing; Broad Discretion Over Use of Proceeds;--Potential Difficulties Associated with Implementing TelePassport Network Expansion Strategy; and--Rapid Changes in Technology and Customer Requirements," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "--The TelePassport Network." - Maximizing Operating Efficiencies and Enhancing Information Systems. The Company intends to continue its attempts to reduce the costs of providing its services by achieving economies of scale in the use of the TelePassport Network. By integrating its current and proposed switching facilities, the Company believes that it will ultimately be able to originate, transport and terminate a larger proportion of its traffic over the TelePassport Network, thereby bypassing the higher costs associated with use of other carriers' switched networks. Integration is expected to significantly reduce the cost structure for calls originating and terminating in markets in which the Company has switching facilities. In order to reduce the cost structure for calls not carried on the TelePassport Network, the Company will continue to attempt to aggressively negotiate favorable reseller contracts with major carriers. The TelePassport Network's utilization of least cost routing ("LCR") is designed to route traffic to minimize the cost per call. In addition, the Company seeks to optimize its leased line utilization by balancing telecommunications traffic during business hours with night and weekend off-peak traffic from alternative sources such as the USAFE Contract and residential customers. Furthermore, the Company plans to continue to invest substantial capital and resources to enhance its information systems to rapidly and economically enter orders and activate new customers, improve customer service, and improve sales tracking and forecasting. See "Risk Factors--Dependence on Effective Information Systems," "Use of Proceeds," "--The USAFE Contract; --The TelePassport Network; and --Information Systems." - Integrating its Distribution Network. In locations the Company deems strategic, the Company generally intends to integrate its distribution and interface directly with customers by acquiring independent sales agents, establishing country managers and/or creating direct sales organizations. In March 1997, the Company entered into agreements to acquire TelePassport Germany and TelePassport Austria, the Company's independent agents in Germany and Austria, respectively. The Company anticipates that the integration of its distribution network will give it greater control over its sales and marketing functions and provide a higher level of service to its customers. See "Risk Factors--Risks Associated With Acquisitions, Investments and Strategic Alliances" and "--Acquisitions." - Targeting Small and Medium-Sized Businesses with a Wide Range of Services. The Company intends to continue to focus on small and medium-sized businesses and residential customers with significant international long distance traffic. The Company believes that these customers tend to be focused principally on quality service at low prices and have traditionally been underserved by the ITOs and the major global telecommunications carriers. In order to attract such customers, who typically require a full-service telecommunications provider, the Company intends to continue to provide a wide range of services. The Company will seek to bundle its international long distance services with the national long distance services of other carriers to provide its customers with an integrated "one-stop shop" long distance service. In addition, the Company offers a variety of other services such as customized calling cards and prepaid debit cards, and plans to introduce additional customer-driven services in the future. See "Risk Factors--Rapid Changes in Technology and Customer Requirements," "--Sales and Marketing; and --Services." - Expanding the Government Services and Supra-National Sectors. The Company intends to continue targeting governmental and supra-national organizations. It has established a specialty marketing group to seek additional military and government contracts. The Company believes that contracts to provide services to such entities present the Company with the opportunity to establish a high profile in the regions surrounding the locality of each contract, enhancing opportunities for new customer development. Further, major contracts of this type will usually require the Company to establish switching facilities and other infrastructure which the Company can then utilize to expand its customer base in 44 48 the region. In addition, the Company seeks to identify other specialty markets which may provide the Company with similar benefits. See "--Sales and Marketing; and --Services." - Expanding Distribution, Customer Bases and Brand Recognition through the Use of Call Reorigination. By relying on a network of local independent agents, the Company intends to continue to use call reorigination, which does not require significant resource and capital investment, to expand the TelePassport brand worldwide in existing and new markets. The Company believes that call reorigination has an extended product life in markets that are not deregulating, are slow in implementing deregulation or are outside of major cities. The Company intends to leverage the customer base, distribution, experience and knowledge gained from its call reorigination efforts to identify private contract opportunities and markets in which it believes it can make profitable investments in infrastructure. As such markets move toward deregulation, the Company intends to migrate its call reorigination customers to facilities-based services. See "--Sales and Marketing; and --Services." - Expanding Wholesale Services. The Company intends to expand the resale of switched minutes to other telecommunications carriers and resellers on a wholesale basis. Although this category of traffic realizes lower margins than other services provided by the Company, it provides a source of additional revenue and adds significant minutes originating and terminating on the TelePassport Network, thereby enhancing the Company's purchasing power for leased lines and switched minutes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." - Pursuing Acquisitions, Investments and Strategic Alliances. The Company intends to enter new markets and expand its current operations through selective acquisitions, investments or strategic alliances of businesses or customer bases that complement the Company's current operations or capabilities. The Company is continuously reviewing opportunities and believes that such acquisitions, investments and strategic alliances are an important means of increasing network traffic volume and achieving economies of scale. The Company believes that its management's extensive entrepreneurial, operational, technical and financial expertise will enable the Company to identify and rapidly address such opportunities. See "Risk Factors--Risks Associated With Acquisitions, Investments and Strategic Alliances" and "--Acquisitions." SALES AND MARKETING The Company provides its services on a retail basis in more than 100 countries, primarily under the "TelePassport" brand, at prices that it believes are typically competitively priced below those of the ITOs. The Company also sells its services under the name MasterCall as an "off brand" service principally designed to address distributor conflicts and to permit experimental services without risking the TelePassport brand. The Company's retail services are generally marketed toward medium-sized businesses with international long distance telecommunications charges in excess of $1,500 per month, small-sized businesses with charges in excess of $250 per month and residential users with charges in excess of $50 per month. In addition to targeting small and medium-sized businesses and residential customers with significant international long distance traffic, the Company markets its services to supra-national and governmental organizations. The Company also provides application platform services and resells switched minutes on a wholesale basis to other telecommunications providers and carriers. Currently, no customer of the Company individually accounts for more than 10% of the Company's telecommunications revenue. The Company markets its retail, governmental and supra-national organizations and wholesale services through a variety of distribution channels, including independent agents, direct sales forces and joint ventures and other strategic relationships. The Company's use of these distribution channels varies from market to market. The Company intends to support the planned expansion of the TelePassport Network with the recruitment and training of additional marketing and sales personnel, including regional distribution managers. Further, the Company intends to enhance its marketing efforts by expanding its product management department, which currently consists of two full-time employees in New York. 45 49 Retail Services For distribution of TelePassport retail services, the Company generally relies on independent local sales agents. In locations the Company deems strategic, the Company seeks to integrate its distribution by either acquiring independent sales agents, establishing country managers and/or creating direct sales organizations. As the Company integrates its distribution in selected locations and replaces or integrates local agents with its own sales organization, employees of the Company, rather than the independent agents and their personnel, will interface directly with its customers. In March 1997, the Company entered into agreements to acquire TelePassport Germany and TelePassport Austria, its independent agents in Germany and Austria, respectively, concurrently with the closing of the Offering. See "--Acquisitions." In addition, the Company seeks to enter new markets and expand operations in existing markets by acquiring complementary businesses with established customer bases in targeted locations. In January 1997, the Company entered into the Intelenet Agreement to acquire Intelenet's customer accounts, principally in Naples and Milan, Italy, and telecommunications equipment. The Intelenet Acquisition will provide the Company with an immediate customer base to gain entry initially into the Milan and Naples markets, and thereafter expand the TelePassport Network into additional cities in Italy. In March 1997, the Company entered into the HCL Agreement to acquire HCL, an alternative network access consultant and installer of PBXs in the United Kingdom. The Company anticipates that the acquisition of HCL will expand the Company's existing customer base in the United Kingdom by providing the opportunity for TelePassport services to be marketed and sold to HCL's customers, as well as enabling the Company to offer an integrated package of PBXs and TelePassport services in the United Kingdom. See "--Acquisitions." Independent local sales agents are paid a variable percentage of collected revenue and, in general, are only granted nonexclusive sales rights, are not required to meet minimum sales quotas and are selectively authorized to sell competitors' services. The Company currently has a total of approximately 200 independent sales agents serving its worldwide market. Customers of TelePassport Southern Africa (Pty.) Ltd. and TelePassport Germany, two independent agents of the Company, and MasterCall, Ltd., an agent in which the Company acquired a controlling interest in May 1995, generated 4.4%, 13.6% and 22.0%, respectively, of the Company's telecommunications revenues for the year ended December 31, 1994, 9.6%, 15.1% and 8.9% for the year ended December 31, 1995, and 12.8%, 17.9% and 5.0% for the year ended December 31, 1996. New agents are recruited through local advertising by the Company and referrals from existing agents and customers. Distribution managers screen prospective agents based on their prior experience in telecommunications or related industries and their distribution strategies, business plans, credit-worthiness and ability to finance their operations. The Company provides training for new agents, focusing particularly on the TelePassport services and provisioning new customers. In addition, agents are provided informational updates and training materials on an ongoing basis. Agents are required to prepare periodic revenue forecasts. The Company utilizes its independent local sales agents to provide the first line of customer service, enabling the Company to deliver such service cost effectively, in local languages and during local business hours. Agents are currently supported by one full-time international distribution manager located in New York and a department of 11 agent support representatives also based in New York. Each new agent is assigned to a dedicated agent support representative. The Company's agent support representatives enter orders, activate new customer accounts and provide product, billing inquiry and resolution assistance to agents and to customers referred by agents. In support of the multilingual requirements of an international distribution network, agent support representatives are fluent in many languages including English, Chinese, French, German, Italian and Japanese. The Company plans to increase the number of agent support representatives and to establish regional customer service support centers in Germany, the United Kingdom and Japan. The Company also provides extensive marketing support to its agents including design, production and distribution of corporate brochures and product and market-specific materials, planning and promotion for, and participation in, trade show and special events, targeted advertising, promotional campaigns and direct mail programs. Governmental and Supra-National Organizations Services The Company currently employs two full-time employees based in Germany responsible for direct sales to, and support of, government and supra-national contracts such as the USAFE Contract. In addition, the 46 50 Company employs a full-time sales manager located in New York and a full-time support representative also located in New York to coordinate sales and maintenance activities for the UN Arrangements. The Company supports its sales efforts by leveraging existing customer relationships and through marketing initiatives that include targeted direct mail campaigns, advertising in publications that serve government and supra-national organizations, follow-up telephone sales, and participation in seminars and conferences sponsored by government and supra-national organizations. In addition, the Company publishes industry-related articles on technology and trends in relevant publications to increase exposure and build its corporate image. Wholesale Services The Company employs a full-time director of international carrier relations located in New York to manage the Company's developing relationships with ITOs and alternative international telecommunications providers, and a full-time sales representative based in New York to manage the Company's United States carrier relationships. In addition, the Company employs a full-time sales representative and a dedicated support representative in New York for its wholesale platform services business. The Company's strategy with respect to its wholesale services is to pursue bilateral buy/sell arrangements wherever practicable. Toward that end, the Company participates in domestic and international carrier membership organizations and related forums and seminars. The Company also submits position papers on industry topics to various industry forums and is frequently invited to participate on panels at industry-sponsored events. Resellers of the Company's platform services are provided training with respect to service applications, maintenance procedures and the automated provisioning process. Strategic Relationships The Company will continue to pursue joint ventures and strategic relationships in order to sell its telecommunications services in selected markets. The Company believes that these relationships may expedite or expand penetration into a particular market. For example, the Company's relationship with Asahi Telecom has provided the Company with a telecommunications partner with access to established distribution in the Japanese market. The Company has also entered into a relationship with a vendor of PBXs and related equipment in Austria whereby such vendor promotes the Company's services to its customers and prospective customers as part of an integrated package. Such relationships are also being pursued with organizations offering similar services in other European countries. In addition, the Company is currently developing an affinity program with a hospitality services organization located in Europe that provides on-line reservation services to hotels, their business and private traveler customers, and travel agencies. The Company is pursuing independent agent relationships with franchisees of such organization to facilitate entry into the hotel/travel services market. The Company intends to market its travel calling card and prepaid debit card services through associated traveler membership organizations, providing value-added services and premium promotional offerings such as frequent hotel guest discounts and related travel packages, including rail, air and car rentals. See "--Japan and Asahi Telecom." Corporate Communications The Company employs a full-time manager for its corporate communications department based in its New York headquarters to promote the Company's corporate image and the TelePassport brand. The Company's corporate communications efforts include public relations, web site development, advertising, direct mail and promotional campaigns. The Company also plans, sponsors and participates in trade shows, seminars and special events, designs and develops product packaging and designs market-specific promotional programs and materials. The Company expects to expand its corporate communications department to three full-time employees in New York and expects to recruit an analyst and specialist in global regulatory trends and requirements. SERVICES The Company provides international long distance services with value-added features on a retail basis to small and medium-sized businesses and residential customers, and also provides such services to supra-national and governmental organizations. Customer access to the TelePassport Network and the Company's services may be obtained through customer-paid local access, domestic and international toll-free access, 47 51 direct digital access through a dedicated line for high volume business users, equal access through automated routing from the PSTN, or call reorigination. The availability of a particular access method in any geographic area is governed by local laws and regulations, the volume of a customer's international long distance traffic and the degree to which the Company has infrastructure to support the access method in such area. The Company's services include VPN services, customized calling cards and prepaid debit cards. The Company offers value-added features such as itemized billing and multiple payment methods. The Company also provides application platform services and resells switched minutes on a wholesale basis to other telecommunications providers and carriers. See "Risk Factors--Substantial Government Regulation" and "Regulation of the International Telecommunications Industry." TelePassport retail services accounted for $23.8 million, or 65.0%, of the Company's telecommunications revenue for the year ended December 31, 1996, as compared to $20.8 million, or 75.4%, for the corresponding period in 1995. Historically, the majority of the Company's telecommunications revenue has been derived from the sale of call reorigination services. As additional markets deregulate and the Company expands the TelePassport Network within those markets, the Company anticipates that the percentage of telecommunications revenue derived from dedicated or switched access services will increase and the percentage of telecommunications revenue from call reorigination services will decrease. Sales to supra-national and governmental agencies accounted for $1.7 million, or 4.6%, of the Company's telecommunications revenue for the year ended December 31, 1996, which included sales of $0.6 million derived from a VPN contract with certain UN organizations and sales of retail services of $1.1 million (also included in the $23.8 million above). The Company did not have any such sales during the corresponding period in 1995. Wholesale services accounted for $12.2 million, or 33.3%, of the Company's telecommunications revenue for the year ended December 31, 1996, as compared to $6.8 million, or 24.6%, for the corresponding period in 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Retail Services TELEPASSPORT WORLD Call reorigination service for voice and fax calling. The TelePassport international gateway in the New York metropolitan area "reoriginates" the call, causing the call to be placed from the United States rather than from the foreign country. The Company is able to take advantage of competitive United States rates, the Company's volume buying power and the LCR utilized in the TelePassport Network, to reduce its costs and offer lower prices to the customer. In addition to the price savings to the customer, the Company believes that, compared to many foreign telephone companies, TelePassport World also provides an improvement in the quality of the communication because of the Company's access to fiber optic routes out of the United States. TelePassport World offers many enhanced features including personalized voice prompts, which permit call back at a specified extension in a choice of eight languages, remote programmable service, which allows the flexibility of selecting the call back number, real time rating for remaining credit for prepaid debit cards and prepaid accounts and fraud protection for billed accounts, and comprehensive billing reports detailing each call. TelePassport World can technically be used from any country in the world to make a call to any country in the world. TELEPASSPORT VPN Virtual private network services for voice, fax and data communications between and among various sites on a private network, and voice and fax communications from any site on the virtual private network to any worldwide destination. TelePassport VPN services provide dedicated access to a TelePassport Network switching facility and then to a pre-defined group of locations within a CUG that can be modified as required, subject to regulatory limitations. This service entails some degree of customization to meet the needs of the customer, including specialized dialing plans, requires individual proposals and contract negotiations, and some installation of equipment at customer locations. The service can be designed so that all costs are translated to per minute charges in the same format as the local ITO, or so that the customer pays a monthly access fee and a lower per minute cost. TelePassport VPN is targeted at large businesses with significant international long distance telecommunication charges. TELEPASSPORT DIRECT Dedicated access service for voice and fax calling from a single site to any destination worldwide. TelePassport Direct supports a dedicated connection from the customer's PBX to the TelePassport switch. Due to the higher costs associated with the dedicated connection, the Company only 48 52 markets TelePassport Direct to business customers with significant international long distance telecommunication charges. TELEPASSPORT CONNECT Local, customer-paid or domestic toll-free access services for voice and fax calling. TelePassport Connect is offered in countries where existing or imminent deregulation has made possible the installation of switching facilities and has opened the market for competitive switched access. The Company currently sells TelePassport Connect in the United States, the United Kingdom and Japan. TELEPASSPORT ONE Direct outbound telecommunications service for voice and fax. Switched or dedicated access permits the customer to use TelePassport through the automatic routing from the PSTN to TelePassport switching facilities ("Equal Access"), after dialing a four or five number code where Equal Access is unavailable, or through a dedicated connection to the Company's switching facilities. The Company currently offers this service in New York, and plans to introduce this service in the United Kingdom (as 1-XXX service) during the first quarter of 1997. TELEPASSPORT EXPRESS An international calling card enabling a customer to place phone calls and send faxes from approximately 40 countries worldwide to any destination without incurring long distance charges to the phone used. TelePassport Express utilizes international toll-free numbers to access the TelePassport Network. The Company targets TelePassport Express to frequent business travelers and vacationers. TELEPASSPORT POWER CARD An international prepaid calling card. Similar to TelePassport Express, the TelePassport Power Card enables the customer to make phone calls and send faxes from approximately 40 countries worldwide to any country in the world, offering savings and convenience for international calling. It is sold in various denominations and currencies. The Company broadly targets the TelePassport Power Card to small and medium-sized businesses, as well as to specific groups of residential customers, including migrant population markets, students, collectors, and vacationers and other occasional travelers. The Company also markets the TelePassport Power Card to organizations for promotions and other private label opportunities, offering card design, production and promotional services. TELEPASSPORT POWER LINE Voice and fax communications from any phone in an origination country to a single, predetermined phone or fax machine anywhere in the world, through local customer-paid access or national or international toll-free numbers. The Company targets the TelePassport Power Line to businesses receiving significant calls per month at the same telephone or fax number from, for example, foreign-based customers calling a customer service or information hotline or traveling and foreign-based employees. Wholesale Services To increase utilization of the TelePassport Network, the Company sells switched minutes providing international call termination services to other telecommunications carriers and resellers on a wholesale basis in the United States, the United Kingdom and Japan. Frequently, the Company's wholesale services are reciprocal in that the Company sells such services to carriers who are also suppliers of the Company. Although wholesale traffic generally realizes lower margins than the Company's retail services, it provides a source of additional revenue and adds significant minutes originating and terminating on the TelePassport Network. The additional traffic enhances the Company's purchasing power with the underlying carriers for both switched minutes and leased lines. The Company also sells a turnkey system platform which performs call reorigination for other resellers. The Company recently introduced to potential resellers turnkey debit card platform services in New York, London and Tokyo. The wholesale platform may include, at the election of the customer, the integration of toll-free, call reorigination and direct access features. In addition to wholesale pricing, services offered to call reorigination and debit card platform resellers include end user retail rating and billing where applicable, authorization and PIN number inventories, the provision of call detail records for invoicing and audit purposes, comprehensive management reports, dedicated customer support and on-line customer activation through the Company's proprietary customer care system. See "--Information Systems." JAPAN AND ASAHI TELECOM Since 1995, the Company has had a series of strategic relationships with Asahi Telecom. In March 1995, the Company and Asahi Telecom established TelePassport Japan, a Japanese company, as a joint venture to 49 53 sell international long distance services in Japan. In April 1995, the Company installed an international gateway switching center at its Tokyo office to, among other things, provide TelePassport Japan with international long distance services for a fee. The switching facility uses innovative call reorigination technology designed to provide the high quality and functionality required for the Japanese market while complying with existing regulatory requirements. Asahi Telecom, an agent for Japan Telecom long distance services and a distributor of NEC PBXs in Japan, performed all sales and marketing for TelePassport Japan. The joint venture has been owned 51% by the Company and 49% by Asahi Telecom, and as of December 31, 1996, had approximately 800 customers, consisting principally of small and medium-sized businesses, and generated an aggregate of $4.0 million of revenues since its inception. Japan Telecom owns 33.5% and NEC owns 9.0% of Asahi Telecom. In February 1996, Asahi Telecom entered into an agreement with Japan Telecom, its network provider, under which Asahi Telecom is installing switches at Japan Telecom node sites, enabling Asahi Telecom to provide, through A.T. NET, its wholly owned subsidiary, one of Japan's first integrated national and international long distance services. A.T. NET primarily targets small and medium-sized Japanese companies located in Tokyo, Osaka, Nagoya and other Japanese cities and supplies national and international long distance services at prices which the Company believes are typically below those of Japan's dominant national and international long distance carriers. TelePassport Japan provided all international long distance services to A.T. NET. In an effort to enhance its presence in the Japanese telecommunications market and strengthen its relationship with Asahi Telecom, in March 1997, the Company, together with A.T. NET and Asahi Telecom entered into the A.T. NET Agreements under which the Company took the place of the joint venture as the provider of international long distance services to A.T. NET, Asahi Telecom and their respective affiliates. Under a reciprocal reselling arrangement, the Company is also entitled to receive preferential pricing to resell A.T. NET's national long distance services in Japan. To the extent allowed by applicable regulation, the Company intends to resell A.T. NET's national long distance services and offer, along with its own international long distance services, an integrated TelePassport national and international long distance service primarily to non-Japanese companies located in Japan, a significant customer segment that A.T. NET does not currently target. The Company believes that such arrangements will also provide it with an added competitive advantage with respect to the Company's wholesale business by allowing it to cost effectively originate and terminate international traffic from and to major metropolitan areas of Japan. In addition, to the extent that A.T. NET offers customized calling cards and prepaid debit cards for its customers, the Company will supply the related national and international long distance services to such cardholders. See "Regulation of the International Telecommunications Industry." Under the terms of the A.T. NET Agreements, the Company, A.T. NET and Asahi Telecom will enter into a sales and marketing agreement pursuant to which the Company, as an agent for A.T. NET, will have the non-exclusive right to sell and market A.T. NET services in return for commissions based on a percentage of revenues generated by those customers of A.T. NET for which the Company is an agent. As part of the A.T. NET Agreements, the Company has exercised an option to purchase for $3.0 million shares representing, in the aggregate, a 10% ownership interest in A.T. NET. The purchase price is payable at any time prior to May 31, 1997 and the Company intends to pay the purchase price from the net proceeds of the Offering. The Company is also entitled to designate one representative to A.T. NET's five-member board of directors for so long as the Company acts as the provider of international long distance services for A.T. NET. The A.T. NET Agreements also provide that A.T. NET and Asahi Telecom will enter into arrangements to provide to the Company's customers those services permitted by A.T. NET's Special Type II registration, which would effectively permit the Company to provide additional telecommunications services in Japan. See "Use of Proceeds" and "Regulation of the International Telecommunications Industry." Under the A.T. NET Agreements, Asahi Telecom purchased the Company's 51% interest in TelePassport Japan and the Company purchased TelePassport Japan's rights to foreign and private line customers, which accounted for approximately 10% of TelePassport Japan's revenues, the private line equipment associated with such customers and certain other assets. Asahi Telecom assumed TelePassport Japan's outstanding debt, which was $3.5 million as of December 31, 1996. 50 54 The Company believes that its relationship with Asahi Telecom and ownership interest in A.T. NET provide the Company with a unique opportunity to competitively penetrate the Japanese market and advance the TelePassport brand. The Company intends to utilize the TelePassport brand recognition that it is creating in Japan as a platform from which to expand into other targeted Asian countries. THE USAFE CONTRACT In May 1996, the United States Air Force Nonappropriated Fund ("AF NAF") Purchasing Office awarded the Company the USAFE Contract to install and maintain state-of-the-art digital PBX systems and telephones at the temporary lodging facilities on certain USAFE bases in Europe. The USAFE maintains such facilities on its military bases primarily for military and Department of Defense ("DoD") personnel performing temporary duty in Europe, for visiting military and United States government officials and for personnel awaiting new assignments or permanent housing. USAFE lodging facilities currently have no in-room telephone services and guests must use public phone booths in the lobbies where they are customarily restricted to five-minute calls. Under the USAFE Contract, the Company is required to provide local exchange and national and international long distance telecommunications services to each room for a period of ten years from the installation and acceptance of each system. Under the terms of the USAFE Contract, the Air Force will receive up to 10% of all long distance revenue depending upon the amount of revenue generated. The USAFE Contract contains a standard government "termination for convenience" clause pursuant to which the AF NAF contracting officer may terminate the contract if the officer determines that such action would be in the best interest of the United States government, provided that the Company may be entitled to recover certain costs upon termination. To date, the Company has received delivery orders for the temporary lodging facilities at two bases in Germany and one base in Italy and has received RFPs for nine bases: two in Germany, five in the United Kingdom, one in Spain and one in Turkey. The temporary lodging facilities on the 14 bases covered by the USAFE Contract house an aggregate of 3,733 rooms. The Company has completed the installation of telecommunications systems providing service to the temporary lodging facilities at the Ramstein and Rhein Main Air Force Bases in Germany. The Company expects to complete the installation of systems at nine additional bases by the end of 1997. The Company believes that the opportunity exists to expand the provision of TelePassport services under the USAFE Contract to the permanent dormitories within USAFE and into other areas of the United States armed forces in Europe. The USAFE Contract contains a provision that permits certain other DoD agencies in Europe to use the purchasing power of the AF NAF Purchasing Office under the terms of the USAFE Contract and present the Company with delivery orders for certain of their facilities in Europe. The Company intends to take advantage of this provision by actively pursuing delivery orders from other United States military facilities in Europe. Further, it is currently anticipated that in October 1997 the United States military will begin to privatize the provision of non-classified telecommunications services, which will result in the solicitation by individual military bases of competitive bids for such services. The Company intends to aggressively pursue such additional contracting opportunities. No assurance can be given that the Company will successfully expand its services or successfully bid on any additional United States military contracts. The Company believes its presence on the USAFE bases will also present it with an opportunity to market TelePassport services to the residents of the local communities surrounding the bases. Many of the USAFE bases are situated outside of clusters of small towns which are home to significant foreign populations. For example, the Rohr Valley, an area approximately 70 miles outside of Frankfurt, houses a group of USAFE bases, including the Ramstein and Rhein Main Air Force Bases, and contains an off-base population of more than 50,000 Americans. The Company believes that the USAFE Contract will significantly improve the TelePassport Network economies of scale for other service segments of the Company. The Company expects that the occupants of the temporary lodging facilities will generate significant phone traffic at night when there tends to be less phone usage from other customers. Accordingly, the Company can expand its total minutes of calls without an equivalent increase in capacity of leased lines. 51 55 THE UN ARRANGEMENTS The Company provides its services to the field offices of several UN and other supra-national and humanitarian organizations and non-governmental agencies. Since June 1993, the Company has been a supplier of call reorigination services for certain UN agencies and their affiliates in over 100 countries and has entered into service contracts with the field offices of other supra-national food, health, fiscal and labor organizations. In certain cases, the umbrella organization or agency agrees to guarantee payment to the Company from the individual foreign offices, internally promote the Company's TelePassport services and distribute TelePassport invoices through its own internal mail service. In general, the service contracts are terminable upon 30 days notice to the Company from either the agency on behalf of all of the covered field offices or an individual field office. The Company also typically agrees to offer the same services and discounted rates to the employees of the field offices and their family members. Charges for such services are billed directly to each individual's personal credit card. The Company believes that contracts to provide services to such entities are strategically important because they present the Company with the opportunity to establish a high profile in the regions surrounding the field offices, enhancing opportunities for new customer development. See "--Sales and Marketing." THE TELEPASSPORT NETWORK The TelePassport Network is a digital, advanced switch-based telecommunications network connected by leased fiber optic transmission facilities. The Company leases IPLCs from MCI, BT and IDC. The TelePassport Network currently has international gateway switching centers in New York and Tokyo. In addition, the Company has switching facilities in London and Vienna. The Company intends to use a significant portion of the net proceeds of the Offering to expand and upgrade the TelePassport Network. The construction of a state-of-the-art international gateway switching center and network management facility in New Jersey, which will replace the New York gateway, is substantially completed. The Company intends to further develop the TelePassport Network by upgrading existing facilities and by adding switching facilities in up to 30 cities over the next three years, depending on the availability of additional financing. These will be located, principally, in primary markets where the Company already has an established customer base or has existing key contracts, as well as in secondary markets in proximity to the Company's primary markets. By the end of 1997, the Company plans to expand the TelePassport Network by upgrading existing and installing additional switching facilities in the New York metropolitan area, the United Kingdom, Austria and Japan and installing switching facilities in Frankfurt, Milan, Naples, Paris and Zurich. The Company anticipates that over the next three years, it will install additional switching facilities in California, Ireland, Spain, France, Italy, Denmark, Germany, Belgium, Sweden and the Netherlands. The Company also plans to invest in digital undersea fiber optic cable and to lease IPLCs in order to cost effectively interconnect the expanding TelePassport Network switching facilities. See "Risk Factors--Substantial Capital Requirements; Need for Additional Financing to Complete Network Expansion; Uncertainty of Additional Financing; Broad Discretion Over Use of Proceeds; and --Potential Difficulties Associated With Implementing Telepassport Network Expansion Strategy," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "--Information Systems." In areas in which the Company believes it is not optimal to own network facilities, the Company typically enters into agreements to resell the facilities of other operators in order to enhance the TelePassport Network. The Company purchases switched minute capacity from various carriers and depends on such agreements for termination of traffic from the TelePassport Network. For the years ended December 31, 1994, 1995, and 1996, respectively, MCI supplied 45.5%, 36.1% and 20.5%, WorldCom Inc. ("WorldCom") supplied 46.8%, 28.2% and 7.5%, and Cable & Wireless International, Inc. ("CWI") supplied 5.1%, 32.6% and 29.3% of the Company's aggregate purchased switched minute capacity. The Company believes that the loss of any one supplier would not have a material adverse effect on the Company's business, financial condition or results of operations. The Company is also a reseller of other carriers' national long distance. In Japan, as a result of the Company's strategic relationship with Asahi Telecom, the Company is entitled to resell, at preferred rates, A.T. NET's national long distance service. The Company plans to use the preferential pricing it will receive as a reseller of A.T. NET's national long distance to offer an integrated TelePassport national and international long distance service in Japan. In other markets, the Company works with multiple national long distance 52 56 carriers to ensure that the pricing and service on each route are the best available and that the Company can provide an integrated long distance service to its customers. See "Risk Factors--Reliance on Third Parties for Leased Capacity" and "--Japan and Asahi Telecom." The economic benefits to the Company of owning and operating the TelePassport Network, in contrast to being a reseller of switched minute capacity, arise principally from reduced transmission costs. The transmission cost for a call that is not routed through the TelePassport Network is dependent upon the variable per minute cost that is paid to the underlying carrier. In contrast, the cost of a call routed over the TelePassport Network is dependent upon the total fixed costs associated with owning and operating the TelePassport Network. Accordingly, the reduction of transmission costs per call is a function of increasing the call volume over the TelePassport Network and maximizing the TelePassport Network's capacity. One method of increasing the capacity of the TelePassport Network is to optimize bandwidth usage by utilizing compression technology. Compression reduces transmission costs by completing multiple calls over a single circuit. As traffic volume through the TelePassport Network increases, transmission costs are expected to decline as a percentage of revenue. This economic benefit, however, is generally limited to traffic that can be originated or terminated in a city where the Company has a switching facility. If a Company-owned switching facility does not exist in an origination or destination city, the Company must transport the call over another carrier's facilities, at higher transmission costs and reduced margins. Accordingly, as the TelePassport Network is expanded, the Company anticipates being able to provide telecommunications services on a more cost-effective basis. The TelePassport Network utilizes "intelligent routing facilities" which incorporate proprietary software designed to maximize network routing efficiency and provide resiliency to the TelePassport Network. The Company's intelligent routing facilities route traffic over the Company's transmission facilities, other carriers' transmission facilities or a combination of such facilities, at the lowest cost to the Company. The LCR software is used to assist the Company in analyzing traffic patterns and determining network usage. If traffic cannot be handled over the least cost route due to overflow, the LCR system is designed to transmit the traffic over the next least cost route. To optimize utilization of the TelePassport Network, the capacity is engineered to accommodate 80% of busy hour traffic, allowing the overflow to route to alternative carriers. See "--Information Systems." In general, the Company relies upon other carriers' networks to provide redundancy in the event of technical difficulties on the TelePassport Network. The Company believes that the strategy of using other carriers' networks for redundancy is currently more cost-effective than purchasing or leasing its own redundant capacity. To the extent that the traffic over the TelePassport Network exceeds the Company's transmission capacity, the Company may elect or be required to route overflow traffic over other carriers' networks, which may result in reduced margins on such calls. The Company has developed and implemented the TelePassport Network Management System (the "Network Management System") to monitor the TelePassport Network, provide traffic flow statistics and identify capacity issues in real time. This information is analyzed for capacity planning and to allow additional throughput to be engineered to maximize utilization of the TelePassport Network. The Company has taken measures to protect the TelePassport Network from unforeseen disasters. The Company's back office operations, billing and switching systems are hardware redundant to prevent a single point of failure from bringing down the entire network. In addition, multiple power sources, surge protection equipment and universal power saver and battery backup provide emergency backup for all systems in the TelePassport Network. The TelePassport Network currently utilizes Summa Four SDS and Excel LNX2000 programmable switches, Network Equipment Technologies Inc.'s IDNX intelligent multiplexers, and Siemens HICOM switches. As future growth dictates, carrier grade switches will be incorporated into the major switching sites. The Company intends to deploy the first of these switches as early as June 1997. The Company is in the process of selecting other network hardware that will best support its use of advanced transport technologies. The TelePassport Network supports various signaling protocols and uses SS7, the industry standard signaling protocol. As upgraded, the TelePassport Network will support advanced technologies such as frame relay, ATM, X.25 packet switching and ISDN. These technologies assist in optimizing the use of bandwidth, which 53 57 can effectively lower operational costs. See "Risk Factors--Potential Difficulties Associated with Implementing TelePassport Network Expansion Strategy." The Company's switching facilities are connected by IPLCs. Generally, the Company leases lines pursuant to one- to three-year leases. Because rates for international transmission lines are continuing to fall, the Company has not made, and has no current intention to make, leases of longer duration with any providers. The Company believes that the opportunities for resale will become increasingly attractive as countries deregulate and grant additional carrier licenses, and competitive pressures force carriers to find alternative sources of distribution. See "Risk Factors--Reliance on Third Parties for Leased Capacity." INFORMATION SYSTEMS The Company has invested substantial resources to implement sophisticated information systems, which it believes are integral to being competitive and to effectively managing its business. The Company plans to continue to invest substantial capital and resources to enhance its information systems by replacing or upgrading certain existing systems and integrating new systems. The Company's information systems enable it to: (i) rapidly and economically integrate new customers; (ii) provide high quality customer service; (iii) provide customized billing information; (iv) provide sales tracking and traffic forecasting; (v) detect and minimize fraud; (vi) provide network security; (vii) provide network trouble shooting, maintenance and engineering modeling; and (viii) generate administrative, financial and marketing reports. See "Risk Factors--Dependence on Effective Information Systems" and " --Business Strategy." The Company's proprietary Communications Order Maintenance System ("COMS") is a remote order entry and customer activation system, which allows sales agents to process orders electronically without the need for human intervention and the cost associated with manual processing and confirmation. COMS validates a customer's information at the agent location before the order is electronically transferred to the Company's proprietary Customer Records System ("CRS") at the Company's central back office operations. CRS automatically checks an incoming COMS order for creditworthiness and sets up the customer account in the CRS database and the switch database. During the next COMS transfer session, COMS is automatically updated by the CRS with the new customer information and status. COMS provides E-mail and trouble reporting that replicates the information held by the back office operations relating to the agent's customers, including financial transactions, billing information and account status. Substantially all of the Company's agents use the software, which is updated via new releases regularly. CRS is integrated with other operational support systems, including billing, credit card processing, provisioning, agent commissioning and trouble reporting. The CRS system provides user friendly, validated order entry and maintenance of all of the Company's accounts, agents, and wholesalers, including those set up remotely by COMS. The CRS provides authorized staff with complete customer and agent information including up-to-the-minute financial status, and real time call detail associated with the customer's usage. The Company plans to develop multiple language capability for the CRS and COMS systems and is presently developing a Japanese language interface. Non-English interfaces will provide the ability to hire non-English speaking staff at generally lower costs and to directly service non-English speaking customers, while still providing integration into the Company's systems. The Company's proprietary billing system utilizes real time worldwide call detail data collection allowing the Company to process credit cards several times per month and to set credit and fraud limits for customers, limiting exposure to bad debts. The Company generates approximately 16,000 invoices per month in multiple presentation formats. The Company is presently developing Japanese language billing. The Company's proprietary Accounts Receivable system provides fully automated handling of customer payments and collections activity, including automatic credit card processing, automatic international direct bank debiting and international wire transfers. The Accounts Receivable system is integrated into the CRS and the billing system. The Company plans to upgrade its existing information systems to include larger and faster servers to accommodate planned growth, to allow for the development of fully integrated international service centers, to allow full utilization of the intranet/Internet paradigm and to take advantage of developments in data warehousing, integrity and security. 54 58 COMPETITION The international telecommunications industry is highly competitive. The Company believes that competition will continue to intensify as the number of new service providers of various sizes increases due to the overall growth in the industry and the global trend toward deregulation. The Company's success depends upon its ability to compete with a variety of telecommunications providers in each of its markets. Competition for customers is primarily based upon price, the type and quality of services offered and customer relationships. Other providers of long distance telecommunications services include: (i) the ITO in each country; (ii) major carriers and their global alliances, such as Global One, a consortium which consists of Sprint Corp., DT and France Telecom; Unisource, a consortium which consists of Telia AB, PTT Telecom BV, Swiss Telecom PTT and Telefonica de Espana S.A.; Concert, a consortium which consists of BT and MCI; and World Partners, which consists of AT&T, Kokusai Denshin and Denwa Co., Ltd. ("KDD"), Singapore Telecommunications Ltd. and Unisource; (iii) secondary alliances of nontraditional carriers which own infrastructure, such as the consortium of Mannesmann AG and Deutsche Bahn AG; and VIAG InterKom GmbH, a joint venture between VIAG AG and BT; and (iv) alternative carriers, such as WorldCom; Viatel, Inc.; RSL Communications plc; and ACC Corp. Other potential competitors include cable television companies, wireless telephone companies, Internet access providers and large end users which have dedicated circuits or private networks. Many of the Company's current or potential competitors have substantially greater financial, marketing and other resources than the Company. The Company believes, however, that it will face less competition when it enters secondary regional markets because competitors will be concentrating on the larger metropolitan areas. See "Risk Factors -- Competition" and "-- Business Strategy." In February 1997, the WTO announced that 69 countries, including the United States, Japan, Switzerland, South Africa and all of the member states of the EU, entered into the WTO Agreement with the goal of increasing competition for telecommunications services in such markets. Under the WTO Agreement, beginning in 1998, such countries are expected to allow access to their domestic and international markets to competing telecommunications providers, allow foreign ownership interests in existing telecommunications providers and establish regulatory schemes to develop and implement policies to accommodate telecommunications competition. Implementation of the WTO Agreement is expected to result in greater competition from new market entrants and existing telecommunications providers in these markets. See "Risk Factors -- Substantial Government Regulation; and -- Competition" and "Regulation of the International Telecommunications Industry." The Company prices its services primarily by discounting against the ITOs in the geographic markets in which the Company operates. The Company has no control over the prices set by these ITOs, and some may be able to use their financial resources to cause severe price competition. Although the Company does not believe that there is an economic incentive for an ITO to pursue such a pricing strategy, there can be no assurance that severe price competition will not occur. The Company's marketing strategy is generally to focus on small and medium-sized businesses and residential customers that generate significant international long distance traffic. Thus, the Company tends not to compete with the major international carriers and the global alliances, which generally offer their lowest rates and best services primarily to larger, higher-volume businesses and less frequently to small and medium-sized businesses. Secondary alliances generally target their services to compete directly with the global alliances and ITOs and not with the Company. The Company's TelePassport Direct and TelePassport VPN services are targeted, however, at larger volume businesses which may also be targeted by the global and secondary alliances. Furthermore, the Company's marketing efforts toward supra-national and governmental organizations may also compete directly with major international carriers. In addition, the Company's pricing as a reseller is dependent upon the pricing strategy of larger carriers who supply the Company with switched minutes. To the extent such carriers target customers similar to those targeted by the Company, such carriers are also direct competitors of the Company. Accordingly, the business success of a reseller is significantly tied to the pricing policies established by potential competitors. 55 59 Many of the newly emerging competitors are smaller carriers, most of which specialize in offering international telephone services utilizing call reorigination and other alternative access methods. Some of these alternative carriers have begun to build networks which are similar to, or more extensive than, the TelePassport Network. Competition for customers among these small carriers is primarily based on the carrier's reputation and the ability of a carrier to provide quality service at low prices. See "Risk Factors -- Competition" and " --Business Strategy." In general, the degree of deregulation in a particular country impacts the Company's ability to compete. In a deregulated country such as the United States, carriers can establish switching facilities, own or lease fiber optic cable, enter into operating agreements with foreign carriers and accordingly provide direct access service. In markets that have not deregulated or are slow in implementing deregulation, such as South Africa, international long distance carriers have used advances in technology to develop innovative alternative access methods, such as call reorigination. In other countries, such as Japan and most EU member states, where deregulation is imminent but not complete, carriers are permitted to offer facilities-based data and facsimile services, as well as limited voice services including those to CUGs, but are as yet precluded from offering full Voice Telephony. As countries deregulate, the demand for alternative access methods typically decreases as carriers are permitted to offer a wider range of facilities-based services. TRADEMARKS AND PROPRIETARY INFORMATION Trademarks. The Company protects the Telepassport brand for its products and services by registration of the Telepassport trademark, where appropriate, both in the United States and in foreign countries. The Company has filed applications in the United States Patent and Trademark Office to register the word mark TelePassport and its stylized "globe" logo on the Principal Register for telephone communications services. The applications have been allowed, subject to the continued commercial use of the marks. The Company has also applied to register the word mark and logo for telephone communications services in up to 13 foreign countries. The Company intends to register its marks in countries where it plans to establish switching facilities. It is possible that prior registrations and/or uses of one or both marks (or a confusingly similar mark) may exist in one or more of such countries, in which case the Company might be precluded from registering and/or using the TelePassport mark and/or logo in such countries. The Company has also applied to register the mark MasterCall in countries where its services are marketed under this brand. Proprietary Information. To protect rights to its proprietary know-how and technology, Company policy requires certain of its employees and consultants to execute confidentiality agreements that prohibit the disclosure of confidential information to anyone outside the Company. These agreements also require disclosure and assignment to the Company of discoveries and inventions made by such persons while employed by the Company. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any such breach or that the Company's confidential information will not otherwise become known or be independently developed by competitors or others. PROPERTIES The Company currently subleases approximately 12,710 square feet of office space at its corporate headquarters in New York, New York. The sublease has an annual rental obligation of approximately $283,000, subject to adjustment, and expires on June 29, 2000. The Company entered an agreement to use and occupy an additional 954 square feet of office space at the same location on a temporary basis until the construction of the New Jersey international gateway switching center and network management facility is completed. The fee for the temporary space is $3,835 per month and the agreement, as extended, expires on March 31, 1997, subject to further extension by the Company upon 30 days' notice. The Company rents additional facilities in the United States to house its switching facilities and additional corporate offices. In Piscataway, New Jersey, the Company leases a 7,681 square foot facility to house its under-construction international gateway switching center and network management facility, as well as additional office space. The Piscataway lease has an annual rental obligation ranging from approximately $84,000 in the first year to $116,000 in the fifth year, and expires on January 31, 2002. The Company leases 160 square feet of space in New York City to house its current international gateway switching center, which 56 60 will be replaced by the Piscataway facility upon its completion. Such lease has an annual rental obligation of approximately $48,000 and is currently on a month-to-month basis. The Company rents facilities in various foreign cities to house its switching facilities and office space primarily for the Company's overseas sales offices. In London, the Company's switching facility is located at the offices of a local telecommunications provider under the terms of a co-location agreement in consideration of a monthly fee of $1,500, subject to adjustment. In Tokyo, the Company leases space for offices and its switching facility for an annual rent of approximately $211,000, and in Germany, the Company rents 996 square feet near the Ramstein Air Force Base for an annual rent of approximately $10,500. The rental amounts set forth above in United States Dollars are based on foreign currency exchange rates in effect as of December 31, 1996. EMPLOYEES As of December 31, 1996, the Company had 75 full-time and five part-time employees, approximately eight of whom were engaged in management, 30 of whom were engaged in sales and marketing, 14 of whom were engaged in network engineering, seven of whom were engaged in managing information systems and 21 of whom were engaged in administration. None of the Company's employees is covered by a collective bargaining agreement. Management believes that the Company's relationship with its employees is satisfactory. LEGAL MATTERS The Company is a party to routine filings and customary regulatory proceedings with the FCC relating to its operations. See "Regulation of the International Telecommunications Industry." In December 1996, Cherry Communications Incorporated, a supplier of telecommunications services to the Company, filed a complaint in the United States District Court for the Northern District of Illinois Eastern Division against USFI, Inc. alleging breach of a carrier service agreement between the parties and seeking damages of at least $613,461. The parties have agreed to stay the litigation pending arbitration of the claim as provided by the service agreement between the parties. The Company believes that the outcome of this proceeding will not have a material adverse effect on the Company's cash flow, financial condition or results of operations. The Company is not currently a party to any other material litigation. THE REORGANIZATION USFI, Inc., the principal operating subsidiary of the Company, was incorporated in January 1993 by Stephen E. Myers, Michael C. Anderson and James D. Pearson (the "Principals"), to exploit opportunities in the international long distance market. In February 1995, the Principals formed USFI-Japan, L.L.C. to hold its interest in TelePassport Japan. In May 1996, the Principals formed TelePassport L.L.C. to act as a holding company for its operating subsidiaries formed in Japan, Switzerland, Austria and Germany and for the subsidiary operating the USAFE Contract. In December 1996, the Principals formed TelePassport Inc., the issuer of the Class B Common Stock offered hereby. Prior to the effective date of the registration statement of which this Prospectus is a part, TelePassport L.L.C. will be merged with TelePassport Inc. and all the outstanding shares and interests in USFI, Inc. and USFI-Japan, L.L.C will be contributed to TelePassport Inc. From and after the date of the Reorganization, all the assets and business of USFI, Inc. and USFI-Japan, L.L.C. will be owned and conducted by TelePassport Inc. As consideration for the contribution of their interests in USFI, Inc. and USFI-Japan, L.L.C., the current equity owners of the TelePassport Companies will receive an aggregate of 7,348,000 shares of Class A Common Stock which, combined with their current stockholdings, will constitute 100% of the outstanding Class A Common Stock, and which will represent 93.2% of the combined voting power of the Company upon completion of the Offering (and after giving effect to the Acquisitions). See "Description of Capital Stock." ACQUISITIONS In March 1997, the Company entered into an agreement with Georg F. Hofer ("Hofer"), the sole stockholder of its German independent agent TelePassport Germany, to purchase all of the outstanding capital 57 61 stock of TelePassport Germany concurrently with the closing of this Offering. The purchase price is $0.2 million in cash payable at the closing and that number of shares of Class B Common Stock equal to $3.8 million divided by the initial public offering price per share. Shares of Class B Common Stock equal to $2.6 million will be issued to Hofer at the closing and the remaining shares will be deposited into escrow to vest ratably over a period of 36 months, subject to certain conditions. The Company will also grant Hofer options under the Long Term Incentive Plan to purchase shares of Class B Common Stock equal to 0.25% of the shares outstanding on the closing date of the Offering, as well as certain piggyback registration rights. In addition, Hofer and TelePassport Germany will enter into a three-year employment agreement. See "Related Party Transactions" and "Description of Capital Stock." Also in March 1997, the Company entered into an agreement with Hofer and the other stockholders of TelePassport Austria to purchase all the capital stock of TelePassport Austria, its independent agent in Austria, concurrently with the closing of the Offering. The purchase price for the TelePassport Austria stock is that number of shares of Class B Common Stock equal to $0.3 million divided by the per share initial public offering price, all of which will be deposited into escrow to vest ratably over a period of 36 months, subject to certain conditions. In addition, two of the sellers will enter into three-year employment agreements with TelePassport Austria. In March 1997, the Company entered into the HCL Agreement with the shareholders of HCL to purchase of all the capital stock of HCL within 30 days after the closing of this Offering (the "HCL Closing"). The purchase price for 80% of the HCL shares consists of $0.3 million in cash plus that number of shares of Class B Common Stock equal to $1.0 million divided by the initial public offering price, all of which is payable at the HCL Closing. The purchase price for the remaining 20% of the HCL shares (the "HCL Final Payment") is payable after the third year (or, at the option of sellers, the fourth year) following the HCL Closing in cash or Class B Common Stock, at the Company's option, in an amount equal to 20% of HCL's annual revenues for such year, as calculated pursuant to the HCL Agreement. In addition, the Company will make a capital contribution to HCL of $250,000 at the HCL Closing. The Company has also agreed to enter into a three-year employment agreement with one of the HCL shareholders to manage the HCL operations. The HCL Final Payment will be forfeited if such employment is terminated by the employee without cause or by the Company with cause prior to the date such payment is due. In addition, in January 1997, the Company entered into the Intelenet Agreement pursuant to which, for $35,000, the Company acquired an option to purchase Intelenet's customer accounts, principally in Milan and Naples, and telecommunications equipment. The option is exercisable until 30 days after the closing of this Offering for an aggregate price equal to (i) the cost of Intelenet's equipment, less $10,000, which is payable in cash upon exercise of the option, and (ii) an amount, payable in three installments, equal to a percentage of the revenues generated by Intelenet's customers in three of the nine months following the installment of new switching facilities. The Company has also agreed to enter into a one-year employment agreement with the president of an affiliate of Intelenet. See "Risk Factors--Risks Associated With Acquisitions, Investments and Strategic Alliances." 58 62 REGULATION OF THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY OVERVIEW International telecommunications services are subject to the laws and regulations of the countries in which those services are provided. Applicable laws and regulations differ significantly in the countries in which the Company operates or plans to operate. Some of those countries prohibit or limit the services which the Company provides or plans to provide as well as the transmission and access methods used to provide those services. In consultation with local counsel in countries where the Company operates or plans to operate, the Company has pursued a strategy of providing its services to the fullest extent believed permissible under each country's laws and regulatory policies. Based upon those consultations, the Company may aggressively interpret local laws and regulations with respect to services that require relatively little resource and capital expenditures, such as call reorigination. The Company's policies are to make significant resource and capital investments, however, only in countries whose laws and regulations clearly allow it to provide such services using the Company's preferred transmission and access methods, and to pursue the highest form of licensing available. See "Risk Factors -- Substantial Government Regulation." If the Company's interpretation of a country's laws or regulations is found to be incorrect, the Company may seek to modify its operations so as to comply with such laws or regulations, or alternatively may be required to cease operations in that country. To date, the Company has not been subject to any fines, penalties or other sanctions, nor has it been the subject of any legal or regulatory action or inquiry as a result of any alleged violations of telecommunications laws or regulations. Since June 1995, 18 countries have formally notified the FCC that call reorigination services violate their laws. FCC policy provides that foreign governments that satisfy certain conditions may request FCC assistance in enforcing their laws against United States call reorigination providers. Of these 18 countries, two countries have requested assistance from the FCC in enforcing their prohibitions on call reorigination within their respective territories. The Company has customers in 17 of these countries, including one country which has requested that the FCC take action against the Company. The customers in these 17 countries accounted for an aggregate of approximately 6.0% of telecommunications revenue in 1996. To date, the FCC has not initiated any action against the Company. The Company believes that, even if it was required to cease operating in one or more of such markets, there would not be a material adverse effect on the Company's business, financial condition or results of operations. See "Risk Factors -- Substantial Government Regulation." REGULATORY FRAMEWORK The regulatory frameworks of the United States and those jurisdictions which the Company considers its core target markets are briefly set forth below. This discussion is intended to provide a general outline of key applicable laws and regulations of those countries and is not intended to be a comprehensive description of the laws or regulatory policies of each country. In February 1997, the WTO announced that 69 countries, including the United States, Japan, Switzerland, South Africa and all of the member states of the EU, entered into the WTO Agreement. Under the WTO Agreement, beginning in 1998, such countries are expected to allow access to their domestic and international markets to competing telecommunications providers, allow foreign ownership interests in existing telecommunications providers and establish regulatory schemes to develop and implement policies to accommodate telecommunications. The WTO Agreement will provide an opportunity for new market entrants, such as the Company, to acquire and operate telecommunications switching facilities in certain of these countries, several of which presently do not permit the provision of facilities-based services in competition with services provided by the incumbent telecommunications providers. See "Risk Factors -- Substantial Government Regulation; and -- Competition." 59 63 United States The Company's provision of international telecommunications service between the United States and foreign points is subject to regulation by the FCC. The Company was required to obtain FCC 214 Authorizations to provide international long distance services. The Company believes that it has obtained all authorizations from the FCC required for the conduct of its current operations, but that it may need additional FCC authorizations in the future. The Company has been authorized by the FCC pursuant to Section 214 to provide international service by the resale of switched services of United States carriers, and to provide international switched service by the resale of international private lines interconnected with the public switched networks of the United States and those countries determined by the FCC to afford resale opportunities equivalent to those available under United States law. To date, such interconnected private line resale has been permitted by the FCC only to four countries: Canada, the United Kingdom, Sweden and New Zealand. It is possible that interconnected private line resale to additional countries may be allowed in the future. Pursuant to FCC rules and policies, the Company's authorization to provide service via the resale of interconnected international private lines will be expanded to include countries subsequently determined by the FCC to afford equivalent resale opportunities to those available under United States law, if any. See "Risk Factors--Substantial Government Regulation." In addition, the Company has been authorized by the FCC pursuant to Section 214 to provide global facilities-based service between the United States and all international points which are not "Ineligible Destination Countries" under the FCC's exclusion list, which list currently excludes only Cuba. With respect to the Company's authorization to provide service between the United States and countries determined by the FCC to afford equivalent resale opportunities, the FCC allows the Company to forward such traffic from the equivalent country to non-equivalent countries by acquiring at published rates and reselling the international switched service of a carrier in the equivalent country. Similarly, the FCC allows the Company to terminate inbound traffic in the United States over interconnected private lines which originates in a non-equivalent country and which is routed from that country to the equivalent country using the originating country's international switched service, as opposed to private lines. These configurations are referred to by the FCC as "switched hubbing." See "Risk Factors--Substantial Government Regulation." The FCC's grant of the Company's FCC 214 Authorization to resell international switched services also permits the Company to offer service by means of call reorigination using uncompleted call signaling. That authorization is subject, however, to several FCC rulings addressing call reorigination. The FCC has determined that call reorigination service using uncompleted call signalling does not violate United States or international law but has held that United States companies providing such services must do so in compliance with the laws of the countries in which they operate. The FCC may condition, modify or revoke any of the Section 214 Authorizations awarded to the Company for violations of the Communications Act, the FCC's rules and policies or the conditions of those authorizations. In addition, the FCC has held that it would consider enforcement action against United States companies engaged in call reorigination by means of uncompleted call signaling in countries where such services are expressly prohibited. See "Risk Factors -- Substantial Government Regulation." Under revised rules established by the FCC in 1996, the Company must offer its international services pursuant to tariff schedules containing the rates, terms and conditions applicable to its international telecommunications services and filed with the FCC on not less than one day's prior notice. This is in lieu of the 14-day notice period previously required by the FCC. The Company has filed a tariff with the FCC. Other FCC requirements applicable to the Company include the filing of contracts with other carriers, including operating agreements, and the periodic filing of certain reports regarding the Company's international traffic and revenues. In addition, the Company is subject to certain FCC-imposed fees including an annual regulatory assessment fee and an annual payment to the Telecommunications Relay Service Fund. The Company's primary business is the provision of international telecommunications services and the Company does not currently market or promote interstate or intrastate telecommunications services. Nonetheless, it is technically possible for existing customers of the Company's international services who are located in the United States to utilize the Company's services to place interstate or intrastate calls. The 60 64 provision of interstate service is subject to the jurisdiction of the FCC. The Company is classified by the FCC as a non-dominant common carrier. Its charges, practices, classifications, and regulation of its services must be just and reasonable, and may not be unreasonably discriminatory. Historically, interstate common carriers were required to maintain tariffs with the FCC. Since the Company does not specifically market interstate services, it has not maintained an interstate tariff with the FCC. To the extent its customers utilize TelePassport services for interstate services, however, the Company could be subject to sanctions for failure to maintain an interstate tariff. The Company believes that imposition of sanctions is unlikely and that any such sanctions would not have a material adverse effect on its financial condition or results of operations. Domestic intrastate long distance services are subject to various state laws and regulatory requirements including certification and tariff filing requirements. The Company currently is not authorized to provide intrastate service in any state and does not maintain any intrastate tariffs. If, in the future, the Company seeks to provide intrastate services, it would apply to obtain state authorizations and file tariffs, as may be required, before commencing service. To the extent that the Company provides intrastate service in any state where it is not authorized to provide such service, the regulatory authorities in such states could impose sanctions against the Company for unauthorized operation. European Union In Europe, the regulation of the telecommunications industry is governed at a supra-national level by the EU. The EU was established by the Treaty of Rome and subsequent conventions and through its operating bodies, the Council of Ministers, the Commission (the "Commission") and the Parliament, is authorized to issue EU "directives." EU member states (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom) are required to implement these directives through national legislation. If an EU member state fails to adopt, or does not properly or fully adopt, such directives, the Commission may take action to require proper implementation through the European Court of Justice. Since 1987, the EU has issued a number of directives aimed at generating competition in the telecommunications markets by liberalizing the provision of telecommunications services and network infrastructure. In 1990, the EU issued a Directive on Competition in the Markets for Telecommunications Services (the "Telecommunications Services Directive") which required each EU member state to abolish all exclusive and special rights concerning the provision of telecommunications services other than voice telephony services. The aim of the Telecommunications Services Directive was to permit the competitive offering of services other than voice telephony, such as value-added services and the delivery of voice services to CUGs. Differing interpretations of the Telecommunications Services Directive and other EU initiatives, as well as varying national policies to liberalize more quickly than the EU requires, have led to variations among the EU member states as to which services may be delivered and the manner in which they may be provided. Subsequent directives adopted by the EU, including the Full Competition Directive adopted in March 1996, require the liberalization of all voice telephony service in the EU and the provision of competitive infrastructures by January 1, 1998. Extensions until 2000 were granted to Ireland and Portugal, each of which believes it has a less developed network, and requests for extensions have been submitted by Luxembourg, Spain and Greece. Spain has since volunteered to liberalize by the second half of 1998 and the Commission expects that Greece will be liberalized by 2001. To date, Sweden, Finland, Denmark and the United Kingdom have liberalized facilities-based services. As discussed above, each EU member state in which the Company currently conducts its business has a different regulatory scheme and such differences are expected to continue beyond January 1998. The Company's regulatory requirements vary considerably from country to country. The Company believes that, to the extent required for the provision of its current services, it has either received all necessary approvals, filed applications for such approvals, received comfort letters or obtained licenses from the applicable regulatory authorities. The EU is currently considering the adoption of a directive to establish a common framework for the granting and administration of licenses to provide telecommunications services and infrastructure. To the extent such directives are adopted by the EU and implemented by the member states in which the Company 61 65 operates, the Company may in the future be required to obtain additional licenses, or renew, modify or replace existing licenses. See "Risk Factors--Substantial Government Regulation." The Company believes that the VAT Directive does not require the Company to charge VAT to EU based customers because it is located outside of the EU. It is anticipated that the VAT Directive will be amended in 1997 to specifically impose VAT on telecommunications services used within the EU and supplied by non-EU based carriers. Under interim rules, Germany has already begun to impose VAT on such services effective January 1, 1997. Under the rules, EU based businesses that purchase telecommunications services from non-EU based carriers will be required to self-account for VAT on such services. Those EU based business customers that are not entitled to recover 100% of VAT, such as banks and insurance companies, will be required to pay VAT directly to the authorities. To the extent that the Company's services are and in the future become subject to VAT, the Company's competitive price advantage will be reduced. See "Risk Factors--Risks Associated With Imposition of VAT on Company's Services." In March 1997, the EU's Telecommunications Council approved a directive setting forth general rules regarding the granting of telecommunications licenses. At the request of certain countries, including Germany, the EU agreed to issue a declaration allowing member states to base their respective license fees on present, as well as estimated future, administrative costs incurred in the management, control and enforcement of individual licenses. As a result of authorizing member states to consider such future administrative costs, license fees in those states that include such expenses may be higher than typical license fees currently charged. See "Risk Factors--Substantial Government Regulation." United Kingdom In the United Kingdom, the Company's services are subject to and affected by the UK Telecommunications Act. The TI Secretary is responsible for granting telecommunications licenses and has the power to revoke them, and the DGT and Oftel are responsible for enforcing the conditions of such licenses. The DGT is required to take enforcement action under the UK Telecommunications Act if it discovers a non-trivial breach of a license condition. BT and its predecessors were the sole providers of public telecommunications services in all but a small part of the United Kingdom until the early 1980's when the British government granted Mercury Communications Ltd. ("Mercury"), now a subsidiary of Cable and Wireless, a license to run its own telecommunications system. In 1991, the British government established a "multi-operator" policy with respect to voice telephony services using fixed access systems to replace the duopoly by BT and Mercury that existed from the early 1980's until 1991. Under the multi-operator policy, the TI Secretary will consider on its merits any application for a license to operate a telecommunications network within the United Kingdom. At the end of 1996, this policy was extended with respect to international facilities and 44 new operators were authorized to connect their United Kingdom networks to systems outside of the United Kingdom. The Company was granted an ISR license under the UK Telecommunications Act on October 11, 1995, authorizing it to operate a switched system and provide switched telecommunications services to the public. The license was granted for a period of one year and continues thereafter in force and effect, subject to revocation by the TI Secretary on one month's prior notice. The license contains general conditions concerning, among other things, the use of interfaces that comply with accepted international standards, the use of automatic calling equipment, restrictions on types of self-advertising that use the licensed system, such as the telemarketing of products covered by the license, and certain administrative items, such as the payment of fees. In addition, the license contains certain conditions relating to the provision of international telecommunications services. Historically, the TI Secretary had specifically designated certain countries for ISR traffic that it considered as maintaining equivalent competitive regulatory frameworks. In July 1996, however, the authorization to provide ISR traffic was extended to all countries, prompting the TI Secretary to implement a "proportionate return" condition. The "proportionate return" condition requires licensees, such as the Company, to ensure that the ratio of incoming to outgoing ISR traffic over the licensed system during certain relevant periods is the same as the ratio of all incoming to outgoing traffic to each of those destinations from the United Kingdom over an earlier period. These rules do not apply to traffic from countries within the 62 66 European Economic Area (which includes the EU member states, Iceland, Liechtenstein and Norway) or the United States, Canada, Australia and New Zealand. The Company is required to keep information and to submit reports concerning these provisions. Except in relation to the countries specifically exempted, the Company will be in breach of a license condition if its ISR traffic is not "two way," both into and out of the country concerned. This provision does not apply where customers connect to a Company switching facility in a relevant country by means of leased lines. The Company presently utilizes its license primarily for the traffic between the United Kingdom and the United States. All public telecommunications operators and ISR operators, as well as several other categories of operators, operate under individual licenses granted by the TI Secretary pursuant to the UK Telecommunications Act. Licenses granted to large public operators, such as BT and Mercury, contain conditions relating to the rights of the public and other operators to connect to such systems. Such conditions are not generally imposed on ISR licenses. However, ISR licenses, in most circumstances, provide for "relevant connectable system status" with respect to BT and other large public operators, giving ISR operators a right to connect to the networks of the large public operators and enjoy wholesale, as opposed to retail, rates with respect to interconnection tariffs and charges. The Company's license provides for "relevant connectable system status" with respect to BT, which entitles the Company to interconnect with BT's systems at wholesale, as opposed to retail, rates with respect to interconnection tariffs and charges subject to the continuing consent of the DGT. The DGT has recently issued a policy statement indicating that, due to the diminishing need to guaranty relevant connectable system status at wholesale rates as a result of increasing competition, ISR operators who have applied for their licenses after February 5, 1996 will not automatically receive relevant connectable system status. Rather, such status will be granted only to those ISR operators that contribute significantly to competition in the United Kingdom's international telecommunications market and then only until such time as full competition in such market is established. ISR operators, such as the Company, who applied for their licenses prior to February 5, 1996 will continue to have relevant connectable system status subject to the determination by the DGT to revoke such status. Wholesale interconnection rates with BT are presently determined by the DGT. The DGT is considering a proposal for implementation in 1997 pursuant to which BT would determine its own interconnection charges, subject to applicable price ceilings and floors set by DGT. The status of this proposed structure and its potential impact on the Company are presently unclear. To reduce transmission costs and expand its current capacity, the Company is exploring the acquisition of one or more IRUs for traffic between the London switching facility and the planned central New Jersey international gateway switching center. The Company is required to apply to the TI Secretary to obtain an IF License that would permit it to operate its own international facilities-based voice services in the United Kingdom. The DGT intends to introduce into telecommunications licenses a fair trading provision prohibiting licensees from engaging in anti-competitive behavior. It is not presently clear when such conditions will be introduced into the Company's license, but such conditions are likely to be submitted to the Company for inclusion in its license during 1997. A violation of such a provision by a licensee, such as entering into a telecommunications cartel, could lead to loss of the license. BT was unsuccessful in recent litigation challenging the authority of the DGT to impose such a condition. See "Risk Factors--Substantial Government Regulation; and --Risks Associated With Imposition of VAT on Company's Services." Germany In the Federal Republic of Germany, liberalization of the telecommunications market is taking place through a three-step process called Postal Reform I--III. Postal Reform I in 1989 divided the state-owned Federal Post Office ("Bundespost") into three government entities: the postal service, the banking service and telecommunications (later to become DT), and ended the government's monopoly on the provision of terminal equipment (i.e., telephones). Postal Reform II in 1995 resulted in the conversion of the three government entities into private stock corporations. Postal Reform III, currently taking place, is expected to complete the privatization and liberalization process by establishing a regulatory framework. 63 67 The constitutional basis for the liberalization of telecommunications was achieved by the addition to the German constitution of a new Article 87(f). Under Article 87(f), the national government is obliged to ensure appropriate and sufficient telecommunications services throughout Germany. The primary business objective of DT was re-defined as the provision of telecommunications services in competition with other suppliers. The legal basis for the new regulatory environment in Germany is the TKG, which, with respect to most of its provisions, became effective August 1, 1996, replacing a number of traditional telecommunications statutes. The Company's services in Germany are subject to the TKG. See "Risk Factors--Substantial Government Regulation." The TKG lays the groundwork for a competitive telecommunications environment in Germany. Since July 1, 1996, owners of telecommunications networks have been permitted to offer their services (other than voice telephony) on the German market and on January 1, 1998, DT's monopoly over voice telephony is scheduled to end. In general, under the TKG, carriers with dominant market positions, such as DT, are required to interconnect their networks with the networks of other service suppliers. The anticipated break-up of DT's monopoly over voice telephony has led to a number of alliances among companies that desire to be key players in Germany's new market, in particular electricity providers. For example, VIAG Interkom GmbH is a joint venture between VIAG AG and BT. To the extent that alliance participants are also part of monopolies in Germany's energy market, which is still not open for competition, such companies could potentially create a negative impact on the liberalization process for telecommunications. Currently in Germany, regulation of the telecommunications industry is governed by the German Ministry of Post and Telecommunications (the "German Ministry"), and to a certain extent by the Commission. As of January 1998, the German Ministry, in its capacity as a regulator, will be replaced by a new regulatory authority yet to be established under the TKG. The new regulatory authority will act within the German Federal Ministry of Economics and will have the leading role in developing the new regulatory environment. Under the TKG, in general, a TKG license is required by any person that: (i) operates transmission facilities for the provision of telecommunications services to the public; or (ii) offers Voice Telephony services to the public through telecommunications networks operated by such provider. The criteria for granting licenses are broadly outlined in the TKG and the new regulatory authority will be responsible for interpreting these guidelines and granting the TKG Licenses. See "Risk Factors--Substantial Government Regulation; and --Risks Associated With Imposition of VAT on Company's Services." Switzerland Until recently, the telecommunications industry in Switzerland was regulated by the Law on Telegraph and Telephone Traffic under which Swiss PTT maintained a monopoly of the Swiss telecommunications market. In June 1991, in response to the liberalization taking place in the EU, the Swiss Parliament adopted a new law on telecommunications. This regulation has partially liberalized the Swiss telecommunications market, limiting the ITO monopoly to voice telephony and the telecommunications infrastructures. As of July 1, 1995, the Federal Government amended the Telecommunications Services Federal Decree of March 25, 1992 in order to authorize private companies to provide voice telecommunications services to CUGs. As a result of this action by the government, telecommunications companies may provide telephone services over leased lines for a group of customers. No permit or notice is required in order to form a CUG or to offer telephone services for a CUG. Although Switzerland is not an EU member state, the EU directives mandating liberalization have nevertheless had an indirect effect on Swiss law, as the Swiss government has expressed its intention to maintain Swiss telecommunications regulations in line with EU directed liberalization. In response to the EU's adoption of the resolution supporting the liberalization of all voice telephony services by January 1, 1998, the Swiss federal government proposed that Parliament further open the Swiss telecommunications market for services and network infrastructures. On October 1, 1996, the Swiss federal government proposed a draft law (the "Draft Law") designed to increase competition in the telecommunications service area and to guarantee "universal" services for the entire Swiss population at reasonable prices. The Company's services in Switzerland will be subject to the Draft Law in the final form in which it is enacted into law. The Draft Law currently provides that any operator offering telecommunications services through self-controlled infrastructures will be required to obtain a license from the Swiss federal authorities. The 64 68 government will be required to grant a license if the applicant possesses the technical abilities to offer the services and is able to offer sufficient guarantees that it will comply with Swiss law. All other service providers will be required only to notify the government of the services offered by them. Any operator that acquires a dominant position in the market will be required to guarantee the interconnection of its services and installations to other suppliers. If an agreement regarding interconnection cannot be reached between a dominant operator and a supplier, an independent federal commission will determine the conditions of such interconnection. In addition, the Draft Law introduces a licensing system for universal services. This includes the obligation to offer telephone services transmission data, service for urgent calls, a network of public telephones and access to the Swiss telephone directories. The Swiss federal government will be authorized to increase the services to be rendered by the holders of such universal service licenses. Telecom PTT, a department within Swiss PTT, will guarantee the universal service obligations without any compensation from the telecommunications industry for a transition period of five years. By the end of such transition period, the licenses for universal service obligations will be offered for tender on a region-by-region basis so that continuous coverage will be made available to the entire country. If provision of the universal service obligations cannot cover costs in particular areas, a subsidy will be offered in the form of investment contributions, which will be financed from a fund derived from license fees collected from holders of service licenses. The Draft Law creates an independent telecommunications commission that will principally be responsible for licensing and approving interconnection decisions. In response to the pressure from the EU liberalization directives, the Swiss Parliament may attempt to adopt the Draft Law during 1997 in order to make it effective by January 1, 1998. The Company is not currently required to obtain a license to provide call reorganization services in Switzerland. In the event that the Draft Law becomes effective on substantially the terms initially published, the Company would be required to notify the government of its provision of services or, depending upon the extent to which the Company expands its operations in Switzerland, obtain a license. See "Risk Factors-- Substantial Government Regulation." Austria The Company's services in Austria are subject to the Austrian Telecommunications Act. In general, the Austrian Telecommunications Act requires a license for the construction and operation of any telecommunications equipment. A license may be refused on the basis of certain public policy rules. Currently, the Austrian ITO generally maintains a monopoly over the fixed public telecommunications network and voice telephony. The government is considering the Austrian Proposed Legislation incorporating the EU directives to liberalize the provision of voice telephony services and infrastructures by January 1998. The Austrian Proposed Legislation would, in effect, end this monopoly, and require dominant providers to grant interconnectivity on a nondiscriminatory basis. Under the proposed law, in general, telecommunications services would be subject only to a notification requirement, but a license would be required for the provision of voice telephony services. Under the proposed law, in order to provide the public switched services that the Company intends to provide in Austria, the Company would be required to obtain an Austrian Telecommunications License. It is currently contemplated that a new regulatory agency would be established which would grant licenses containing fixed durations but subject to renewal for so long as the licensee complies with applicable laws and regulations. See "Risk Factors--Substantial Government Regulation; and --Risks Associated With Imposition of VAT on Company's Services." Japan Prior to the liberalization of the Japanese telecommunications market in 1985, domestic and international calls were monopolized by Nippon Telegraph and Telephone Public Corporation ("NTT") and KDD, respectively. The Company's services are subject to the Japanese Law that became effective on April 1, 1985. Under the Japanese Law, both domestic and international telecommunications services may be provided by "Type I" and "Type II" carriers. As of March 31, 1996, there were 126 Type I carriers, 50 Special Type II carriers and approximately 3,000 General Type II carriers. As part of the 1985 reform, NTT was privatized and renamed Nippon Telegraph and Telephone Corporation. 65 69 Type I carriers provide telecommunications services through their own telecommunication circuit facilities. In order to conduct Type I telecommunications business, the carrier must be licensed by the Japanese Ministry. Under the Japanese Law, the Japanese Ministry must approve an application for a Type I license if certain conditions prescribed by the Japanese Law are met. These conditions are broadly written, however, and in practice, the Japanese Ministry enjoys a considerable degree of discretion in determining whether to grant a Type I license. The terms and conditions (including the tariff) for the provision of telecommunications services by a Type I carrier must be approved by the Japanese Ministry. Foreign ownership in a Type I carrier is limited to less than one-third, or 20% in the case of NTT and KDD, of the outstanding shares. The Japanese Ministry has announced a proposal to amend the Japanese Law to eliminate the restrictions on foreign ownership of Type I telecommunications carriers, except with respect to NTT and KDD, in which foreign ownership will continue to be restricted to less than 20%. The amendment is expected to become effective in January 1998. Type II carriers provide telecommunications services using telecommunications facilities and services provided by Type I carriers. A Type II telecommunications business is defined in the Japanese Law as a telecommunications business other than a Type I telecommunications business. Type II telecommunications business is classified into Special Type II and General Type II. Special Type II telecommunications business is defined as (i) the provision of national and international telecommunication services to an unspecified number of general subscribers through facilities that exceed the minimum capacity prescribed by Cabinet Order (currently an equivalent of two thousand 64K bps lines), and (ii) the provision of telecommunications services through facilities for telecommunication between a location within Japan and a location outside Japan. The latter definition of a Special Type II business is interpreted by the Japanese Ministry in such a way that only services provided through such facilities as leased circuits connecting a node situated in Japan and one situated outside Japan fall under this definition. In order to conduct Special Type II telecommunications services, a carrier must be registered with the Japanese Ministry. The conditions for registration as a Special Type II carrier are significantly less stringent than conditions for license as a Type I carrier. The terms and conditions for provision of telecommunications services by a Special Type II carrier must be filed with the Japanese Ministry but it is not necessary that such terms and conditions be approved by the Japanese Ministry. General Type II telecommunications business is defined as Type II telecommunications business other than Special Type II business. General Type II telecommunications business may be conducted by any person who files a notice with the Japanese Ministry with respect thereto. There is no requirement for a General Type II carrier to file with the Japanese Ministry the terms and conditions for provision of services nor must a General Type II carrier obtain the Japanese Ministry's approval. There is no restriction on foreign ownership of a Special or General Type II carrier. To use the facilities and services provided by a Type I carrier, a Special or General Type II carrier may enter into a "non-tariff based contract" with the Type I carrier. Non-tariff based contracts with Type I carriers are subject to the approval of the Japanese Ministry. The Company, through its Japanese subsidiary, has filed notice with the Japanese Ministry as a General Type II carrier and is in the process of seeking Special Type II registration. In addition, the A.T. NET Agreements provide that A.T. NET and Asahi Telecom will enter into arrangements to provide to the Company's customers those services permitted by A.T. NET's Special Type II registration. The Company's registration as Special Type II carrier would permit the Company to provide additional national and international services in Japan. See "Risk Factors--Substantial Government Regulation" and "Business-- Japan and Asahi Telecom." South Africa The telecommunications industry in South Africa is principally regulated by the SA Post Office Act and the recently enacted SA Telecommunications Act. Section 78 of the SA Post Office Act confers a statutory monopoly on Telkom, a state-owned company, for the construction, maintenance or use of any telecommunications line. A "telecommunications line" is broadly defined in the SA Post Office Act as including "any apparatus, instrument, pole, mast, wire, pipe, pneumatic or other tube, thing or means which is or may be used 66 70 for or in connection with the sending, conveying, transmitting or receiving of signs, signals, sounds, communications or other information." It is anticipated that the government will promulgate regulations by mid-1997 that will provide for the repeal of Section 78 of the SA Post Office Act pursuant to Section 106 of the SA Telecommunications Act. Accordingly, while the SA Telecommunications Act ultimately envisages the liberalization of telecommunications in South Africa, Telkom continues to exercise at least a temporary monopoly over fixed line telephony. The Company's services in South Africa are subject to such Acts. The stated principal objectives of the SA Telecommunications Act are ensuring fair competition within, and encouraging investment and innovation in, the South African telecommunications industry. Once Section 32 of the SA Telecommunications Act becomes effective, it will prohibit any person from providing a telecommunications service except under, and in accordance with, a telecommunications license issued to that person in accordance with the SA Telecommunications Act. A "telecommunications service" is defined as any service provided by a "telecommunication system." A "telecommunications system" is, in turn, defined as "any system or series of telecommunication facilities or radio, optical or other electromagnetic apparatus or any similar technical system used for the purpose of telecommunication." The Company believes that the SA Post Office Act and the SA Telecommunications Act allow the Company to provide its call reorigination services and that such laws do not require the Company to obtain a license for the provision of such services. The law does, however, require a license for the connection, operation and maintenance of automatic dialing devices for the provision of call reorigination services, or any similar telecommunications apparatus. The Company believes that its agents in South Africa that supply such equipment have obtained the required licenses. It is uncertain how and whether, if at all, the licensing provisions contained in Section 32 and accompanying Section 34, once promulgated, will affect the provision of the Company's call reorigination services. Once Section 34 of the SA Telecommunications Act is promulgated, a telecommunications service provider will only be able to apply for a license to provide a telecommunications service if invited to do so by the Minister of Posts, Telecommunications and Broadcasting (the "South African Minister") via notice in the Government Gazette. Under the SA Telecommunications Act, Telkom is currently the only entity which has been granted a license to provide, among other things, public switched telecommunication services, local access telecommunication services and public pay telephone services. The initial term of Telkom's license is 25 years. Although no date has been specified by statute for the abolition of Telkom's monopoly over fixed-line telephony, the White Paper on Telecommunications Policy published by the South African Minister in the Government Gazette dated March 13, 1996, anticipates that Telkom's current monopoly will be phased out over a period of six years. The SA Telecommunications Act established a new telecommunications regulatory authority called the South African Telecommunications Regulatory Authority ("SATRA"). Although the members of SATRA were appointed by presidential proclamation and took office on February 3, 1997, SATRA is not yet fully operational and the regulation of the telecommunications industry is in the meantime managed by the Department of Posts and Telecommunications. SATRA's functions will include the granting of telecommunication licenses, albeit that applications for such licenses may not be sought until such time as the South African Minister calls for such applications by way of invitation in the Government Gazette. SATRA will be governed by and represented by its council, the members of which are appointed by the President on the advice of Parliament's standing committees on communications. Although the SA Telecommunications Act states that SATRA will be independent and impartial in the performance of its functions, it will be required to act in accordance with policy directions issued by the South African Minister. Such policy directions are required to be consistent with the objective of the SA Telecommunications Act of ensuring fair competition within the telecommunications industry. See "Risk Factors--Substantial Government Regulation." 67 71 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information regarding the Company's directors and officers (ages as of December 31, 1996).
NAME AGE POSITION - -------------------- ---- ------------------------------------------------------ Stephen E. Myers 48 Chairman of the Board James D. Pearson 42 President, Chief Executive Officer and Director Francis J. Mount 54 Executive Vice President and Chief Operating Officer John C. Brizendine 52 Executive Vice President Jan Piazza 42 Vice President, Sales and Marketing Paul K. Heun 36 Vice President, Network Services R. Gordon Mills 63 Chief Financial Officer and Secretary Charles Hoepper 47 Vice President, Finance Michael C. Anderson 56 Director
The business experience, principal occupations and employment, as well as the periods of service, of each of the directors and executive officers of the Company during at least the last five years are set forth below. Stephen E. Myers, the founder of the Company, has been Chairman of the Board of Directors of the Company since February 1993. Mr. Myers is a co-founder, and since 1976 has been Chairman and a principal shareholder of US Cable and the US Cable Group. At various times, US Cable has served up to approximately 235,000 cable subscribers in more than 150 communities throughout the United States. James D. Pearson has been a Director of the Company since February 1993 and has been President and Chief Executive Officer of the Company since 1994. Since 1992, Mr. Pearson has been President and Chief Executive Officer of US Cable and the US Cable Group. From 1982 to 1991, Mr. Pearson served as the Chief Financial Officer for US Cable. Prior to joining US Cable, Mr. Pearson served as a Second Vice President for the Continental Illinois National Bank and Trust in Chicago as a lender to the media, communications, and sports industries. Francis J. Mount was appointed Vice President and Chief Operating Officer of the Company in January 1996 and was subsequently promoted to Executive Vice President and Chief Operating Officer in June 1996. From 1990 to January 1996, Mr. Mount was employed by MCI, most recently as Director, Global Technical Services, responsible for supporting international development, alliance management and all technical operations and services outside of the United States. This included the construction and maintenance of large networks such as Hyperstream, Concert and private networks for large accounts such as J.P. Morgan, Proctor and Gamble and IBM. From March 1967 to December 1989, Mr. Mount was employed at AT&T in various positions, including Chief Executive Officer pro tem, Chief Technical Officer in a Cable & Wireless joint venture in Jamaica and District Manager, International Business Development. John C. Brizendine is a co-founder of the Company and has been Executive Vice President of the Company since February 1993. Mr. Brizendine has been instrumental in the development and market introduction of the TelePassport service line, the formation of the Company's wholesale business and the establishment of the Company's strategic relationships in Japan. From 1969 to 1992, Mr. Brizendine held several executive and management positions at IBM. In such capacities, Mr. Brizendine was responsible for marketing IBM database and data communications software systems and the market introduction of image management systems in the United States. Mr. Brizendine was also responsible for the adaptation and introduction strategy for IBM telecommunications and database software in Italy and Japan. Jan Piazza has been Vice President, Sales and Marketing, of the Company since September 1995, in which capacity she is responsible for wholesale and retail sales, major account management and corporate communications. From 1987 to August 1995, Ms. Piazza served in various positions at a predecessor of WorldCom, most recently as Vice President of Product Development and Carrier Sales. From 1983 to 1987, Ms. Piazza was Director of Sales Administration and Customer Service for Argo Communications, a then 68 72 start-up satellite provider, which introduced the first gateway switch to France. From 1980 to 1983, Ms. Piazza was Manager of Subscriber Services at Manhattan Cable Television in New York City. Paul K. Heun has been Vice President, Network Services, of the Company since April 1996 and is responsible for the day to day operation of the TelePassport Network worldwide. From January 1995 to April 1996, Mr. Heun was employed by AT&T where he was involved in the formation of an AT&T local access company. Beginning in April 1989, Mr. Heun was employed within the international division of MCI where he held several positions in which his responsibilities ranged from assignments in data services and voice to servicing projects related to the Japanese community and running MCI's switch operations in New York City. R. Gordon Mills has been Chief Financial Officer of the Company since June 1993. It is anticipated that Mr. Mills will become Controller of the Company subsequent to the closing of the Offering. From 1991 to 1993, Mr. Mills was Vice President, Finance, of Total Office Today, Inc., a commercial stationery company servicing medium and large-sized companies. From 1981 to 1991, Mr. Mills served as Corporate Controller of the Haagen Dazs Company during its transition from an entrepreneurial business to a worldwide manufacturer and distributor of premium ice creams. Mr. Mills is a former member of the Board of Directors of The Commerce & Industry Association of New Jersey and currently serves as Board Chairman of a regional food service company. Charles Hoepper has been Vice President, Finance, of the Company since March 1997. It is anticipated that Mr. Hoepper will become Chief Financial Officer of the Company subsequent to the closing of the Offering. From 1991 to 1997, Mr. Hoepper was employed by Suburban Propane L.P., a natural propane distributor, most recently as its Chief Financial Officer. From 1985 to 1991, Mr. Hoepper was a Director of Finance at MCI. Michael C. Anderson, a founder of the Company, has been a Director of the Company since February, 1993. Mr. Anderson is also a co-founder of US Cable and has served as Executive Vice President of US Cable and the US Cable Group since 1976. Prior to co-founding US Cable, Mr. Anderson held key positions in marketing, sales and management for both domestic and international corporations, including Shell Oil Co. One of Mr. Anderson's primary responsibilities at US Cable has been corporate development, including numerous system acquisitions, consolidations and divestitures. Mr. Anderson's current activities include initiatives throughout Spain to develop strategic alliances and seek cable/telephony franchises to construct state-of-the-art, broadband fiber-based full-service networks. Following the Offering, the Company intends to establish a Board of Directors of six persons. Upon the closing of the Offering, the Board will consist of three members and have three vacancies. To fill the vacancies on the Board of Directors, the Board of Directors of the Company intends to appoint, within 60 days of the Offering, three directors, at least two of whom are neither officers nor employees of the Company or its affiliates. All directors hold office until the next annual meeting of stockholders or until their successors are elected and qualify. Officers are elected annually by, and serve at the discretion of, the Board of Directors. COMMITTEES OF THE BOARD OF DIRECTORS Effective upon the Offering, the Board of Directors will have three standing committees: the Compensation Committee, the Audit Committee and the Executive Committee. Upon their appointment, the three directors who will fill the vacancies on the Board of Directors will serve on the Compensation Committee and the Audit Committee. The members of the Executive Committee will be Messrs. Myers (Chairman), Anderson and Pearson. The functions of the Compensation Committee are to review and approve salaries, benefits and bonuses for all executive officers of the Company, and to review and recommend to the Board of Directors matters relating to employee compensation and employee benefit plans. The Compensation Committee also administers the Long Term Incentive Plan. See "Management--Long Term Incentive Plan." The functions of the Audit Committee are to recommend annually to the Board of Directors the appointment of the independent auditors of the Company, review the scope of their annual audit and other services they are asked to perform, review the report on the Company's financial statements following the audit, review the accounting and financial policies of the Company, review management's procedures and policies with respect 69 73 to the Company's internal accounting controls and review related party transactions. The functions of the Executive Committee are to address significant corporate, operating and management matters between meetings of the full Board of Directors. DIRECTOR COMPENSATION Currently, the Company's directors do not receive cash compensation for service on the Board of Directors or committees thereof, although directors are reimbursed for certain out-of-pocket expenses in connection with attendance at Board of Directors and committee meetings. Following completion of the Offering, non-employee Directors will each receive options for 5,000 shares of Class B Common Stock and will be compensated at the rate of $12,000 per year, payable quarterly. The Company has adopted the Long Term Incentive Plan under which the Company may, from time to time and in the discretion of the Board of Directors (or committee), grant options to directors in a manner complying with the provisions of Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). EXECUTIVE COMPENSATION Summary Compensation Table. The table below summarizes the compensation earned by the Company's Chief Executive Officer and the Company's four (other) most highly compensated executive officers, whose total annual salary and bonus exceeded $100,000 (the "Named Executive Officers"), for services rendered during the fiscal year ended December 31, 1996. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------------------------------------ OTHER ANNUAL ALL OTHER SALARY BONUS COMPENSATION COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) - -------------------------------------------- ----- -------- -------- ------------ ------------ James D. Pearson, President and Chief Executive Officer(1)...................... 1996 -- -- -- -- Francis J. Mount, Chief Operating Officer................... 1996 $150,000 $37,000 -- $30,000(2) John C. Brizendine, Executive Vice President.................. 1996 $138,000 $25,000 -- -- Jan Piazza, Vice President, Sales and Marketing....... 1996 $100,000 $30,000 $52,000(3) -- Paul K. Heun, Vice President, Network Services.......... 1996 $110,000 $20,000 -- $20,000(4)
- --------------- (1) Mr. Pearson received no compensation from the Company during 1996. See "Related Party Transactions." See "--Employment Agreements" for Mr. Pearson's compensation arrangement with the Company following the completion of the Offering. (2) This amount represents an incentive payment paid to Mr. Mount upon his appointment as Chief Operating Officer of the Company. (3) This amount represents commissions earned by Ms. Piazza in 1996. (4) This amount represents an incentive payment paid to Mr. Heun upon his appointment as Vice President, Network Services. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors did not have a Compensation Committee prior to the date of this Prospectus. Accordingly, the entire Board of Directors made all determinations concerning compensation of executive officers. The members of the Compensation Committee effective upon the Offering and appointment of additional directors will consist of three directors, at least two of whom are neither officers nor employees of 70 74 the Company or its affiliates. There are no Compensation Committee (or Board of Directors) interlock relationships with respect to the Company. EMPLOYMENT AGREEMENTS Effective upon the closing of the Offering, the Company will enter into a two-year employment agreement with James D. Pearson as President and Chief Executive Officer. The agreement will provide for a per annum base salary of $175,000, plus a minimum annual bonus of $100,000. The agreement will provide that Mr. Pearson shall not, for a period of years after termination of the agreement, compete with or solicit any employee or agent of the Company or any of the Company's affiliates. The agreement will be terminable only for "Cause" (as defined in the agreement). In the event of a "Change of Control" (as defined in the agreement), Mr. Pearson will be entitled to receive a payment in the amount of 24 months base salary. Under the agreement, Mr. Pearson shall devote to the Company's affairs substantially all of his business time and attention. Effective upon the closing of the Offering, the Company will also be subject to employment agreements with Francis J. Mount as Executive Vice President and Chief Operating Officer, Paul K. Heun as Vice President, Network Services, Jan Piazza as Vice President, Sales and Marketing and Charles Hoepper as Chief Financial Officer. The agreements will be terminable by either party in accordance with the terms thereof, and provide for base salaries of $150,000, $110,000, $100,000 and $175,000, respectively, plus annual bonuses generally based on performance. The agreements will provide that the employees shall not, for a period of two years after termination of their respective agreements, compete with or solicit any employee or agent of the Company or any of the Company's affiliates. LONG TERM INCENTIVE PLAN In 1997, the Board of Directors adopted the Long Term Incentive Plan and, prior to the Offering, the Company's stockholders will approve the Long Term Incentive Plan. The primary purpose of the Long Term Incentive Plan is to provide a means through which the Company may attract and retain competent persons to become directors and consultants of the Company and through which the Company may attract and retain able persons to enter and remain in the employ of the Company. Eligible persons include selected employees, officers, directors and consultants of the Company. The Long Term Incentive Plan is administered by a committee, as defined in the Long Term Incentive Plan (the "Committee"), appointed by the Board of Directors. Awards may be granted by the Committee to eligible persons in the form of non-qualified stock options, incentive stock options (within the meaning of Section 422 of the Internal Revenue Code), stock appreciation rights, restricted stock awards, stock awards and other stockbased compensation ("Incentive Awards"). The aggregate number of shares of Class B Common Stock that may be issued pursuant to Incentive Awards under the Long Term Incentive Plan may not exceed 1,903,500 shares; provided, however, that stock appreciation rights that are exercisable as an alternative to an option and shares of Class B Common Stock returned to the Company as a result of forfeitures will not be considered in applying the foregoing limitation. The maximum number of shares which may be the subject of options and stock appreciation rights granted in any calendar year to an eligible individual shall not exceed shares. The Long Term Incentive Plan permits the Committee to grant Incentive Awards which would constitute "performance-based compensation" for purposes of Section 162(m) of the Internal Revenue Code. The maximum dollar amount of Incentive Awards constituting performance-based compensation that may be granted to an eligible individual during any calendar year shall not exceed . In case of a Change of Control Event (as defined in the Long Term Incentive Plan), (i) all restrictions on restricted stock awarded under the Long Term Incentive Plan will expire, and (ii) all stock options outstanding under the Long Term Incentive Plan will become immediately vested and exercisable. As of the date of this Prospectus, Incentive Awards to purchase an aggregate of 886,390 shares of Class B Common Stock will be issued and outstanding pursuant to the Long Term Incentive Plan. It is anticipated that the Company will file a registration statement under the Securities Act to register the shares of Class B Common Stock to be issued under the Long Term Incentive Plan. 71 75 PRINCIPAL STOCKHOLDERS The following table sets forth, as of the date of this Prospectus and as adjusted to reflect the sale of the Class B Common Stock being offered hereby and the issuance of 340,000 shares of Class B Common Stock in connection with the Agent Acquisitions and the acquisition of HCL, certain information with respect to the beneficial ownership of the Company's voting securities by (i) each person known by the Company to be the owner of more than 5% of the outstanding shares of any class of the Company's Common Stock, (ii) each director, (iii) each Named Executive Officer and (iv) all directors and executive officers as a group:
SHARES PERCENTAGE OF VOTING BENEFICIALLY PERCENTAGE OF CLASS(2) POWER(2)(3) OWNED(1) ------------------------- ------------------------- ------------ PRIOR TO PRIOR TO NAME TITLE OF CLASS NUMBER OFFERING AFTER OFFERING OFFERING AFTER OFFERING - ----------------------------------- --------------------- ------------ -------- -------------- -------- -------------- Stephen E. Myers (4)............... Class A Common Stock 6,210,015 84.5% 84.5% 84.5% 78.8% Class B Common Stock -- -- -- -- Michael C. Anderson (5)............ Class A Common Stock 730,590 9.9 9.9 9.9 9.3 Class B Common Stock -- -- -- -- James D. Pearson (6)............... Class A Common Stock 406,939 5.5 5.5 5.5 5.2 Class B Common Stock 55,673 * 1.0 * Francis J. Mount (7)............... Class A Common Stock -- -- -- -- -- Class B Common Stock 50,041 * ** * -- John C. Brizendine (8)............. Class A Common Stock -- -- -- -- -- Class B Common Stock 89,077 * 1.6 100 Jan Piazza (9)..................... Class A Common Stock -- -- -- -- -- Class B Common Stock -- -- -- -- Paul K. Heun (10).................. Class A Common Stock -- -- -- -- -- Class B Common Stock -- -- -- -- Directors and executive officers... Class A Common Stock 7,305,900 99.4% 99.4% 99.4% as a group (9 persons total) (11) Class B Common Stock 194,791 * 3.5% * 93.2%
- --------------- *Notwithstanding an aggregate of 886,390 shares issuable upon exercise of a like number of options granted pursuant to the Long Term Incentive Plan, zero shares of Class B Common Stock are outstanding prior to the Offering. ** Represents less than 1%. (1) Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares beneficially owned by them. A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date hereof have been exercised. (2) Assumes 7,350,000 shares of Class A Common Stock outstanding prior to and after the Offering, and zero and 5,340,000 shares of Class B Common Stock outstanding, respectively, prior to and after the Offering. (3) Determined with respect to matters submitted to all stockholders for a vote, assuming in such case the Class A Common Stock and the Class B Common Stock vote together as a single class. Each share of Class A Common Stock is entitled to ten votes and each share of Class B Common Stock is entitled to one vote. See "Description of Capital Stock." (4) The address for Mr. Myers is 249 Royal Palm Way, Suite 301, Office D, Palm Beach, Florida 33480. Includes 37,479 shares of Class A Common Stock representing Mr. Myers' portion of the shares underlying the currently exercisable portion of the Pearson Option (as hereafter defined), shares of Class A Common Stock held in trust for the benefit of Mr. Myers and his children and 186,300 shares of Class A Common Stock held in two separate trusts for the benefit of members of Mr. Myers' family, the trustee of such trusts having the right to transfer the shares to other trusts, the beneficiaries of which may include such family members or others, as well as Mr. Myers. See "Related Party Transactions." (5) The address for Mr. Anderson is 249 Royal Palm Way, Suite 301, Office D, Palm Beach, Florida 33480. Includes 4,165 shares of Class A Common Stock representing Mr. Anderson's portion of the shares underlying the currently exercisable portion of the Pearson Option (as hereafter defined). See "Related Party Transactions." 72 76 (6) The address for Mr. Pearson is 28 West Grand Avenue, Montvale, New Jersey 07645. Includes 55,673 shares of Class B Common Stock issuable upon exercise of a like number of vested options granted to Mr. Pearson pursuant to the Long Term Incentive Plan. Also includes 41,644 shares of Class A Common Stock currently issuable upon exercise of the Pearson Option (as hereafter defined), but excludes 166,574 shares underlying such option which are not currently exercisable. See "Related Party Transactions." (7) The address for Mr. Mount is 1212 Avenue of the Americas, New York, NY 10036. Includes 50,041 shares of Class B Common Stock currently issuable upon exercise of a like number of options granted to Mr. Mount pursuant to the Long Term Incentive Plan, but excludes 42,007 shares underlying options which are not currently exercisable. See "Management." (8) The address for Mr. Brizendine is 1212 Avenue of the Americas, New York, NY 10036. Includes 89,077 shares of Class B Common Stock issuable upon exercise of a like number of vested options granted to Mr. Brizendine pursuant to the Long Term Incentive Plan. See "Management." (9) The address for Ms. Piazza is 1212 Avenue of the Americas, New York, NY 10036. Does not include 50,000 shares of Class B Common Stock issuable upon exercise of a like number of options granted to Ms. Piazza pursuant to the Long Term Incentive Plan which are not currently exercisable. See "Management." (10) The address for Mr. Heun is 1212 Avenue of the Americas, New York, NY 10036. Does not include 30,000 shares of Class B Common Stock issuable upon exercise of a like number of options to be granted to Mr. Heun pursuant to the Long Term Incentive Plan which are not currently exercisable. See "Management." (11) Includes 194,791 shares of Class B Common Stock currently issuable upon exercise of a like number of options under the Long Term Incentive Plan, but excludes 214,507 shares underlying options which are not currently exercisable. 73 77 RELATED PARTY TRANSACTIONS On December 27, 1994, U.S. FiberCom Network, Inc., an inactive affiliate under common control, was merged with and into the Company. For accounting purposes, the transaction was treated as a contribution of the net assets of U.S. FiberCom Network, Inc. to the Company and the assets were recorded at their historical carrying value by the Company. The net assets, primarily consisting of property and equipment and amounts due from the Company, had a net historical carrying value of $1.0 million, resulting in an increase to additional paid-in capital of this amount. Prior to the contribution, the Company utilized certain of the fixed assets of U.S. FiberCom Network, Inc. and was charged certain expenses amounting to $0.01 million. For the year ended December 31, 1996, US Cable advanced an aggregate of $0.16 million for certain expenses incurred by the Company. Since the Company's inception, James D. Pearson, the Company's President and Chief Executive Officer, has provided services to the Company while employed by US Cable. To date, the Company has paid no compensation to Mr. Pearson. In March 1995, the Company entered into an agreement with TelePassport Japan to provide international telecommunications services and to lease switching equipment. For the years ended December 31, 1995 and 1996, the Company's consolidated revenues included approximately $0.4 million and $3.4 million, respectively, for such services provided. See "Business--Japan and Asahi Telecom." In February 1997, the Company agreed to purchase certain equipment and software from Network Equipment Technologies, Inc. ("NET"), subject to a certain volume purchase and license agreement expected to be entered into in March 1997 (the "NET Purchase Agreement"). In February 1997, Stephen E. Myers, the Company's Chairman of the Board, entered into an escrow agreement with NET and the Company (the "NET Escrow Agreement") whereby Mr. Myers deposited $0.75 million (the "Escrow Deposit") with an escrow agent to secure the Company's payment obligations under the proposed NET Purchase Agreement. Pursuant to the terms of the NET Escrow Agreement, after delivery to the escrow agent of proper notice that the Company has paid its obligations under the NET Purchase Agreement, Mr. Myers will be entitled to the Escrow Deposit without interest thereon. See "Use of Proceeds." In March 1997, the Company entered into an agreement to acquire all of the capital stock of TelePassport Germany, its independent agent in Germany. At the closing of such acquisition, TelePassport Germany will repay to Hofer, if it has not already done so prior to such date, outstanding debt of up to $110,000. In connection with the execution of the TelePassport Germany agreement, the Company loaned TelePassport Germany $200,000 and agreed to lend TelePassport Germany an additional $100,000 to $300,000, at the option of TelePassport Germany, prior to the closing. The loan bears interest at the rate of 12% per annum and is repayable in full on September 20, 1997. The Company will also grant Hofer options to purchase shares of Class B Common Stock, as well as certain piggyback registration rights. In addition, Hofer and TelePassport Germany will enter into an employment agreement. See "Business--Sales and Marketing" and "Description of Capital Stock." As of the date of this Prospectus, Messrs. Myers and Anderson have granted to Mr. Pearson a seven-year option to purchase an aggregate of 208,218 shares of Class A Common Stock (representing 3% of the outstanding shares of Common Stock owned by Messrs. Myers and Anderson prior to the Offering) at an exercise price of $2.50 per share. The option to purchase 20% of the shares is immediately exercisable and the remainder vests at a rate of 20% per year over the next four years, subject to accelerated vesting under certain circumstances. See "Principal Shareholders." For information concerning the TelePassport Companies, see "Business--The Reorganization." For information concerning employment and consulting agreements with, and compensation of, the Company's executive officers and directors, see "Management--Employment Agreements" and "Management--Long Term Incentive Plan." The Company believes that the terms of each of the foregoing transactions and those that will exist after the consummation of the Offering are no less favorable to the Company than could have been obtained from non-affiliated third parties, although no independent appraisals were obtained. 74 78 DESCRIPTION OF CAPITAL STOCK Upon consummation of the Offering and after giving effect to the issuance of 340,000 shares of Class B Common Stock in connection with the Agent Acquisitions and the acquisition of HCL, the authorized capital stock of the Company will consist of 9,000,000 shares of Class A Common Stock, 20,000,000 shares of Class B Common Stock and 1,000,000 shares of Preferred Stock, of which 7,350,000 shares of Class A Common Stock will be issued and outstanding, 5,340,000 shares of Class B Common Stock will be issued and outstanding, and no shares of Preferred Stock will be issued or outstanding. The following description of certain provisions of the Company's Amended and Restated Certificate of Incorporation and By-laws is a summary only and is qualified in its entirety by the provisions of such documents, copies of each of which have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. COMMON STOCK The Class B Common Stock and the Class A Common Stock are substantially identical, except for disparity in voting power, convertibility and transferability. The Class B Common Stock is entitled to one vote per share and is not convertible into Class A Common Stock. The Class A Common Stock is entitled to ten votes per share and is convertible at any time on a share-for-share basis into Class B Common Stock. In the event any shares of Class A Common Stock are transferred to any person or entity not affiliated (as defined in the Amended and Restated Certificate of Incorporation) with the transferor or the Company, then such shares shall automatically convert into a like number of shares of Class B Common Stock. Except as otherwise required by law, under the Company's Amended Certificate of Incorporation, shares of Class A Common Stock and Class B Common Stock will vote together on all matters submitted to vote of stockholders, including the election of directors. Upon completion of the Offering, the Company's current stockholders collectively will own 100% of the outstanding Class A Common Stock, which will represent 92.7% of the combined voting power of the Company. Accordingly, the holders of the Class A Common Stock will have the right to elect a majority of the Company's Board of Directors. There are no preemptive, subscription, conversion or redemption rights pertaining to the shares of Common Stock. Holders of shares of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors from funds legally available therefor and to share ratably in the assets of the Company available upon liquidation, dissolution or winding up. The holders of shares of Common Stock do not have cumulative voting rights for the election of directors. All of the outstanding shares of Common Stock are duly authorized, validly issued, fully paid and non-assessable. PREFERRED STOCK The Amended and Restated Certificate of Incorporation authorizes the issuance of 1,000,000 shares of Preferred Stock, $.01 par value per share, in one or more series, with each series to have such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Class B Common Stock. In addition, the Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although the Company does not have any current intentions to issue any shares of Preferred Stock, there can be no assurance that the Company will not do so in the future. REGISTRATION RIGHTS In connection with the Company's acquisition of TelePassport Germany, its independent agent in Germany, the Company has agreed to grant Hofer piggy-back registration rights, subject to certain exceptions, for a period of two years commencing six months after the closing of the Offering with respect to all of the shares of Class B Common Stock issued to Hofer under the agreement. In addition, the Company has granted 75 79 similar rights to a stockholder with respect to 44,100 shares of Class B Common Stock issuable upon conversion of a like number of shares of Class A Common Stock. DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS Certain provisions of the Delaware General Corporation Law and of the Amended and Restated Certificate of Incorporation and By-Laws, summarized in the following paragraphs, may be considered to have an anti-takeover effect and may delay, deter or prevent a tender offer, proxy contest or other takeover attempt that a stockholder might consider to be in such stockholder's best interest, including such an attempt as might result in payment of a premium over the market price for shares held by stockholders. Delaware Anti-Takeover Law. Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the time of the transaction in which the person became an interested stockholder unless (i) prior to the time the person became an interested stockholder, either the business combination or the transaction which resulted in the person becoming an interested stockholder is approved by the board of directors of the corporation, (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock, or (iii) on or after such time the business combination is approved by the board of directors and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person who owns 15% or more of the corporation's outstanding voting stock or who is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder, as well as the affiliates and associates of such person. The restrictions of Section 203 do not apply if, among other things, a corporation, by action of its stockholders, adopts an amendment to its certificate of incorporation or by-laws expressly electing not to be governed by Section 203, provided that, in addition to any other vote required by law, such amendment to the certificate of incorporation or by-laws must be approved by the affirmative vote of a majority of the shares entitled to vote. Moreover, an amendment so adopted is not effective until twelve months after its adoption and does not apply to any business combination between the corporation and any person who became an interested stockholder of such corporation on or prior to such adoption. The Company's Amended Certificate of Incorporation and By-laws do not currently contain any provisions electing not to be governed by Section 203 of the Delaware General Corporation Law. Class A Voting Rights. Shares of Class A Common Stock are entitled to ten votes per share, as compared to one vote per share for the Class B Common Stock. Upon completion of the Offering, the Company's current stockholders collectively will own 100% of the outstanding Class A Common Stock, which will represent 92.7% of the combined voting power of the Company. Accordingly, the holders of the Class A Common Stock will have the right to elect a majority of the Company's Board of Directors. This may have the result of discouraging a change in control of the Company, even if a Class B stockholder considered to be in such stockholder's best interest. Preferred Stock. The Company is authorized to issue 1,000,000 shares of undesignated Preferred Stock. Under certain circumstances, the issuance of Preferred Stock could be utilized as a method of discouraging, delaying or preventing a change in control of the Company. DIRECTOR LIABILITY AND INDEMNIFICATION Pursuant to the Company's Amended and Restated Certificate of Incorporation and By-laws, officers and directors of the Company shall be indemnified by the Company to the fullest extent allowed under Delaware law for claims brought against them in their capacities as officers or directors. Indemnification is not allowed if the officer or director does not act in good faith and in a manner reasonably believed to be in the best interests of the Company, or if the officer or director had no reasonable cause to believe his conduct was lawful. Accordingly, indemnification may occur for liabilities arising under the Securities Act. The Company and the 76 80 Underwriters have agreed to indemnify each other (including officers and directors) against certain liabilities, including liabilities under the Securities Act. See "Underwriting." Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. The Registrant intends to apply for a director and officer liability insurance policy, under which each director and certain officers of the Company would be insured against certain liabilities. In addition, prior to the effectiveness of the Offering, the Company will enter into indemnity agreements with each of its officers and directors. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is Bank of New York. 77 81 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have 7,350,000 shares of Class A Common Stock outstanding and 12,690,000 shares of Common Stock outstanding (13,440,000 shares if the over-allotment option is exercised in full). Of the shares of Common Stock to be issued and outstanding after the Offering, all of the shares of Class B Common Stock sold in the Offering will be freely tradeable without restriction or further registration under the Securities Act, except for any shares purchased by "affiliates" of the Company within the meaning of Rule 144 under the Securities Act ("Rule 144"). The outstanding shares of Class A Common Stock are "restricted securities," as that term is defined under Rule 144, and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemption provided by Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including persons deemed to be "affiliates" of the Company, who has beneficially owned his or her shares for at least two years since the later of the date of the acquisition of the securities from the Company or from an affiliate is entitled to sell within any three-month period that number of restricted securities that does not exceed the greater of one percent of the then outstanding shares of securities of the same class or the average weekly trading volume of such securities during the four calendar weeks immediately preceding such sale, or the filing of notice of proposed sale, if required, subject to the availability of adequate current public information about the Company. After three years have elapsed since the later of the date the securities were acquired from the Company or from an affiliate of the Company, such shares may be sold without limitation by persons who are not affiliates of the Company at the time of sale and have not been affiliates of the Company for at least three months under Rule 144(k). Effective April 29, 1997, an amendment to Rule 144 will reduce the holding period required for shares subject to Rule 144 to become eligible for sale in the public market from two years to one year, and from three years to two years in the case of sales by non-affiliates under Rule 144(k). The Company, its officers, directors and all existing holders of Common Stock have agreed that, for a period of 180 days after the date of this Prospectus, they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any additional shares of Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock, or disclose the intention to make any such offer, sale, pledge, disposal or filing, without the prior written consent of Credit Suisse First Boston Corporation, except, in the case of the Company, issuances pursuant to the Long Term Incentive Plan. Rule 701 under the Securities Act provides that, beginning 90 days after the date of this Prospectus, shares of Class B Common Stock acquired on the exercise of outstanding options prior to the date of this Prospectus may be resold by persons other than affiliates subject only to the manner of sale provisions of Rule 144, and by affiliates subject to all provisions of Rule 144 except its two-year minimum holding period (one year, upon the effective date of the amendment to Rule 144). The Company intends to file one or more registration statements under the Securities Act to register the shares of Class B Common Stock issued and reserved for issuance in compensatory arrangements and under the Long Term Incentive Plan. Registration would permit the resale of such shares by non-affiliates and affiliates, subject to the lock-up described above, in the public market without restriction under the Securities Act. Prior to the Offering, there has been no public trading market for the shares of Class B Common Stock and there can be no assurance that a regular trading market will develop after the Offering, or that if developed it will be sustained. In addition, no prediction can be made as to the effect, if any, that market sales of shares of Class B Common Stock or the availability of such shares for sale will have on the market prices prevailing from time to time. Nevertheless, the possibility that substantial amounts of shares of Class A or Class B Common Stock may be sold in the public market may adversely affect prevailing market prices for the shares of Class B Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. 78 82 CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS OF COMMON STOCK The following is a summary of the principal United States federal income and estate tax consequences of the ownership and sale or other disposition of Class B Common Stock by a person (a "non-U.S. holder") which, for United States federal income tax purposes, is a nonresident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust, as such terms are defined in the Internal Revenue Code of 1986 (the "Code"). This summary does not address all aspects of United States federal income and estate taxes which may be relevant to non-U.S. holders which may be subject to special treatment under United States federal income tax laws (for example, insurance companies, tax exempt organizations, financial institutions or broker-dealers). Furthermore, this summary does not discuss any aspect of foreign, state or local taxation. This summary is based on current provisions of the Code, existing and proposed regulations promulgated thereunder and administrative and judicial interpretations thereof, all of which are subject to change. Dividends. Dividends paid to a non-U.S. holder of Class B Common Stock will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the dividends (i) are effectively connected with the conduct of a trade or business of the non-U.S. holder in the United States and the non-U.S. holder provides the payer with proper documentation or (ii) if a tax treaty applies, are attributable to a United States permanent establishment of the non-U.S. holder. In order to claim the benefit of an applicable tax treaty rate, a non-U.S. holder may have to file with the Company or its dividend paying agent an exemption or reduced treaty rate certificate or letter in accordance with the terms of such treaty. Dividends which are effectively connected with such a United States trade or business or, if a tax treaty applies, are attributable to such a United States permanent establishment, are generally subject to tax on a net income basis (that is, after allowance for applicable deductions) at rates applicable to United States citizens, resident aliens and domestic United States corporations and are not generally subject to withholding. Any such effectively connected dividends received by a non-United States corporation may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Under current United States Treasury regulations, dividends paid to an address outside the United States are presumed to be paid to a resident of such country for purposes of the withholding discussed above (unless the payer has knowledge to the contrary), and, under the current interpretation of United States Treasury regulations, for purposes of determining the applicability of a tax treaty rate. Under recently proposed United States Treasury regulations (the "Proposed Regulations"), not currently in effect, however, a non-U.S. holder of Class B Common Stock who wishes to claim the benefit of an applicable treaty rate would be required to satisfy applicable certification and other requirements. The Proposed Regulations are proposed to be effective for payments made after December 31, 1997. There can be no assurance that the Proposed Regulations will be adopted or what the provisions will include if and when adopted in temporary or final form. Certain certification and disclosure requirements must be complied with in order to be exempt from withholding under the effectively connected income exemption discussed above. A non-U.S. holder of Class B Common Stock that is eligible for a reduced rate of United States tax withholding pursuant to an income tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the United States Internal Revenue Service. Disposition of Class B Common Stock. A non-U.S. holder generally will not be subject to United States federal income tax in respect of gain recognized on the sale or other disposition of Class B Common Stock unless (i)(a) the gain is effectively connected with the conduct of a trade or business of a non-U.S. holder in the United States or (b) if a tax treaty applies, the gain is attributable to a United States permanent establishment of the non-U.S. holder, (ii) in the case of an individual non-U.S. holder who is present in the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions are satisfied, or (iii)(a) if the Company is or has been a "U.S. real property holding corporation" 79 83 for federal income tax purposes at any time during the five-year period ending on the date of the disposition, or, if shorter, the period during which the non-U.S. holder held the Class B Common Stock (the "applicable period"), and (b) assuming that the Class B Common Stock continues to be "regularly traded on an established securities market" for tax purposes, the non-U.S. holder owns, actually or constructively, at any time during the applicable period more than 5% of the outstanding Class B Common Stock. The Company believes it is not currently a U.S. real property holding corporation and does not anticipate becoming such a corporation. If an individual non-U.S. holder falls under the clause (i) above, such individual generally will be taxed on the net gain derived from a sale under regular graduated United States federal income tax rates. If an individual non-U.S. holder falls under clause (ii) above, such individual generally will be subject to a flat 30% tax on the gain derived from a sale, which may be offset by certain United States capital losses (notwithstanding the fact that such individual is not considered a resident of the United States). Thus, non-U.S. holders who have spent (or expect to spend) 183 days or more in the United States in the taxable year in which they contemplate a sale of Class B Common Stock are urged to consult their tax advisors as to the tax consequences of such sale. If a non-U.S. holder that is a foreign corporation falls under clause (i) above, it generally will be taxed on its net gain under regular graduated United States federal income tax rates and, in addition, may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Federal Estate Taxes. Class B Common Stock held by a holder who is neither a United States citizen nor a United States resident (as specifically defined for United States federal estate tax purposes) at the time of death will be included in such holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. United States Information Reporting Requirements and Backup Withholding Tax. The Company must report annually to the Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends. These information reporting requirements apply regardless of whether withholding is required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder resides under the provisions of an applicable income tax treaty. United States backup withholding (which generally is imposed at a 31% rate) generally will not apply to (i) the payment of dividends paid on Class B Common Stock to a non-U.S. holder at an address outside the United States or (ii) the payment of the proceeds of a sale of Class B Common Stock to or through the foreign office of a broker. In the case of the payment of proceeds from such a sale of Class B Common Stock through a foreign office of a broker that is a United States person or a "U.S. related person," however, information reporting (but not backup withholding) is required with respect to the payment unless the broker has documentary evidence in its files that the owner is a non-U.S. holder (and has no actual knowledge to the contrary) and certain other requirements are met or the holder otherwise establishes an exemption. For this purpose, a "U.S. related person" is (i) a "controlled foreign corporation" for United States federal income tax purposes, or (ii) a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment (or for such part of the period that the broker has been in existence) is derived from activities which are effectively connected with the conduct of a Untied States trade or business. The payment of the proceeds of a sale of shares of Class B Common Stock to or through a United States office of a broker is subject to information reporting and possible backup withholding at a rate of 31% unless the holder certifies, among other things, its non-United States status under penalties of perjury or otherwise establishes an exemption. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder will be allowed as a refund or a credit against such non-U.S. holder's United States federal income tax liability, provided that the required information is furnished to the Internal Revenue Service. 80 84 The Proposed Regulations would provide alternative methods for satisfying the certification requirements described above. THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL UNITED STATES FEDERAL INCOME AND ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF CLASS B COMMON STOCK BY NON-UNITED STATES HOLDERS. ACCORDINGLY, INVESTORS ARE URGED TO CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF CLASS B COMMON STOCK, INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION. 81 85 UNDERWRITING Under the terms and subject to the conditions contained in an Underwriting Agreement dated , 1997, between the Company and the U.S. Underwriters (the "U.S. Underwriting Agreement"), the underwriters named below (the "U.S. Underwriters"), for whom Credit Suisse First Boston Corporation and Smith Barney Inc. are acting as representatives (the "Representatives"), have severally but not jointly agreed to purchase from the Company the following respective numbers of U.S. Shares:
NUMBER OF UNDERWRITER U.S. SHARES ----------------------------------------------------------------- ----------- Credit Suisse First Boston Corporation........................... Smith Barney Inc. ............................................... ------- Total.................................................. =======
The U.S. Underwriting Agreement provides that the obligations of the U.S. Underwriters are subject to certain conditions precedent and that the U.S. Underwriters will be obligated to purchase all the U.S. Shares offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The U.S. Underwriting Agreement provides that, in the event of a default by a U.S. Underwriter, in certain circumstances the purchase commitments of non-defaulting U.S. Underwriters may be increased or the U.S. Underwriting Agreement may be terminated. The Company has entered into a Subscription Agreement (the "Subscription Agreement") with the Managers of the International Offering (the "Managers") providing for the concurrent offer and sale of the International Shares outside the United States and Canada. The closing of the U.S. Offering is a condition to the closing of the International Offering and vice versa. The Company has granted to the U.S. Underwriters and the Managers an option, exercisable by Credit Suisse First Boston Corporation, on behalf of the U.S. Underwriters and the Managers, expiring at the close of business on the 30th day after the date of this Prospectus, to purchase up to 750,000 additional shares of Class B Common Stock from the Company at the initial public offering price, less the underwriting discounts and commissions, all as set forth on the cover page of this Prospectus. Such option may be exercised only to cover over-allotments in the sale of the shares of Class B Common Stock offered hereby. To the extent that this option to purchase is exercised, each U.S. Underwriter and each Manager will become obligated, subject to certain conditions, to purchase approximately the same percentage of additional shares being sold to the U.S. Underwriters and the Managers as the number of U.S. Shares set forth next to such U.S. Underwriter's name in the preceding table and as the number set forth next to such Manager's name in the corresponding table in the Prospectus relating to the International Offering bears to the total number of shares of Class B Common Stock in such tables. The Company has reserved for purchase from the Underwriters up to shares of Class B Common Stock which may be purchased by employees and friends of the Company through a directed share program. Such sales will be at the initial public offering price. The number of shares of Class B Common Stock available to the general public will be reduced to the extent these persons purchase the reserved shares. The Company has been advised by the Representatives that the U.S. Underwriters propose to offer the U.S. Shares in the United States and Canada to the public initially at the offering price set forth on the cover page of this Prospectus and, through the Representatives, to certain dealers at such price less a concession of $ per share, and that the U.S. Underwriters and such dealers may allow a discount of $ per share on sales to certain other dealers. After the Offering, the public offering price and concession and discount to dealers may be changed by the Representatives. The public offering price, the aggregate underwriting discounts and commissions per share and per share concession and discount to dealers for the U.S. Offering and the concurrent International Offering will be identical. Pursuant to an Agreement between the U.S. Underwriters and the Managers (the "Intersyndicate Agreement") relating to the Offering, changes in the public offering price, concession and discount to dealers 82 86 will be made only upon the mutual agreement of Credit Suisse First Boston Corporation, on behalf of the U.S. Underwriters, and Credit Suisse First Boston (Europe) Limited ("CSFBL"), on behalf of the Managers. Pursuant to the Intersyndicate Agreement, each of the U.S. Underwriters has agreed that, as part of the distribution of the U.S. Shares and subject to certain exceptions, it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Class B Common Stock or distribute any prospectus relating to the Class B Common Stock to any person outside the United States or Canada or to any other dealer who does not so agree. Each of the Managers has agreed or will agree that, as part of the distribution of the International Shares and subject to certain exceptions, it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Class B Common Stock or distribute any prospectus relating to Class B Common Stock in the United States or Canada or to any other dealer who does not so agree. The foregoing limitations do not apply to stabilization transactions or to transactions between the U.S. Underwriters and the Managers pursuant to the Intersyndicate Agreement. As used herein, "United States" means the United States of America (including the States and the District of Columbia), its territories, possessions and other areas subject to its jurisdiction. "Canada" means Canada, its provinces, territories, possessions and other areas subject to its jurisdiction, and an offer or sale shall be in the United States or Canada if it is made to (i) any individual resident in the United States or Canada or (ii) a corporation, partnership, pension, profit-sharing or other trust or other entity (including any such entity acting as an investment adviser with discretionary authority) whose office most directly involved with the purchase is located in the United States or Canada. Pursuant to the Intersyndicate Agreement, sales may be made between the U.S. Underwriters and the Managers of such number of shares of Class B Common Stock as may be mutually agreed upon. The price of any shares so sold shall be the public offering price, less such amount as may be mutually agreed upon by Credit Suisse First Boston Corporation, as representative of the U.S. Underwriters and CSFBL, on behalf of the Managers, but not exceeding the selling concession applicable to such shares. To the extent there are sales between the U.S. Underwriters and the Managers pursuant to the Intersyndicate Agreement, the number of shares of Class B Common Stock initially available for sale by the U.S. Underwriters or by the Managers may be more or less than the amount appearing on the cover page of this Prospectus. Neither the U.S. Underwriters nor the Managers are obligated to purchase from the other any unsold shares of Class B Common Stock. This Prospectus may be used by underwriters and dealers in connection with sales of International Shares to persons located in the United States, to the extent such sales are permitted by the contractual limitations on sales described above. The Company, its officers, directors and all existing holders of Common Stock have agreed that, for a period of 180 days after the date of this Prospectus, they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Securities Act relating to, any additional shares of Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock, or securities convertible into or exchangeable or exercisable for any shares of Common Stock, or disclose the intention to make any such offer, sale, pledge, disposal or filing, without the prior written consent of Credit Suisse First Boston Corporation, except, in the case of the Company, issuances pursuant to the Long Term Incentive Plan. Credit Suisse First Boston Corporation, on behalf of the Underwriters, may engage in over-allotment, stabilizing transactions, syndicate covering transaction and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the Class B Common Stock in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit Credit Suisse First Boston Corporation to reclaim a selling concession from a syndicate member when Class B Common Stock originally sold by such syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the Class B Common 83 87 Stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The Company has agreed to indemnify the U.S. Underwriters and the Managers against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments which the U.S. Underwriters and the Managers may be required to make in respect thereof. Application has been made to list the shares of Class B Common Stock on the Nasdaq National Market under the symbol "TEPP." Prior to the Offering there has been no public market for the Class B Common Stock. The initial public offering price for the Class B Common Stock will be determined by negotiation among the Company and Credit Suisse First Boston Corporation as the representative of the U.S. Underwriters and CSFBL on behalf of the Managers and does not reflect the market price of the Class B Common Stock following the Offering. Among the principal factors to be considered in determining the initial public offering price will be market conditions for initial public offerings, the history of and prospects for the Company's business, the Company's past and present operations, its past and present earnings and current financial position, an assessment of the Company's management, the market of securities of companies in businesses similar to those of the Company, the general condition of the securities markets and other relevant factors. There can be no assurance that the initial public offering price will correspond to the price at which the Class B Common Stock will trade in the public market subsequent to the Offering or that an active trading market for the Class B Common Stock will develop and continue after the Offering. The Representatives have informed the Company that they do not expect discretionary sales by the U.S. Underwriters and the Managers to exceed 5% of the number of shares being offered in the Offering. NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the shares of Class B Common Stock in Canada is being made only on a private placement basis exempt from the requirements that a prospectus be prepared and filed with the securities regulatory authorities in each province where trades of the shares of Class B Common Stock are effected. Accordingly, any resale of the shares of Class B Common Stock in Canada must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the shares of Class B Common Stock purchased by them. REPRESENTATIONS OF PURCHASERS Each purchaser of shares of Class B Common Stock in Canada who receives a purchase confirmation will be deemed to represent to the Company and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such shares of Class B Common Stock without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION AND ENFORCEMENT The securities offered hereby are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Section 32 of the Regulation under the Securities Act (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the United States federal securities laws. 84 88 All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Ontario purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against the issuer or such persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of shares of Class B Common Stock to whom the Securities Act (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any shares purchased by such purchaser pursuant to the Offering. Such report must be in the form attached to British Columbia Common Stock Commission Blanket Order BOR #95/17, a copy of which may be obtained from the Company. Only one such report must be filed in respect of shares of Class B Common Stock acquired on the same date and under the same prospectus exemption. LEGAL MATTERS The validity of the shares of Class B Common Stock will be passed upon for the Company by Baer Marks & Upham LLP, New York, New York. The Underwriters have been represented by Cravath, Swaine & Moore, New York, New York. EXPERTS The consolidated financial statements and schedule of TelePassport Inc. at December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, which, as to the years 1996 and 1995, are based in part on the report of Deloitte Touche Tohmatsu, independent auditors. The financial statements and schedule referred to above are included in reliance on such reports given upon the authority of such firm as experts in accounting and auditing. The financial statements of TelePassport Japan Co., Ltd. as of December 31, 1996 and 1995 and for the year ended December 31, 1996 and the period from March 6, 1995 (date of incorporation) to December 31, 1995 included in this Prospectus and Registration Statement have been audited by Deloitte Touche Tohmatsu, independent auditors, as stated in their report thereon appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 85 89 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 including all amendments thereto (the "Registration Statement") under the Securities Act with respect to the Class B Common Stock offered by this Prospectus. This Prospectus, which constitutes a part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain parts of which are omitted from this Prospectus in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Offering, reference is made to the Registration Statement, including the exhibits filed therewith. After consummation of the Offering, the Company will be subject to the informational and reporting requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, will be required to file reports, proxy statements and other information with the Commission. The Registration Statement, as well as any such report, proxy statement and other information filed by the Company with the Commission, may be inspected and copies may be obtained from the Public Reference Section at the Commission's principal office, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following regional offices of the Commission: Northeast Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048 and Midwest Regional Office, Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511, upon payment of the fees prescribed by the Commission. The Commission maintains a World Wide Web site on the Internet at http:/www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and where the contract or other document has been filed as an exhibit to the Registration Statement, each such statement is qualified in all respects by such reference to the applicable document filed with the Commission. The Company intends to distribute to its stockholders annual reports containing audited financial statements certified by its independent auditors and such other periodic reports as the Company may determine to be appropriate or as may be required by law. 86 90 GLOSSARY OF TERMS Accounting or Settlement Rate--The per minute rate negotiated between carriers in different countries for termination of international long distance traffic in, and return traffic to, the carriers' respective countries. ATM (Asynchronous Transfer Mode)--A high capacity transmission method for voice, data and image communications. Call reorigination--A form of dial up access that allows a user to access a telecommunications company's network by placing a telephone call and waiting for an automated callback. The callback then provides the user with dial tone which enables the user to place a call. Technical innovations have enabled telecommunications carriers to offer a "transparent" form of call reorigination without the usual "hang-up" and "callback" whereby the call is automatically and swiftly processed. COMS (Communication Order Maintenance System)--TelePassport's proprietary customer order entry system. Correspondent agreement--Agreement between international long distance carriers that provides for the termination of traffic in, and return traffic to, the carriers' respective countries at a negotiated per minute rate and provides for a method by which revenues are distributed between the two carriers. CUG (Closed User Group)--A group of specified users, such as employees of a company, permitted by applicable regulations to access a private voice or data network. Dedicated access--A means of accessing a network through the use of a permanent point-to-point circuit typically leased from an ITO. The advantage of dedicated access is simplified premises-to-anywhere calling, faster call set-up times and potentially lower access costs (provided there is sufficient traffic over the circuit to generate economies of scale). Dedicated leased line--Any circuit (typically supplied by and leased from an ITO) designated to be at the exclusive disposal of a given subscriber. Dial up access--A form of service whereby access to a network is obtained by dialing an international toll-free number or a paid local access number. Direct access--A method of accessing a network through the use of private lines. Facilities-based carrier--A carrier which owns long distance interexchange and transmission facilities. Fiber optic--Otherwise known as optical fiber, this is a transmission medium consisting of high-grade glass fiber through which light beams are transmitted carrying a high volume of telecommunications traffic. International gateway--A switching facility that provides connectivity between international carriers and performs any necessary signaling conversions between countries. IPLC (International Private Line Circuits)--Point-to-point permanent connections which can carry voice and data. IPLCs are owned and maintained by ITOs or third party resellers. IRU (Indefeasible Rights of Use)--The rights to use a telecommunications system, usually an undersea cable, with most of the rights and duties of ownership, but without the right to control or manage the facility and, depending upon the particular agreement, without any right to salvage or duty to dispose of the cable at the end of its useful life. ISDN (Integrated Services Digital Network)--a hybrid digital network capable of providing transmission speeds of up to 128 kilobits per second for both voice and data. ISR (International Simple Resale)--The use of international leased lines for the resale of Voice Telephony to the public. ITO (Incumbent Telecommunications Operator)--The dominant carrier in each country, often government-owned or protected; commonly referred to as the Postal, Telephone and Telegraph Company, or PTT. 87 91 LCR (Least Cost Routing)--Routing of calls in the least expensive manner. Local connectivity--Physical circuits connecting the switching facilities of a telecommunications services provider to the interexchange and transmission facilities of an ITO. Local exchange--A geographic area determined by the appropriate regulatory authority in which calls generally are transmitted without toll charges to the calling or called party. PBX (Public Branch Exchange)--Switching equipment that allows connection of private extension telephones to the PSTN or to a private line. PSTN (Public Switched Telephone Network)--An abbreviation used by the ITO, PSTN refers to a telephone network which is accessible by the public at large through private lines, wireless systems and pay phones. Private line--A dedicated telecommunications connection between end user locations. Resale--Resale by a provider of telecommunications services of services sold to it by other providers or carriers on a wholesale basis. SS7 (Signaling System 7)--An international standardized signaling system for use in digital networks. Switched access--A method of accessing a network through the PSTN. Switched minutes--The number of minutes of telephone traffic carried on a network using switched access. Switching facility--A device that opens or closes circuits or selects the paths or circuits to be used for transmission of information. Switching is a process of interconnecting circuits to form a transmission path between users. VPN (Virtual Private Network)--Carrier-provided services that provide capabilities similar to those of private lines, such as conditioning, error testing and higher speed, full-duplex, four wire transmission with a line quality adequate for data. Voice telephony--A term used by the EU, defined as the commercial provision for the public of the direct transport and switching of speech in real-time between public switched network termination points, enabling any user to use equipment connected to such a network termination point in order to communicate with another termination point. X.25--A form of packet switching (a system whereby messages are broken down into smaller units called packets which are then individually addressed and routed through the network). The Company uses X.25 packet switching as a means of originating callback requests. 88 92 INDEX TO FINANCIAL STATEMENTS
PAGE ---- TELEPASSPORT INC. AND SUBSIDIARIES: Report of Independent Auditors...................................................... F-2 Consolidated Balance Sheets as of December 31, 1995 and 1996........................ F-3 Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996......................................................................... F-4 Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 1994, 1995 and 1996.............................................................. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996......................................................................... F-6 Notes to Consolidated Financial Statements.......................................... F-7 TELEPASSPORT JAPAN CO., LTD.: Independent Auditors' Report........................................................ F-14 Balance Sheets as of December 31, 1996 and 1995..................................... F-15 Statements of Operations for the Year Ended December 31, 1996 and the Period from March 6, 1995 (Date of Incorporation) to December 31, 1995....................... F-16 Statements of Shareholders' Capital Deficiency for the Year Ended December 31, 1996 and the Period from March 6, 1995 (Date of Incorporation) to December 31, 1995... F-17 Statements of Cash Flows for the Year Ended December 31, 1996 and the Period from March 6, 1995 (Date of Incorporation) to December 31, 1995....................... F-18 Notes to Financial Statements....................................................... F-19
F-1 93 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders TelePassport Inc. We have audited the accompanying consolidated balance sheets of TelePassport Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements of TelePassport Japan Co., Ltd., an unconsolidated 51% owned subsidiary (see Note 1), have been audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for TelePassport Japan Co., Ltd., is based solely on their report. 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 and, for 1995 and 1996, the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1995 and 1996, the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of TelePassport Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Hackensack, New Jersey The foregoing report is in the form that will be signed upon the completion of the reorganization described in Note 1 to the financial statements. ERNST & YOUNG LLP Hackensack, New Jersey March 19, 1997 F-2 94 TELEPASSPORT INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31, -------------------- 1995 1996 ------- -------- ASSETS Current assets: Cash.................................................................. $ 420 $ 1,088 Accounts receivable: Customers, less allowance of $683 and $790......................... 3,852 4,332 Foreign joint venture.............................................. 304 1,838 Prepaid expenses and other current assets............................. 75 366 ------- -------- Total current assets............................................... 4,651 7,624 Property and equipment, net (Note 3).................................... 1,974 5,194 Deferred costs, net of accumulated amortization of $20 and $58.......... 133 596 Goodwill, net of accumulated amortization of $5 and $14................. 122 113 Deposits................................................................ 123 353 ------- -------- Total assets.................................................. $ 7,003 $ 13,880 ======= ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable...................................................... $ 4,797 $ 10,494 Accrued liabilities................................................... 1,845 1,788 Reseller deposits..................................................... 263 309 Capital lease obligations............................................. 3 61 Due to affiliates..................................................... 327 1,476 ------- -------- Total current liabilities.......................................... 7,235 14,128 Capital lease obligations............................................... 289 Loan from affiliates (Note 7)........................................... 1,258 Commitments and contingencies (Note 5) Equity in accumulated net loss of foreign joint venture, net of investment and long-term advances..................................... 348 1,801 Stockholders' deficit: Preferred stock, $.01 par value, authorized 1,000,000 shares, none issued............................................................. Class A common stock, $.01 par value, authorized 9,000,000 shares; issued and outstanding, 7,350,000 shares........................... 74 74 Class B common stock, $.01 par value, authorized 20,000,000 shares; none issued........................................................ Additional paid-in capital............................................ 5,410 15,718 Accumulated deficit................................................... (7,319) (18,124) Cumulative translation adjustment..................................... (3) (6) ------- -------- Total stockholders' deficit........................................ (1,838) (2,338) ------- -------- Total liabilities and stockholders' deficit................... $ 7,003 $ 13,880 ======= ========
See accompanying notes. F-3 95 TELEPASSPORT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEAR ENDED DECEMBER 31, ---------------------------------------- 1994 1995 1996 ---------- ---------- ---------- Telecommunications revenue............................. $ 12,775 $ 27,643 $ 36,550 Costs and expenses: Cost of telecommunications services (Note 6)......... 8,907 20,075 29,880 Selling expenses..................................... 1,687 2,579 3,800 General and administrative expenses.................. 5,173 5,349 8,804 Non cash compensation (Note 5)....................... 2,718 Depreciation and amortization (Note 2)............... 100 395 714 ---------- ---------- ---------- Total costs and expenses..................... 15,867 28,398 45,916 ---------- ---------- ---------- Loss from operations................................... (3,092) (755) (9,366) Other income (expense) -- net (Note 5)................. (315) 37 14 Equity in net loss of foreign joint venture............ (703) (1,453) ---------- ---------- ---------- Loss before minority interest.......................... (3,407) (1,421) (10,805) Minority interest...................................... 20 ---------- ---------- ---------- Net loss............................................... $ (3,407) $ (1,401) $ (10,805) ========== ========== ========== Net loss per common share.............................. $ (.45) $ (.19) $ (1.43) ========== ========== ========== Weighted average common shares outstanding............. 7,546,805 7,546,805 7,546,805 ========== ========== ==========
See accompanying notes. F-4 96 TELEPASSPORT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (IN THOUSANDS)
ADDITIONAL CUMULATIVE CLASS A PAID-IN ACCUMULATED TRANSLATION COMMON STOCK CAPITAL DEFICIT ADJUSTMENT TOTAL ------------ ---------- ----------- ----------- ------- Balance at January 1, 1994............... $ 74 $ 1,321 $ (2,511) $(1,116) Capital contributions.................. 1,885 1,885 Contribution of USFN net assets........ 1,045 1,045 Net loss for 1994...................... (3,407) (3,407) ---- -------- --------- ------- Balance at December 31, 1994............. 74 4,251 (5,918) (1,593) Capital contributions.................. 1,159 1,159 Net loss for 1995...................... (1,401) (1,401) Foreign currency translation........... $(3) (3) ---- -------- --------- --- ------- Balance at December 31, 1995 74 5,410 (7,319) (3) (1,838) Capital contributions.................. 7,590 7,590 Compensation related to stock options............................. 2,718 2,718 Net loss for 1996...................... (10,805) (10,805) Foreign currency translation........... (3) (3) ---- -------- --------- --- ------- Balance at December 31, 1996............. $ 74 $ 15,718 $ (18,124) $(6) $(2,338) ==== ======== ========= === =======
See accompanying notes. F-5 97 TELEPASSPORT INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------- 1994 1995 1996 ------- ------- -------- OPERATING ACTIVITIES Net loss................................................... $(3,407) $(1,401) $(10,805) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................... 100 395 714 Provisions for losses on receivables.................... 645 184 352 Non cash compensation................................... 2,718 Equity in net loss of foreign joint venture............. 703 1,453 Minority interest....................................... (20) Changes in operating assets and liabilities: Increase in accounts receivable from customers and foreign joint venture.............................. (1,691) (2,788) (2,366) (Increase) decrease in other current assets........... (37) 28 (291) Increase in deposits.................................. (76) (230) Increase in accounts payable and accrued expenses..... 2,505 2,644 5,640 Increase (decrease) in reseller deposits.............. 152 (6) 46 Increase in due to affiliates......................... 64 263 1,149 ------- ------- -------- Net cash used in operating activities...................... (1,669) (74) (1,620) INVESTING ACTIVITIES Investment in/advances to TelePassport Japan............... (355) Purchase of interest in Mastercall (net of cash acquired)............................................... (70) Purchase of equipment...................................... (304) (1,655) (3,537) Increase in deferred costs................................. (14) (139) (217) ------- ------- -------- Net cash used in investing activities...................... (318) (2,219) (3,754) FINANCING ACTIVITIES Capital contributions (including $34 of cash of USFN in 1994)................................................... 1,919 1,159 6,332 Advances from affiliates................................... 333 1,258 Deferred costs in connection with initial public offering................................................ (284) Repayment of capital lease obligation...................... (21) (3) ------- ------- -------- Net cash provided by financing activities.................. 2,252 2,396 6,045 Effect of exchange rate changes on cash.................... (1) (3) ------- ------- -------- Increase in cash........................................... 265 102 668 Cash at beginning of year.................................. 53 318 420 ------- ------- -------- Cash at end of year........................................ $ 318 $ 420 $ 1,088 ======= ======= ========
See accompanying notes. F-6 98 TELEPASSPORT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1996 1. ORGANIZATION AND NATURE OF BUSINESS These financial statements reflect the combination of USFI, Inc. ("USFI"), USFI-Japan, LLC ("USFI-Japan") and TelePassport LLC (collectively "the USFI Companies"). TelePassport Inc. ("TelePassport" or the "Company") was incorporated in Delaware on December 9, 1996 for the purpose of acquiring and continuing the operations of the USFI Companies. TelePassport and each of the USFI Companies are entities under common control. In connection with the initial public offering of the Company's common stock, TelePassport LLC merged into TelePassport and the stock of USFI and USFI-Japan was contributed to TelePassport (the "reorganization") (see Note 9). USFI, which was incorporated in New York on February 12, 1993, provides least cost routing for international long distance telecommunication services, which primarily originate and terminate outside of the United States. Substantially all billings for service are denominated in U.S. currency. Customers are principally located in Western Europe, Japan and South Africa. No individual customer represents a significant percentage of revenues, however, the Company utilizes outside agents to sell its services in certain geographic areas, with agents in Germany and South Africa representing customers with revenue aggregating 15% and 18%, and 10% and 13%, respectively, of total 1995 and 1996 revenues. The Company performs a credit evaluation of all new customers and requires certain customers to provide collateral in the form of a cash deposit or letter of credit. At December 31, 1995 and 1996, the Company had letters of credit issued on its behalf from customers in the amount of approximately $525,000 and $327,000, respectively. On May 15, 1995, USFI acquired a 51% interest in Mastercall, Ltd. ("Mastercall"), a joint venture that resells USFI's international telecommunications services in the United Kingdom, for a purchase price of approximately $148,000. The acquisition was accounted for using the purchase method of accounting and the results of operations have been included in the financial statements of the Company from the date of acquisition. USFI-Japan was organized in February 1995 for the sole purpose of establishing and investing in TelePassport Japan Co., Ltd. ("TelePassport Japan"), a 51% owned joint venture which commenced operations in March 1995. TelePassport Japan provides international telecommunication services to Japanese customers through the utilization of services provided by USFI. The Company accounts for this investment under the equity method as it has significant influence but does not exercise control over TelePassport Japan under the terms of the shareholder agreement with its joint venture partner. Summarized financial information for TelePassport Japan as of December 31, 1995 and 1996 and for the period from March 6, 1995 (date of incorporation) to December 31, 1995 and the year ended December 31, 1996 is as follows (in thousands):
1995 1996 ------- ------- Total assets....................................... $ 1,128 $ 3,111 Total liabilities.................................. 1,878 6,378 Telecommunications revenue......................... 418 3,531 Net loss........................................... 1,378 2,849
TelePassport LLC was organized in May 1996 for the purpose of building an international framework for USFI's operations. The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal F-7 99 TELEPASSPORT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR ENDED DECEMBER 31, 1996 1. ORGANIZATION AND NATURE OF BUSINESS (CONTINUED) course of business. The Company plans on funding its anticipated capital requirements to continue as a going concern from anticipated proceeds from the initial public offering of its Common Stock. Alternatively should the public offering not be completed as planned, the Company has obtained commitments from its shareholders to provide the Company with sufficient financial support to enable it to continue as a going concern. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. SIGNIFICANT ACCOUNTING POLICIES Depreciation Furniture and equipment are recorded at cost and are depreciated over the estimated useful lives of three to five years, utilizing the straight-line method. Assets acquired pursuant to capital lease arrangements and leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the terms of the leases. Depreciation expense was $98,000, $371,000 and $667,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Deferred Costs and Goodwill Deferred costs include costs to obtain trademarks and certain organizational costs and, as of December 31, 1996, $284,000 in connection with the Company's initial public offering. Goodwill consists of approximately $127,000 relating to the 1995 acquisition of Mastercall (see Note 1). Such costs are amortized on the straight-line basis generally as follows:
PERIOD OF ASSET AMORTIZATION --------------------------------------------------------- ------------ Trademarks............................................... 5 years Organization costs....................................... 5 years Goodwill................................................. 15 years
Revenue Recognition The Company recognizes revenue from services and the related costs at the time the services are rendered. Income Taxes Income taxes are accounted for under the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Net Loss Per Share Net loss per common and common equivalent share is based on the weighted average number of shares of common stock outstanding during each period, as adjusted for the effects of the application of Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No. 83. Pursuant to SAB No. 83, options granted within one year of the Company's initial public offering which have an exercise price less than the initial F-8 100 TELEPASSPORT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR ENDED DECEMBER 31, 1996 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) public offering price are treated as outstanding for all periods presented (using the treasury stock method at the initial public offering price) even though the effect is to reduce the loss per share. Basis of Consolidation The consolidated financial statements include the accounts of TelePassport and subsidiaries. All significant intercompany accounts and transactions have been eliminated. 3. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
DECEMBER 31, ------------------------- 1995 1996 ---------- ---------- Furniture and equipment............................. $ 892,009 $1,518,918 Switching equipment................................. 1,716,820 4,817,196 Leasehold improvements.............................. 89,425 59,587 ---------- ---------- 2,698,254 6,395,701 Less accumulated depreciation....................... 724,547 1,201,337 ---------- ---------- $1,973,707 $5,194,364 ========== ==========
4. INCOME TAXES Certain of the USFI Companies have elected to be taxed as "S" Corporations for federal income tax purposes and, as such, any income or loss of such companies were reported directly to the shareholders for inclusion in their tax returns. Due to the reorganization (see Note 1), such USFI companies will no longer be taxed as "S" Corporations and their tax attributes are assumed by the Company. Therefore, additional deferred taxes will be recorded for the Company. The components of deferred income tax assets and liabilities as of December 31, 1995 and 1996 would have been as follows if the reorganization had occurred as of the respective dates:
YEAR ENDED DECEMBER 31, -------------------------- 1995 1996 ---------- ----------- DEFERRED TAX ASSETS Allowance for doubtful accounts.................................... $ 272,540 $ 315,527 Accrued liabilities................................................ 303,887 385,472 Accumulated amortization........................................... 3,286 NOL carryforwards.................................................. 426,860 1,163,446 ---------- ----------- 1,003,287 1,867,731 Less valuation allowance........................................... (928,176) (1,741,515) ---------- ----------- Total deferred tax assets.......................................... 75,087 126,216 DEFERRED TAX LIABILITIES Accumulated depreciation........................................... (75,087) (126,216) ---------- ----------- Total deferred tax liabilities..................................... (75,087) (126,216) ---------- ----------- Net deferred tax assets............................................ $ -- $ -- ========== ===========
F-9 101 TELEPASSPORT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR ENDED DECEMBER 31, 1996 4. INCOME TAXES (CONTINUED) At December 31, 1996, the Company has available net operating loss carryforwards for New York City purposes of $13,146,000, which expire in 2009-2011. Had the reorganization described above occurred and had the Company operated as a 'C' Corporation, the reconciliation of the income tax computed at the U.S. federal statutory rate to income tax expense would have been as follows:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1994 1995 1996 ----------- --------- ----------- Tax (benefit) at U.S. statutory rate................. $(1,158,281) $(175,362) $(3,673,700) State and local taxes, net of federal benefit........ (202,359) (30,637) (499,380) Losses of foreign subsidiaries....................... 773,500 Non-deductible items................................. 5,675 6,116 5,059 Change in valuation allowance........................ 1,353,973 198,814 3,393,637 Other................................................ 992 1,069 884 ----------- --------- ----------- $ -- $ -- $ -- =========== ========= ===========
5. COMMITMENTS AND CONTINGENCIES Leases The Company leases office and switch site space under noncancellable operating leases. In December 1996, the Company entered into a capital lease agreement for switching equipment. The future minimum annual rental commitments under capital and operating leases having terms in excess of one year as of December 31, 1996 are as follows:
OPERATING CAPITAL ---------- -------- 1997................................................................. $ 609,000 $ 75,000 1998................................................................. 645,000 82,000 1999................................................................. 412,000 82,000 2000................................................................. 213,000 82,000 2001................................................................. 116,000 82,000 Thereafter........................................................... 6,000 ---------- -------- Total minimum lease payments......................................... $1,995,000 409,000 ========== Less amount representing interest.................................... 59,000 -------- Present value of net minimum lease payments.......................... $350,000 ========
Rent expense was $260,000, $256,000 and $301,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Litigation During 1994, the Company became involved in a contract dispute which was presented to an arbitrator and, in August 1995, an award in the amount of $333,450 representing damages and administrative fees and costs was determined to be payable by the Company. The award amount has been included in 1994 other income (expense) and was paid in 1996. F-10 102 TELEPASSPORT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR ENDED DECEMBER 31, 1996 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company is involved in litigation in the normal course of business. In the opinion of management, such litigation will not have a material effect on the Company's cash flows, financial condition or results of operations. Letters of Credit At December 31, 1994, the Company had letters of credit outstanding amounting to $400,000 on behalf of certain telecommunications carriers which expired on various dates during 1995. Incentive Plans Certain of the Company's subsidiaries have Incentive Plans which entitle certain key employees to participate in certain distributions, if any, by the Company of cash or property to two of the Company's principal stockholders. Participation commences when the amount of distributions paid exceeds certain stipulated amounts. No such distributions have been made. Based on the estimated value of the Incentive Plans to such employees, the Company recorded $2,718,000 of compensation expense in 1996. In connection with the Company's initial public offering (see Note 9), the Incentive Plans were terminated in 1997. In 1997, the Board of Directors adopted the 1997 Long Term Incentive Plan (the "1997 Plan") and, pursuant to the 1997 Plan, options to purchase 886,390 shares were granted including options to purchase 258,881 shares of Class B common stock at an exercise price of $4.50 per share to employees who previously participated in the Incentive Plans (see Note 10.) 6. MAJOR SUPPLIERS During 1996, 1995 and 1994, MCI, World Com, Inc. and Cable & Wireless International, Inc. provided the Company with a majority of its international telecommunications network services. Charges for such services are included in cost of telecommunications services in the accompanying statement of operations. 7. RELATED PARTIES In March 1995, the Company entered into an agreement with TelePassport Japan to provide international telecommunications services and to lease switching equipment to TelePassport Japan. Telecommunications revenue for 1995 and 1996 include approximately $371,000 and $3,400,000 for services provided to TelePassport Japan. The equipment under lease has a net book value of $140,000 and $186,000 at December 31, 1996 and 1995, respectively, and is included in property and equipment. Loan from affiliates at December 31, 1995 represents a note due to US Cable Corporation ("US Cable"), an affiliate of certain stockholders. During 1996, such stockholders assumed the note from US Cable and contributed the outstanding balance to capital. Included in due to affiliates at December 31, 1995 and 1996 are amounts due to TelePassport Japan for carrier charges paid by TelePassport Japan on behalf of the Company and amounts due to US Cable for expenses paid on behalf of the Company. On December 27, 1994 the net assets of US FiberCom Network, Inc. ("USFN"), an inactive affiliate under common control, were merged into USFI, with the net assets recorded at their historical carrying value by USFI. Net assets, primarily consisting of advances to USFI, had a net historical carrying value of $1,045,000, resulting in an increase to additional paid-in capital of this amount. Prior to the merger, the Company utilized the fixed assets of USFN and was charged certain expenses amounting to $86,000, which is included in 1994 general and administrative expenses. F-11 103 TELEPASSPORT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR ENDED DECEMBER 31, 1996 8. EMPLOYEE BENEFIT PLAN Effective January 1, 1994, the Company implemented a defined contribution plan that qualifies as a deferred salary arrangement under Section 401(a) of the Internal Revenue Code. All full-time employees meeting minimum service requirements are eligible to participate and may contribute up to 18% of their pre-tax earnings subject to certain Internal Revenue Code restrictions. The Company matches 50% of each employee's contribution up to an annual maximum of $390 for 1994 and $500 per employee for 1995 and 1996. Total Company contributions were $7,000, $14,000 and $16,000 for the years ended December 31, 1994, 1995 and 1996, respectively. 9. STOCKHOLDERS' EQUITY In January 1997, the Company's Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission for an initial public offering of the Company's Common Stock. The Certificate of Incorporation authorizes the issuance of Preferred Stock, $.01 par value per share, in one or more series, with each series to have such designations, rights and preferences as may be determined by the Board of Directors. 10. LONG TERM INCENTIVE PLAN In 1997, the Board of Directors adopted the 1997 Long Term Incentive Plan (the "1997 Plan"). The 1997 Plan provides for the Compensation Committee (the "Committee") to grant to qualified employees and directors of the Company options to purchase shares of Class B Common Stock. Options may be granted by the Committee to eligible persons in the form of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, performance units or shares and other stock-based compensation. As of the effective date of the registration statement, options to purchase 600,000 shares were granted at the initial offering price. In addition, options for 258,881 shares were granted at an exercise price of $4.50 per share (see Note 5) and options for 27,509 shares were granted at an exercise price of $6.50 per share. 11. BUSINESS SEGMENT The Company operates in a single industry segment. For the years ended December 31, 1994, 1995 and 1996 substantially all of the Company's telecommunications revenues were derived from traffic transmitted through its New York switch facilities. The geographic origin of revenue is as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 ------- ------- ------- (IN THOUSANDS) North America............................... $ 1,484 $ 6,700 $ 8,579 Europe...................................... 7,189 13,976 17,310 Japan....................................... 2,440 2,057 3,611 Southern Africa............................. 1,088 4,285 6,532 South America............................... 574 625 518 ------- ------- ------- $12,775 $27,643 $36,550 ======= ======= =======
Substantially all telecommunications revenue with the exception of revenue received from its equity investee (TelePassport Japan), are derived from unaffiliated customers. F-12 104 TELEPASSPORT INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR ENDED DECEMBER 31, 1996 12. SUBSEQUENT EVENTS On March 12, 1997, the Company sold its 51% interest in TelePassport Japan to Asahi Telecom ("Asahi") its joint venture partner for $217,000. The Company also purchased equipment with a net book value of approximately $60,000 and assumed certain customers of TelePassport Japan for total consideration of $223,000. Concurrent with these transactions, the Company entered into a series of agreements with Asahi, which included the option to purchase for $3,000,000 a 10% interest in A.T. Net, a wholly-owned subsidiary of Asahi. At the date of sale, the Company's carrying value of its investment in TelePassport Japan was negative. Upon exercise of the option and payment of the exercise price, the Company intends to reduce the cost of its investment ($3,000,000) in A.T. Net by the carrying value of its investment in TelePassport Japan at the date of sale. In March 1997, the Company entered into an agreement to purchase 100% of the outstanding capital stock of TelePassport GmbH, its German independent agent, concurrent with the closing of the initial public offering of the Company's common stock. The purchase price consists of $200,000 in cash and 173,333 shares of common stock. In addition, 80,000 shares of common stock will be deposited in escrow to vest ratably over a period of 36 months. In March 1997, the Company entered into an agreement to purchase 100% of the outstanding capital stock of Hercules Consultants, Limited ("HCL") within 30 days after the closing of the initial public offering. HCL is an alternative network access consultant and installs and maintains telecommunication equipment in the United Kingdom. The purchase price for 80% of the HCL shares consist of $300,000 in cash and 66,667 shares of common stock payable at the closing. Also, in March 1997, the Company entered into an agreement to purchase 100% of the outstanding capital stock of TelePassport Telekom GmbH, its independent agent in Austria, concurrent with the closing of the initial public offering. The purchase price consists of 20,000 shares of common stock, all of which will be deposited into escrow to vest ratably over a period of 36 months. F-13 105 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of TelePassport Japan Co., Ltd.: We have audited the accompanying balance sheets of TelePassport Japan Co., Ltd. as of December 31, 1996 and 1995, and the related statements of operations, shareholders' capital deficiency, and cash flows for the year ended December 31, 1996 and the period from March 6, 1995 (date of incorporation) to December 31, 1995 (all expressed in Japanese yen). 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 auditing standards generally accepted in the United States of America. 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, such financial statements present fairly, in all material respects, the financial position of TelePassport Japan Co., Ltd. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for the year ended December 31, 1996 and the period from March 6, 1995 (date of incorporation) to December 31, 1995, in conformity with accounting principles generally accepted in the United States of America. Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 1 to the financial statements. Such U.S. dollar amounts are presented solely for the convenience of readers outside Japan. /s/ DELOITTE TOUCHE TOHMATSU Tokyo, Japan February 7, 1997, except for Note 9, as to which the date is March 4, 1997. F-14 106 TELEPASSPORT JAPAN CO., LTD. BALANCE SHEETS
THOUSANDS OF YEN ---------------------- U.S. DOLLARS (NOTE 1) DECEMBER 31 ------------ ---------------------- DECEMBER 31, 1996 1995 1996 --------- --------- ------------ ASSETS CURRENT ASSETS: Cash................................................. Y 39,344 Y 4,858 $ 339,172 Accounts receivable: Trade............................................. 34,090 14,011 293,879 Shareholder and affiliated companies (Note 3)..... 182,465 42,714 1,572,974 Other............................................. 26,442 5,736 227,948 Inventory............................................ 38,576 332,552 Prepaid expenses and other current assets............ 6,989 4,318 60,250 --------- --------- ----------- Total current assets......................... 327,906 71,637 2,826,775 --------- --------- ----------- ASSETS UNDER CAPITAL LEASES (Note 4)................... 39,682 36,503 342,086 Accumulated amortization............................. (9,860) (3,230) (85,000) --------- --------- ----------- Net assets under capital leases.............. 29,822 33,273 257,086 --------- --------- ----------- TELEPHONE RIGHTS....................................... 2,283 2,278 19,681 --------- --------- ----------- REFUNDABLE LEASE DEPOSITS.............................. 135 7,615 1,164 --------- --------- ----------- ORGANIZATION COST...................................... 1,020 1,342 8,794 --------- --------- ----------- TOTAL........................................ Y 361,166 Y 116,145 $ 3,113,500 ========= ========= =========== LIABILITIES AND SHAREHOLDERS' CAPITAL DEFICIENCY CURRENT LIABILITIES: Short-term bank loans (Note 5)....................... Y 410,000 Y 62,000 $ 3,534,483 Current maturities of capital lease obligations (Note 4)................................................ 7,898 6,817 68,086 Accounts payable: Trade............................................. 37,128 19,244 320,069 Shareholders and affiliated companies (Note 3).... 236,678 43,790 2,040,328 Other............................................. 282 275 2,431 Accrued expenses and other current liabilities....... 3,485 1,779 30,042 --------- --------- ----------- Total current liabilities.................... 695,471 133,905 5,995,439 LONG-TERM DEBT FROM SHAREHOLDERS (Note 3).............. 32,360 32,360 278,966 LONG-TERM CAPITAL LEASE OBLIGATIONS (Note 4)........... 21,769 27,032 187,664 --------- --------- ----------- Total liabilities............................ 749,600 193,297 6,462,069 --------- --------- ----------- COMMITMENTS (Notes 4 and 7) SHAREHOLDERS' CAPITAL DEFICIENCY Common stock, Y50 thousand par value -- authorized, 200 shares; issued and outstanding, 100 shares.... 52,000 52,000 448,276 Additional paid-in capital (Note 8).................. 570 Deficit.............................................. (440,434) (129,722) (3,796,845) --------- --------- ----------- Total shareholders' capital deficiency....... (388,434) (77,152) (3,348,569) --------- --------- ----------- TOTAL........................................ Y 361,166 Y 116,145 $ 3,113,500 ========= ========= ===========
See notes to financial statements. F-15 107 TELEPASSPORT JAPAN CO., LTD. STATEMENTS OF OPERATIONS
THOUSANDS OF YEN ------------------------------- PERIOD FROM U.S. DOLLARS MARCH 6, 1995 (NOTE 1) (DATE OF ------------ YEAR ENDED INCORPORATION) YEAR ENDED DECEMBER 31, TO DECEMBER 31, DECEMBER 31, 1996 1995 1996 ------------ --------------- ------------ NET SALES............................................. Y386,091 Y 39,382 $ 3,328,371 ---------- ------------ ----------- COSTS AND EXPENSES (Note 3): Direct costs........................................ 446,957 44,641 3,853,078 Selling, general and administrative expenses........ 231,901 121,015 1,999,147 ---------- ------------ ----------- Total costs and expenses.................... 678,858 165,656 5,852,225 ---------- ------------ ----------- Operating loss.............................. 292,767 126,274 2,523,854 ---------- ------------ ----------- OTHER EXPENSES (Note 3): Interest expenses -- net............................ 6,433 1,757 55,457 Other expenses -- net............................... 12,082 1,691 104,155 ---------- ------------ ----------- Total other expenses........................ 18,515 3,448 159,612 ---------- ------------ ----------- NET LOSS.............................................. Y311,282 Y 129,722 $ 2,683,466 ========== ============ ===========
See notes to financial statements. F-16 108 TELEPASSPORT JAPAN CO., LTD. STATEMENTS OF SHAREHOLDERS' CAPITAL DEFICIENCY
THOUSANDS OF YEN -------------------------------------- ADDITIONAL NUMBER OF COMMON PAID-IN SHARES STOCK CAPITAL DEFICIT --------- ------- ---------- ----------- ISSUANCE OF COMMON STOCK....................... 100 Y52,000 Y570 Net loss..................................... Y(129,722) --- ------- ---- --------- BALANCE, DECEMBER 31, 1995..................... 100 Y52,000 Y570 Y(129,722) Net loss..................................... (311,282) Offset against deficit (Note 8).............. (570) 570 --- ------- ---- --------- BALANCE, DECEMBER 31, 1996..................... 100 Y52,000 Nil Y(440,434) === ======= ==== =========
U.S. DOLLARS (NOTE 1) --------------------------------------- ADDITIONAL COMMON PAID-IN STOCK CAPITAL DEFICIT -------- ---------- ----------- BALANCE, DECEMBER 31, 1995............................. $448,276 $ 4,914 $(1,118,293) Net loss............................................. (2,683,466) Offset against deficit (Note 8)...................... (4,914) 4,914 -------- ------ ------------ BALANCE DECEMBER 31, 1996.............................. $448,276 Nil $(3,796,845) ======== ====== ============
See notes to financial statements. F-17 109 TELEPASSPORT JAPAN CO., LTD. STATEMENTS OF CASH FLOWS
THOUSANDS OF YEN -------------------------------- PERIOD FROM U.S. DOLLARS MARCH 6, 1995 (NOTE 1) (DATE OF ------------ YEAR ENDED INCORPORATION) YEAR ENDED DECEMBER 31, TO DECEMBER 31, DECEMBER 31, 1996 1995 1996 ------------ --------------- ------------ OPERATING ACTIVITIES: Net loss......................................... Y (311,282) Y(129,722) $ (2,683,466) ----------- --------- ------------ Adjustments to reconcile net loss to net cash used in operating activities: Amortization.................................. 6,952 3,499 59,931 Changes in operating assets and liabilities: Increase in accounts receivable............. (180,537) (62,461) (1,556,353) Increase in inventory....................... (38,575) (332,543) Increase in prepaid expenses and other current assets........................... (2,670) (4,318) (23,017) Increase in accounts payable................ 210,497 63,309 1,814,630 Increase in accrued expenses and other current liabilities...................... 1,988 1,779 17,137 ----------- --------- ------------ Total adjustments........................ (2,345) 1,808 (20,215) ----------- --------- ------------ Net cash used in operating activities.... (313,627) (127,914) (2,703,681) ----------- --------- ------------ INVESTING ACTIVITIES: Payments for refundable lease deposits........... (7,615) Refund of refundable lease deposits.............. 7,480 64,483 Payments of organization cost.................... (1,611) Purchases of telephone rights.................... (5) (2,278) (43) ----------- --------- ------------ Net cash provided by (used in) investing activities............................. 7,475 (11,504) 64,440 ----------- --------- ------------ FINANCING ACTIVITIES: Proceeds from issuance of common stock........... 52,570 Borrowing of short-term bank loans............... 348,000 62,000 3,000,000 Borrowings of long-term debt from shareholders... 32,360 Repayments of capital lease obligations.......... (7,362) (2,654) (63,466) ----------- --------- ------------ Net cash provided by financing activities............................. 340,638 144,276 2,936,534 ----------- --------- ------------ NET INCREASE IN CASH............................... Y 34,486 Y 4,858 $ 297,293 ----------- --------- ------------ CASH, BEGINNING OF PERIOD.......................... 4,858 41,879 ----------- --------- ------------ CASH, END OF PERIOD................................ Y 39,344 Y 4,858 $ 339,172 =========== ========= ============ ADDITIONAL CASH FLOW INFORMATION: Interest Paid.................................... Y 3,172 Y 1,757 $ 27,345 NONCASH INVESTING AND FINANCING ACTIVITY: Acquisition of assets under capital leases....... 3,179 36,503 27,405
See notes to financial statements. F-18 110 TELEPASSPORT JAPAN CO., LTD. NOTES TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM MARCH 6, 1995 (DATE OF INCORPORATION) TO DECEMBER 31, 1995 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Basis of Presentation -- The accompanying financial statements of TelePassport Japan Co., Ltd. (the "Company") are stated in Japanese yen, the currency of the country in which the Company is incorporated and operates. The translation of Japanese yen amounts into U.S. dollar amounts as of and for the year ended December 31, 1996, is included herein solely for the covenience of readers outside Japan and has been made at the rate of Y116=U.S.$1, the approximate rate of exchange at December 31, 1996. The U.S. dollar amounts should not be construed as a representation that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP"). The Company maintains its books of account in conformity with accounting principles generally accepted in Japan. No adjustments were required to the financial statement amounts in order for them to be in conformity with US GAAP. The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has obtained commitments from its shareholders to provide the Company with sufficient financial support to enable it to continue as a going concern. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Revenue Recognition -- Revenues from telephone services and related direct costs are recognized in the period in which the services are rendered. 3. Inventory -- Inventory, which consists of in-bound ringer equipment, is stated at the lower of cost or market, cost being determined on the average method. 4. Assets Under Capital Leases -- Assets leased under long-term noncancelable lease agreements are capitalized in conformity with the provisions of SFAS No. 13, as amended. Amortization of assets under capital leases is computed on the straight-line method over the lease terms. 5. Organization Cost -- Organization cost is stated at net of accumulated amortization. Amortization is computed on the straight-line method over five years. 6. Income Taxes -- Deferred income tax assets and liabilities are computed for temporary differences between the financial statement and tax basis of assets and liabilities and for tax credit and loss carryforwards based on provisions of the enacted tax laws. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. 2. ORGANIZATION AND NATURE OF BUSINESS The Company was incorporated on March 6, 1995, under the Commercial Code of Japan and in accordance with the shareholders' agreement (the "shareholders' agreement") dated March 13, 1995, between USFI-Japan LLC ("USFI-JAPAN"), a U.S. limited liability company, and Asahi Telecom Co., Ltd. ("ASAHI"), a Japanese corporation. The Company is owned 51% by USFI-JAPAN and 49% by ASAHI. The Company provides international direct dial telephone services for Japanese customers by utilization of the services of USFI, Inc. ("USFI"), an affiliate of USFI-JAPAN, for transmission of customer telephone calls to international points. F-19 111 TELEPASSPORT JAPAN CO., LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. RELATED PARTY TRANSACTIONS The balances and transactions with related parties as of December 31, 1996 and 1995, and for the year ended December 31, 1996 and the period from March 6, 1995 to December 31, 1995, are summarized as follows:
THOUSANDS OF YEN U.S. DOLLARS -------------------- ------------ 1996 1995 1996 -------- ------- ------------ Balances as of December 31: Accounts receivable: USFI.......................................... Y158,707 Y30,130 $ 1,368,164 ASAHI......................................... 12,584 A.T. NET Corporation.......................... 15,823 136,405 USFI-Network KK............................... 7,935 68,405 -------- ------- ----------- Total.................................... Y182,465 Y42,714 $ 1,572,974 ======== ======= =========== Accounts payable: USFI.......................................... Y197,444 Y37,783 $ 1,702,104 ASAHI......................................... 24,276 4,267 209,276 USFI-JAPAN.................................... 1,234 1,740 10,638 USFI-Network KK............................... 13,724 118,310 -------- ------- ----------- Total.................................... Y236,678 Y43,790 $ 2,040,328 ======== ======= =========== Long-term debt: USFI-JAPAN.................................... Y 16,180 Y16,180 $ 139,483 ASAHI......................................... 16,180 16,180 139,483 -------- ------- ----------- Total.................................... Y 32,360 Y32,360 $ 278,966 ======== ======= =========== Transactions for the year ended December 31, 1996 and the period from March 6, 1995 to December 31, 1995: Carrier charges -- USFI.......................... Y367,557 Y36,826 $ 3,168,595 ======== ======= =========== Commission expense -- ASAHI...................... Y 49,111 Y 4,972 $ 423,371 Maintenance fee -- ASAHI......................... Y 13,600 $ 117,241 ======== ======= =========== Dialer cost -- ASAHI............................. Y 3,600 $ 31,034 ======== ======= =========== Debit card commission -- USFI.................... Y 3,175 $ 27,371 ======== ======= =========== Collection fee -- A.T. NET Corporation........... Y 490 $ 4,224 ======== ======= =========== Management fee expense: USFI-JAPAN.................................... Y 1,198 ASAHI......................................... 1,151 -------- ------- ----------- Total.................................... Y 2,349 ======== ======= =========== Interest expense: USFI-JAPAN.................................... Y 1,135 Y 506 $ 9,784 ASAHI......................................... 1,135 496 9,784 -------- ------- ----------- Total.................................... Y 2,270 Y 1,002 $ 19,568 ======== ======= ===========
F-20 112 TELEPASSPORT JAPAN CO., LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company was required to pay carrier charges to USFI for its services for transmission of customer telephone calls to international points according to the "Private Label Reseller Agreement" dated March 13, 1995, between USFI and the Company. The carrier charges are included in direct costs in the accompanying statements of operations. USFI exempted the Company from equipment rental payments set forth in section 10 of the Agreement for the year ended December 31, 1996. Under the shareholders' agreement, the Company pays management fees equal to 3.06% of gross revenues to USFI-JAPAN with respect to services it provides in connection with the technical operations of the Company and 2.94% of gross revenues to ASAHI with respect to services it provides in connection with sales and marketing operations of the Company. USFI-JAPAN and ASAHI exempted the Company from payments of such management fees for the year ended December 31, 1996. Management fees for the period from March 6, 1995 to December 31, 1995 are included in selling, general and administrative expenses in the accompanying statements of operations. The Company has a sales and marketing agreement with ASAHI which stipulates the payment of commissions at a certain percentage of customer collections net of taxes, fees, refunds, credits and any other non-long distance charges. Commissions are included in selling, general and administrative expenses. The Company pays maintenance fees and dialer cost to ASAHI for the services of providing support to the customers, maintaining auto-dialers and operating switching equipment under the service agreement dated April 1, 1996 between ASAHI and the Company. The Company receives commissions for handling sales of the prepaid card of USFI at 35% of collections at an assumed exchange rate of Y100 per U.S. dollar. Under the collecting agent agreement between the Company and A.T. NET Corporation ("ATN"), a wholly owned subsidiary of ASAHI, ATN assumes the billing and collection function for certain customers and accepts the credit risk of non-payment by the customers. ATN pays to the Company 100% of the amount billed by ATN to the customers less compensation of 3% of the customer billing amount for such services. The Company pays several expenditures on behalf of USFI-Network KK ("USFI-NETWORK"), a Japanese corporation owned 100% by USFI Global Network Services LLC which is an affiliate of USFI-JAPAN. Under the shareholders' agreement, Y16,180 thousand ($139,483) is loaned to the Company by each of USFI-JAPAN and ASAHI. The loans are unsecured and due in July 2000, bearing interest at 7% per annum, payable annually. 4. CAPITAL LEASES The Company leases machinery and equipment under long-term noncancelable lease agreements. Such leases are accounted for as capital leases. F-21 113 TELEPASSPORT JAPAN CO., LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 1996:
YEAR ENDING THOUSANDS DECEMBER 31 OF YEN U.S. DOLLARS -------------------------------------------------------------- --------- ------------ 1997........................................................ Y 8,902 $ 76,741 1998........................................................ 8,902 76,741 1999........................................................ 8,902 76,741 2000........................................................ 4,884 42,104 2001........................................................ 276 2,380 ------- -------- Total minimum lease payments........................ 31,866 274,707 Less -- amount representing interest and estimated executory costs.................................................... 2,199 18,957 ------- -------- Present value of net minimum lease payments................. 29,667 255,750 Less -- current maturities.................................. 7,898 68,086 ------- -------- Long-term capital lease obligations......................... Y21,769 $187,664 ======= ========
5. SHORT-TERM BANK LOANS Short-term bank loans represent unsecured borrowings under bank overdraft agreements and bear interest at an annual rate of 1.625% at December 31, 1996. Under the bank overdraft agreements, the Company can borrow up to the maximum amount of Y450,000 thousand ($3,879,310). As is customary in Japan, the bank overdraft agreements provide, under certain circumstances, that the Company shall provide collateral or guarantees for present and future indebtedness immediately upon the banks' request. Basic agreements with banks also provide that the banks have the right to offset cash deposited with them against borrowings or any other indebtedness outstanding in the case of default or other similar events. 6. OPERATING LOSS CARRYFORWARDS At December 31, 1996, the Company had net operating loss carryforwards of Y434,528 thousand ($3,745,931) for Japanese tax purposes. Such loss carryforwards, if unused as offsets to future taxable income, will expire as follows:
EXPIRE IN THOUSANDS OF YEN U.S. DOLLARS ------------------------------------------------ ---------------- ------------ 2000............................................ Y132,598 $ 1,143,086 2001............................................ 301,930 2,602,845 ------------ ------------ Total................................. Y434,528 $ 3,745,931 ============ ============
The following is the detail of deferred tax balances at December 31, 1996 and 1995:
THOUSANDS OF YEN U.S. DOLLARS ---------------------- ------------ 1996 1995 1996 --------- -------- ------------ Deferred tax assets: Accrued liabilities................... Y 888 $ Net operating loss carryforwards...... Y 217,264 61,368 1,872,966 --------- -------- ------------ Total......................... 217,264 62,256 1,872,966 Valuation allowance..................... (217,264) (62,256) (1,872,966) --------- -------- ------------ Total......................... Nil Nil Nil ========= ======== ============
F-22 114 TELEPASSPORT JAPAN CO., LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS Rent expenses for office premises and parking space under cancelable long-term leases amounted to Y7,191 thousand ($61,991) and Y7,642 thousand for the year ended December 31, 1996 and for the period from March 6, 1995 to December 31, 1995, respectively. 8. ADDITIONAL PAID-IN CAPITAL The Commercial Code of Japan requires at lease 50% of the issue price of new shares, with a minimum of the par value thereof, to be designated as stated capital as determined by resolution of the Board of Directors. Proceeds in excess of amounts designated as stated capital are credited to additional paid-in capital. The Company may transfer portions of additional paid-in capital to stated capital by resolution of the Board of Directors. Additional paid-in capital may also be used to reduce deficit by resolution of the shareholders. 9. SUBSEQUENT EVENTS Effective March 4, 1997, the Company, USFI-JAPAN, USFI, USFI-NETWORK, ASAHI and ATN have executed the NTP purchase and sale agreement and certain other agreements for the purpose of restructuring the domestic and international telephone services provided in Japan by USFI and ASAHI and their affiliates. Under the NTP purchase and sale agreement, ASAHI agreed to purchase from USFI-JAPAN 51% of the common stock of the Company. Upon completion of this sale transaction, the Company will become a wholly owned subsidiary of ASAHI. Also under the agreement, the Company agreed to sell and transfer to USFI-NETWORK twelve customer accounts, private line equipment for the transferred customers and two employees for the aggregate consideration of Y26,217 thousand, which would result in gain of approximately Y19,000 thousand in 1997. The revenues from the transferred customers amounted to Y10,831 thousand in 1996. Concurrently, the shareholders' agreement discussed in Note 2 and the Private Label Reseller Agreement and the sales and marketing agreement with ASAHI discussed in Note 3 have been terminated. The Company has newly executed a reseller agreement with USFI-NETWORK, pursuant to which the Company will be granted the right to resell certain USFI-NETWORK services. F-23 115 - ------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary.............................. 3 Risk Factors.................................... 10 Use of Proceeds................................. 26 Dividend Policy................................. 26 Dilution........................................ 27 Capitalization.................................. 28 Selected Financial Data......................... 29 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 31 The International Telecommunications Industry... 38 Business........................................ 41 Regulation of the International Telecommunications Industry................... 59 Management...................................... 68 Principal Stockholders.......................... 72 Related Party Transactions...................... 74 Description of Capital Stock.................... 75 Shares Eligible For Future Sale................. 78 Certain United States Tax Consequences to Non- United States Holders of Common Stock......... 79 Underwriting.................................... 82 Notice to Canadian Residents.................... 84 Legal Matters................................... 85 Experts......................................... 85 Additional Information.......................... 86 Glossary of Terms............................... 87 Index to Financial Statements................... F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING) ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ TelePassport Inc. 5,000,000 Shares Class B Common Stock ($0.01 par value) PROSPECTUS Credit Suisse First Boston Smith Barney Inc. - ------------------------------------------------------ 116 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS SUBJECT TO COMPLETION, DATED MARCH 20, 1997 5,000,000 Shares TelePassport Inc. [LOGO] Class B Common Stock ($0.01 par value) ------------------ All the shares of Class B Common Stock, par value $0.01 per share (the "Class B Common Stock"), of TelePassport Inc. ("TelePassport" or the "Company") offered hereby are being sold by the Company. Of the 5,000,000 shares of Class B Common Stock being offered, 1,000,000 shares (the "International Shares") are initially being offered by the Managers (as defined herein) outside the United States and Canada (the "International Offering") and 4,000,000 shares (the "U.S. Shares" and together with the International Shares, the "Shares") are initially being concurrently offered by the U.S. Underwriters (as defined herein), in the United States and Canada (the "U.S. Offering" and together with the International Offering, the "Offering"). The initial price to public and the underwriting discounts and commissions of the International Offering and the U.S. Offering are identical. See "Subscription and Sale." The Company's common stock has been designated into two classes, consisting of Class A Common Stock, par value $0.01 per share (the "Class A Common Stock") and the Class B Common Stock (collectively, the "Common Stock"). The Class B Common Stock and the Class A Common Stock are substantially identical, except for disparity in voting power, convertibility and transferability. The Class B Common Stock is entitled to one vote per share and is not convertible into Class A Common Stock. The Class A Common Stock is entitled to ten votes per share and is convertible at any time on a share-for-share basis into Class B Common Stock. Except as otherwise required by law, under the Company's Amended and Restated Certificate of Incorporation, shares of Class A Common Stock and Class B Common Stock will vote together on all matters submitted to a vote of stockholders, including the election of directors. Upon completion of the Offering and after giving effect to certain acquisitions, the Company's current stockholders collectively will own 100% of the outstanding Class A Common Stock, which will represent 92.7% of the combined voting power of the Company. Accordingly, the holders of the Class A Common Stock will have the ability to elect all of the Company's Board of Directors. See "Description of Capital Stock." Prior to the Offering, there has been no public market for the Class B Common Stock. It is anticipated that the initial public offering price will be between $14.00 and $16.00 per share. For information relating to the factors to be considered in determining the initial public offering price, see "Subscription and Sale." Application has been made for quotation of the shares of Class B Common Stock on The Nasdaq Stock Market's National Market ("NNM") under the symbol "TEPP." ------------------ THE CLASS B COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE CLASS B COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 10 HEREIN. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PRICE DISCOUNTS AND PROCEEDS TO TO PUBLIC COMMISSIONS COMPANY(1) --------------------------------------------------- Per Share....................................... $ $ $ Total (2)....................................... $ $ $
(1) Before deduction of expenses payable by the Company estimated at $ . (2) The Company has granted to the U.S. Underwriters and the Managers an option, exercisable by Credit Suisse First Boston Corporation for 30 days from the date of this Prospectus, to purchase a maximum of 750,000 additional shares to cover over-allotments of shares. If such option is exercised in full, the total Price to Public will be $ , Underwriting Discounts and Commissions will be $ and Proceeds to Company will be $ . ------------------ The International Shares are offered by the several Managers when, as and if issued by the Company, delivered to and accepted by the Managers and subject to their right to reject orders in whole or in part. It is expected that the International Shares will be ready for delivery on or about , 1997, against payment in immediately available funds. Credit Suisse First Boston (Europe) Limited Smith Barney Inc. The date of this Prospectus is , 1997. 117 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS] TABLE OF CONTENTS
PAGE ----- PROSPECTUS SUMMARY.................... 3 RISK FACTORS.......................... 10 USE OF PROCEEDS....................... 26 DIVIDEND POLICY....................... 26 DILUTION.............................. 27 CAPITALIZATION........................ 28 SELECTED FINANCIAL DATA............... 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 31 THE INDUSTRIAL TELECOMMUNICATIONS INDUSTRY............................ 38 BUSINESS.............................. 41 REGULATION OF THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY......... 59 PAGE ----- MANAGEMENT............................ 68 PRINCIPAL STOCKHOLDERS................ 72 RELATED PARTY TRANSACTIONS............ 74 DESCRIPTION OF CAPITAL STOCK.......... 75 SHARES ELIGIBLE FOR FUTURE SALE....... 77 CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS OF COMMON STOCK........................ 78 SUBSCRIPTION AND SALE................. 81 LEGAL MATTERS......................... 84 EXPERTS............................... 84 ADDITIONAL INFORMATION................ 85 GLOSSARY OF TERMS..................... 86 INDEX TO FINANCIAL STATEMENTS......... F-1
------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "SUBSCRIPTION AND SALE." Alt-2 118 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS (CONTINUED)] SUBSCRIPTION AND SALE The institutions named below (the "Managers") have, pursuant to a Subscription Agreement dated , 1997, between the Company and the Managers (the "Subscription Agreement"), severally and not jointly, agreed with the Company to subscribe and pay for the following respective numbers of International Shares as set forth opposite their names:
NUMBER OF MANAGER INTERNATIONAL SHARES ------------------------------------------------------------ -------------------- Credit Suisse First Boston (Europe) Limited................. Smith Barney Inc. .......................................... ------ Total............................................. ======
The Subscription Agreement provides that the obligations of the Managers are such that, subject to certain conditions precedent, the Managers will be obligated to purchase all the International Shares offered hereby (other than those shares covered by the over-allotment option described below) if any are purchased. The Subscription Agreement provides that, in the event of a default by a Manager, in certain circumstances the purchase commitments of the nondefaulting Managers may be increased or the Subscription Agreement may be terminated. The Company has entered into an Underwriting Agreement with the U.S. Underwriters of the U.S. Offering (the "U.S. Underwriters") providing for the concurrent offer and sale of the U.S. Shares in the United States and Canada. The closing of the U.S. Offering is a condition to the closing of the International Offering and vice versa. The Company has granted to the Managers and the U.S. Underwriters an option, exercisable by Credit Suisse First Boston Corporation, on behalf of the Managers and the U.S. Underwriters, expiring at the close of business on the 30th day after the date of this Prospectus, to purchase up to 750,000 additional shares at the initial public offering price less the underwriting discounts and commissions, all as set forth on the cover page of this Prospectus. Such option may be exercised only to cover over-allotments in the sale of the Shares. To the extent that this option to purchase is exercised, each Manager and each U.S. Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of additional shares being sold to the Managers and the U.S. Underwriters as the number of International Shares set forth next to such Manager's name in the preceding table bears to the total number of International Shares in such table and as the number set forth next to such U.S. Underwriter's name in the corresponding table in the prospectus relating to the U.S. Offering bears to the sum of the total number of Shares in such tables. The Company has been advised by Credit Suisse First Boston (Europe) Limited, on behalf of the Managers, that the Managers propose to offer the International Shares outside the United States and Canada initially at the public offering price set forth on the cover page of this Prospectus and, through the Managers, to certain dealers at such price less a commission of $ per share and that the Managers and such dealers may reallow a commission of $ per share on sales to certain other dealers. After the initial public offering, the public offering price and commission and re-allowance may be changed by the Managers. The public offering price, the aggregate underwriting discounts and commissions per share and the per share commission and re-allowance to dealers for the International Offering and the concurrent U.S. Offering will be identical. Pursuant to an Agreement between the U.S. Underwriters and the Managers (the "Intersyndicate Agreement") relating to the Offering, changes in the offering price, the aggregate underwriting discounts and commissions per share and per share commission and re-allowance to dealers will be made only upon the mutual agreement of Credit Suisse First Boston (Europe) Limited, on behalf of the Managers, and Credit Suisse First Boston Corporation, as representative of the U.S. Underwriters. Pursuant to the Intersyndicate Agreement, each of the Managers has agreed that, as part of the distribution of International Shares and subject to certain exceptions, it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Class B Common Stock or distribute any prospectus relating to the Class B Common Stock in the United States or Canada or to any other dealer who does not so agree. Each Alt-3 119 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS (CONTINUED)] of the U.S. Underwriters has agreed that, as part of the distribution of the U.S. Shares and subject to certain exceptions, it has not offered or sold, and will not offer or sell, directly or indirectly, any shares of Class B Common Stock or distribute any prospectus relating to the Class B Common Stock to any person outside the United States and Canada or to any other dealer who does not so agree. The foregoing limitations do not apply to stabilization transactions or to transactions between the Managers and the U.S. Underwriters pursuant to the Intersyndicate Agreement. As used herein, "United States" means the United States of America (including the States and the District of Columbia), its territories, possessions and other areas subject to its jurisdiction, "Canada" means Canada, its provinces, territories, possessions and other areas subject to its jurisdiction, and an offer or sale shall be in the United States or Canada if it is made to (i) an individual resident in the United States or Canada or (ii) any corporation, partnership, pension, profit-sharing or other trust or other entity (including any such entity acting as an investment adviser with discretionary authority) whose office most directly involved with the purchase is located in the United States or Canada. Pursuant to the Intersyndicate Agreement, sales may be made between the Managers and the U.S. Underwriters of such number of shares of Class B Common Stock as may be mutually agreed upon. The price of any shares so sold will be the public offering price less such amount agreed upon by Credit Suisse First Boston (Europe) Limited, on behalf of the Managers, and Credit Suisse First Boston Corporation, as representative of the U.S. Underwriters, but not exceeding the selling concession applicable to such shares. To the extent there are sales between the Managers and the U.S. Underwriters pursuant to the Intersyndicate Agreement, the number of shares of Class B Common Stock initially available for sale by the Managers or by the U.S. Underwriters may be more or less than the amount appearing on the cover page of this Prospectus. Neither the Managers nor the U.S. Underwriters are obligated to purchase from the other any unsold shares of Class B Common Stock. Each of the Managers and the U.S. Underwriters severally represents and agrees that: (i) it has not offered or sold and prior to the date six months after the date of issue of the Class B Common Stock will not offer or sell any shares of Class B Common Stock to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act of 1986 with respect to anything done by it in relation to the Shares in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the Shares to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. Purchasers of shares of Class B Common Stock outside the United States may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the Price to Public set forth on the cover page of this Prospectus. The Company, its officers, directors and all existing holders of Common Stock, have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any additional shares of Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock, or disclose the intention to make any such offer, sale, pledge, disposal or filing for a period of 180 days after the date of this Prospectus without the prior written consent of Credit Suisse First Boston Corporation, except, in the case of the Company, issuances pursuant to the Long Term Incentive Plan. Credit Suisse First Boston Corporation, on behalf of the Managers and the U.S. Underwriters, may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the Class B Common Stock in the open market after the distribution has Alt-4 120 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS (CONTINUED)] been completed in order to cover syndicate short positions. Penalty bids permit Credit Suisse First Boston Corporation to reclaim a selling concession from a syndicate member when the Class B Common Stock originally sold by such syndicate member is purchased in a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the Class B Common Stock to be higher than it would otherwise be in the absence of such transactions. These transactions may be effected on The Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The Company has agreed to indemnify the Managers and the U.S. Underwriters against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments that the Managers and the U.S. Underwriters may be required to make in respect thereof. Application has been made to list the shares of Class B Common Stock on the NNM under the symbol "TEPP." Alt-5 121 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS (CONTINUED)] Prior to the Offering, there has been no public market for the Class B Common Stock. The initial public offering price for the Class B Common Stock was determined by negotiation between the Company and Credit Suisse First Boston Corporation, as representative of the U.S. Underwriters, and Credit Suisse First Boston (Europe) Limited, on behalf of the Managers, and does not reflect the market price for the Class B Common Stock following the Offering. Among the principal factors considered in determining the initial pubic offering price were market conditions for initial public offerings, the history of and prospects for the Company's businesses, the Company's past and present operations, its past and present earnings and current financial position, an assessment of the Company's management, the market of securities of companies in businesses similar to those of the Company, the general condition of the securities markets and other relevant factors. There can be no assurance that the initial public offering price will correspond to the price at which the Class B Common Stock will trade in the public market subsequent to the Offering or that an active trading market for the Class B Common Stock will develop and continue after the Offering. The Managers and the U.S. Underwriters have informed the Company that they do not expect discretionary sales by the Managers and the U.S. Underwriters to exceed 5% of the number of shares of Class B Common Stock being offered in the Offering. Alt-6 122 [ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS (CONTINUED)] LEGAL MATTERS The validity of the shares of Class B Common Stock will be passed upon for the Company by Baer Marks & Upham LLP, New York, New York. The Underwriters have been represented by Cravath, Swaine & Moore, New York, New York. EXPERTS The consolidated financial statements and schedule of TelePassport Inc. at December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, which, as to the years 1996 and 1995, are based in part on the report of Deloitte Touche Tohmatsu, independent auditors. The financial statements and schedule referred to above are included in reliance on such reports given upon the authority of such firm as experts in accounting and auditing. The financial statements of TelePassport Japan Co., Ltd. as of December 31, 1996 and 1995 and for the year ended December 31, 1996 and the period from March 6, 1995 (date of incorporation) to December 31, 1995 included in this Prospectus and Registration Statement have been audited by Deloitte Touche Tohmatsu, independent auditors, as stated in their report thereon appearing herein, and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. Alt-7 123 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the issuance and distribution of the securities being registered hereunder (including the shares of Class B Common Stock which may be issued pursuant to the over-allotment option). All of the amounts shown are estimates (except for the SEC and the NASD filing fees). SEC filing fee............................................... $ 27,878.79 NASD, Inc. filing fee........................................ 9,700.00 NASDAQ listing fee........................................... 30,600.00 Transfer agent's fee......................................... 20,000.00 Printing and engraving expenses.............................. 250,000.00 Legal fees and expenses...................................... 600,000.00 Accounting fees and expenses................................. 250,000.00 Miscellaneous expenses....................................... 311,821.21 -------------- Total.............................................. $ 1,500,000.00 ==============
- --------------- * To be provided by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Section 145 of the Delaware General Corporation Law, the Registrant has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933 (the "Securities Act"). The Registrant's Bylaws provide that the Registrant will indemnify its directors, executive officers, other officers, employees and agents to the fullest extent permitted by Delaware law. The Registrant's Amended and Restated Certificate of Incorporation provides for the elimination of liability for monetary damages for breach of the directors' fiduciary duty of care to the Registrant and its stockholders. These provisions do not eliminate the directors' duty of care and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Registrant, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for any transaction from which the director derived an improper personal benefit, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. Reference is made to Section 7 of the Underwriting Agreement (Exhibit 1.1 to this Registration Statement) which provides for indemnification by the Underwriters and their controlling persons, on the one hand, and of the Registrant and its controlling persons on the other hand, against certain civil liabilities, including liabilities under the Securities Act. The Registrant intends to apply for a director and officer liability insurance policy, under which each director and certain officers of the Company would be insured against certain liabilities. In addition, prior to the effectiveness of the Offering, the Company will enter into indemnity agreements with each of its officers and directors. II-1 124 ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES. The Registrant was organized as a Delaware corporation on December 9, 1996. Upon the completion of the Offering, the following stockholders will receive the stated number of shares of Class A Common Stock of the Registrant pursuant to the Reorganization: Stephen E. Myers............................................... 6,210,015(1) Michael C. Anderson............................................ 730,590(2) James D. Pearson............................................... 365,295(3) Seth Davis..................................................... 44,100 Total
- --------------- (1) Includes 1,700 shares purchased from the Registrant in December 1996 for $17. (2) Includes 200 shares purchased from the Registrant in December 1996 for $2. (3) Includes 100 shares purchased from the Registrant in December 1996 for $1. The Company believes that the issuances described above were made in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act for transactions by an issuer not involving a public offering. The recipients of the securities above represented their intentions to acquire the securities for investment only and not with a view to or a sale in connection with any distribution thereof. No underwriter or underwriting discount or commission was involved in any of such issuances. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS The following Exhibits are filed herewith and made a part hereof. 1.1* Form of Underwriting Agreement. 1.2* Form of Subscription Agreement. 2.1* Agreement of Merger between TelePassport LLC and TelePassport Inc. 3.1* Amended and Restated Certificate of Incorporation of the Registrant. 3.2* Amended and Restated By-Laws of the Registrant. 4.1 Specimen Stock Certificate for shares of Class B Common Stock. 4.2* Form of Lock-Up Agreement. 5.1* Opinion of Baer Marks & Upham LLP. 10.1 Agreement dated May 1, 1996, between the United States AF NAF Purchasing Office and USFI, Inc. 10.2* Form of Independent Representative's Agreement. 10.3* The Registrant's Long Term Incentive Plan. 10.4* Form of Customer Wholesale Agreement. 10.5 Letter Agreement dated March 11, 1997, among Franz Hruby, Wolfgang Schlick, Georg Hofer and TelePassport Telekom GmbH. 10.6 Share Purchase Agreement dated March 14, 1997, among USFI, Inc., Stephen Charles Edwards and Michael Peter Riley. 10.7 Letter Agreement dated as of March 1, 1997 between USFI, Inc. and Georg Hofer. 10.8** Option Agreement dated January 21, 1997, between TelePassport Inc. and Intelenet, Inc.
II-2 125 10.9* Telecommunication Equipment Housing Agreement dated November 14, 1995. 10.10** Sublease Agreement dated January 28, 1993, between US Fibercom Network, Inc. and United States Tennis Association. 10.11** License Agreement dated November 6, 1996, between USFI, Inc. and 48th Americas Company. 10.12** Collocation and Facilities Management Service Agreement dated May 22, 1995, between Voyager Networks, Inc. and USFI, Inc. 10.13* Lease Agreement dated March 1, 1995, between Tokuyo Sangyo Inc. and USFI Network K.K. (Translation from Japanese to English). 10.14* Employment Agreement with James D. Pearson. 10.15* Employment Agreement with Francis J. Mount. 10.16* Employment Agreement with Jan Piazza. 10.17* Employment Agreement with Paul K. Heun. 10.18 USFI Provider Reseller Agreement dated as of March 4, 1997, by and among USFI Network K.K., A.T. Net KK and Asahi Telecom Co., Ltd. 10.19 Securities Purchase Agreement dated as of March 4, 1997 among USFI Network KK, Nihon TelePassport K.K., USFI-Japan, L.L.C., USFI Inc., Asahi Telecom Co., Ltd. and A.T. Net K.K. 10.20 NTP Purchase and Sale Agreement dated as of March 4, 1997 among Nihon TelePassport K.K., USFI, Inc., USFI-Japan, L.L.C., USFI Network K.K., Asahi Telecom Co., Ltd. and A.T. Net K.K. 10.21 USFI Provider Reseller Agreement (For NTP) dated as of March 4, 1997, by and among USFI Network K.K., Nihon TelePassport K.K. and Asahi Telecom Co., Ltd. 10.22 A.T. Net Provider Reseller Agreement dated as of March 4, 1997, by and among USFI Network K.K. and A.T. Net K.K. 10.23* Form of Indemnity Agreement. 21.1* Subsidiaries of the Registrant. 23.1 Consent of Baer Marks & Upham LLP (included in Part II of this Registration Statement). 23.2 Consent of Ernst & Young LLP, independent auditors (included in Part II of this Registration Statement). 23.3 Consent of Deloitte Touche Tohmatsu, independent auditors (included in Part II of this Registration Statement). 24.1** Powers of Attorney. 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. ** Previously filed. (b) FINANCIAL STATEMENT SCHEDULES Report of Ernst & Young LLP, independent auditors Schedule II -- Valuation and Qualifying Accounts All other schedules have been omitted because the information to be set forth therein is not applicable or is shown in the financial statements or the notes thereto. II-3 126 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (a) The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4) or 497(h) under the Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and that offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 127 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 20th day of March 1997. TELEPASSPORT INC. By: /s/ JAMES D. PEARSON ------------------------------------ James D. Pearson President Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated:
SIGNATURE TITLE DATE - ----------------------------------------------- ---------------------------- --------------- * Chairman of the Board of March , 1997 - ----------------------------------------------- Directors Stephen E. Myers /s/ JAMES D. PEARSON President, Chief Executive March 20, 1997 - ----------------------------------------------- Officer (Principal Executive James D. Pearson Officer) and Director /s/ R. GORDON MILLS Chief Financial Officer March 20, 1997 - ----------------------------------------------- (Principal Financial and R. Gordon Mills Accounting Officer) * Director March , 1997 - ----------------------------------------------- Michael C. Anderson * /s/ JAMES D. PEARSON March 20, 1997 - ----------------------------------------------- As Attorney-in-fact
II-5 128 CONSENT OF COUNSEL We hereby consent to the reference to our firm in Amendment No. 1 to the Registration Statement on Form S-1 of TelePassport Inc., dated March 20, 1997, under the caption "Legal Matters." In giving such consent, we do not thereby concede that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933 (the "Securities Act"), or the rules or regulations promulgated thereunder, or that we are "experts" within the meaning of the Securities Act or such rules and regulations. BAER MARKS & UPHAM LLP New York, New York March 20, 1997 II-6 129 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated , 1997, in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-20977) and related Prospectus of TelePassport Inc. for the registration of 5,750,000 shares of its Class B Common Stock. Hackensack, New Jersey , 1997 The foregoing consent is in the form that will be signed upon the completion of the reorganization described in Note 1 to the consolidated financial statements. ERNST & YOUNG LLP Hackensack, New Jersey March 19, 1997 II-7 130 CONSENT OF INDEPENDENT AUDITORS We consent to the use in this Amendment No. 1 to the Registration Statement relating to the registration of the Class B Common Stock of TelePassport Inc. on Form S-1 dated March 20, 1997 of our report dated February 7, 1997, except for Note 9, as to which the date is March 4, 1997, appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. DELOITTE TOUCHE TOHMATSU Tokyo, Japan March 20, 1997 II-8 131 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders TelePassport Inc. We have audited the consolidated financial statements of TelePassport Inc. and subsidiaries as of December 31, 1996, and 1995 and for each of the three years in the period ended December 31, 1996, and have issued our report thereon dated , 1997 (included elsewhere in this Registration Statement). Our audits also included the financial statement schedule listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Hackensack, New Jersey , 1997 The foregoing report is in the form that will be signed upon the completion of the reorganization described in Note 1 to the financial statements. ERNST & YOUNG LLP Hackensack, New Jersey March 19, 1997 S-1 132 TELEPASSPORT INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
COLUMN E COLUMN B COLUMN C -------- ----------- ----------------- COLUMN D BALANCE COLUMN A BALANCE AT ADDITIONS ------------ AT END - ------------------------------------------- BEGINNING CHARGED TO COSTS DEDUCTIONS- OF DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE PERIOD - ------------------------------------------- ----------- ----------------- ------------ -------- Year ended December 31, 1994 Allowance for doubtful accounts.......... $ 320 $ 645 $465(a) $500 ===== ===== ==== ==== Year ended December 31, 1995 Allowance for doubtful accounts.......... $ 500 $ 184 $ 1(a) $683 ===== ===== ==== ==== Year ended December 31, 1996 Allowance for doubtful accounts.......... $ 683 $ 352 $245(a) $790 ===== ===== ==== ====
- --------------- (a) Accounts written off as uncollectible. S-2 133 EXHIBIT INDEX 1.1* Form of Underwriting Agreement. 1.2* Form of Subscription Agreement. 2.1* Agreement of Merger between TelePassport LLC and TelePassport Inc. 3.1* Amended and Restated Certificate of Incorporation of the Registrant. 3.2* Amended and Restated By-Laws of the Registrant. 4.1 Specimen Stock Certificate for shares of Class B Common Stock. 4.2* Form of Lock-Up Agreement. 5.1* Opinion of Baer Marks & Upham LLP. 10.1 Agreement dated May 1, 1996, between the United States AF NAF Purchasing Office and USFI, Inc. 10.2* Form of Independent Representative's Agreement. 10.3* The Registrant's Long Term Incentive Plan. 10.4* Form of Customer Wholesale Agreement. 10.5 Letter Agreement dated March 11, 1997, among Franz Hruby, Wolfgang Schlick, Georg Hofer and TelePassport Telekom GmbH. 10.6 Share Purchase Agreement dated March 14, 1997, among USFI, Inc., Stephen Charles Edwards and Michael Peter Riley. 10.7 Letter Agreement dated as of March 1, 1997 between USFI, Inc. and Georg Hofer. 10.8** Option Agreement dated January 21, 1997, between TelePassport Inc. and Intelenet, Inc. 10.9* Telecommunication Equipment Housing Agreement dated November 14, 1995. 10.10** Sublease Agreement dated January 28, 1993, between US Fibercom Network, Inc. and United States Tennis Association. 10.11** License Agreement dated November 6, 1996, between USFI, Inc. and 48th Americas Company. 10.12** Collocation and Facilities Management Service Agreement dated May 22, 1995, between Voyager Networks, Inc. and USFI, Inc. 10.13* Lease Agreement dated March 1, 1995, between Tokuyo Sangyo Inc. and USFI Network K.K. (Translation from Japanese to English). 10.14* Employment Agreement with James D. Pearson. 10.15* Employment Agreement with Francis J. Mount. 10.16* Employment Agreement with Jan Piazza. 10.17* Employment Agreement with Paul K. Heun. 10.18 USFI Provider Reseller Agreement dated as of March 4, 1997, by and among USFI Network K.K., A.T. Net KK and Asahi Telecom Co., Ltd. 10.19 Securities Purchase Agreement dated as of March 4, 1997 among USFI Network KK, Nihon TelePassport K.K., USFI-Japan, L.L.C., USFI Inc., Asahi Telecom Co., Ltd. and A.T. Net K.K. 10.20 NTP Purchase and Sale Agreement dated as of March 4, 1997 among Nihon TelePassport K.K., USFI, Inc., USFI-Japan, L.L.C., USFI Network K.K., Asahi Telecom Co., Ltd. and A.T. Net K.K. 10.21 USFI Provider Reseller Agreement (For NTP) dated as of March 4, 1997, by and among USFI Network K.K., Nihon TelePassport K.K. and Asahi Telecom Co., Ltd.
134 10.22 A.T. Net Provider Reseller Agreement dated as of March 4, 1997, by and among USFI Network K.K. and A.T. Net K.K. 10.23* Form of Indemnity Agreement. 21.1* Subsidiaries of the Registrant. 23.1 Consent of Baer Marks & Upham LLP (included in Part II of this Registration Statement). 23.2 Consent of Ernst & Young LLP, independent auditors (included in Part II of this Registration Statement). 23.3 Consent of Deloitte Touche Tohmatsu, independent auditors (included in Part II of this Registration Statement). 24.1** Powers of Attorney. 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. ** Previously filed. (b) FINANCIAL STATEMENT SCHEDULES Report of Ernst & Young LLP, independent auditors Schedule II -- Valuation and Qualifying Accounts All other schedules have been omitted because the information to be set forth therein is not applicable or is shown in the financial statements or the notes thereto. EX-4.1 2 SPECIMEN STOCK CERTIFICATE 1 EXHIBIT 4.1 SPECIMEN CERTIFICATE OF STOCK NUMBER SHARES TPB TELEPASSPORT INC. CUSIP 87943Y 10 2 INCORPORATED UNDER THE LAWS SEE REVERSE FOR OF THE STATE OF DELAWARE CERTAIN DEFINITIONS THIS CERTIFIES THAT is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE CLASS B COMMON STOCK OF THE PAR VALUE OF $.01 PER SHARE OF TELEPASSPORT INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized Attorney, upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [TELEPASSPORT INC. CORPORATE SEAL 1996 DELAWARE] President Secretary COUNTERSIGNED AND REGISTERED: THE BANK OF NEW YORK TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE 2 THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT-____________Custodian____________ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts to Minors of survivorship and not as tenants in common Act______________________________ (State) Additional abbreviations may also be used though not in the above list.
For Value Received,_______________________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ____________________________________ | | | | |____________________________________| _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ _________________________________________________________________________Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________Attorney to transfer the said stock on the books of the within named Company with full power of substitution in the premises. Dated_________________________________ _______________________________________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. EX-10.1 3 AGREEMENT DATED MAY 1, 1996: USFI 1 Exhibit 10.1 NONAPPROPRIATED FUND CONTRACT/AWARD Page 1 of 162 Pages 1. Contract Number 2. Purchaser Request Number 3. Effective Date 4. Issued By 5. Administered By (if other than block 4) AF NAF PURCHASING OFFICE CHARLOTTE GUILMENOT 9504 IH 35 NORTH, SUITE 370 (210) 657-5804 SAN ANTONIO, TX 78233-6636 6. DELIVERY /X/ FOB DESTINATION OTHER (See Schedule) 7. CONTRACTOR NAME AND ADDRESS (Street, City, Country, Suite and Zip Code) USFI NETWORK SERVICES, INC. 1212 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10036 8. DISCOUNT FOR PROMPT PAYMENT PERCENT CALENDAR DAYS 9. TELEPHONE NO. (212) 703-0102 10. SUBMIT INVOICES (Original and one copy unless otherwise specified) TO ADDRESS SHOWN IN BLOCK 12. 11. SHIP TO (Mark for, if applicable) 12. INVOICE TO: AS INDICATED ON EACH DELIVERY ORDER N/A 13. TABLE OF CONTENTS (The following checked sections are contained in the contract) (X) SEC PART 1 - THE SCHEDULE PAGE /X/ A Solicitation/contract form 1-2 /X/ B Supplies or services and prices/costs 1-8 /X/ C Description/specifications/work statement 1-4 /X/ D Packaging and marking 1 /X/ E Inspection and acceptance 1 /X/ F Deliveries or performance 1-5 /X/ G Contract administration data 1-2 /X/ H Special contract requirements 1-6 /X/ I Contract clauses 1-11 PART III - LIST OF DOCUMENTS, EXHIBITS AND OTHER ATTACHMENTS /X/ J List of attachments 1-69 PART IV - REPRESENTATIONS AND INSTRUCTIONS /X/ K Representations, certifications, and other statements of offerors or quoters 1-14 N/A L Instructions, conditions, and notices to offerors or quoters N/A M Evaluation factors for award ITEM NO. SUPPLIES/SERVICES QUANTITY UNIT UNIT PRICE AMOUNT SEE ATTACHED TOTAL AMOUNT OF CONTRACT $NO COST CONTRACTING OFFICER WILL COMPLETE BLOCK 14 OR 18 AS APPLICABLE 14. /x/ CONTRACTOR'S NEGOTIATED AGREEMENT (Contractor is required to sign this documentation and return ____ copies to issuing offices.) Contractor agrees to furnish and deliver all items or perform all services set forth, or otherwise identified above and on any continuation sheets for the consideration granted herein. The rights and obligations of the portion to this contract shall be subject to and governed by the following documents (a) this award/contract, (b) the solicitation, if any, and (c) such provisions, representations, certifications, and specifications, as are attached or incorporated by reference herein. (Attachments are listed herein.) 15. SIGNATURE OF PERSON AUTHORIZED TO SIGN (Contractor) /s/ James Pearson 16. TYPE OR PRINT NAME -- TITLE OF SIGNER James Pearson - President 17. DATE SIGNED 4/23/96 18. / / AWARD (Contractor is not required to sign this document.) Your offer on Solicitation Number _________________________________________ including the additions or changes made by you which additions or changes are set forth in full above, is hereby accepted as to the items listed above and on any continuation sheets. This award consummates the contract which consists of the following documents: (a) the solicitation and your offer, and (b) this award/contract. No further contractual document is necessary. 19. SIGNATURE OF CONTRACTING OFFICER 20. TYPE OR PRINT NAME OF CONTRACTING OFFICER 21. DATE SIGNED 22. If this contract exceeds ________ manual approval of ______________________ must be obtained prior to commencing any performance. Without such approval this contract will have neither force nor effect. 23. TYPE OR PRINT NAME AND TITLE OF APPROVING OFFICIAL 24. SIGNATURE OF APPROVING OFFICIAL 25. DATE SIGNED AF Form 2640. DEC 87 Previous Edition 2 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE RESPONSE TO SECTION B SUPPLIES OR SERVICES AND PRICES/COSTS 5.1 All information in this section pertains to Items 0001 through 0004 in STATEMENT OF WORK (SOW) FOR UNITED STATES AIR FORCES IN EUROPE (USAFE) LODGING FACILITY TELECOMMUNICATIONS SYSTEM (LFTS) 96-0022 dated 2 Feb 96 with amendments A-001 dated on 23 Feb 96 and A-002 dated 7 Mar 96. 5.2 A schedule for the GOVERNMENT percentage of long distance revenues follows. The tables show total estimated revenues, the percentage of revenues to be paid to the GOVERNMENT, and total GOVERNMENT revenues derived from long distance revenues at varying usage rates. These estimates are based on the indicated minutes/room at an 85 percent occupancy rate. The total dollar figures are long distance receipts collected during a single month at the initial three lodging facilities - Ramstein, Rhein-Main, and Aviano. The year figure is calculated from the first complete month of operation following the acceptance of the third and final system required in the original solicitation (Ramstein, Rhein-Main, and Aviano). These figures represent revenue derived only from long distance, and do not include potential revenue the GOVERNMENT will realize from the sale of debit cards. Actual revenue will begin at the site acceptance for each location. B-1 3 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE REVENUE ESTIMATES RAMSTEIN/RHEIN-MAIN/AVIANO MINUTES PER ROOM/PER NIGHT 85% OCCUPANCY Min/room/night 5 10 15 20 Total Monthly Revenue $143,034 $286,069 $429,103 $572,138
GOVERNMENT PERCENTAGE OF REVENUE BASED ON TOTAL LONG DISTANCE FEES RAMSTEIN/RHEIN-MAIN/AVIANO AS RECORDED ON THE CALL DETAIL REGISTER
DOLLAR AMT 0-100 101-200 201-300 301-400 401-500 greater than 501 Year 1 0% 0% 1% 2% 2.50% 2.50% Year 2 0% 0% 1% 2% 2.50% 2.50% Year 3 0% 0% 1% 3% 4% 5% Year 4 0% 1% 2% 3% 4% 5% Year 5 0% 1% 2% 3% 4% 5% Year 6 0% 2% 3% 4% 6% 7.50% Year 7 0% 2% 3% 5% 6% 7.50% Year 8 0% 3% 4% 5% 7.50% 10% Year 9 0% 4% 5% 7.50% 7.50% 10% Year 10 0% 5% 6% 7.50% 10% 10%
PROJECTED GOVERNMENT REVENUE IN DOLLARS PER YEAR
in minutes at $0.99 5 10 15 20 Year 1 $ -- $ 34,328 $ 128,731 $ 171,641 Year 2 $ -- $ 34,328 $ 128,731 $ 171,641 Year 3 $ -- $ 34,328 $ 205,970 $ 343,283 Year 4 $ 17,164 $ 68,657 $ 205,970 $ 343,283 Year 5 $ 17,164 $ 68,657 $ 205,970 $ 343,283 Year 6 $ 34,328 $ 102,985 $ 308,954 $ 514,924 Year 7 $ 34,328 $ 102,985 $ 308,954 $ 514,924 Year 8 $ 51,492 $ 137,313 $ 386,193 $ 686,565 Year 9 $ 68,657 $ 171,641 $ 386,193 $ 686,565 Year 10 $ 85,821 $ 205,970 $ 514,924 $ 686,565 Total $ 308,954 $ 961,191 $2,780,588 $4,462,673
B-2 4 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 5.3 Response to B-2 paragraph 3: 5.3.1 The Call Detail Recorder (CDR) system will pass all telephone-related call charges to the government-owned SIMS computer system or its replacement, so that a detailed call record statement of charges can be printed out by the lodging desk attendant and presented to the guest on checkout. Actual charges will be collected by the lodging desk attendant. USFI NETWORK SERVICES, INC. will backup and archive CDR data on a regular basis. The existing USFI NETWORK SERVICES, INC. billing department at our home office in New York City will, during the first week of each month, reconcile the entire previous month's CDR data from each location and prepare an invoice for the USFI NETWORK SERVICES, INC. percentage of the long distance charges. USFI NETWORK SERVICES, INC. will mail the invoice for the entire previous month's activity to the designated GOVERNMENT office by the 15th of each month. The GOVERNMENT shall process the invoice and remit payment for the USFI NETWORK SERVICES, INC. percentage of long distance charges by the final day of the month in which the invoice was received. 5.4 Response to B-2 paragraph 4: 5.4.1 USFI NETWORK SERVICES, INC.'s toll rates from the major military concentrations in Europe may vary according to call destination. Long distance per/minute prices for calls originating in the lodging facility and terminating in the United States are guaranteed for the first year. USFI NETWORK SERVICES, INC. will negotiate rate changes in excess of the US Consumer Price Index with the Contracting Officer and the Contracting Officer's Technical Representative at any time after the first year. Normally, any proposed rate changes would reflect either increased competition in international long distance as deregulation alters the operating environment, or advances in technology which change USFI NETWORK SERVICES, INC.'s cost of delivering traffic to the destination. Such changes have traditionally resulted in lower tariffs as volumes increase. USAFE is a finite community, however, and it must be understood that the costs of operating a closed user group network increase over time. It is no longer possible to make a dime DDD phone call from a public phone booth in the United States. B-3 5 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 5.4.2 Following is the guaranteed first year pricing for long distance traffic originating in the designated location and terminating in the US, excluding taxes: Ramstein: $0.99 per minute Rhein-Main $0.99 per minute Aviano $0.99 per minute 5.4.3 For any guest whose long distance fees total more than $100.00, total fees will be discounted by 15 percent. Example:
Total long distance: Discount Actual Bill at Checkout $142.00 $21.30 $120.70
5.4.4 The full USFI NETWORK SERVICES, INC. long distance rate tables are located at the end of this section. These rates are based upon zones defined by European telecom commercial providers. 5.4.4.1 Zone pricing for traffic originating in Germany is as follows:
ZONE PRICE ---- ----- El $0.99 E2 $1.49 W1 $0.99 W2 $1.99 W3 $1.99 W4 $1.99
5.4.4.2 Zone pricing for traffic originating in Italy is as follows:
ZONE PRICE ---- ----- El $0.99 E2 $1.49 W1 $0.99 W2 $1.99 W3 $1.99 W4 $1.99
B-4 6 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 5.5 USFI NETWORK SERVICES, INC. will provide interfaces to the host commercial network and to the GOVERNMENT DSN system as an additional service to lodging guests. The response to question #74 in the QUESTIONS AND ANSWERS document issued by the Contracting office on 7 Mar 96 states that "the only charge to the guest will be the negotiated long distance User Fee of which a percentage shall be paid to the government." This statement is appropriate for a facility located within the US, but clearly does not reflect the cost of making a local call in European countries. USFI NETWORK SERVICES, INC. will, therefore, levy the following fees as a means of recovering these costs: 5.5.1 Local calls to host nation telephone system: $.50 for the initial connection and first meter pulse, $.30 for each additional meter pulse. 5.6 RESPONSE TO ITEM 0001: BASIC SERVICES 5.6.1 USFI NETWORK SERVICES, INC. will provide a Nortel Meridian SL-1 PBX, which will meet or exceed all industry standards for state-of-the-art hotel/motel features. The Meridian SL-1 is the same basic switch purchased by the Air Force under the Base Information Digital Distribution System (BIDDS) contract, and is the same product offered by Nortel in the BIDDS-NAS solicitation. The Meridian SL-1 is capable of 65,000 busy hour call completions; 140,000 CCS at P.01 grade of service; and 2,700 simultaneous connections. 5.7 Response to Basic Services section following paragraph B4. Specific responses follow in Response to Statement of Work section. 0001AA System Requirements - System will meet or exceed requirements specified in SOW paragraph 3.1 and sub-paragraphs. 0001AA-1 Trunking Services - System will meet or exceed requirements specified in SOW 3.1.6. Trunking for the lodging facilities will be to the host commercial network, to the Government DSN system, and to the USFI Long Distance Network. B-5 7 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 000lAA-2 System Design - System will meet or exceed requirements specified in SOW paragraph 3.2. 0001AA-3 Call Detail Recording and Billing System - System will meet or exceed requirements specified in SOW paragraphs 3.2.4 and 3.2.5. 0001AA-4 Room/Bed Housekeeping and Occupancy Status - System will meet or exceed requirements specified in SOW paragraph 3.2.5.2. 0001AA-5 System Features - System will meet or exceed requirements specified in SOW paragraph 3.4. 0001AA-6 Administrative Service - System will meet or exceed requirements specified in SOW paragraph 3.2.3. 0001AA-7 Reliability of Service - System will meet or exceed requirements specified in SOW paragraph 3.1.11. 0002AA All items will be provided according to schedule in Section F. Delivery dates are contingent upon contract award date. 0003 TRAINING - In general, USFI Network Services, Inc. recognizes that lodging facility employees are the key to Customer satisfaction with the system we provide under this contract. We are committed to providing all training necessary so that lodging facility employees are fully qualified to provide the highest level of Customer Service. Placing a full time employee at USAFE's disposal demonstrates our objective to this ideal. 0003AA Attendant Training - will comply with SOW paragraph 3.13.1. 0003AB Administrative Training - will comply with SOW paragraph 3.13.2. 0003AC Station Training - will comply with SOW paragraph 3.13.3. 0003AD Billing Training - will comply with SOW paragraph 3.13.4. 0003AE Call Detail Recording Training - will comply with SOW paragraph 3.13.4. 0004 RECURRING ITEMS OR EXPANDED SERVICES B-6 8 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 0004AB System Requirements - System meets or exceeds all specifications in SOW paragraph 3.1 and sub-paragraphs. 0004AB-1 Single Line Service - System meets or exceeds requirements specified in SOW paragraph 3.1.5.1. 0004AC-1 Trucking to and from the Local Exchange Carrier - System meets or exceeds requirements specified in SOW paragraphs 3.1.1,3.1.2, and 3.1.6. 0004AC-2 Trunking to the Base DCO - This item requires clarification from the contracting officer. System will meet or exceed trunking requirements specified in SOW paragraphs 3.1.1,3.1.2, and 3.1.6. Paragraph 3.7.2.1 pertains to use of government cable. 0004AD Hotel/Motel Attendant Service - System meets or exceeds requirements specified in SOW paragraph 3.4 and sub-paragraphs. SOW paragraph 3.2.5.2 pertains to room status and housekeeping system. 0004AE Administrative Services - System will meet or exceed requirements specified in SOW paragraph 3.23. 0004AF Interface Telecommunications System with LFTS - System will meet or exceed requirement in SOW paragraph 3.1.1. 0004AG Interface Telecommunications System with SIMS - System will meet or exceed requirements specified in SOW paragraph 3.2.6. 0004AH-1 Administrative Training - Training will meet or exceed requirements specified in SOW paragraph 3.13.2. 0004AH-2 Attendant Training - Training will meet or exceed requirements specified in SOW paragraph 3.13.1. Rates submitted under Section B are firm and fixed percentages/fees for the duration of the awarded contract. These rates shall apply, as a minimum, to Ramstein AB, Rhein Main AB, and Aviano AB. B-7 9 USFI Network Services, Inc. Germany/Italy Long Distance Fee Schedule
ZONE E1 ZONE E2 ZONE W1 ZONE W4 ZONE W4 (cont.) ZONE W4 (cont.) $0.99 Per Minute $1.49 Per Minute $0.99 Per Minute $1.99 Per Minute $1.99 Per Minute $1.99 Per Minute Andorra Albania Alaska Afghanistan French Polynesia Norfolk Island Austria Algeria Canada American Samoa Gabon Oman Belgium Belarus Hawaii Angola Gambia Palau Czechoslovakia Bosnia-Herzegovina Anguilla Georgia Palm Island Denmark Bulgaria United States Anarctica Ghana Panama Faeroe Islands Croatia Antigua Greenland Papau New Guiness Finland Cyprus Armenia Grenada Paraguay France Egypt Aruba Guadeloupe Peru Greece Estonia ZONE W2 Ascension Island Guam Phillippines Iceland Gilbraltar $1.99 Per Minute Azerbaijan Guantanamo Bay Pitcairn Island Ireland Hungary Bahamas Guatemala Qatar Bahrain Guinea Reunion Island Italy Israel Australia Bangladesh Guinea Bissau Rwanda Liechtenstein Jordan Japan Barbados Guyana Saipan Luxembourg Latvia New Zealand Belize Haiti Sao Tome Monaco Lebanon Singapore Benin Honduras Seychelles Netherlands Libya Bermuda India Sierra Leone Norway Lithuania Bhutan Iraq Solomon Islands Poland Macedonia Bolivia Jamaica Somali Republic Portugal Malta Botswana Kenya Spanish Sahara San Marino Moldova ZONE W3 British Virgin Island Kiribati Sri Lanka Spain Morocco Brunei Kuwait St. Helena Sweden Romania $1.99 Per Minute Burkina Faso Laos St. Kitts Switzerland Russia Burma Lesotho St. Lucia United Kingdom Slovenia Antilles Burundi Libya St. Pierre Germany Syria Argentina Cambodia Macao St. Vincent Tunisia Brazil Cameroon Madagascar Sudan Turkey Chile Cape Verde Islands Malawi Swaziland Ukraine Columbia Cayman Islands Malaysia Tanzania Uzbekistan Dominican Rep Cen. African Rep. Maldives Thailand Yugoslavia Iran Chad Mail Togo South Africa China Marshall Island Tonga Taiwan Comoros Mauritania Trinidad & Tobago United Arab Emirates Congo Mauritius Turkmenistan Cook Islands Mayotte Island Turkis & Calcos Islands Costa Rica Mexico Tuvalu Cuba Micronesia Uganda Diego Garcia Mongolia Union Island Djibouti Montserrat Uruguay Dominica Mozambique Vanuata Easter Island Mustique Venezuela Ecuador Namibia Vietnam El Salvador Nauru Wake Island Equatorial Guinea Nepal Wallis/Fortuna Island Eritrea Nevis Western Samoa Ethiopia New Caledonia Yemen Arab Republic Falkland Islands Nicaragua Zaire Fiji Niger Zambia French Antilles Nigeria Zimbabwe French Guyana Niue
10 STATEMENT OF WORK (SOW) FOR UNITED STATES AIR FORCES IN EUROPE (USAFE) LODGING FACILITY TELECOMMUNICATIONS SYSTEM (LFTS) 1. SCOPE: 1.1 General. This Statement of Work (SOW) defines the requirements for a Lodging Facility Telecommunications System (LFTS), including hotel/motel accounting and management; features. The contractor shall provide a LFTS consisting of all new host nation approved (HNA) equipment and connection (s) including the basic digital switching system, attendant consoles, administrative terminals, subscriber line circuit equipment, trunk circuit equipment, distribution frames, wire and cable plant, house wire, customer premise equipment, uninterrupted power supply (UPS), outside plant (black) cable, and all other ancillary Hotel/Motel equipment and software necessary to provide service for a complete telecommunication system. This system shall have a modular architecture with an expansion capability. CENTREX service is not acceptable. 1.1.1 Contractor's Fees. The LFTS requirements and associate services will be provided by the contractor in exchange for toll traffic and a percentage of long distance toll charges recorded by lodging. (Long distance toll charges - restrictions applicable). Maximum charge that can be applied to the transient guests' billing for these services will not exceed the long distance, operator assisted, day rate as charged by the carrier in effect at the time services are used. 1.1.2 Payment Responsibilities. The percentage (contractor's fee) provided is only on the amount actually applied to the transient guests' bill. Contractor's equipment failure shall be the responsibility of the contractor. The responsibility for the collection of the charges, once they have been applied to the billing, will rest with the U.S. Government. 1.1.3 Internal Controls and Administrative Procedures. The internal controls and the administrative procedures for the government's paying the contractor fees will be addressed in the proposal. This should cover such items as monitoring equipment, listings, due dates and other items that will insure both the contractor and the U.S. Government are protected against any unnecessary loss and conform to the host nation laws. These internal controls and administrative procedures are negotiable items. 2. APPLICABLE DOCUMENTS. 2.1 General. The following documents shown below form a part of this SOW. Any suggestions or recommendations made by the following documents shall be considered requirements under this SOW. In the event of a conflict between the documents referenced in this SOW and the contents of this SOW, the following order of precedence shall apply: 2.1.1 This Statement of Work (SOW). C-1 11 2.1.1.2 Communications System Program Office (CSPO) Documents EPS-93F-CSPO-015A Equipment Performance Specification 21 March 95 for a European Lodging Facility Telecommunications System (Copy of the above document is included in the Request for Proposals (RFP). 2.1.1.3 Applicable Host Nation Standards 2.1.2 Total number of Sites and Drawings: Drawings and sketches will be provided for the contractor's information during site visits/upon request for USAFE site/locations as follows: APPENDIX A Ramstein Air Base, Germany Ref. Section J, Atch 4 APPENDIX B Rhein-Main Air Base, Germany Ref. Section J, Atch 5 APPENDIX C Aviano Air Base, Italy Ref. Section J, Atch 6 2.1.2.1 Appendices may be increased or decreased depending on the USAFE mission requirements. Specifically, Spangdahlem Air Base, Germany may be included at a later date. 2.1.2.2 Note: The final room configurations may be slightly different than shown in the available drawings. Floor plans of the lodging/billeting facilities are available for viewing at the local Civil Engineering Squadron. 3. SYSTEM REQUIREMENTS. 3.1 General System Requirements. 3.1.1 System Compatibility and Interface. The LFTS shall be compatible with the existing base Dial Central Office (DCO), Defense Switching Network (DSN), local commercial telephone system, government furnished equipment (GFE), and meet or exceed all host nation telecommunications connectivity requirements. The contractor shall accomplish all host nation connectivity requirements. The contractor shall provide an interface to a GFE property management system. 3.1.2 Direct Dialing. The switching system shall be capable of performing Direct Outward Dialing (DOD), Direct Inward Dialing (DID), and Direct Distance Dialing (DDD) to the Public Switched Telephone Network without the need of an attendant. DOD, DID, and DDD shall each be assigned to properly class marked stations. C-2 12 3.1.3 Flexibility of Connection. Any station directory number shall be assigned to any switching system line equipment terminal by programming internal switching system memory. 3.1.4 DTMF Dialing Operation. The equipment shall automatically interconnect station lines in response to off-hook Dual Tone Multi-Frequency (DTMF) signals without the aid of an attendant. 3.1.5 Class of Service. The switching system shall provide all necessary classes of service (class marks) to control subscriber access to other subscribers and trunk circuits. All class mark codes shall be assigned on a per line basis for each switched line. 3.1.5.1 Single Line Service. The contractor shall provide single line station service. 3.1.6 Trunking. The contractor shall provide trunking with a minimum grade of service of P.03 during the office busy hours. Provide trunking to and from the local exchange service, interconnect toll service, and USAFE base/location DCO/DSN. The contractor switching system shall provide trunk circuit interfaces with standard signaling modes. The system shall recognize and respond to the various signaling and supervision methods using trunk cards with programmable and/or strapping options to provide satisfactory trunk operation. Coordinate with the Base Communications Officer (BCO) on the trunking to be provided by the USAFE base/location DCO/D. 3.1.7 Traffic. 3.1.7.1 Grades of Service. The switching system shall be designed with sufficient intra-system circuit paths between line ports and trunk ports to meet the following grades of service: 3.1.7.1.1 Intra-office Paths P.005 3.1.7.1.2 Incoming Registers 3.1.7.1.2.1 without start signal P.001 3.1.7.1.2.2 with start signal P.01 3.1.7.1.3 DTMF Senders P.001 3.1.7.2 Traffic Measurement Data. Traffic measurement data shall be provided on hard copy printout via the Administrative Terminal. The switching system shall store traffic data for study periods up to 24 hours. Data outputs shall include usage data on all trunks and call completion data. C-3 13 3.1.7.2.1 Traffic Measurement and Analysis Report. This report provides data concerning use and congestion in the switching system. This report will be used to determine whether the switching system is providing adequate traffic capacity and to determine whether existing facilities are adequate. (Reference CDRL sequence number A006). a. General. The report shall provide printed, tabulated data from the traffic measuring system. The report shall provide measurements for seven consecutive business days, on an hourly basis, unless a shorter interval is requested. The data shall include all of those items listed in paragraphs 3.2.4 and 3.8.4.2. b. Analysis. The report shall contain an analysis of the traffic measurements and recommendations based on the analysis. Recommendations shall address expansion of switch hardware and software and shall be specific and detailed. 3.1.8 Self Testing and Alarms. An automatic routine under stored program control shall be provided to monitor the integrity of the switching system. The LFTS shall provide audible and visual alarms indicating malfunctions or other conditions affecting service which are detected by the switching system. Audible and visual alarms shall be extended to the attendant location position or other remote locations as designated in the SOW. Differing alarms shall indicate major and minor failures. External alarms for subsystems external to the DPABX are acceptable. Failure of any portion of the billing system will produce a major alarm. 3.1.9 System Failures. 3.1.9.1 Major. A failure resulting from: 3.1.9.1.1 loss of call processing on (greater than or equal to) 10% of equipped lines or trunks, or (greater than or equal to) 10 equipped lines or trunks, whichever is greater; 3.1.9.1.2 failure of the billing system or any component of the system, or a major alarm. 3.1.9.2 Minor. A failure resulting from: 3.1.9.2.1 loss of call processing of (greater than) 2% (less than) 10% of equipped lines or trunks, or two equipped lines or trunks, whichever is greater; 3.1.9.2.2 any abnormal hardware or software condition which requires maintenance action to restore the LFTS to normal operation, or a minor alarm. 3.1.10 Environmental Conditions. 3.1.10.1 Temperature. The switching system shall operate continuously at ambient temperature between 10 (degrees) C and 30 (degrees) C (50 (degrees) F and 86 (degrees) F) without degradation of performance. The switching system shall operate at extreme ambient temperatures of 5 (degrees) C and 40 (degrees C (41 C-4 14 (degrees) F and 104 (degrees) F) for a minimum of 24 continuous hours. Ambient refers to conditions at a location five feet above the floor and 15 inches in front of the equipment. 3.1.10.2 Humidity. The switching system shall operate continuously at a relative humidity between 20% to 60% without degradation of performance. The switching system shall be capable of operating continuously for a 24 hour period, without degradation of performance, when the relative humidity is between 60 & 95%, non- condensing. 3.1.11 System Availability. Availability is defined as the percentage of total time that the switching system is able to perform its intended function. Availability for the LFTS shall be 99.99%. 3.1.12 Automatic Software Reload. The contractor shall provide an automatic software reloading system. After commercial power is restored following a power loss exceeding the capacity of the battery backup system, the system shall reload the call processing software and the database, eliminating the need for reprogramming the system. 3.2 System Design. 3.2.1 Expansion Capability. The switch system shall be expandable, as identified in the SOW, beyond the equipped capacity. Expansion of the system beyond the equipped capacity shall not cause service interruption exceeding one hour in duration. Time and duration of any service interruption required to expand the system shall be coordinated with the LFM in accordance with the SOW. All necessary common control equipment, software features, and power system components shall be provided at the initial installation to accommodate the ultimate expansion defined in the SOW. 3.2.2 Dialing Plan. The Dialing Plan for the switching system shall utilize the NNX codes assigned by the local Telephone Company (TELCO). It shall be capable of three, four, and five digit station numbers and one, two, and thee digit access codes. Numbering shall be approved by the Lodging Facility Manager (LFM) and not in conflict with any computer management system already in place. Trunk access codes and feature operating codes shall be established by the contractor, with final approval by the government. For example:
Dial Code Usage --------- ----- 0 Lodging Attendant 1 through 6 Station Number 7 Base DCO 8 Other Common Carriers *90 Commercial Operators 91 Commercial DDD 91-800 Commercial Toll free
C-5 15 * Access to off base operator assisted calls shall be restricted to lodging attendant. 3.2.3 Administrative Terminal (AT). The contractor shall provide an AT for exclusive use by the Lodging Facility personnel The terminal shall provide access to the switching system and allow additions, deletions, and changes to be made to administrative data (station features, telephone numbers, authorization codes, class of service, etc.) and call detail and billing parameters. The AT shall consist of an alphanumeric keyboard, printer, and visual display terminal (VDT). The contractor shall perform the initial translations. 3.2.3.1 Answer Detection Capability. The LFTS shall be capable of providing answer detection, either as an integral part of the system, or as an adjunct system. The answer detection capability shall allow the switch to positively identity when the call is answered and start billing at that time, rather than start billing after a pre-set time or number of rings. 3.2.4 Call Detail Recording (CDR). 3.2.4.1 Call Detail Recording. The LFTS shall automatically collect, sort, and store CDR data (paragraph 3.2.4.1.1 through 3.2,4.1.8). The CDR subsystem shall store the processed CDR data on disks. The storage capacity of the disks shall be no less than 20,000 call records. An audible and visible alarm shall activate when the disks are nearing capacity. The CDR subsystem shall read and display the stored data from the disks and shall provide a local hard copy printout on command. Reading and changing the storage device, or printing of stored data shall not result in the loss of data or interfere with data collection. The CDR subsystem shall be equipped with the necessary hardware and software to allow the user to enter any time interval and sort on any one of the following parameters (with the exception of paragraph 3.2.4.1.3,3.2.4.1.6 and 3.2.4.1.7): 3.2.4.1.1 Time interval alone (i.e. all calls placed in the initially specified time interval). 3.2.4.1.2 Room number/extension number. 3.2.4.1.3 Called number(s) (segregated by area and NNX codes). 3.2.4.1.4 Toll and non-toll calls. 3.2.4.1.5 Time call originated (date, hour, minute). 3.2.4.1.6 Time call completed (date, hour, minute). 3.2.4.1.7 Duration of call (accurate to at least five seconds). 3.2.4.1.8 Authorization code (minimum of five digits). C-6 16 3.2.4.2 Call Sorting. After selecting the time interval and one or more of the previous parameters, with no more than five operator entries, the CDR subsystem shall display, and print on command, the following data: 3.2.4.2.1 Calling number. 3.2.4.2.2 Called number. 3.2.4.2.4 Time call originated (date, hour, minute). 3.2.4.2.5 Time call completed (date, hour, minute), or alternatively, duration of call. 3.2.4.2.6 Authorization code/Account code. 3.2.4.2.7 Toll charge (dollars. cents). 3.2.5 Call Billing/Room Status Subsystem (CBRSS). The LFTS shall be equipped with all necessary hardware and software to provide the call billing/room status function (CBRSS). The CBRSS will not be installed on the Services Information Management System (SIMS) computer. It may be installed on the PBX or a separate computer(s) depending on the vendor's solution. The CBRSS subsystem will have at least two communication ports, one to SIMS, and one to a printer to list all call account/room status records and print reports. The CBRSS shall pass both the call account record and the room/bed housekeeping and occupancy status record to SIMS and to the CBRSS printer. The capability to send a call record to SIMS and the printer simultaneously as well as the ability to select either option alone is required. The format of the call accounting and the room status records sent to the printer can be determined by the vendor but must be understandable by the attendant i.e. each field value must be identified by a clear text label. The call accounting records and room status records shall be passed to the SIMS when it is connected. If SIMS is not available, CBRSS must be able to store at least 20000 call records with the capacity to run reports with the same options outlined in paragraphs 3.2.4.1 and 3.2.4.2. It must also be able to continue routing the call billing/room status records to the printer, easily identifying that it must be manually posted. CBRSS data shall not be lost due to commercial AC power outage. 3.2.5.1 Call Billing Function. Charges shall be automatically computed for commercial, DDD, and Lodging operator assisted toll calls and billed to the calling station. Direct dialed and operator assisted toll calls originated by the lodging attendant and extended to a station number shall be billed to the station number for single occupancy quarters and to the applicable authorization/account code for multiple occupancy quarters. The toll rate data base shall be software programmable and based upon necessary tariff parameters (e.g., area and NNX codes, trunk group, mileage, etc.) and inputs from the LFM. The contractor shall provide protection of, and access to, the data base by means of a password (s). The contractor shall perform the initial programming and shall maintain and update the data base as rate changes occur for the life of the contract. C-7 17 3.2.5.2 Room/Bed Housekeeping and Occupancy Status. The CBRSS shall store and display the status of each guest room by room number. Housekeeping status shall be updated by the housekeeper dialing codes from the room phone. The system shall print, on command, a housekeeping report that contains the following data: 3.2.5.2.1 Room number (capable of five alphanumeric characters). 3.2.5.2.2 Cleaning status (clean or not clean). 3.2.5.2.3 Inspection status (inspected or not inspected). 3.2.5.2.4 Occupancy status (occupied or not occupied). 3.2.5.2.5 Room requires maintenance. 3.2.6 SIMS Interface Requirements. The contractor shall provide the necessary interface and connections between the Call Billing/Room Status System (CBRSS) and the SIMS system or its replacement. SIMS interface specifications will be provided by the government in the delivery order. The interface specifications will include the necessary message formats and software handshaking protocols necessary to interface the CBRSS to SIMS or its replacement. 3.2.7 Power Requirements. The switching and billing system shall include an Uninterrupted Power Supply (UPS) system powered by the commercial AC power. The UPS shall provide sufficient standby power to operate the switching and billing system for a minimum of four (4) hours should the commercial AC power be interrupted. The UPS shall automatically disconnect the batteries from the switching and billing system should the battery voltage fall below the manufacturer's low voltage limit. The UPS shall be sized at cut over for the expansion capacity of the switching system. Batteries shall be of the maintenance free, sealed recombining type. These batteries shall utilize an immobilized electrolyte and vent no gases. Power faults shall be indicated by a visual and audible alarm remote to the immediate area of the attendant console. Audible alarms remote to the attendant position shall have a means of being silenced at the attendant position. 3.2.8 Power connectivity shall be accomplished in accordance with the host nation requirements. All host nation connectivity requirements shall be acquired by the contractor. 3.3 System Features. The LFTS switching system shall be configured to include system features described below. C-8 18 3.3.1 Message Waiting. The contractor shall provide the attendant console or message waiting center instruments with the ability to activate and deactivate a message waiting lamp at each station instrument with message waiting capability. 3.3.2 Authorization/Account Code Calling. The LFTS shall have the capability of random generation and activation and deactivation of authorization/account codes. The authorization codes shall not be less than five digits and shall be assigned to any station line when properly class-marked. The authorization/account code shall be assigned from the administration terminal by lodging personnel. 3.3.3 Station Number Hunting. When the first number in a hunting group is found busy, each line within the hunting group shall be checked consecutively until an idle line is found. If any idle line is found, that line will be rung. If all lines are found busy, the calling party shall receive line busy tone. Each hunt group shall consist of either consecutive or non-consecutive directory numbers. 3.3.4 Automatic Wake-up. The contractor's equipment shall provide an automatic wake-up service. This service shall permit the attendant to instruct the switching system to automatically call a station at a specified time. The attendant shall be able to cancel and activate a wake-up call from the attendant's position. A subscriber via the subscriber's telephone, shall have the capability to instruct the switching system to automatically call their station (and only their station) at a specified time; a subscriber shall have the capability to cancel wake up calls that the subscriber programmed. The contractor shall provide a printed record of the wake-up request. The record shall consist of the room number of the requester, wake-up time, wake-up cancellation, and indication if the wake-up call was answered. The system shall be capable of ringing at least 10% of equipped lines simultaneously (all having the same wake-up time) using this feature. The automatic wake-up service shall override the DO NOT DISTURB feature. 3.3.5 Do Not Disturb. This feature allows a station to block all incoming calls and reroute them to the attendant console or message center. The attendant console shall not automatically override this feature, but may be overridden by input from the attendant. 3.3.6 Automated Attendant (AA). The LFTS shall provide the automated attendant capability for all incoming trunks (city and base). All incoming calls shall be routed to an automated attendant system. This system shall inform the caller, via announcement, that a room number can be dialed directly if the caller knows the number, otherwise, the call will be reverted to the attendant. This AA system may be internal to the switching system or may be provided via an external system. The specific announcements shall be identified by the LFM. 3.3.7 Automatic Call Distribution (ACD). The LFTS shall provide ACD. The ACD feature shall provide for efficient distribution and handling of a large volume of incoming calls to a group of telephone instruments (termed ACD agent positions) designated for this purpose. The application of the ACD feature shall be to support offices which C-9 19 routinely handle large volumes of call traffic, such as lodging reservations and comparable activities. The ACD feature shall be capable of supporting at least one ACD group consisting of 10 ACD agent positions and at least 15 ACD directory numbers per group in accordance with the definitions provided below. 3.3.7.1 ACD Operation. 3.3.7.1.1 ACD Call Queuing. Incoming calls to directory numbers assigned to ACD positions shall be served on a First In and First Out basis and equitably distributed to the in-service ACD agent positions that are in an idle state and ready to accept calls. The call distribution algorithm shall distribute calls to ACD agent positions that have been idle the longest period of time. The total number of calls queued by an ACD group shall be limited by both the number of calls in the queue and the time the longest call has been in the queue. Both of these parameters shall be customer definable. 3.3.7.1.2 ACD Directory Number and Queue Assignments. The ACD feature shall support multiple ACD directory numbers. The number of ACD numbers assigned at a particular site shall be a function of the projected traffic characteristics of each ACD facility. It shall be possible to assign multiple ACD agents to an individual ACD. The assignment of specific ACD agents to specific ACD directory numbers shall be programmable in the system data base via the Administrative Terminal (AT). 3.3.7.1.3 Non-ACD Directory Number Allocations. Each ACD agent position shall be assigned one or multiple directory numbers to receive or originate non-ACD calls. 3.3.7.1.4 Recorded Announcement and Music On Hold Treatment. When the number of incoming calls in queue exceeds the number of idle ACD agents, the system shall route the call to a recorded announcement to inform the calling party of the delay. Incoming calls shall be routed to the announcement either when the call is initially placed in the queue or after an established time delay threshold as measured from the time that the call was originally placed in queue. Following the application of the recorded announcement, the LFTS shall provide wither "silent hold" treatment or music on hold treatment, as specified in system translations. Silent hold treatment or music on hold treatment shall be provided to the calling party until the call is answered by the ACD agent or until the call is abandoned. A capability shall be provided to periodically play recorded announcements over the silent hold or music on hold treatment for the duration (until an agent answers or the call is abandoned). 3.3.7.1.5 ACD Night Service. ACD night service shall provide treatment for incoming calls to ACD directory numbers that are not in service after normal business hours. The night service function shall provide the capability to: 3.3.7.1.5.1 Route incoming ACD calls to a recorded announcement, or C-10 20 3.3.7.1.5.2 Forward the incoming ACD calls to a designated night service directory number. 3.3.7.2 ACD Agent Positions. 3.3.7.2.1 ACD Agent Position Functions. The ACD feature shall support both working agent (non-supervisory) and supervisory agent positions. Non-supervisory positions shall support normal incoming ACD call processing tasks. Supervisory ACD positions shall be capable of supporting incoming call-processing tasks and the following supervisory functions: 3.3.7.2.1.1 Provide visual indicators which present information on the state of each non-supervisory agent assigned to an ACD supervisor. As a minimum, the information provided to an ACD supervisor position shall include the following: 3.3.7.2.1.1.1 Agent position is in active/inactive state 3.3.7.2.1.1.2 Agent is busy processing an ACD call 3.3.7.2.1.1.3 Agent is waiting for an ACD call 3.3.7.2.1.1.4 Agent is busy on a non-ACD call. 3.3.7.2.1.2 Provide access to visual display of summary information on the status of all agents assigned to an ACD supervisor. As a minimum, the ACD summary information shall include the following: 3.3.7.2.1.2.1 Number of positions whether active or inactive 3.3.7.2.1.2.2 Number of agents busy on ACD calls 3.3.7.2.1.2.3 Number of agents in the make busy mode 3.3.7.2.1.2.4 Number of agents waiting for ACD calls 3.3.7.2.1.2.5 Number of agents busy on non-ACD calls 3.3.7.2.1.2.6 Number of calls waiting in each ACD queue allocated to the ACD supervisor and the waiting time of the first call waiting in each queue or some other statistically meaningful measurement of agent call handling performance (e.g. average speed of answer). 3.3.7.2.1.3 Have access to ACD management reports specified in paragraph 3.3.7.4. C-1l 21 3.3.7.2.2 ACD Agent Position Equipment Characteristics. As a minimum, ACD Agent positions shall be equipped with a telephone instrument that incorporates an LED, LCD, or comparable visual display for presenting calling source information and other relevant data to facilitate ACD agent call processing. For ACD facilities which require ACD management reporting functions, ACD supervisory position(s) shall be equipped with visual display units and/or printers for providing ACD performance statistics to ACD supervisors. Specific quantities of ACD agent positions, ACD supervisory positions, visual display units and printers will be identified in the site SOW. 3.3.7.3 ACD Agent Features. 3.3.7.3.1 Make Busy Function. The ACD feature shall provide a "make busy" function which permits an ACD agent to depress a button or key which prevents subsequent incoming calls from being directed to that agent position. Operation of make busy function while an agent is processing an active call shall not disconnect the current call process. 3.3.7.3.2 Emergency Alert. The contractor shall provide an emergency alert capability. Activation of a special emergency button on the agent's phone shall automatically print the date, time, called station number, and calling station number or incoming trunk identity at the AT printer of the LFTS serving the called station and simultaneously signal the supervisor. 3.3.7.3.4 Call Force. The call force feature shall allow subsequent incoming calls to be placed on the line without requiring the agent to physically hang up. 3.3.7,4 ACD Management Reports. ACD management reports shall be generated which include detailed information on the number of incoming ACD calls. ACD calls completed, ACD calls not completed and reasons that calls were not completed, ACD queue statistics and other data which may be used by management and administrative personnel to assess call handling efficiency. Information similar to the following shall be included in ACD management reports: 3.3.7.4.1 A count of the number of incoming ACD calls 3.3.7.4.2 A count of the number of completed ACD calls 3.3.7,4.3 A count of the number of calls not completed because the incoming call queue threshold has been exceeded 3.3.7.4.4 A count of the number of calls not completed because the maximum time a call can wait in queue has been exceeded 3.3.7.4.5 The number of ACD calls abandoned by the calling party C-12 22 3.3.7.4.6 A count of the number of calls received during night service 3.3.7.4.7 Average speed of answer 3.3.7.4.8 Average number of calls in queue 3.3.7.4.9 Average holding time 3.3.7.4.10 Duration of the longest call held in queue. 3.4 Attendant Console. 3.4.1 Attendant Console Capabilities. 3.4.1.1 Attendant Console. The attendant console shall operate with keys or push buttons. There shall be no cords for call completion or extension. 3.4.1.2 Attendant Call Queuing. Incoming calls not answered by the attendant shall be placed in queue. The call shall be extended to the console on a first come, first serve basis. The contractor shall provide a recorded announcement and a recording and announcing device for all queued calls. All calls placed in queue shall automatically receive the recorded announcement without assistance from the attendant. 3.4.1.3 Full Access. The attendant console shall have full access to all main lines and trunks in the system with the ability to complete station-to-station, station-to-trunk, trunk-to-station, and trunk-to-trunk calls. No arbitrary system restrictions will be made. USFI, Inc. will work with the COTR to ensure all parties are fully protected from fraud and abuse. 3.4.1.4 Alphanumeric Display. An alphanumeric display shall be provided on the attendant console to display the calling station number (for local stations) or the trunk circuit to which the attendant is connected. 3.4.2 Attendant Console Features. 3.4.2.1 Split Calling. The attendant shall be able to converse privately with either the calling or the called party on all calls. 3.4.2.2 Busy Verification. The attendant shall be able to determine whether a busy station line is actually in service. A warning tone shall first be placed on the line being verified before completing the talking path. The attendant shall be able to release the connection after busy verification. 3.4.2.3 Call Transfer. The attendant shall be able to transfer trunk calls to and from any station line. The attendant shall be able to transfer any trunk call to a conference circuit. 3.4.2.4 Call Hold. The attendant shall be able to place an incoming call on hold. C-13 23 3.4.2.5 Class of Service Override. The attendant shall be able to override any line or trunk class of service marking for the purpose of accessing and switching the circuit. 3.4.2.6 Conference Calls. The attendant shall be able to establish user defined conference calls of up to six parties. 3.5 Station Features for Administrative Telephones. The following station features shall be assigned to administrative office phones: 3.5.1 Call Transfer. Subscribers shall be able to transfer any in progress call to another station without assistance from the attendant. 3.5.2 Call Hold. Subscribers shall be able to place an in-progress call on hold. 3.5.3 Three-way Conference. Properly class marked subscribers shall be able to place a call on hold and then add a third party to an in progress local or trunk call without attendant assistance. 3.6 Premise Equipment. 3.6.1 Telephone Instruments. All telephone instruments shall be new, full size, fully modular, DTMF instruments. The contractor shall provide message waiting capability for all instruments with message waiting specified in the SOW. The message waiting feature shall use a visual means to alert the station user of message waiting. All instruments shall be of the same neutral color as agreed to by the LFM. Telephone instruments shall, as a minimum, consist of the base unit with DTMF keypad, hand set, hand set cord and fully modular mounting cord. 3.7 Distribution System. Government furnished outside (black) cable that is available for contractor use to interconnect billeting buildings to the Main Distribution Frame shall be identified by the base Communications Squadron. The contractor shall be responsible for providing and installing any other additional outside cable required. The contractor shall provide and install all new inside (building) cable, conduits, ducts, distribution frames, terminal equipment, terminal blocks, and any other hardware necessary to provide complete telecommunication service. Demarcation points of government furnished black cable will be at the terminal blocks in each building unless otherwise specified in the SOW. New standard, fully modular jacks and plugs shall be provided by the contractor for all installations and relocation of terminal equipment. The contractor shall provide complete service to, and interface at, the government specified demarcation points for those pre-wired buildings, if any, that are identified in the appendices for each site. 3.7.1 Distribution System Design. The distribution system shall consist of transmission channels along with any associated terminals, splicing, etc., required to provide electrical connectivity from the terminal equipment to the DF. The distribution plant shall be sized C-14 24 as specified in the delivery order. The distribution plant shall be designed with all lines and spares being "fixed count" (i.e., dedicated and accessible at the main distribution frame (MDF)) with no multiple connections except as specified in the SOW. All outside plant cable pairs shall be terminated on gas tube protectors at the distribution frames and the terminal end. 3.7.2 Cable and Trenching. All outside cable shall be filled and direct buried or underground in new conduit and ducts. Gopher resistant cable, if required, will be specified in the SOW. All road/driveway crossings shall be accomplished by boring/accupunch method unless otherwise approved, in writing, by the contracting officer after contractor coordination with base roads and ground agencies. All buried cable crossing under roads, streets, parking lots, driveways, railroads, etc., that bears vehicular traffic shall be placed in protective conduit. The contractor shall accomplish all trenching IAW REA standards and shall be responsible for performing all back filling, re-seeding, re-paving, or any other service and material to restore services to their original condition. All outside cable termination shall be enclosed in weather tight enclosures, and all outdoor splices shall be direct buried using filled, sealed enclosures. The use of buried distribution terminals is prohibited. Any indoor filled cable shall not exceed 50 feet, shall be in conduit, and shall run directly to the house terminal block. All indoor splices shall be enclosed in a proper type of indoor splice enclosure. Filled cable run indoors shall not be run between floors or inside walls, nor shall it be terminated on protective devices if such device is part of the Main Distribution Frame (MDF) or an Intermediate Distribution Frame (IDF). If a conduit is available, it shall be used for cable entrance. The cable shall be run to the protected terminal upwards in a vertical direction wherever possible and be sealed to prevent jelly leakage. Where a cable enters a facility through an exterior wall, it shall be properly sealed on both sides of entry to prevent any kind of leakage. The contractor shall ensure cable installation does not cause mechanical stress or strain to the cable, or result in sharp edges, burrs, or other projections which may be injurious to the insulation or jackets of the wiring. In addition, the contractor shall provide ground level (flush), telephone warning, splice, and route signs at all underground/buried splice locations and all changes of direction in excess of 30 degrees. All contractor cable and trenching shall meet all host nation requirements, specifications and environmental standards. 3.7.2.1 Government Furnished Cable Connectivity. The only Government furnished cable used for the LFTS are those cable pairs that provide base extensions and tie lines to the base DCO/DSN. The contractor shall provide all splicing and interface to the government specified demarcation points (e.g. house terminal, IDF, pedestal, MDF) with the GFE cable. All contractor installed pairs shall be terminated to the MDF, at the hub building (where applicable), and at the individual building terminals. Cable runs shall not have bridge taps or loop extenders installed. When installed, the cables shall have no more 'bad' pairs than were originally certified as 'bad' by the manufacturer. 3.7.2.2 Digging Permits. Cable shall be installed at or deeper than 18". The contractor shall not dig on the base without a valid digging permit. To obtain a digging permit, the C-15 25 contractor shall prepare and submit for approval an AF Form 103, which can be obtained at the base government Civil Engineering Squadron. This form will take approximately 10 days to process and the resulting digging permit is good for 30-60 days. When the contractor is ready to dig at a particular site, CE shall be notified 48 hours in advance so that the utilities can be marked before the contractor begins to dig. Trenches within three feet of existing utilities must be hand-dug. Any damage to marked utilities during installation shall be repaired at the contractor's expense. When installing the outside plant, the contractor shall bore under all CE specified roads. All other roads, parking lots, and sidewalks may be trenched across. Upon review of the contractor's installation plan, the base may request that additional roads be bored vice trenched. When restoring the trench and bore pit locations, the contractor shall compact the soil to prevent sinking and re-compact after 30 days. All roads shall be returned to original condition. When filling trench and bore pit locations in grassy areas, the contractor shall 'top off' the restoration with at least six inches of topsoil. The contractor shall be responsible for re-seeding the trenched and bored areas in grassy areas, except as identified by CE in the grassy area around DV/VIP lodging/billeting facilities, which shall be sod instead of seed. 3.7.3 House Wire. House wire shall be extended from punch down terminal blocks at the outside plant terminal location to intermediate terminal points within each facility. Each station shall be provided with two individual pairs of wires (four conductors) from the building terminal. Station lines shall be terminated on standard two pair flush mounted modular jacks at all locations except on masonry walls. RJ-11 or similar jacks may be used on masonry wall locations. Jacks for desk type phones shall be mounted no higher than 12 inches from floor level. Jacks for wall type phones shall be mounted no lower than 52 inches and no higher than 56 inches from the floor level. The contractor shall route all house wire on the interior of the buildings. The contractor shall install all house wire so that it is concealed inside walls, ceilings, or other parts of the permanent structure. Where house wire can not be concealed, it shall be placed in color coordinated raceways with the proper appliance for installing flush mounted jacks, and require the approval of the Lodging Facility Manager prior to installation. All house wiring shall comply with host nation requirements. 3.8 Engineering and Installation. 3.8.1 Meetings. The contractor shall attend all meetings as identified by the contracting officer. The contracting officer will notify the contractor of the date, time, and location of meetings. The Lodging Facility Manager (project manager) will notify the contractor of the meeting agenda. 3.8.2 Site Survey. The contractor shall accomplish a building by building site survey of affected lodging/billeting facilities after contract award. The contractor shall schedule and coordinate the site survey with the Project Manager/LFM(s). The contractor shall perform the site survey with the LFM and other specified government representatives. The contractor shall assemble a complete listing of all locations, quantities and types of C-16 26 all equipment including, but not limited to, lines, trunks, customer premise equipment, special systems, and transmission facilities. 3.8.3 LFTS Installation. The contractor shall not begin any installation until the contracting officer has approved the Installation Plan. The contractor shall install the new LFTS in accordance with the approved Installation Plan. The contractor shall coordinate with lodging/billeting facility personnel to assemble the subscriber data (i.e. Telephone number, class of service, etc.). The contractor shall assemble the subscriber data and shall coordinate with the BCO and local telephone company to obtain information concerning circuit cable pair assignments, trunk choices, schedules, etc., to obtain optimum trunk hunting sequences, terminal assignments, and programming of the LFTS (Reference CDRL sequence number A001) 3.8.4 Cut over. The cut over shall occur on dates and times mutually agreed to by the contractor and the contracting officer. Cut over shall not occur until all pre-cut over installation tests have been performed successfully and any functional discrepancies identified have been corrected. The contractor shall allow a minimum of 48 hours from completion of all testing and correction of any discrepancies before cut over to allow adequate time for the Government to determine if the LFTS is ready for cut over. The contractor shall coordinate system outages during cut over with the LFM to minimize disruptions. (Reference CDRL sequence number A002) 3.8.4.1 Testing. The switch shall be ready for government observed installation testing/inspection no later than fifteen (15) days prior to the mutually agreed upon cut over date. Installation testing shall be performed in accordance with the approved Installation Acceptance Test Plan to verify that the LFTS meets the EPS and SOW requirements. The contracting officer shall be notified in writing no less than two weeks before any official testing is to be performed. Failure to meet the testing date may result in postponement of the cut over. (Reference CDRL sequence number A008.) 3.8.4.2 Traffic Measurement and Analysis. The contractor shall perform traffic measurement and analysis for 30 consecutive calendar days immediately following cut over of the LFTS. The contractor shall give recommended solutions to the LFM in order to alleviate any known problems (e.g. call blocking, dial tone delay, insufficient trunking) IAW SOW and EPS paragraphs 3.1.7 and 3.2.4 (Reference CDRL sequence number A006) 3.9 Scheduled Service Interruptions. When the contractor must schedule a service interruption for the purpose of working on the LFTS, the work shall be done at a time which will cause the least inconvenience to the users. The contractor shall notify and coordinate with the LFM in advance of any scheduled service interruption. The contractor shall specify the starting time and duration of the interruption along with what lines will be affected. The contractor shall provide verbal notification to the LFM immediately after service has been restored. C-17 27 3.9.1 Service Outages. The contractor, upon notification of a service outage from the LFM through the contracting officer, shall restore all outages on a priority basis IAW the following subparagraphs. The contractor shall provide verbal notification to the LFM through the contracting officer immediately after service has been restored. 3.9.2 Major Failures. If a major failure as described in EPS paragraph 3.1.9.1 occurs, the contractor shall perform an emergency service call. The contractor's personnel shall arrive at the lodging facility within two (2) hours after notification. Restoration/repair shall begin immediately and continue until the system failure(s) are repaired and service is restored. 3.9.3 Minor Failures. If a minor failure as described in EPS paragraph 3.1.9.2 occurs, the contractor shall perform a routine service call. The contractor shall restore all minor failures no later than three (3) workdays after notification. 3.10 Installation Records (As built Drawings): The contractor shall provide Communication-Computer System Installation Records at the time of cut over. These records shall indicate the complete "as built" configuration of the LFTS at the time of cut over. The contractor shall revise the records as a result of any modification, upgrade, or expansion. (Reference CDRL sequence number A004). 3.11 Expanded Service. The contractor shall provide expanded services after cut over in accordance with the terms of the contract as requested by the government. Expanded services are those services necessary to satisfy additional requirements over and above those provided at cut over. 3.12 Reserved Rights. The government reserves the right to pre-wire and provide instruments to all or part of any or all new and remodeled buildings along with providing and installing some or all outside cabling for these installations. The contractor shall provide any necessary splicing and shall interface to the government specified demarcation points (e.g. house terminal, IDF, pedestal, MDF). 3.13 Training. The contractor shall provide training, in English, for government representatives at each USAFE base/location. All classes shall be conducted at the local base. The class starting dates shall be proposed by the contractor and coordinated and approved by the LFM. Actual hands-on training shall be conducted on live equipment, within seven (7) days prior to cut over but after successful completion of installation testing. Contractor provided technical assistance shall be available on site for seven days after cut over. The contractor shall provide training on the equipment, such as; the Attendant Console, Administrative Terminal, Administrative Telephone Instruments, Billing System, Call Detail Recording System, Automatic Call Distribution, Voice Mail, etc. Attendees will be identified by the LFM. (reference CDRL sequence number A005) 3.13.1 Front Desk Attendant Training. The contractor shall provide training on front desk attendant services for a minimum of five government representatives per attendant C-18 28 terminal equipment. Provide training at the request of the LFM, but no more than once a year. 3.13.2 Administrative Training. The contractor shall provide training on administrative services for a minimum of two government representatives at each USAFE base/location. Provide training at the request of the LFM, but no more than once a year. 3.13.3 Station Training. The contractor shall provide trailing on station services and system features for a minimum of five government representatives at each USAFE base/location. 3.13.4 Billing Training. The contractor shall provide training on call detail recording and billing services for a minimum of five government representatives at each USAFE base/location. 3.13.5 User Manual. The contractor shall prepare user manual and pad overlays with the instructions to explain the operation of service and the dialing plan. There shall be three types of overlays, one for single line service, one for multi-line service and one for PC/Lap Top connectivity. (Reference CDRL sequence number A010 and A011) 3.14 System Documentation. The contractor shall provide the commercial system documentation (in English). This documentation shall be maintained on-site and shall include the basic design and detailed operation of the switch, the attendant console, the AT, the billing system, the call detail recording subsystem, and the voice mail system. (Reference CDRL sequence number A010 and A011.) The contractor shall also develop (in English) and provide subscriber education pamphlets. The contractor shall provide one for every telephone provided under this contract. (Reference CDRL sequence number A007) 3.15 Personal Computer (PC)/Lap Top Computer Connectivity: 3.15.1 Private and shared rooms shall have one duplex outlet to be used for message waiting telephone service and the other for a computer MODEM connection using a RJ-45 terminal. Different directory numbers are required. 3.15.2 Suites shall have two duplex outlets to accommodate two ringing phones and two RJ-45 connectors for computer use. The two phones shall have the same number and the two computer outlets shall have the same number. The phone and computer directory numbers shall be different. Location of the outlets shall be coordinated with the LFM. 4. QUALITY CONTROL. 4.1 Quality Control Program. The contractor shall establish a quality control program to assure that the LFTS meets all of the performance criteria in this specification and conforms to host nation standards and environmental requirements. This program shall C-19 29 include physical inspections and functional testing of the LFTS before, during and after cut over. 4.2 Quality Assurance. The government Quality Assurance Evaluator (QAE) (the base lodging manager) and the Contracting Officer's Technical Representative (COTR) will monitor the installation progress to insure that the LFTS meets the requirements of the SOW and EPS. 4.3 Installation Testing. The contractor shall perform an installation test of the complete LFTS to ensure requirements of the SOW and EPS are met or exceeded. Government representatives will be allowed to witness all inspections and tests to assure conformance with the SOW and EPS. The contractor shall demonstrate to the government representative, all requirements of the SOW and EPS, prior to acceptance testing. The contractor shall notify the Contracting Officer no later than two weeks prior to installation testing to allow sufficient time for a government representative to observe. No official installation testing will take place prior to a government representative arriving on site. (Reference CDRL sequence number A008). 4.4 Acceptance Testing. The contractor shall accomplish acceptance testing IAW the Acceptance Test Plan. Acceptance testing shall not begin until the government has approved the Acceptance Test Plan. Acceptance testing shall consist of 30 consecutive days of satisfactory operation of the LFTS. Satisfactory operation shall be operational with no major failure (as defined in paragraph 3.9.2) and with satisfactory traffic conditions (as defined in paragraph 3.1.7). The inability to perform satisfactory operation shall be justification to reschedule and restart the operational test period and reschedule the acceptance testing. During the acceptance testing, the contractor shall contact the LFM at least daily on normal duty workdays and at least once daily on non-workdays to verify proper system operation and arrange to correct malfunctions or explain proper operating procedures. (Reference CDRL sequence number A008). 4.4.1 Acceptance Test Report. The contractor shall document the results of tests and examination on LFTS prior to system acceptance in the Test/Inspection Report. (Reference CDRL sequence No. A009) 5. PREPARATION FOR DELIVERY. 5.1 Packaging shall be IAW the terms of the contract and meet host nation requirements. 6. NOTES. 6.1 Acronyms. BCO: Base Communications Officer. BCE: Base Civil Engineer. C-20 30 CDRL: Contract Data Requirements List. COTR: Contracting Officer Technical Representative DTMF: Dual Tone Multi Frequency. EPS: Equipment Performance Specification. FAM: Functional Area Monitor. FCA: Functional Configuration Audit. IAW: In Accordance With. IDF: Intermediate Distribution Frame. LFM: Lodging Facility Manager. LFTS: Lodging Facility Telecommunications System. MDF: Main Distribution Frame. PCA: Physical Configuration Audit. QAE: Quality Assurance Evaluator. SIMS: Services Information Management System. SOW: Statement of Work. 6.2 EFI&T. EFI&T, as used in the EPS, is defined as a contractor responsibility to engineer, design, furnish, install, test, and maintain a system or single item of equipment to provide a service to the government. 6.3 Point of Contact (POC). The LFM or authorized representative shall be the sole focal point for all service requests. 6.4 Attendants. Attendants will be provided by the LFM. 6.5 Paragraph Referencing. Any reference to a paragraph is understood to include all subparagraphs. 6.6 Response Time. All response times for work requests, outages, etc. are based upon consecutive clock hours, unless otherwise stated, and shall begin from the time that the C-21 31 contractor is first notified, verbally or in writing, whichever occurs first. If verbally notified, a follow-up written verification will be forwarded. 6.7 Outside Plant. That portion of the LFTS extending outward from the MDF up to and including terminal blocks and intermediate distribution frames but excluding premise equipment. 6.8 Premise Equipment. Premise equipment includes telephones, telephone cables, modular jacks (usually flush mounted), gray wire runs to the intermediate distribution frame or terminal blocks. 6.9 Inside Plant. That portion of the LFTS extending inward from, and including, the MDF. 6.10 Two-Way Lines. All lines shall be two-way unless stated otherwise. 6.11 Demarcation Points. All government specified demarcation points will be identified by the BCO during the contractor's site survey. 6.12 Disclaimer for Government Provided Drawings. Government provided drawings are for the purpose of establishing a conceptual basis to enable contractors to prepare a suitable proposal. Contractors choosing to use any or all information therein shall do so only if and when their engineering and design considerations so dictate. The contractor shall not depend on government provided information to determine cable lengths, condition of cable and other equipment, building construction or other physical considerations. These items must be determined by the contractor by site visits and physical surveys. C-22 32 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 3.1.1 USFI certifies that the PBX provided will meet or exceed all host nation telecommunications connectivity requirements, will be fully compatible with the local commercial telephone system, and will have an interface to the GOVERNMENT property management system. The Defense Switched Network (DSN) interface will consist of an E-l circuit capable of carrying 30 simultaneous voice/data calls to the existing Siemens KNS-4100 in Germany and Italtel Office 5000 system in Italy. The demarcation points for the USFI E-1 circuits are the underground cable distribution blocks in the following buildings: Ramstein: Building 305 Rhein-Main Building 600 Aviano: Building 256 3.1.1.2 NOTE: The lodging manager at each base must submit a communications service request (C4SRD) to have the host base communications squadron provision the DSN switch for one E-1 circuit with 30 channels, and extend that circuit to the demarcation point. USFI cannot take responsibility for the hardware and software provisioning required in the GOVERNMENT DSN switching system. These actions must be coordinated through the local communications squadron to the appropriate DISA-Europe office in Vaihingen, Germany. 3.1.2 System will meet or exceed requirement by providing interface into the public network. USFI will obtain a block of Direct Inward Dial (DID) numbers from the host nation telephone service provider. These numbers will be unique, and will not conflict with the existing base access to public telephone system network. USFI will provide DID capability from the GOVERNMENT DSN system, but takes no responsibility for provisioning the GOVERNMENT system. USFI recommends obtaining a unique NNX code from DISA-Europe in Vaihingen for each lodging PBX facility. 3.1.3 System will meet or exceed requirement. 3.1.4 System will meet or exceed requirement. 3.1.5 System will meet or exceed requirement. 3.1.5.1 System will provide single line service. 3.1.6 System will meet requirement concerning grade of service standards. The nomenclature used in the SOW (LEC, IXC) is unique to the post divestiture C-23 33 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE US operating norm of using the Regional Bell Operating Companies for local service, and Inter Exchange Carriers (AT&T, MCI, US Sprint, etc.) for long distance. Trunking for the lodging facilities will be to the host commercial network, to the GOVERNMENT DSN system, and to the USFI long distance network. USFI will provide a standard E-1 CAS signaling interface capable of true answer supervision to the designated demarcation point for the GOVERNMENT DSN switch. USFI will order and connect circuits through the local commercial telephone service so that lodging guests can directly call the immediate area surrounding the military installation through the host nation telephone system. USFI will provide all equipment necessary at each location to interface the lodging telecommunications system to the USFI long distance telephone network. USFI requires a Letter of Authority signed by the appropriate GOVERNMENT representative in order to have service from the host nation telephone company delivered to a GOVERNMENT facility. 3.1.7 No response required. 3.1.7.1 System will meet or exceed all grade of service requirements. 3.1.7.2 System will meet or exceed traffic measurement requirements. 3.1.8 System will meet or exceed self-test and alarm requirements. 3.1.9 System will meet requirements for major and minor alarm thresholds. 3.1.10 System will meet or exceed environmental condition requirements. 3.1.11 System will meet or exceed system availability requirements. 3.1.12 System will meet automatic software reload requirements. 3.2 No response required. 3.2.1 Systems will be expandable to meet all known requirements. The expansion limitation for the Nortel Meridian SL-1 product line is 80,000 stations. 3.2.2 System will meet or exceed dialing plan requirements. Dialing plan in SOW reflects the US operating environment (toll free 800). USFI will propose and negotiate a standardized dialing plan appropriate to the host nation operating environment with USAFE representatives during post-award site survey so that all future lodging switches will use the same standardized dialing scheme. C-24 34 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 3.2.3 USFI will provide an administrative console with the required capabilities for the exclusive use of lodging facility personnel. USFI will perform all initial translations. 3.2.3.1 System will meet the requirement to detect true answer supervision as the signal to start billing. 3.2.4 No response required. 3.2.4.1 System will meet or exceed all call detail recording requirements. 3.2.4.2 System will meet or exceed call sorting requirements. 3.2.5 System will meet or exceed requirements. The CBRSS system will be powered by the USFI provided UPS. 3.2.5.1 System will meet or exceed requirements. USFI will develop, program, and maintain all applicable rating and routing tables. 3.2.5.2 System will meet or exceed requirements. The Maid Identification feature allows the maid to update the room status with one of the following codes: 1 - cleaning requested 2 - cleaning in progress 3 - room cleaned 4 - room passed inspection 5 - room failed inspection 6 - cleaning skipped 7 - not for sale 3.2.6 System will meet or exceed requirements. The system provided by USFI will meet all industry standard handshaking protocols for interfacing to a property management system. 3.2.7 USFI will provide a UPS capable of supporting the system for a minimum of 4 hours. The battery plant will consist of sealed, maintenance-free gel cells which vent no gases. Power failure alarms will be indicated by visual and audible remote alarms at the attendant console. USFI will provide lodging personnel with a 24 hour, seven day per week contact name and number for such emergencies. 3.2.8 Power connectivity will comply with host nation requirements. C-25 35 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 3.3 No response required. 3.2.1 System will meet requirement. 3.3.2 System will meet requirements. 3.3.3 System will meet station hunting requirement. 3.3.4 System will meet automatic wake-up performance requirements concerning feature activation and deactivation by the guest, printed record of feature activation/deactivation and wake-up call answer indication, and the capability of simultaneously ringing 10 percent of equipped lines. The automatic wake-up service will override the DO NOT DISTURB feature. 3.3.5 System will meet Do Not Disturb requirement. 3.3.6 USFI will provide an automated attendant feature internally with the PBX. This system will meet performance requirements. USFI will program announcements identified by the LFM. 3.3.7 System will meet or exceed all ACD requirements listed in paragraphs 3.3.7 through 3.3.7.4.10. 3.4 No response required. 3.4.1 Attendant consoles will meet requirements of cordless operation. 3.4.1.2 Calls not answered by the attendant will automatically receive a recorded announcement treatment, will be placed in queue, and will be extended to the attendant console on a first come, first serve basis. USFI will provide recorded announcements, and will provide a device which will allow Government employees the capability of recording customized announcement. 3.4.1.3 The attendant console will have full access to all main lines and trunks in the system, and will be capable of completing station-to-station, station-to-trunk and trunk-to-trunk calls providing there is a clear means of allocating any applicable toll charges. No arbitrary system restrictions will be made. USFI, Inc. will work with the COTR to ensure all parties are fully protected from fraud and abuse. 3.4.1.4 System will meet requirements. C-26 36 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 3.4.2 No response required. 3.4.2.1 System will meet requirements. 3.4.2.2 System will meet requirements. 3.4.2.3 System will be capable of meeting requirement, but feature may be blocked by USFI due to toll considerations. 3.4.2.4 System will meet requirement. 3.4.2.5 System will meet requirement. 3.4.2.6 System will meet requirement. 3.5 No response required. 3.5.1 System will meet call transfer requirement. 3.5.2 System will meet call hold requirement. 3.5.3 System will meet three-way conference requirement. 3.6 No response required. 3.6.1 Telephone sets will meet requirements. 3.6.2 Not applicable. DELETED 3.7 USFI outside plant installation will meet all specifications. The only outside plant cable work required will be at Ramstein Air Base. This work will use existing government manhole/duct/conduit systems to install outside plant cables from building 305 to buildings 2409/2408, from building 305 to buildings 304/303, and from building 305 to buildings 538/540/542/541. USFI will trench from the east end of the parking lot adjacent to building 305 to the cable entry point of building 306. USFI will use the Government-provided outside plant cable at Rhein-Main. USFI will also use existing C-27 37 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE GOVERNMENT cable to gain access to buildings 230, 232, 255, 273, and 274 at Aviano. 3.7.1 System will meet requirements. 3.7.2 USFI will meet all cable and trenching requirements. 3.7.2.1 USFI will meet all cable termination requirements. 3.7.2.2 USFI will meet all requirements concerning depth of cable, obtaining a valid digging permit, and coordinating digging with all appropriate GOVERNMENT parties. 3.7.3 System will meet house wiring requirements. 3.8 No response required. 3.8.1 USFI will attend all meetings scheduled either by the contracting officer or the Lodging Facility Manager. 3.8.2 USFI will comply with site survey requirements. 3.8.3 USFI will not begin any installation work until the Installation Plan (CDRL A001) has been approved by the contracting officer. 3.8.4 USFI intends to pursue an installation schedule in order to provide telephone service at the three lodging facilities in the minimum amount of time. USFI will not cut the system over until all functional discrepancies have been corrected to the Contract Officer Representative's satisfaction. Since there is no existing system, there will be no disruptions involved in the cut over. USFI's cut over plan (CDRL A002) will address the replacement of DSN phones, where they exist, with USFI-provided lodging phones. USFI's target cut over dates, based on an April 15, 1996 contract award, are as follows:
LOCATION BUILDING DATE -------- -------- ---- Ramstein 305 August 16, 1996 Rhein-Main 600 September 6, 1996 Aviano 256 September 27, 1996
C-28 38 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 3.8.4.1 The switch will be ready for testing seven days prior to the mutually agreed upon cut over date. Testing will be performed according to the Acceptance Test Plan (CDRL A003). Cut over will not occur without the full concurrence of GOVERNMENT representatives. 3.8.4.2 USFI will perform traffic measurement and analysis for 30 consecutive days immediately following cut over of the LFTS. USFI will recommend solutions to any problems identified during this analysis period. 3.9 Any service disruptions for the purpose of working on the LFTS will be fully coordinated with the LFM. Since USFI will provide access to a full time employee to accomplish this work, the service times can be scheduled at off hours when the impact on lodging guests will be minimized. USFI will notify the LFM or the LFM's designated representative upon completion of any service-impacting work. 3.9.1 USFI will comply with the terms specified concerning service restoration priorities and follow-up procedures. 3.9.2 Will fully comply. 3.9.3 Will respond within 24 hours in 90 percent of cases. All minor failures will be corrected within three workdays. 3.10 USFI will provide Installation Records (CDRL A004) at cut over, and will revise the records to reflect any system changes through modification, upgrade, or expansion. 3.11 USFI is fully committed to providing the best Customer Service available. Our goal is to develop a mutually rewarding long term relationship through our commitment to your satisfaction. Expanded service is defined as additional services or features required to support the lodging mission (i.e. addition of new buildings, rooms, and lodging offices). 3.12 USFI concurs. 3.13 USFI will provide training during the seven day testing period prior to cut over. This training will be scheduled through the LFM, and at the convenience of GOVERNMENT lodging employees. Training will be conducted on the operational system. USFI will remain on site for at least seven days following cut over to provide technical assistance to lodging employees on all equipment, and on a to be negotiated ongoing basis of no less than one session per year (CDRL A005). Training will include the Attendant Console, C-29 39 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE Administrative Terminal, Administrative Telephone Instruments, Billing System, Call Detail Recording System, Automatic Call Distribution, Voice Mail and all available system features. USFI recognizes that lodging employees' thorough understanding of all system features is crucial to the perception of the quality of the service USFI is providing to lodging guests. USFI is fully committed to providing any training necessary, within reasonable limits, for lodging employees to operate the LFTS and advise guests on feature usage. 3.13.1 USFI will provide requested initial training, and will also make training material available to LFM for ongoing, in house training. 3.13.2 USFI will provide requested training. The full time USFI employee will provide ongoing training as required. 3.13.3 USFI will provide station and features training during the week prior to cut over, and on an ongoing basis as required. 3.13.4 USFI will provide billing training as necessary to ensure smooth operation and collection of all fees. 3.13.5 USFI will provide user manuals and key pad overlays, and stock replacement items to account for loss/pilferage (CDRL A009). 3.14 System documentation provided by USFI will comply with all specifications (CDRL A006 and CDRL A007). 3.15 No response required. 3.15.1 USFI will exceed specifications by integrating the voice and data requirements at the telephone instrument. PC connectivity will be accomplished with an RJ-45 connector to the telephone set. The voice and data ports will have different directory numbers. 3.15.2 System will meet requirements, as in 3.15.2. 4 Quality Control Program 4.1 USFI will fully comply with Quality Control requirements. 4.2 USFI will fully support the GOVERNMENT Quality Assurance program, and coordinate all activities through the designated QAE and FAM. C-30 40 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 4.3 USFI will fully comply with all requirements for Installation Testing. 4.4 USFI will fully comply with all requirements for Acceptance Testing. 4.4.1 USFI will provide an Acceptance Test Report as required (CDRL A008). 5 No response required. 5.1 All packaging will meet the terms of the contract and all host nation requirements. C-31 41 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 3 SUMMARY OF RESPONSE TO SOLICITATION: 3.1 USFI will provide the following: 3.1.1 A modern state of the art fully digital PBX system at each base listed in the RFP. The PBX system provided by USFI will accommodate lines and trunks, will offer the latest in hotel/motel technology, and will offer a robust feature set which will meet or exceed every requirement in the Statement of Work. 3.1.2 Digital telephone sets with an integrated data port and message waiting lamp installed at each location identified during the site survey. 3.1.3 All in-house cabling, ducts, and jacks required to connect all telephone sets to the PBX. 3.1.4 An underground cable distribution system for the Ramstein billeting complex. 3.1.5 Voice mail system capable of supporting every subscriber on each system. 3.1.6 A billing system which will track all toll charges and transmit a record of those charges to the GOVERNMENT SIMS system so fees can be collected by the GOVERNMENT at guest check out. 3.1.7 Room status indicator system. 3.1.8 Interfaces to the demarcation points specified in Section 7. 3.1.9 Attendant consoles (four at Ramstein, one each at Rhein-Main and Aviano). 3.1.10 Four hour battery backup on PBX and CDR systems. 3.1.11 PBX network security. 3.1.12 Access to a full-time USFI employee for maintenance. Access to Nortel for extended maintenance for the life of the contract. 3.2 The US GOVERNMENT will provide the following at no charge to the bidder: C-32 42 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 3.2.1 General 3.2.1.1 Utilities. 3.2.1.2 Equipment rooms identified in site surveys on February 13. 15 and 16 for PBX and USFI network equipment installations. 3.2.2 Ramstein: 3.2.2.1 Use of existing manhole/duct/conduit system to install cables from building 305 to all other billeting facilities on Ramstein Air Base, with the exception of building 1018. 3.2.2.2 Use of GOVERNMENT cable pair to connect building 305 to building 1018. No arbitrary system restrictions will be made. USFI, Inc. will work with the COTR to ensure all parties are fully protected from fraud and abuse. 3.2.2.3 Use of existing unused fiber optic cables, as required, to be determined during post award site survey. 3.2.2.4 Use of existing flat conduit in all buildings. 3.2.3 Rhein-Main 3.2.3.1 Use of existing 100 pair cable from building 600 to building 632, 633, and 634. 3.2.3.2 Use of existing flat conduit. 3.2.4 Aviano 3.2.4.1 Use of existing GOVERNMENT cable to all buildings. C-33 43 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 3.3 SUMMARY OF UNSOLICITED OFFERS: In addition to responding to the basic terms set forth in the GOVERNMENT RFP, USFI is pleased to offer the following: 3.3.1 Prepayment of the first $50,000.00 of the GOVERNMENT portion of long distance revenues. Payment will be made within 30 days of contract award. 3.3.2 Certificates for 30 minutes of free USFI long distance for military members experiencing a hardship. USFI will negotiate the number of certificates to be awarded and will work through the Lodging Facility Manager, the local Chief/Sergeant Major Groups, and the local First Sergeants group to develop criteria to identify hardship cases. 3.3.3 USFI offers to provide the requested LFTS services to the extended Ramstein area (Vogelweh, Landstuhi and Sembach) in conjunction with the Ramstein installation. The specific system configuration will be determined by mutual agreement with the USAFE Services representatives during the post-award Ramstein site survey. To provide complete feature transparency between sites, the USFI preferred solution is to service the outlying areas by expanding the capacity of the Ramstein PBX. If the GOVERNMENT chooses to exercise this option. USFI will prepay an additional $50,000.00 of the GOVERNMENT percentage of long distance within 30 days of receipt of a delivery order, for a total prepayment of $100,000.00 of GOVERNMENT percentage of long distance fees. 3.3.4 USFI Debit Cards for over the counter sales at the lodging facilities reception desks. The Debit Cards will be for pre-determined amounts ($10, $15, $20, etc.) and can be used in any card phone for calls to any destination in the world. Long distance charges are subtracted from the card balance as the cards are used. USFI offers the GOVERNMENT 15 percent of any revenues from Debit Card sales. USFI further offers to design the cards to meet any GOVERNMENT requirement. This option will be declined at the present time by the Government, however, the Government reserves the right to implement this at a later date. C-34 44 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE SPECIFIC DESCRIPTION OF OFFER: 4.1 SYSTEM OVERVIEW: USFI will install a complete turn-key communications system which will interface with existing and planned GOVERNMENT equipment at each facility designated in the RFP. In order to standardize the delivery for both current and all projected requirements. USFI will provide NORTEL MERIDIAN SL-1 (1) or equivalent equipment at each Site. The Meridian product line features a US-manufactured system which has already been host nation certified in Germany, Italy, the United Kingdom, and Turkey. The USFI telecommunications system at each location will include the following: 4.1.1 A full-featured, expandable, state of the art Nortel Meridian SL-I PBX. 4.1.2 All facilities necessary to connect lodging facility guests to the USFI long distance network. 4.1.3 All facilities necessary to a meet a GOVERNMENT demarcation point for connecting lodging facility guests to the GOVERNMENT DSN private switching network. USFI will provision the lodging PBX for DID/DOD capability to the demarcation point once adequate controls are developed with safeguards against fraud and toll skipping. USFI takes no responsibility for equipping or provisioning the GOVERNMENT DSN system. 4.1.4 All facilities necessary to connect lodging facility guests to the local host nation commercial network. 4.1.5 The quantity and types of telephone sets specified in the RFP and identified in the site surveys. 4.1.6 A data port connection for each guest telephone set. 4.1.7 All interior and exterior cabling necessary to connect telephone sets to the PBX. 4.1.8 A billing system which will be fully interactive with the GOVERNMENT SIMS system. (1) USFI intends to deliver Nortel Meridian SL-1 PBX equipment. However, the equipment purchase and delivery agreement with Nortel is not yet finalized. USFI may provide functionally equivalent equipment from another manufacturer. For the purposes of this proposal, the terms "Nortel," and "Meridian" shall mean "Nortel or equivalent" and "Meridian or equivalent." C-35 45 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 4.1.9 A room status/indicator system which will be fully interactive with the GOVERNMENT SIMS systems. 4.2 PBX: USFI will provide a state of the art NORTEL hotel/motel PBX at each site identified in the SOW. Each PBX will offer integrated voice/data capabilities to the desktop, and will offer the most advanced feature sets available for a hotel/motel application. The USFI current purchasing arrangement with NORTEL will include installation of all systems by the same division that has installed all Air Force switches purchased under the Scope Dial I, Scope Dial II, and BIDDS programs. The PBX systems USFI will provide are the same product line as the BIDDS systems purchased from NORTEL. USFI will provide the following specific PBX Systems: 4.2.1 Ramstein: NORTEL MERIDIAN SL-1, expandable to 10,000 stations. 4.2.2 Rhein-Main: NORTEL MERIDIAN SL-1, expandable to 10,000 stations. 4.2.3 Aviano: NORTEL GALILEO, expandable to 200 stations as originally configured. The Aviano switch can be converted to a Meridian SL-1 if necessary, and will then be expandable to 10,000 stations. 4.3 PBX INSTALLATION: USFI will install the PBXs, along with all supporting equipment (rectifiers: uninterrupted power supplies, batteries, channel banks, etc.) in the rooms identified during the site surveys of the three facilities. Following are the building locations, installation sequence, and projected operational (cut over) dates for each system, based upon an April 15, 1996 contract award date and a standard 12-week delivery for PBX equipment:
LOCATION BUILDING DATE -------- -------- ---- Ramstein 305 August 16, 1996 Rhein-Main 600 September 6, 1996 Aviano 256 September 27, 1996
4.3.1 NOTE: The Aviano operational date is based on the assumption that building 256 renovation will be complete by July 1, 1996. 4.4 NETWORK INTERFACES: USFI will provide the designated interface to each of the following Systems: C-36 46 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 4.4.1 Host nation commercial network: USFI will provide Direct Inward and Outward dialing capability to the host nation system through a E-l CAS DTMF digital trunk interface. 4.4.2 Defense Switched Network (DSN): USFI will install an E-l CAS DTMF interface to the demarcation point listed in the Section B response to each SOW item. The provisioning of the GOVERNMENT DSN network is the sole responsibility of the GOVERNMENT. 4.4.3 USFI proprietary network. 4.5 DESCRIPTION OF TELEPHONE SETS: 4.5.1 USFI will install one single line Nortel Meridian Business set at each room location identified in the site surveys. These sets have all required features concerning message waiting lamps, and can be pre-programmed to automatically dial the front desk, the Officer/NCO club, Recreation Center, Tours and Travel Office, etc. 4.5.2 USFI will provide Nortel Meridian Multi-line Business sets at all locations which require more than a single line capability, also identified during the site surveys. 4.5.3 USFI will install two-line telephone sets at each location identified in the Aviano site survey. 4.6 DATA PORTS: The Meridian Business sets have an integrated module for a direct computer connection, eliminating the need for a second jack on the wall. This connection is made using a standard RJ-45 modular connector cable, which USFI will provide. This fully digital solution allows for simultaneous voice and data transmission up to 19.2 kbit/s over the same wire pair, and provides the capability of assigning a separate and unique director number to the computer port. 4.7 CABLE: All buried and house cable will be installed by our European business partner, MCNICHOLAS COMMUNICATIONS LIMITED, a subsidiary of MCNICHOLAS CONSTRUCTION GROUP. MCNICHOLAS, based in the United Kingdom, is one of the major civil engineering and underground cable installation firms in Europe, and also has an entire division which specializes in the latest technologies in house cabling. MCNICHOLAS COMMUNICATIONS LIMITED will, under USFI's direction, install all required underground cable at Ramstein, and will wire each room at all three locations with the capacity necessary to C-37 47 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE support the voice and data requirement at each telephone location identified during the site surveys. 4.8 CABLE INSTALLATION: Please see the cable layout maps located at Section 6 of the USFI NETWORK SERVICE, INC. response for specific cable installation layout and parts list. 4.8.1 RAMSTEIN: 4.8.1.1 EXTERIOR CABLING: 4.8.1.1.1 USFI will install two 100 pair cables from building 305 to building 2409/2408 through existing GOVERNMENT underground/duct system. USFI will install another two 100 pair cables from building 305 to the Prime Knight complex (buildings 538, 540, 542 and 541) through existing GOVERNMENT underground/duct system. USFI will install two 100 pair cables from building 305 to building 304/303 through existing GOVERNMENT conduit. USFI will install a 100 pair cable from building 305 to building 306 using existing conduit under the parking lot adjacent to building 305, then by USFI-provided conduit for approximately 130 meters to the building 306 cable demarcation entry point. 4.8.1.1.2 USFI will use 30 existing cable pairs on GOVERNMENT cable to extend service from building 305 to the General Cannon Suite in building 1018. The GOVERNMENT must reserve 30 pairs on the cable from building 500 to building 305, and on the cable from building 500 to building 1018, then cross connect these 30 cable pairs at the main distributing frame located in the switch room in building 500. 4.8.1.2 INTERIOR CABLING: 4.8.1.2.1 USFI will install house cable in the existing conduits to reach each floor, and in existing flat duct to reach the rooms. USFI will pierce the wall of each room and run the cable to the desired point inside the room using flat plastic conduit. USFI will terminate the cables on C-38 48 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE surface or flush mount jacks at the direction of the LFM. We recommend the most aesthetically, mechanically and structurally sound practice be followed. 4.8.2 RHEIN MAIN: 4.8.2.1 EXTERIOR CABLING: USFI will use the existing GOVERNMENT 100 pair cable multipled from building 600 to buildings 632, 633, and 634. 4.8.2.2 INTERIOR CABLING: USFI will install house cable to each room through the existing duct system in buildings 600, 632 and 633. In building 634, USFI will install an aesthetically neutral exterior ducting system on the first floor level to each corner of the building, then extend the wiring to the second and third floor levels through USFI-provided interior duct 4.8.3 AVIANO: 4.8.3.1 EXTERIOR CABLING: 4.8.3.1.1 Buildings 230 and 232: USFI will use the existing GOVERNMENT cable plant to reach all locations. Buildings 230 and 232 currently have DSN phones installed in each room. USFI will remove the GOVERNMENT phones and replace them with USFI phones on a one-for-one basis reusing the existing 0202 overhead cable. 4.8.3.1.2 Buildings 255, 273 and 274. GOVERNMENT records indicate sufficient capacity exists (75 cable pair) to each of these buildings. USFI will use existing GOVERNMENT cable to those locations. 4.8.3.2 INTERIOR CABLING: 4.8.3.2.1 Buildings 255, 273, and 274: USFI will install flat duct and cable to each required location. C-39 49 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 4.8.3.2.2 Building 256: USFI will use existing conduit to extend interior cable from the PBX room to each floor, then use existing flat duct to extend cabling to each room as required. 4.8.3.2.3 Buildings 230 and 232: USFI will use existing GOVERNMENT house cable. 4.9 MAINTENANCE: 4.9.1 GENERAL: 4.9.1.1 MANPOWER: USFI will make available full time employee in Europe to provide first level maintenance and ongoing training in response to USAFE's needs under this contract, 4.9.1.2 MAINTENANCE SPARES/CONSUMABLES: USFI will preposition recommended maintenance spares at each site according to manufacturer's specifications. USFI will also stock telephone sets, consoles, plastic overlays, guest instruction booklets, cables, and other consumables as required. USFI reserves the right to negotiate to recover costs from the GOVERNMENT should breakage or pilferage of these consumable items exceed a reasonable rate. 4.9.1.3 LOGISTICS SUPPORT: USFI requires logistics support privileges for full time USFI employee(s) whose main purpose is providing operational support at military lodging facilities in Europe. 4.9.2 COUNTRY SPECIFIC 4.9.2.1 Germany: USFI will station full-time USFI employee at Ramstein AB, Germany to provide initial response to system problems, and address any concerns or expanded services requested from the GOVERNMENT. Second level response will be provided by the PBX manufacturer. C-40 50 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE 4.9.2.2 Italy: 4.9.2.2.1 USFI will provide first level and second level maintenance response through the equipment manufacturer. The USFI Germany-based employee will regularly visit the Aviano location to address any provisioning or additional training needs of the GOVERNMENT. 4.9.2.2.2 Optionally, USFI is willing to hire active duty military members on a part-time basis to provide the initial maintenance response, provided this would not interfere with the military members' primary responsibility to the US Air Force. 4.10 CALL DETAIL RECORDING-CALL BILLING(ROOM STATUS SUBSYSTEM: USFI will provide a billing system which meets all specifications in SOW sections 3.2.4 and 3.2.5. 4.10.1 The Ramstein and Rhein-Main call detail recording systems will reside on a stand alone computer system which will interface the PBX to the SIMS system. Nortel does not offer an integrated CDR system which fully complies with the SOW specifications on the Meridian SL-1 product line. 4.10.2 The CDR system for Aviano is fully integrated into the basic operating system of the PBX. 4.11 TRAINING: USFI will provide initial training as called for in CDRL A005. This will include all training necessary for lodging facilities employees to operate the system. Refresher training and new employee training sessions will be scheduled at least once a year for the life of the contract. Since USFI will provide access to a full-time employee, we are prepared to offer interim training above the minimum requested in the SOW. 4.12 LFTS SYSTEMS AT FOLLOW ON LOCATIONS: USFI commits to providing a good-faith estimate for any future delivery orders, and will provide the Air Force with a professional recommendation on the viability of same. It is standard industry practice for a party requesting systems such as those requested by the GOVERNMENT to provide estimates or guarantees of minutes in order for the respondent to perform a meaningful risk analysis. In this case, the GOVERNMENT is unable to quantify the number of minutes or the C-41 51 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE destination of long distance traffic originating in the GOVERNMENT transient lodging facilities. The risk involved in complying with the terms of this SOW lies entirely with USFI. This being the case, USFI stipulates that a GOVERNMENT delivery order for Moron, Incirlik, Izmir, Alconbury, Croughton, Fairford, Lakenheath, Mildenhall, and Spangdahlem will constitute a request for USFI to perform a cost analysis, and that USFI's obligation ends with providing the GOVERNMENT a price per minute for long distance traffic originating from that specific facility and terminating in the US. USFI further believes that a price per minute of greater than $2.50 makes long distance telephone service unaffordable to the average active duty military member, and thus constitutes a declination on USFI's part to provide a LFTS to that facility without further consideration from the GOVERNMENT. 4.1.3 Time and Materials: 4.13.1 USFI will modify the system to meet future GOVERNMENT requirements on a Time and Material basis at rates to be negotiated after contract award. C-42 52 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE The statement of work calls for at least nine different interfaces. Following is a list of these interfaces with the demarcation point for USFI NETWORK SERVICES, Inc. responsibility. INTERFACE TYPE DEMARCATION PBX - SIMS RS-232 GFE Computer Serial Port PBX - CDR RS-232 USFI Responsibility PBX - RSI Proprietary USFI Responsibility CDR - SIMS RS-232 GFE Computer Serial Port RSI - SIMS Proprietary USFI Responsibility PTT E-l CAS DTMF Ramstein - Type 66 block bldg 305 Rhein-Main - Type 66 block bldg 600 Aviano - Type 66 block bldg 256 DSN E-1 CAS DTMF Ramstein - Type 66 block bldg 305 Rhein-Main - Type 66 block bldg 600 Aviano - Type 66 block bldg 256 Line - Telephone RJ-11 USFI Responsibility Data Port - DCE RJ-45 USFI Responsibility PBX - USFI Network E-l USFI Responsibility C-43 53 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE Section D -- Packaging and Marking All packaging will be in accordance with standard commercial practice. D-1 54 SECTION E INSPECTION AND ACCEPTANCE 1. Introduction. This section describes the certification process and the acceptance criteria for all equipment and services ordered under this contract. It also defines government and contractor responsibilities and the point of inspection and acceptance. 2. Inspection and Performance Testing. Shall be in accordance with para 3.8.4.1 of Section C. 3. The activity responsible for performing inspection and acceptance of the supplies called for under this contract is as follows: As specified on each delivery order issued pursuant to this contract USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE Section E - Inspection and Acceptance 1. USFI acknowledge the Government and contractor responsibilities defined in the RFP and clarified in Section II of the USFI response. 2. USFI requests clarification on this issue at post-award. Since there is no existing system, there will be no true cutover. System activation will only take place upon full Government acceptance of the entire LFTS. Government telephones and secure telephones currently exist in some of the lodging facilities. These phones provide Government service to the rooms and must be left operational until an agreed upon cutover date has been established. New telephone sets shall he provided for these facilities and any secure telephones shall be left in place and operational. 3. No response required E-1 55 SECTION F DELIVERIES OR PERFORMANCES 1. TIME OF DELIVERY (APR 1984): (a) The NAFI desires delivery to be made according to the following schedule: DESIRED DELIVERY SCHEDULE
*CDRL# ITEM DELIVERY DATE - -------------------------------------------------------------------------------- A001 Installation Plan Within 30 Days After Contract Award for Aviano AB, Rhein-Main AB and Ramstein AB. Within 30 Days After Receipt of Each Delivery Order for all others A005 Training Plan Within 60 Days After Contract Award for Aviano AB, Rhein-Main AB and Ramstein AB. Within 30 Days After Receipt of Each Delivery Order for all others N/A Installation begins Within 90 Days After Contract Award for Aviano AB, Rhein-Main AB and Ramstein AB. Within 60 Days After Receipt of Each Delivery Order for all others A002 Cutover Plan Within 90 Days After Contract Award for Aviano AB, Rhein-Main AB and Ramstein AB. Within 60 Days After Receipt of Each Delivery Order for all others A006 Traffic Measurement Within 90 Days After Contract Award and Analysis for Aviano AB, Rhein-Main AB and Ramstein AB. Within 60 Days After Receipt of Each Delivery Order for all others A003 Post-Cutover Quality Within 45 Days Before Acceptance Control Report Testing at all sites A007 Subscriber Education Within 30 Days Prior to Acceptance Pamphlet at all sites A008 Installation and Within 15 Days Prior to acceptance Acceptance Test Plan Start Date at all sites A010/A011 Subscriber Education Within 15 Days Prior to Acceptance Pamphlet Standard Start Date at all sites Telephone Instrument Subscriber Education Pamphlet LT1-Line Telephone Instrument A004 Communications-Computer Within 15 Days Prior to Final Systems Installation Acceptance at all sites Records
F-1 56 * Data Item Descriptions (DID) are located in Section J, Attachment 3. If the offeror is unable to meet the desired delivery schedule, it may, without prejudicing evaluation of its offer, propose a delivery schedule below. However, the offeror's proposed delivery schedule must not extend the delivery period beyond the time for delivery in NAFTs required delivery schedule as follows: (b) The NAFI requires delivery to be made according to the following schedule: REQUIRED DELIVERY SCHEDULE
*CDRL# ITEM DELIVERY DATE - -------------------------------------------------------------------------------- A001 Installation Plan Within 30 Days After Contract Award for Aviano AB, Rhein-Main AB and Ramstein AB. Within 30 Days After Receipt of Each Delivery Order for all others A005 Training Plan Within 60 Days After Contract Award for Aviano AB, Rhein-Main AB and Ramstein AB. Within 30 Days After Receipt of Each Delivery Order for all others N/A Installation begins Within 90 Days After Contract Award for Aviano AB, Rhein-Main AB and Ramstein AB. Within 60 Days After Receipt of Each Delivery Order for all others A002 Cutover Plan Within 90 Days After Contract Award for Aviano AB, Rhein-Main AB and Ramstein AB. Within 60 Days After Receipt of Each Delivery Order for all others A006 Traffic Measurement Within 90 Days After Contract Award and Analysis for Aviano AB, Rhein-Main AB and Ramstein AB. Within 60 Days After Receipt of Each Delivery Order for all others A003 Post-Cutover Quality Within 45 Days Before Acceptance Control Report Testing at all sites A007 Subscriber Education Within 30 Days Prior to Acceptance Pamphlet at all sites A008 Installation and Within 15 Days Prior to Acceptance Acceptance Test Start Date at all sites Plan
F-2 57 A010IA011 Subscriber Education Within 15 Days Prior to Acceptance Pamphlet Start Date at all sites Standard Telephone Instrument Subscriber Education Pamphlet LT1-Line Telephone Instrument A004 Communications- Within 15 Days Prior to Final Computer Systems Acceptance at all sites Installation Records
* Data Item Descriptions (DID) are located in Section J, Attachment 3. The NAFI will evaluate equally, as regards time of delivery, offers that propose delivery of each quantity within the applicable delivery period specified above. Offers that propose delivery that will not clearly fall within the applicable required delivery period specified above, will be considered nonresponsive and rejected. The NAFI reserves the right to award under either the required delivery schedule or the proposed delivery schedule, when an offeror offers an earlier delivery schedule than required above. If the offeror proposes no other delivery schedule, the required delivery schedule above will apply. OFFEROR'S PROPOSED DELIVERY SCHEDULE *CDRL# ITEM DELIVERY DATE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (c) Attention is directed to the Contract Award provision of the solicitation that provides that a written award or acceptance of offer mailed, or otherwise furnished to the successful offeror, results in a binding contract, The NAFI will mail or otherwise furnish to the offeror an award or notice of award not later than the day the award is dated. Therefore, the offeror should compute the time available for performance beginning with the actual date of award, rather than the date the written notice of award is received from the Contracting Officer through the ordinary mails. However, the NAFI will evaluate an F-3 58 offer that proposes delivery based on the Contractor's date of receipt of the contract or notice of award by adding five days for delivery through the ordinary mails. If, as so computed, the offered delivery date is later than the required delivery date, the offer may be considered nonresponsive and rejected. 2. F.O.B. POINT: Supplies shall be delivered to: ADDRESS SPECIFIED ON EACH DELIVERY ORDER 3. F.O.B. DESTINATION (APR 1984). (a) The term "F.O.B. DESTINATION", as used in this clause, means- (1) Free expense to the NAFI, on board the carrier's conveyance, at a specified delivery point where the consignee's facility (plant, warehouse, store, lot, or other location to which shipment can be made) is located; and (2) Supplies shall be delivered to the destination consignee's wharf (if destination is a port city and supplies are for export), warehouse unloading platform, or receiving dock, at the expense of the Contractor. The NAFI shall not be liable for any delivery, storage, demurrage, accessorial, or other charges involved prior to the actual delivery (or constructive placement" as defined in carrier tariffs) of the supplies to the destination, unless such charges are caused by an act or order of the NAFI acting in its contractual capacity. If rail carrier is used, supplies will be delivered to the specified unloading platform of the consignee. If motor carrier (including "piggyback") is used, supplies shall be delivered to truck tailgate at the unloading platform of the consignee. If the Contractor uses rail carrier or freight forwarder for less than carload shipments, the contractor will assure that the carrier will furnish tailgate delivery if transfer to truck is required to complete delivery to consignee. (b) The Contractor shall- (1) (i) Pack and mark the shipment to comply with contract specifications; or (ii) In the absence of specifications, prepare the shipment in conformance with carrier requirements; (2) Prepare and distribute commercial bills of lading; (3) Deliver the shipment in good order and condition to the point of delivery specified in the contract; (4) Be responsible for any loss of and/or damage to the goods occurring before receipt of the shipment by the consignee at the delivery point specified in the contract; (5) Furnish a delivery schedule and designate the mode of delivering carrier; and (6) Pay and bear all charges to the specified point of delivery. 4. TERM OF CONTRACT: The term of this contract will be for 120 months (10 years). All percentages shall remain firm and fixed for this period. 5. DELETED. F-4 59 6. DELIVERY SITES: Upon contract award, delivery orders will be issued for Aviano Air Base, Italy, Rhein Main Air Base, Germany and Ramstein Air Base, Germany. Delivery orders may also be issued under the resulting contract for 9 other USAFE command bases: Moron Air Base, Spain Incirlik Air Base, Turkey Izmir Air Base, Turkey RAF Alconbury, United Kingdom RAF Croughton, United Kingdom RAF Fairford, United Kingdom RAF Lakenheath, United Kingdom Mildenhall, United Kingdom Spangdahlem Air Base, Germany In addition, other DoD NAFI's located in the European Theater may issue delivery orders against the resulting contract, (Ref. Para H-3). F-5 60 SECTION G CONTRACT ADMINISTRATION DATA 1. CONTRACTING OFFICER'S TECHNICAL REPRESENTATIVE (COTR): The COTR is responsible for performing all administrative functions necessary to ensure performance of this contract, for the Air Force only. Wayne P. Sellers Unit 3050, Box 160 APO AE 09094-0160 2. QUALITY ASSURANCE EVALUATOR (QAE) The Quality Assurance Evaluator will monitor the installation progress to insure that the LFTS meets the requirements of the SOW and EPS. The Lodging Manager at each base location will serve as the QAE. 3. CONTRACTING OFFICER (CO): The CO is responsible for issuing any amendment to the Request for Proposal and any modification to the contract(s). The address for the CO is: AFNAF PURCHASING OFFICE 9504 IH 35 NORTH, SUITE 370 SAN ANTONIO, TX 78233 4. CALL DETAIL REGISTER (CDR): The Government shall provide the contractor, on the 15th of each month, 2 copies of the CDR for the previous month. This will include information that the contractor specifies. The Government shall also send the contractor a check for the percentage of the amount of funds collected for telephone calls for the preceding month. In the event the billing exceeds the income recorded through the CDR the contractor shall be responsible for paying the difference. 5. BILLING AND COLLECTION: Percent of money from toll calls that the contractor will receive from the lodging is based on the number of long distance calls recorded by the LFTS call detail recording on a monthly basis: (1) Dial Out Direct (DOD) calls placed against guest authorization codes. (2) Operator-assisted DOD calls charged to guest authorization codes. 6. NONAPPROPRIATED FUND INSTRUMENTALITY (NAFI) DESIGNATED: For the purpose of this purchase, the designated NAFI will be the NAFI identified on each order issued against this contract as the NAFI receiving the services ordered. G-1 61 SECTION G CONTRACT ADMINISTRATION DATA 1. CONTRACTING OFFICER'S TECHNICAL REPRESENTATIVE (COTR): The COTR is responsible for performing all administrative functions necessary to ensure performance of this contract. Wayne P. Sellers Unit 3050, Box 160 APO AE 09094-0160 2. QUALITY ASSURANCE EVALUATOR (QAE) The Quality Assurance Evaluator will monitor the installation progress to insure that the LFTS meets the requirements of the SOW and EPS. The Lodging Manager at each base location will serve as the QAE. 3. CONTRACTING OFFICER (CO): The CO is responsible for issuing any amendment to the Request for Proposal and any modification to the contract(s). The address for the CO is: AFNAF PURCHASING OFFICE 9504 IH 35 NORTH, SUITE 370 SAN ANTONIO, TX 78233 4. CALL DETAIL REGISTER (CDR): The Government shall provide the contractor, on the 15th of each month, 2 copies of the CDR for the previous month. This will include information that the contractor specifies. The Government shall also send the contractor a check for the percentage of the amount of funds collected for telephone calls for the preceding month. In the event the billing exceeds the income recorded through the CDR the contractor shall be responsible for paying the difference. 5. BILLING AND COLLECTION: Percent of money from toll calls that the contractor will receive from the lodging is based on the number of long distance calls recorded by the LFTS call detail recording on a monthly basis: (1) Dial Out Direct (DOD) calls placed against guest authorization codes. (2) Operator-assisted DOD calls charged to guest authorization codes. 6. NONAPPROPRIATED FUND INSTRUMENTALITY (NAFI) DESIGNATED: For the purpose of this purchase, the designated NAFI will be the NAFI identified on each order issued against this contract as the NAFI receiving the services ordered. G-1 62 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE Section G -- Contract Administration Data 1. Acknowledged. 2. Acknowledged. 3. Acknowledged, and clarified in Section II response to SOW. Since long distance will be carried over the USFI network, the last sentence is not applicable. 4. Billing and Collection: Acknowledged, and clarified in Section B response located at Section IV of USFI response. 5. Nonappropriated Fund Instrumentality (NAFI) Designated: Acknowledged. G-2 63 SECTION H SPECIAL PROVISIONS 1. DELETED. 2. CONTRACTING OFFICER'S AUTHORITY The Contracting Officer is the only person authorized to approve changes in any of the requirements under this contract and not withstanding any provisions contained elsewhere in this contract, the said authority remains solely in the Contracting Officer. In the event the Contractor effects any such change at the direction of any person other than the Contracting Officer, the change will be considered to have been without authority and will not be recognized for payment by the Government. 3. CONTRACT USAGE The Government retains the right to incorporate any Department of Defense (DoD) Nonappropriated Fund Instrumentality (NAFI) located in the EUROPEAN THEATER into this contract by the issuance of Delivery Orders. The Government further retains the right to negotiate for the incorporation of these bases consistent with the functionalities and requirements identified in this contract. 4. RIGHTS IN DATA The rights obtained by the Government in technical data are set forth in the Right Technical Data Clause incorporated in the contract, and nothing elsewhere in this contract or in any documents incorporated by reference in this contract shall be construed as in any way altering such right except as restricted by the express terms, if any, of this contract as to data called for and furnished for provisioning purposes only. 5. UTILITY SERVICES The Government will provide free of charge at existing outlets all necessary utility services (except long distance telephone services) required for performance of this contract. The Government will make available a telephone for contractor's use in the performance of this duties wider this contract. The Contractor shall carefully conserve utilities furnished. 6. SUPERVISION AND CONTROL The Government shall not exercise any supervision or control over the contractor's employees performing services under this contract. Such employees shall be accountable not to the Government but solely to the contractor, who in turn is responsible to the Government. 7. QUALIFICATION OF CONTRACTOR PERSONNEL a. All maintenance services under resultant contract are to be performed by competent personnel, experienced and highly qualified to provide the required services in accordance with the best commercial practices, without unnecessary delays. H-i 64 b. Prior to award of the contract, at the request of the Government, the low bidder may be required to submit evidence of responsibility which shall include a statement as to personnel resources and facilities with which they intend to perform the contract, and a list of firms for which similar maintenance has been provided in the past year for systems of the type listed herein. 8. RISK OF LOSS OR DAMAGE The Contractor and its insurer, if any, relieve the Government of responsibility for all risks of loss or damage to the systems/equipment called for under this contract prior to their/its formal acceptance by the Government. The Contractor shall not be liable for loss of, or damage to, supplies caused by the negligence of officers, agents, or employees of the Government acting within the scope of their employment. In addition, the Contractor and its insurers, if any, relieve the Government of all responsibility for all risks of loss or damage to Contractor-owned equipment instruments and tools caused by nuclear radiation, radioactive contamination, war, insurrection, rebellion, or weapons of war. 9. SITE PREPARATION a. Equipment space and environmental specifications for site preparation shall be furnished in writing by the Contractor. These specifications shall be in such detail as to ensure that the equipment to be installed shall operate efficiently from the point of view of environment. b. At the request of the Government, the Contractor will prepare, in cooperation with the Government, a detailed site plan. This detailed site plan, which will be tailored to the Government facilities, will be prepared within thirty (30) calendar days after notification by the Government, and will supplement the general specifications furnished as part of the equipment proposal, if required. c. The Government shall prepare site at its own expense and in accordance with the specifications furnished by the Contractor. d. If any required alterations or modifications in site preparation are attributable to incomplete or erroneous equipment space and environmental specifications or to the detailed site plan provided by the Contractor, the alterations or modifications shall be made at the expense of the Contractor. e. The Contractor shall inspect the site within sixty (60) days from receipt of written notice from the Government that the site is ready for inspection and shall notify the Government in writing of any site deficiencies requiring corrective action within ten (10) days from the date of inspection. Such inspection shall not be construed to be acceptance of power and air conditioning facilities. 10. MODIFICATIONS a. The Government shall have the option to have all Contractor sponsored engineering changes which are available at the time of installation or are later offered at no cost, incorporated into the equipment covered by this contract. b. The contractor shall notify the Government of all such changes prior to commencing any modifications. All Contractor sponsored modifications, except changes required to correct safety hazards, which may impact on system performance or the performance of any attached devices not supplied under this contract, shall be subject to approval by the Government prior to commencing the modification. In the event a modification is made to correct a safety hazard and such modification results in degraded system performance, the contract shall provide any additional equipment or software necessary to bring the system up to its former performance level or other wise compensate the Government for loss of system performance capability. c. All modifications, except safety changes, shall be accomplished at the site. H-2 65 11. SUBSTITUTIONS AND ADDITIONS In the event the contractor commercially announces newer components that can be technically substituted for items listed in Section B, the contractor may propose said items for contract substitution after the new item is commercially announced. Substitution may be authorized by a bilateral contract modification, when the item(s) provide at least equivalent performance with economic benefits or significantly enhanced performance at no additional cost to the Government or a combination of both of the above. The Government reserves the right to accept or reject the contractor substituted components proposal. 12. POST-AWARD CONFERENCE If a post-award conference is deemed necessary by the Contracting Officer, it will be held within 30 days after contract award at AFNAF Purchasing Office, 9504 IH 35 North, Suite 370, San Antonio TX 78233. The purpose of the conference is to review with the contractor the requirements of the contract, coordinate installation, training and contractor personnel support. The contractor will be notified of the date of the conference at least five days prior to the conference. 13. RELEASE OF PROGRAM INFORMATION The Contractor shall not hold any discussions or release any information or data pertaining to this program without the approval of AFNAF Purchasing Office. This restriction applies to all releases of information to the public, industry or Government organization except as follows: a. Information for actual or potential subcontractors or vendors necessary for the Contractor's accomplishment of this program. b. Information to be supplied to a duly authorized representative of AFNAF Purchasing Office. 14. INCORPORATION OF PLANS, TEST PROCEDURES AND PROGRAMS Plans, test procedures, programs, drawings and specifications submitted are incorporated by reference in this contract upon approval by the Contracting Officer at no change in contract price. Subsequent to Contracting Officer approval, such plans, test procedures, programs, drawings, and specifications shall become the basis for accepting the applicable service or item(s) under this contract and for the contractor to perform the tasks thereunder. 15. DIGGING PERMITS The contractor shall obtain digging permits prior to commencing any digging or excavating on the base. Digging permits may be obtained from the Base Civil Engineer. 16. SUPPORT CONTRACTOR FOR SYSTEMS ENGINEERING AND TECHNICAL ASSISTANCE (SETA) Technical, schedule, and cost information (including data providing pursuant to requirements for this contract) may be evaluated by a Systems Engineering and Technical Assistance Contractor pursuant to its contract with the Government. 17. LOCAL AREA REQUIREMENTS The contractor shall be responsible for making provision with the Host Base Security Police for issuance of installation identifications, vehicle control, personal identification cards/controlled area/restricted area badges as required. Contractor personnel shall comply with local security requirements and instructions as provided by each installation commander or his duly appointed representative(s). H-3 66 18. SUPERVISION OF EMPLOYEES The contractor shall select, supervise, and exercise control and direction over its employees under this contract. Contractor shall not supervise, direct or control the activities of Department of Defense personnel. Except as may be otherwise expressly specified herein, the contractor shall provide all necessary administration and other support to its employees. 19. INSURANCE For the purpose of the clause of this contract entitled "Insurance-Work On A Government Installation" (9Apr 1984) (FAR 52.228-5. See 1-1.I.23) the minimum coverage required during the term of this contract shall be as follows: (1) Comprehensive General Liability (Bodily Injury) $500,000.00/per person (2) Comprehensive Automobile Liability $200,000.00/per person For Bodily Injury $500,000.00/per occurrence For Bodily Injury $20,000.00/per occurrence For Property Damage (3) Workmen's Compensation IAW Applicable Statutes (4) Employer's Liability $100,000.00 20. INTERCONNECTION The contractor fully acknowledges the rights of the Air Force and other vendors to interconnect with the contractor's intrasystem wiring as the requirements may occur during the life of this contract. In this regards, the contractor further agrees to use best efforts to achieve this goal and resolve interconnection problems with reasonable, prudent, and timely actions on all occasions. 21. PERIODIC PROGRESS MEETING a. Program management personnel, contracting personnel, and other Government personnel as appropriate, may be required to meet periodically with the contractor to review contract progress and performance. At these meetings personnel will apprise the Government of problems, if any, being experienced. Appropriate action shall be taken to resolve outstanding issues. b. Program management personnel shall determine the frequency of these meetings based on the contractor's performance. 22. TECHNICAL GUIDANCE a. Technical guidance under this contract will be given to the contractor by the supporting Base Communications Squadron. Technical guidance is defined as that process by which the contractor receives guidance and approvals in his technical efforts as it relates to an element of work or task solely within the existing requirements of the contract as a result of technical review of the contractor's work by the supporting Base Communications Squadron. If unable to obtain support from the Base Communications Squadron, contact Wayne Sellers. 06371476595. H-4 67 b. Only the Contracting Officer (CO) is authorized to redirect the effort or in any way modify any of the terms of this contract. Such redirection or modification of contract terms shall be accomplished by issuance of change orders or supplemental agreements to this contract signed by the CO. In any event, if the contractor believes technical guidance given involves a change to the scope of the contract, he will immediately notify the CO pursuant to FAR 52.243-7, "Notification of Changes". 23. CONTRACTOR USE OF TELEPHONE SYSTEM Any cable system provided by the contractor under this contract is for the exclusive use of the Department of Defense base for which this contract applies. The contractor shall not use the cable, lines, or any equipment installed under this contract, whether installed prior to cutover or as a result of expanded service. It shall be clearly understood by the contractor that expanded services requested by the Contracting Officer or his duly authorized representative are within the scope of the contract up to the capacity of the switch as limited by this contract. 24. APPROVAL OF CONTRACT DATA ITEMS AND RELATED WORK The contractor shall proceed with the work related to a specific data item, as identified in the DD Form 1423 (Contract Data Requirements List), only after approval has been obtained, This paragraph does not apply to data items and related work if approval is not required on the DD Form 1423. Data items requiring approval are identified by the "A" in block 8 of the Contract Data Requirements List. 25. RELOCATION The Contracting Office, after approval of Installation Commander shall negotiate with the contractor to relocate switch. 26. ADVERTISING OF AWARD The Contractor agrees not to refer to awards in commercial advertising in such a manner as to state or imply that the product or service provided is endorsed or preferred by the Federal Government or is considered by the Government to be superior to other products or services. 27. OPTION TO BUY EQUIPMENT Upon completion of the performance period of each site (10 years), and prior to removal of any contractor owned equipment, the Government shall have the option to buy existing equipment at fair market value which shall be negotiated between the contracting officer and the contractor for each site. 28. HOST NATION REQUIREMENTS During the execution of the services provided under this contract, the Contractor must ensure the Host Nation Equivalent Requirements have priority/precedence. 29. PERFORMANCE PERIOD The performance period for each site will commence upon actual completion of installation, inspection and acceptance by the ordering NAFI for the system ordered for that particular site and shall not exceed a period of l0 years from that date. H-5 68 USFI NETWORK SERVICES, INC. RESPONSE TO REQUEST FOR PROPOSAL (RFP) F41999-96-R-0022 TELEPHONE SERVICES FOR TEMPORARY LODGING FACILITIES IN EUROPE Section H-- Special Services 1 Deletion acknowledged. 2 Acknowledged. 3 Acknowledged, with clarification in USFI response Section IV paragraph 4.12. 4 USFI requests clarification on this paragraph. 5 Acknowledged. 6 Acknowledged. 7 Acknowledged. 8 Acknowledged. 9 Acknowledged. lO MODIFICATIONS: Since the Government is not purchasing anything under this solicitation, engineering change proposals which exceed the performance levels specified in the SOW will be included or not included at USFI's discretion. Any proposed changes on the part of USFI will be fully coordinated with the appropriate Government representative. All hazardous conditions will be corrected immediately. H-6 69 SECTION I CONTRACT CLAUSES 1. DEFINITIONS (1975 MAY) - As used throughout this contract, the following terms and abbreviation have the meanings set forth below: a. The term "contract" means this agreement or order and any modifications hereto b. The abbreviation "NAFT" means Nonappropriated Fund Instrumentality of the United States Government. c. The term "Contracting Officer" means the person executing or responsible for administering this contract on behalf of the NAFI, which is a party hereto, or his successor or successors. d. The term "Contractor" means the party responsible for providing supplies and/or services at a certain price or rate to the NAFI under this contract. 2. DISPUTES (1979 DEC) a. Except as otherwise provided in this contract, any dispute or claim concerning this contract which is not disposed of by agreement shall be decided by the Contracting Officer; who shall state his decision in writing and mail or otherwise furnish a copy of it to the Contractor. Within 90 days from the date of receipt of such copy, the Contractor may appeal by mailing or otherwise furnishing to the Contracting Officer a written appeal addressed to the Armed Services Board of Contract Appeals, and the decision of the Board shall be final and conclusive; provided that if no such appeal is filed, the decision of the Contracting Officer shall be final and conclusive. The Contractor shall be afforded an opportunity to be heard and to offer evidence in support of any appeal under this clause. Pending final decision on such a dispute, however, the Contractor shall proceed diligently with the performance of the contract and in accordance with the decision of the Contracting Officer unless directed to do otherwise by the Contracting Officer. b. This "Disputes" clause does not preclude consideration of law questions in connection with decisions provided for in paragraph "a" above, provided, that nothing in this contract shall be construed as making final the decision of any administrative official, representative, or board on a question of law. 3. LAW GOVERNING CONTRACTS ( 1970 JUL) - In any dispute arising out of this contract, the decision of which requires consideration of law questions, the rights and obligations of the parties shall be interpreted and determined in accordance with the substantive laws of the United States of America. 4. LEGAL STATUS (1973 JUL) - The NAFI is an integral part of the Department of Defense and is an instrumentality of the United States Government. Therefore, NAFI contracts are United States Government contracts; however, they do not obligate appropriated funds of the United States. 5. EXAMINATION OF RECORDS (1979 DEC) a. This clause is applicable if the amount of this contract exceeds $10,000 and the contract was entered into by means of negotiation. The Contractor agrees that the Contracting Officer or his duly authorized representative shall have the right to examine and audit the books and records of the Contractor directly pertaining to the contract during I-1 70 the period of the contract and until the expiration of three years after the final payment under the contract. b. The Contractor agrees to include the clause in "a" above in all subcontracts hereunder which exceed $10,000. 6. ASSIGNMENT (1987 SEP) - No assignment by the Contractor, assigning its rights or delegating its obligations under this contract will be effective and binding on the NAFI until the written terms of the assignment have been approved in writing by the Contracting Officer. 7. GRATUITIES (1984 JUL) a. The NAFI may, by written notice to the Contractor, terminate the right of the Contractor to proceed under this contract if it is found, after notice and hearing, by the Secretary of the Air Force or his duly authorized representative, that gratuities (in the form of entertainment, gifts, or otherwise) were offered or given by the Contractor, or any agent, or representative of the contractor, to any officer or employees of the Government or the NAFI with a view toward securing favorable treatment with respect to the awarding or amending, or the making of any determinations with respect to the performing of such contract. b. In the event this contract is terminated as provided in paragraph "a" hereof, the NAFI shall be entitled (i) to pursue the same remedies against the Contractor as it could pursue in the event of a breach of contract by the Contractor, and (ii) as a penalty in addition to any other damages to which it may be entitled by law, to exemplary damages in an amount (as determined by the Secretary of the Air Force or his duly authorized representative) which shall be not less than three nor more than ten times the cost incurred by the Contractor in providing any such gratuities to any such officer or employee. c. The rights and remedies of the NAFI provided in this clause shall not be exclusive and are in addition to any other rights and remedies provided by law or under this contract. 8. TERMINATION FOR CONVENIENCE (1984 FEB) - The Contracting Officer, by written notice, may terminate this contract, in whole or in part, when it is in the best interest of the NAFI. If this contract is for supplies and is so terminated, the Contractor shall be compensated in accordance with FAR, Sub Parts 49.1 and 49.2 in effect on this contract's date. To the extent that this contract is for services and is so terminated, the NAFI shall be liable only for payment in accordance with the payment provisions of this contract for services rendered prior to the effective date of termination, providing there are no Contractor claims covering nonrecurring costs for capital investment. If there are any such Contractor claims, they shall be settled in accordance with FAR, Sub Parts 49.1 and 49.2. 9. TERMINATION FOR DEFAULT (1987 SEP) - (a) (1) The NAFI may, subject to paragraphs (c) and (d) below, by written notice of default to the Contractor, terminate this contract in whole or in part if the Contractor fails to - (i) Deliver the supplies or perform the service within the time specified within this contract or any Extension; (ii) Make progress, so as to endanger performance of this contract (but see subparagraph (a)(2) below);or I-2 71 (iii) Perform any of the other provisions of this contract (but see subparagraph (a)(2) below). (2) The NAFI's right to terminate this contract under subdivisions (1)(ii) and (1)(iii) above, may be exercised if the Contractor does not cure such failure within 10 days (or more if authorized in writing by the Contracting Officer) after receipt of notice from the Contracting Officer specifying the failure. (b) If the NAFI terminates this contract in whole or in part, it may acquire, under the terms and in the manner the Contracting Officer considers appropriate, supplies or services similar to those terminated, and the Contractor will remain liable to the NAFI for any excess costs for those supplies or services. However the Contractor must continue the work not terminated. (c) The Contractor shall not be liable for any excess costs if the failure to perform the contract arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (1) acts of God or of the public enemy, (2) act of the NAFI in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and; (9) unusually severe weather. Defaults by subcontractors at any tier for any reason do not constitute causes beyond the control and without the fault or negligence of the Contractor. (d) If this contract is terminated for default, the NAFI may require the Contractor to transfer title and deliver to the NAFI as directed by the Contracting Officer, any (1) completed supplies, and (2) partially completed supplies and materials, parts, tool dies, jigs, fixtures, plans, drawings, information, and contract rights (collectively referred to as manufacturing materials in the clause) that the Contractor has specifically produced or acquired for the terminated portion of this contract. Upon direction of the Contracting Officer, the Contractor shall also protect and preserve property in its possession in which the NAFI has an interest. (e) The NAFI shall pay the contract price for completed supplies delivered and accepted. The Contractor and Contracting Officer shall agree on the amount of payment for manufacturing materials delivered and accepted and for the protection and preservation of the property. Failure to agree will be a dispute under the Disputes Clause. The NAFI may withhold from these amounts any sum the Contracting Officer determines to be necessary to protect the NAFI against loss because of outstanding liens or claims of former lien holders. (f) If, after termination, it is determined that the Contractor was not in default, or that the default was excusable, the rights and obligations of the parties shall be the same as if the termination had been issued for convenience of the NAFI (g) The rights and remedies of the NAFI in this clause are in addition to any other rights and remedies provided by law or under this contract. 10. INSPECTION AND ACCEPTANCE (1989 DEC) - Inspection and acceptance will be at destination, unless otherwise provided in this contract. Notwithstanding the requirements for any NAFI inspection and test contained in specifications applicable to this contract, except where specialized inspections or tests are specified for performance solely by the NAFI, the Contractor, shall perform or have performed the inspections and tests required to substantiate that the supplies provided under the contract conform to the drawings, specifications, and contract requirements listed herein, including if applicable the technical requirements for the manufacturers' part numbers specified herein. I-3 72 11. VARIATION IN QUANTITY (1973 JUL) - No variation in quantity of any item called for by this contract will be accepted unless authorized by the Contracting Officer. 12. PAYMENTS (1989 SEP) - Unless otherwise specified, payment will be made on partial deliveries accepted by the NAFI. Payments and penalties for late payments are subject to the requirements established by the Prompt Payment Act, as amended, and as implemented for NAFI's. If the NAFI makes payment but such payment fails to include a prompt payment penalty due to the Contractor within 10 days from when the contract payment is made, penalty amounts will not be paid unless the Contractor makes a written request within forty days after the date of payment. 13. HOLD AND SAVE HARMLESS (1973 JUL) - The Contractor shall indemnify, save harmless, and defend the NAFI, its outlets and customers from any liability, claimed or established for violation or infringement of any patent, copyright, or trademark right asserted by any third party with respect to goods hereby ordered or any part thereof. Contractor further agrees to hold the NAFI harmless from all claims or judgments for damages resulting from the use of products listed in this contract, except for such claims or damages caused by, or resulting from negligence of NAFI customers, employees, agents, or representatives. Also, Contractor shall at all times hold and save harmless the NAFI, its agents, representatives, and employees from any and all suits, claims, charges, and expenses which arise out of acts or omissions of Contractor, its agents, representatives, or employees. 14. MODIFICATIONS (1975 JAN) - No agreement or understanding to modify this contract will be binding upon the NAFI unless made in writing and signed by a Contracting Officer from the office that issued the contract or its successor. 15. TAXES (1987 SEP) - a. Except as may be otherwise provided in this contract, the contract price includes all taxes, duties or other public charges in effect and applicable to this contract on the contract date, except any tax, duty, or other public charge, which by law, regulation or governmental agreement, is not applicable to expenditures made by the NAFI or on its behalf; or any tax, duty, or other public charge from which the Contractor, or any subcontractor hereunder, is exempt by law, regulation or otherwise. If any such tax, duty, or other public charge has been included in the contract price, through error or otherwise, the contract price shall be correspondingly reduced. b. If for any reason, after the contract date of execution, the Contractor or subcontractor is relieved in whole or in part from the payment or the burden of any tax, duty, or other public charge included in the contract price, the contract price shall be correspondingly reduced; or if the Contractor or subcontractor is required to pay in whole or in part any tax, duty, of other public charge which was not applicable at the contract date of execution the contract price shall be correspondingly increased. 16. PROOF OF SHIPMENT (1987 OCT) - (Applicable to shipments outside the United States through the Defense Transportation System [DTS] and Parcel Post shipments to overseas destinations.) a. Notwithstanding any clause of this contract to the contrary, payment will be made for items not yet received, upon receipt of an invoice accompanied by an appropriate proof of shipment. If shipment is made by insured parcel post, the contractor must furnish a I-4 73 copy of the Insured Mail Receipt issued by the US Postal Service. Otherwise, a stamped copy of a Certificate of Mailing issued by the US Postal Service must be furnished. If shipment is made by a common carrier (rail, air or motor freight), the Contractor must furnish a signed copy of the shipping document on which items are receipted for by the common carrier. A signed receipt by a NAFI representative at the delivery point (CCP or POE) is also acceptable evidence of proof of shipment. b. Forwarding a proof of shipment and an invoice for payment by the Contractor shall be construed as a certification by the contractor that the items shipped conform to the specifications. c. Notwithstanding any provisions of this clause or any payment made pursuant to the terms of this clause prior to receipt of the items contracted for, the NAFI retains the right to inspect upon receipt and the right to reject nonconforming items. The liability of the Contractor with respect to items for which payments have been made will, after inspection by the NAFI or after the expiration of a reasonable time following delivery to the NAFI within which inspection may be made, whichever occurs first, be limited to (i) exceptions taken at the time of inspection, and (ii) latent defects, fraud, or such gross mistakes as amount to fraud. - 17. COMMERCIAL WARRANTY (1978 DEC) - The Contractor agrees that the supplies or services furnished under this contract shall be covered by the most favorable commercial warranties the Contractor gives to any customer for such supplies or services and that the rights and remedies provided herein are in addition to and do not limit any rights afforded to the NAFI by any other clause of this contract. The printed terms and conditions of such warranty will be provided to the NAFI with the delivery of any supplies covered. 18. ADVERTISEMENTS (1973 JUL) - Contractor agrees that none of its nor its agent's advertisements, to include publications, merchandise, promotions, coupons, sweepstakes, contest, sales brochures, etc, shall state, infer or imply that the Contractor's products or services are approved, promoted, or indorsed by the NAFI Any advertisement, including cents-off coupons, which refers to a NAFI will contain a statement that the advertisement is neither paid for, nor sponsored in whole or in part by, the particular activity. 19. DISCOUNTS FOR PROMPT PAYMENT (1987 SEP) - a. Discounts for prompt payment will not be considered in the evaluation of offers. However, any offered discount will form a part of the award, and will be taken if payment is made within the discount period indicated in the offer by the offeror. As an alternative to offering a prompt payment discount in conjunction with the offer, offerors awarded contracts may include prompt payment discounts on individual invoices. b. In connection with any discount offered for prompt payment, time shall be computed from (1) the date of completion of performance of the services or delivery of the supplies to the carrier if acceptance is at point of origin, or date of delivery at destination or port of embarkation if delivery and acceptance are at either of these points, or (2) the date a proper invoice or voucher is received in the office specified by the NAFI, if the latter is later than date of performance or delivery. For the purpose of computing the discount earned, payment shall be considered to have been made on the date which appears on the payment check or the date on which a wire transfer was made. 20. INVOICES (1989 SEP): I-5 74 a. An invoice is a written request for payment under the contract for supplies delivered or for services rendered. In order to be proper, an invoice should include (and in order to support the payment of interest penalties, must include) the following: (i) Invoice date; (ii) Name of Contractor, (iii) Contract number (including order, number, if any), contract line item number, contract description of supplies or services, quantity, contract unit of measure and unit price, and extended total; (iv) Shipment number and date of shipment (Bill of Lading number and weight of shipment will be shown for shipments on Government Bills of Lading) (v) Name and address to which payment is to be sent (which must be the same as that in the contract or on a proper notice of assignment); (vi) Name (where practicable), title, phone number and mailing address of person to be notified in event of a defective invoice; and (vii) Any other information or documentation required by other provisions of the contract (such as evidence of shipment). Invoices shall be prepared and submitted in duplicate (one copy shall be marked Original") unless otherwise specified. b. For purposes of determining if interest begins to accrue under the PROMPT PAYMENT ACT (PUBLIC LAW 97-177): (i) A proper invoice will be deemed to have been received when it is received by the office designated in the contract for receipt of invoices and acceptance of the supplies delivered or services rendered has occurred. (ii) Payment shall be considered made on the date on which a check for such payment is dated. (iii) Payment terms (e.g. "Net 20") offered by the contractor will not be deemed Required payment dates. (iv) The following periods of time will not be included: (A) After receipt of improper invoice and prior to notice of any defect or impropriety, but not to exceed three days for meat and meat food products, five days for perishable agricultural commodities, and 15 days in all other cases, and (B) Between the date of a notice of any defect or impropriety and the date a proper invoice is received. When the notice is in writing, it shall be considered made on the date shown on the notice." 21. NOTIFICATION OF DEBARMENT/SUSPENSION STATUS (JUN 1985) The Contractor shall provide immediate notice to the Contracting Officer in the event of being suspended debarred or declared ineligible by any other Federal Department or agency, or upon receipt of a notice of proposed debarment from another DOD Agency, during the performance of this contract. 22. INTEGRITY OF UNIT PRICES (SEP 1987): a. Any proposal submitted for the negotiation of prices for items of supplies shall distribute costs within contracts on a basis that ensures that unit prices are in proportion to the items base cost (e.g., manufacturing or acquisition costs). Any method of distributing costs to line items that distorts unit prices shall not be used. For example, distributing costs equally among line items is not acceptable except when there is little or no variation in base cost. Nothing in this paragraph requires submission of cost or pricing data not otherwise required by law or regulation. I-6 75 b. The requirement in paragraph (a) of this clause does not apply to any Department of Defense (DOD) and National Aeronautics and Space Administration (NASA) contract or subcontract item of supply for which the unit price is, or is based on, an established catalog or market price for a commercial item sold in substantial quantities to the general public. A price is based on a catalog or market price only if the item being purchased is sufficiently similar to the catalog or market price commercial item to ensure that any difference in price can be identified and justified without resort to cost analysis. c. The Offeror/Contractor shall also identify those supplies which it will not manufacture or to which it will not contribute significant value when requested by the Contracting Officer. However, for DOD and NASA contracts, the information shall not be required for commercial items sold in substantial quantities to the general public when the price is, or is based on, established catalog or market prices. d. The Contractor shall insert the substance of this clause, less paragraph (c), in all subcontracts. 23. SOLICITATION DEFINITIONS (JUL 1987) "Offer" means "Proposal" in negotiation. "Solicitation" means a request for proposals (RFP) or a request for quotations (RFQ) in negotiation. "Government" means United States Government. (End of provision) 24. ACCEPTANCE (1989 SEP) - Acceptance of the supplies or services or a written notice of rejection must be accomplished on or before the fifth working day following delivery of the supplies or services. Unless otherwise specified in this contract. 25. NON-WAIVER OF DEFAULTS (1987 SEP) - Any failure by the NAFI at any time, or from time to time, to enforce or require strict performance of any terms or conditions of this contract will not constitute waiver thereof and will not affect or impair such terms or conditions in any way or the NAFI's right at any time to avail itself of such remedies as it may have for any breach or breaches of such terms and conditions. I-7 76 LIST OF FAR CLAUSES INCORPORATED BY REFERENCE The provisions of the following clauses set forth in the Federal Acquisition Regulation (FAR) or DOD FAR Supplement are hereby incorporated into this order or contract by reference with the same force and effect as though herein set forth in full. As used in the following clauses, the term "Government" is deleted and the abbreviation "NAFI" is substituted in lieu thereof. The date of each clause shall be the current date set forth in FAR or DOD FAR Supplement on the issuance date of this order or contract. Clauses made inapplicable by the reference or by the kind of order or contract (e.g. orders or contract for services instead of supplies) are self deleting. The complete text of any clause incorporated in this order or contract by reference may be obtained from the Contracting Officer. CLAUSE NO. REFERENCE CLAUSE TITLE --------------------------------------- 26 52.243-1 Changes - Fixed-Price 27 52.232-11 Extras 28 52.246-16 Responsibility for Supplies 29 52.225-11 Restrictions on Certain Foreign Purchases 30 52.222-4 Contract Work Hours and Safety Standards Act - Overtime Compensation 31 52.222-20 Walsh-Healy Public Contracts Act 32 52.222-26 Equal Opportunity 33 52.203-1 Officials not to Benefit 34 52.203-5 Covenant Against Contingent Fees 35 52.222-35 Affirmative Action for Special Disabled and Vietnam Era Veterans 36 52.222-36 Affirmative Action for Handicapped Workers 37 52.223-2 Clean Air and Water *38 52.225-7001 Buy American Act and Balance of Payments Program (NOTE: The 25% differential specified in DOD 7060.3, paragraph D1c(3), shall be used for evaluation in lieu of the 50% differential prescribed in FAR, Part 25.) I-8 77 39 52.222-3 Convict Labor 40 52.247-52 Clearance and Documentation Requirements - Shipments to DOD Air or Water Terminal Transshipment Points *41 52.225-7002 Qualifying Country Sources as Subcontractors 42 52.203-7 Anti-Kickback Procedures *43 52.203-7001 Special Prohibition on Employment 44 52.203-10 Price or Fee Adjustment for Illegal or Improper Activity 45 52.203-11 Certification any Disclosure Regarding Payments to Influence Certain Federal Transactions (Included if contract is expected to exceed $100,000) 46 52.203-12 Limitation on Payments to Influence certain Federal Transactions (Included if contract is expected to exceed $100,000) 47 52.203-13 Procurement Integrity - Service Contracting *48 52.225-7007 Trade Agreements Act *49 52.225-7036 North American Free Trade Agreement Implementation Act *50 52.225-7037 Duty-Free Entry-NAFTA Country End Products and Supplies 51 52.225-14 Inconsistency Between English Version and Translation of Contract** **In the event of inconsistency between any terms of this contract any translation thereof into another language, the English language meaning shall control. 52 52.227-1 Authorization and Consent 53 52.227-3 Patent Indemnity 54 52.227-19 Commercial Computer Software- Restricted Rights I-9 78 55 225-227-7019 Identification of Restricted Rights Computer Software 56 225-227-7013 Rights In Technical Data & Computer *Denotes DOD FAR Supplement ADDITIONAL GENERAL PROVISIONS APPLICABLE TO SERVICES (FULL TEXT NOT REQUIRED) 57 52.243-1 ALT I Changes - Fixed Price 58 52.246-4 Inspection of Services - Fixed Prices (1992 Feb) 59 52.222.41 Services Contract Act of 1965, as Amended (1989 May) (NOTE: Applicable to orders in excess of $2,500.00) 60. ORDERING (APR 1984). a. Any supplies and services to be furnished under this contract shall be ordered by the issuance of delivery orders by the individuals or activities designated in the Schedule. Such orders may be issued under this contract from date of award through 120 months. b. All delivery orders are subject to the terms and conditions of this contract. In the event of conflict between a delivery order and this contract, the contract shall control. c. If mailed, a delivery order is considered "issued" when the NAFI deposits the order in the mail. Orders may be issued orally or by written telecommunications only if authorized in the Schedule. 61. DELIVERY ORDER LIMITATIONS (APR 1984). a. Minimum Order: When the NAFI requires supplies or services covered by this contract in an amount of less than one system per base, the NAFI is not obligated to purchase, nor is the Contractor obligated to furnish, those supplies or services under the contract. b. Maximum Order: The Contractor shall not be obligated to honor- (1) Any order for a single item in excess of one system per base; (2) Any order for a combination of items in excess of one system per base; or (3) A series of orders from the same ordering office within one system per base days that together call for quantities exceeding the limitation in subparagraph (1) or (2) above. c. If this is a requirements contract (i.e., includes the Requirements clause at subsection 52.216-21 of Federal Acquisition Regulation (FAR)), the NAFI is not required to order a part of any one requirement exceeds the maximum-order limitations in paragraph (b) above. d. Notwithstanding paragraphs (b) and (c) above, the Contractor shall honor any order exceeding the maximum order limitations in paragraph (b), unless that order (or orders) is returned to the ordering office within 10 days after issuance, with written notice stating the Contractor's intent not to ship the item (or items) called for and the reasons. I-10 79 Upon receiving this notice, the NAFI may acquire the supplies or services from another source. 62. INDEFINITE QUANTITY (APR 1984). a. This is an indefinite quantity contract for the supplies or services specified, and effective for the period stated, in the Schedule. The quantities of supplies and services specified in the Schedule are estimates only and are not purchased by this contract. b. Delivery or performance shall be made only as authorized by orders issued in accordance with the Ordering clause. The Contractor shall furnish to the NAFI, when and if ordered, the supplies or services specified in the Schedule up to and including the quantity designated in the Schedule as the "maximum." The NAFI shall order at least the quantity of supplies or services designated in the schedule as the "minimum." c. Except for any limitations on quantities in the Delivery-Order Limitations clause or in the Schedule, there is no limit on the number of orders that may be issued. The NAFI may issue orders requiring delivery to multiple destinations or performance at multiple locations. d. Any order issued during the effective period of this contract and not completed within that period shall be completed by the Contractor within the time specified in the order. The contract shall govern the Contractor's and NAFI's rights and obligations with respect to that order to the same extent as if the order were completed during the contract's effective period; provided, that the Contractor shall not be required to make any deliveries under this contract after date specified on the delivery order. I-11 80 EQUIPMENT PERFORMANCE SPECIFICATION FOR A EUROPEAN LODGING FACILITY TELECOMMUNICATIONS SYSTEM (LFTS) Section J, Attachment 1 Page 1 of 21 81 EQUIPMENT PERFORMANCE SPECIFICATION FOR A LODGING FACILITY TELECOMMUNICATIONS SYSTEM (LFTS) 1. ITEM DESCRIPTION. 1.1 General. This Equipment Performance Specification (EPS) defines the requirements for a new Lodging Facility Telecommunications System (LFTS), including hotel/motel accounting and management features. The contractor shall provide a LFTS consisting of all new equipment including the basic digital switching system, attendant consoles, administrative terminals, subscriber line circuit equipment, trunk circuit equipment, distribution frames, wire and cable plant, house wire, customer premise equipment, uninterrupted power supply (UPS), outside plant (black) cable, and all other ancillary Hotel/Motel equipment and software necessary to provide service for a complete telecommunication system. This system shall have a modular architecture with an expansion capability. Centrex service is not acceptable. 2. APPLICABLE DOCUMENTS. 3. SYSTEM REQUIREMENTS. 3.1 General System Requirements. 3.1.1 System Compatibility and Interface. The LFTS shall be compatible with the existing base Dial Central Office (DCO), local commercial telephone system, and government furnished equipment (GFE). The contractor shall provide an asynchronous RS-232C port to interface to a GFE property management system. 3.1.2 Direct Dialing. The switching system shall be capable of performing Direct Outward Dialing (DOD), Direct Inward Dialing (DID), and Direct Distance Dialing (DDD) to the Public Switched Section J, Attachment 1 Page 2 of 21 82 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425 21 March 95 Telephone Network without the need of an attendant. DOD, DID, and DDD shall each be assigned to properly class marked stations. 3.1.3 Flexibility of Connection. Any station directory number shall be assignable to any switching system line equipment terminal by programming internal switching system memory. 3.1.4 DTMF Dialing Operation. The equipment shall automatically interconnect station lines in response to off-hook Dual Tone Multi-Frequency (DTMF) signals without the aid of an attendant. 3.1.5 Class of Service. The switching system shall provide all necessary classes of service (class marks) to control subscriber access to other subscribers and trunk circuits. All class mark codes shall be assignable on a per line basis for each switched line. 3.1.6 Trunking. The switching system shall provide trunk circuit interfaces with standard signaling modes. The system shall recognize and respond to the various signaling and supervision methods using trunk cards with programmable and/or strapping options to provide satisfactory trunk operation. 3.1.7 Traffic. 3.1.7.1 Grades of Service. The switching system shall be designed with sufficient intra-system circuit paths between line ports and trunk ports to meet the following grades of service: Intra-office Paths P.005 Incoming Registers without start signal P.001 with start signal P.01 DTMF Senders P.001 3.1.7.2 Traffic Measurement Data. Traffic measurement data shall be provided on hard copy printout via the Administrative Terminal. The switching system shall store traffic data for study periods up to 24 hours. Data outputs shall include usage data on all trunks and call completion data. Section J, Attachment 1 Page 3 of 21 83 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425 21 March 95 3.1.7.2.1 Traffic Measurement and Analysis Report. This report provides data concerning use and congestion in the switching system. This report will be used to determine whether the switching system is provided adequate traffic capacity and to determine whether existing facilities are adequate. (Reference CDRL sequence number A006). a. General. The report shall provide printed, tabulated data from the traffic measuring system. The report shall provide measurements for seven consecutive business days, on an hourly basis, unless a shorter interval is requested. The data shall include all of those items listed in paragraphs 3.2.4 and 3.8.4.2. b. Analysis. The report shall contain an analysis of the traffic measurements and recommendations based on the analysis. Recommendations shall address expansion of switch hardware and software and shall be specified and detailed. 3.1.8 Self Testing and Alarms. An automatic routine under stored program control shall be provided to monitor the integrity of the switching system. The LFTS shall provide audible and visual alarms indicating malfunctions or other conditions affecting service which are detected by the switching system. Audible and visual alarms shall be extended to the attendant location position or other remote locations as designated in the SOW. Differing alarms shall indicate major and minor failures. External alarms for subsystems external to the DPABX are acceptable. Failure of any portion of the billing system will produce a major alarm. 3.1.9 System Failures. 3.1.9.1 Major. A failure resulting from: loss of call processing on greater than = 10% of equipped lines or trunks, or greater than = 10 equipped lines or trunks, whichever is greater: failure of the billing system or any component of the system, or a major alarm. 3.1.9.2 Minor. A failure resulting from: loss of call processing of greater than 2% less than 10% of equipped lines or trunks or 2 equipped lines or trunks, whichever is greater; any abnormal hardware or software condition which requires maintenance action to restore the LFTS to normal operation, or a minor alarm. Section J, Attachment 1 Page 4 of 21 84 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425 21 March 95 3.1.10 Environmental Conditions. 3.1.10.1 Temperature. The switching system shall operate continuously at ambient temperature between 10 C and 30 C (50 F and 86 F) without degradation of performance. The switching system shall operate at extreme ambient temperatures of 5 C and 40 C (41 F and 104 F) for a minimum of 24 continuous hours. Ambient refers to conditions at a location 5 feet above the floor and 15 inches in front of the equipment. 3.1.10.2 Humidity. The switching system shall operate continuously at a relative humidity between 20% to 60% without degradation of performance. The switching system shall be capable of operating continuously for a 24 hour period, without degradation of performance, when the relative humidity is between 60 & 95%, non-condensing. 3.1.11 System Availability. Availability is defined as the percentage of total time that the switching system is able to perform its intended function. Availability for the LFTS shall be 99.99%. 3.1.12 Automatic Software Reload. The contractor shall provide an automatic software reloading system. After commercial power is restored following a power loss exceeding the capacity of the battery backup system, the system shall reload the call processing software and the database, eliminating the need for reprogramming the system. 3.2 System Design. 3.2.1 Expansion Capability. The switch system shall be expandable, as identified in the SOW, beyond the equipped capacity. Expansion of the system beyond the equipped capacity shall not cause service interruption exceeding one hour in duration. Time and duration of any service interruption required to expand the system shall be coordinated with the LFM in accordance with the SOW. All necessary common control equipment, software features, and power system components shall be provided at the initial installation to accommodate the ultimate expansion defined in the SOW. 3.2.2 Dialing Plan. The Dialing Plan for the switching system shall utilize the NNX codes assigned by the local Telephone Company (TELCO). It shall be capable of three, four, and five Section J, Attachment 1 Page 5 of 21 85 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425 21 March 95 digit station numbers and one, two, and three digit access codes. Numbering shall be approved by the Lodging Facility Manager (LFM) and not in conflict with any computer management system already in place. Trunk access codes and feature operating codes shall be established by the contractor, with final approval by the government. FOR EXAMPLE:
Dial Code --------- 0 Lodging Attendant 1 through 6 Station Number 7 8 *90 91 91-800
- ---------- * Access to off base operator assisted calls shall be restricted to lodging attendant. 3.2.3 Administrative Terminal (AT). The contractor shall provide an AT for exclusive use by the Lodging Facility personnel. The terminal shall provide access to the switching system and allow additions, deletions, and changes to be made to administrative data (station features, telephone numbers, authorization codes, class of service, etc.) and call detail and billing parameters. The AT shall consist of an alphanumeric keyboard, printer, and VDT. The contractor shall perform the initial translations. 3.2.4 Call Detail Recording (CDR). 3.2.4.1 Call Detail Recording. The LFTS shall automatically collect, sort, and store CDR data (items [1] through [8]). The CDR subsystem shall store the processed CDR data on disks. The storage capacity of the disks shall be no less than 20,000 call records. An audible and visible alarm shall activate when the disks are nearing capacity. The CDR subsystem shall read and display the stored data from the disks and shall provide a local hardcopy printout on command. Reading and changing the storage device, or printing of stored data shall not result in the loss of data or interfere with data collection. The CDR subsystem shall be equipped with the necessary hardware and Section J, Attachment 1 Page 6 of 21 86 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425, 21 March 95 software to allow the user to enter any time interval and sort on any one of the following parameters (with the exception of items [3], [6], and [7]): [1] Time interval alone (i.e. all calls placed in the initially specified time interval). [2] Room number/extension number. [3] Called number(s) (segregated by area and NNX codes). [4] Toll and non-toll calls. [5] Time call originated (date, hour, minute). [6] Time call completed (date, hour, minute). [7] Duration of call (accurate to at least five seconds). [8] Authorization code (minimum of five digits). 3.2.4.2 Call Sorting. After selecting the time interval and one or more of the previous parameters, with no more than five operator entries, the CDR subsystem shall display, and print on command, the following data: [1] Calling number. [2] Called number. [3] Time call originated (date, hour, minute). [4] Time call completed (date, hour, minute), or alternatively, duration of call. [5] Authorization code/Account code. [6] Toll charge (dollars, cents). Section J, Attachment 1 Page 7 of 21 87 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425 21 March 95 3.2.5 Call Billing/Room Status Subsystem (CBRSS). The LFTS shall be equipped with all necessary hardware and software to provide the call billing/room status function (CBRSS). The CBRSS will not be installed on the SIMS computer. It may be installed on the PBX or a separate computer(s) depending on the vendor's solution. The CBRSS subsystem will have at least two communication ports, one to SIMS, and one to a printer to list all call account/room status records and print reports. The CBRSS will pass both the call account record and the room/bed housekeeping and occupancy status record to SIMS as well as to the CBRSS printer. The capability to send a call record to SIMS and the printer simultaneously as well as the ability to select either option alone is required. The format of the call accounting and the room status records sent to the printer can be determined by the vendor but must be understandable by the attendant i.e. each field value must be identified by a clear text label. The call accounting records and room status records will be passed to the SIMS when it is connected. If SIMS is not available, CBRSS must be able to store at least 20000 call records with the capacity to run reports with the same options outlined in EPS paras 3.2.4.1 and 3.2.4.2. It must also be able to continue routing the call billing/room status records to the printer, easily identifying that it must be manually posted. CBRSS data shall not be lost due to commercial AC power outage. 3.2.5.1 Call Billing Function. Charges shall be automatically computed for commercial, DDD, and Lodging operator assisted toll calls and billed to the calling station. Direct dialed and operator assisted toll calls originated by the lodging attendant and extended to a station number shall be billed to the station number for single occupancy quarters and to the applicable authorization/account code for multiple occupancy quarters. The toll rate data base shall be software programmable and based upon necessary tariff parameters (e.g., area and NNX codes, trunk group, mileage, etc.) and inputs from the LFM. The contractor shall provide protection of, and access to, the data base by means of a password(s). The contractor shall perform the initial programming and shall maintain and update the data base as rate changes occur for the life of the contract. 3.2.5.2 Room/Bed Housekeeping and Occupancy Status. The CBRSS shall store and display the status of each guest room by room number. Housekeeping status shall be updated by the housekeeper dialing codes from the room phone. The system shall print, on command, a housekeeping report that contains the following data: Section J, Attachment 1 Page 8 of 21 88 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425. 21 March 95 [1] Room number (capable of 5 alphanumeric characters). [2] Cleaning status (clean or not clean). [3] Inspection status (inspected or not inspected). [4] Occupancy status (occupied or not occupied). [5] Room requires maintenance. 3.2.6 SIMS Interface Requirements. The contractor shall provide the necessary interface and connections between the Call Billing/Room Status System (CBRSS) and the SIMS system or its replacement. SIMS interface specifications will be provided by the government in the delivery order. The interface specifications will include the necessary message formats and software handshaking protocols necessary to interface the CBRSS to SIMS or its replacement. 3.2.7 Power Requirements. The switching and billing system shall include an Uninterrupted Power Supply (UPS) system powered by the commercial AC power. The UPS shall provide sufficient standby power to operate the switching and billing system for a minimum of four (4) hours should the commercial AC power be interrupted. The UPS shall automatically disconnect the batteries from the switching and billing system should the battery voltage fall below the manufacturer's low voltage limit. The UPS shall be sized at cutover for the expansion capacity of the switching system. Batteries shall be of the maintenance free, sealed recombining type. These batteries shall utilize an immobilized electrolyte and vent no gases. Power faults shall be indicated by a visual and audible alarm remoted to the immediate area of the attendant console. Audible alarms remoted to the attendant position shall have a means of being silenced at the attendant position. 3.3 System Features. The LFTS switching system shall be configured to include system features described below. 3.3.1 Message Waiting. The contractor shall provide the attendant console or message waiting center instruments with the ability to activate and deactivate a message waiting lamp at each station instrument with message waiting capability. Section J, Attachment 1 Page 9 of 21 89 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425 21 March 95 3.3.2 Authorization/Account Code Calling. The LFTS shall have the capability of random generation and activation and deactivation of authorization/account codes. The authorization codes shall not be less than 5 digits and shall be assignable to any station line when properly classmarked. The authorization/ account code shall be assignable from the administration terminal by lodging personnel. 3.3.3 Station Number Hunting. When the first number in a hunting group is found busy, each line within the hunting group shall be checked consecutively until an idle line is found. If any idle line is found, that line will be rung. If all lines are found busy, the calling party shall receive line busy tone. Each hunt group shall consist of either consecutive or nonconsecutive directory numbers. 3.3.4 Automatic Wake-up. The contractor's equipment shall provide an automatic wake-up service. This service shall permit the attendant to instruct the switching system to automatically call a station at a specified time. The attendant shall be able to cancel and activate a wake-up call from the attendant's position. A subscriber via the subscriber's telephone, shall have the capability to instruct the switching system to automatically call their station (and only their station) at a specified time; a subscriber shall have the capability to cancel wake up calls that the subscriber programmed. The contractor shall provide a printed record of the wake-up request. The record shall consist of the room number of the requester, wake-up time, wake-up cancellation, and indication if the wake-up call was answered. The system shall be capable of ringing at least 10% of equipped lines simultaneously (all having the same wake-up time) using this feature. The automatic wake-up service shall override the DO NOT DISTURB feature. 3.3.5 Do Not Disturb. This feature allows a station to block all incoming calls and reroute them to the attendant console or message center. The attendant console shall not automatically override this feature, but may be overridden by input from the attendant. 3.3.6 Automated Attendant. The LFTS shall provide the automated attendant capability for all incoming trunks (city and base). All incoming calls shall be routed to an automated attendant system. This system shall inform the caller, via announcement, that a room number can be dialed directly if the caller knows the number, otherwise, the call will be reverted to the attendant. This Section J, Attachment 1 Page 10 of 21 90 CSPO/PGE EPS-93F-CSPO-015A Scott AFE IL 62225-5425. 21 March 95 AA system may be internal to the switching system or may be provided via an external system. The specific announcements will be identified by the LFM. 3.3.7 Automatic Call Distribution. When specified in the site SOW, the LFTS shall provide Automatic Call Distribution (ACD). The ACD feature shall provide for efficient distribution and handling of a large volume of incoming calls to a group of telephone instruments (termed ACD agent positions) designated for this purpose. The application of the ACD feature will be to support offices which routinely handle large volumes of call traffic, such as lodging reservations and comparable activities. The ACD feature shall be capable of supporting at least 1 ACD group consisting of 10 ACD agent positions and at least 15 ACD directory numbers (DNs) per group in accordance with the definitions provided below. 3.3.7.1 ACD Operation. 3.3.7.1.1 ACD Call Queuing. Incoming calls to directory numbers assigned to ACD positions shall be served on a First In and First Out basis and equitably distributed to the in-service ACD agent positions that are in an idle state and ready to accept calls. The call distribution algorithm shall distribute calls to ACD agent positions that have been idle the longest period of time. The total number of calls queued by an ACD group shall be limited by both the number of calls in the queue and the time the longest call has been in the queue. Both of these parameters shall be customer definable. 3.3.7.1.2 ACD Directory Number and Queue Assignments. The ACD feature shall support multiple ACD directory numbers. The number of ACD numbers assigned at a particular site will be a function of the projected traffic characteristics of each ACD facility. If shall be possible to assign multiple ACD agents to an individual ACD. The assignment of specific ACD agents to specific ACD directory numbers shall be programmable in the system data base via the Administrative Terminal (AT). 3.3.7.1.3 Non-ACD Directory Number Allocations. Each ACD agent position shall be assignable one or multiple directory numbers to receive or originate non-ACD calls. 3.3.7.1.4 Recorded Announcement and Music On Hold Treatment. When the number of incoming calls in queue exceeds the number of idle ACD agents, the system shall route the call Section J, Attachment 1 Page 11 of 21 91 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425 21 March 95 to a recorded announcement to inform the calling party of the delay. Incoming calls shall be routed to the announcement either when the call is initially placed in the queue or after an established time delay threshold as measured from the time that the call was originally placed in queue. Following the application of the recorded announcement, the LFTS shall provide wither "silent hold" treatment or music on hold treatment, as specified in system translations. Silent hold treatment or music on hold treatment shall be provided to the calling party until the call is answered by the ACD agent or until the call is abandoned. A capability shall be provided to periodically play recorded announcements over the silent hold or music on hold treatment for the duration (until an agent answers or the call is abandoned). 3.3.7.1.5 ACD Night Service. ACD night service shall provide treatment for incoming calls to ACD DNs that are not in service after normal business hours. The night service function shall provide the capability to: a. Route incoming ACD calls to a recorded announcement, or b. Forward the incoming ACD calls to a designated night service directory number. 3.3.7.2 ACD Agent Positions. 3.3.7.2.1 ACD Agent Position Functions. The ACD feature shall support both working agent (non-supervisory) and supervisory agent positions. Non-supervisory positions shall support normal incoming ACD call processing tasks. Supervisory ACD positions shall be capable of supporting incoming call-processing tasks and the following supervisory functions: a. Provide visual indicators which present information on the state of each non-supervisory agent assigned to an ACD supervisor. As a minimum, the information provided to an ACD supervisor position shall include the following: (1) Agent position is in active/inactive state (2) Agent is busy processing an ACD call (3) Agent is waiting for an ACD call Section J, Attachment 1 Page 12 of 21 92 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425. 21 March 95 (4) Agent is busy on a non-ACD call. b. Provide access to visual display of summary information on the status of all agents assigned to an ACD supervisor. As a minimum, the ACD summary information shall include the following: (1) Number of positions wither active or inactive (2) Number of agents busy on ACD calls (3) Number of agents in the make busy mode (4) Number of agents waiting for ACD calls (S) Number of agents busy on non-ACD calls (6) Number of calls waiting in each ACD queue allocated to the ACD supervisor and the waiting time of the first call waiting in each queue or some other statistically meaningful measurement of agent call handling performance (e.g. average speed of answer). c. Have access to ACD management reports specified in para 3.3.7.4. 3.3.7.2.2 ACD Agent Position Equipment Characteristics. As a minimum, ACD Agent positions shall be equipped with a telephone instrument that incorporates an LED, LCD, or comparable visual display for presenting calling source information and other relevant data to facilitate ACD agent call processing. For ACD facilities which require ACD management reporting functions, ACD supervisory position(s) shall be equipped with visual display units and/or printers for providing ACD performance statistics to ACD supervisors. Specific quantities of ACD agent positions, ACD supervisory positions, visual display units and printers will be identified in the site SOW. 3.3.7.3 ACD Agent Features. Section J, Attachment 1 Page 13 of 21 93 CSPO/PGE EPS-93F-CSPO-015A Scott AFE IL 62225-5425. 21 March 95 3.3.7.3.1 Make Busy Function. The ACD feature shall provide a "make busy" function which permits an ACD agent to depress a button or key which prevents subsequent incoming calls from being directed to that agent position. Operation of make busy function while an agent is processing an active call shall not disconnect the current call process. 3.3.7.3.2 Emergency Alert. When specified in the site SOW, the contractor shall provide an emergency alert capability. Activation of a special emergency button on the agent's phone shall automatically print the date, time, called station number, and calling station number or incoming trunk identity at the AT printer of the LFTS serving the called station and simultaneously signal the supervisor. 3.3.7.3.4 Call Force. The call force feature shall allow subsequent incoming calls to be placed on the line without requiring the agent to physically hang up. 3.3.7.4 ACD Management Reports. ACD management reports shall be generated which include detailed information on the number of incoming ACD calls, ACD calls completed, ACD calls not completed and reasons that calls were not completed, ACD queue statistics and other data which may be used by management and administrative personnel to assess call handling efficiency. Information similar to the following shall be included in ACD management reports: a. A count of the number of incoming ACD calls b. A count of the number of completed ACD calls c. A count of the number of calls not completed because the incoming call queue threshold has been exceeded d. A count of the number of calls not completed because the maximum time a call can wait in queue has been exceeded e. The number of ACD calls abandoned by the calling party f. A count of the number of calls received during night service Section J, Attachment 1 Page 14 of 21 94 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425. 21 March 95 g. Average speed of answer h. Average number of calls in queue i. Average holding time j. Duration of the longest call held in queue. 3.4 Attendant Console. 3.4.1 Attendant Console Capabilities. 3.4.1.1 Attendant Console. The attendant console shall operate with keys or pushbuttons. There shall be no cords for call completion or extension. 3.4.1.2 Attendant Call Queuing. Incoming calls not answered by the attendant shall be placed in queue. The call shall be extended to the console on a first come, first serve basis. The contractor shall provide a recorded announcement and a recording and announcing device for all queued calls. All calls placed in queue shall automatically receive the recorded announcement without assistance from the attendant. 3.4.1.3 Full Access. The attendant console shall have full access to all main lines and trunks in the system with the ability to complete station-to-station, station-to-trunk, trunk-to-station, and trunk-to-trunk calls. 3.4.1.4 Alphanumeric Display. An alphanumeric display shall be provided on the attendant console to display the calling station number (for local stations) or the trunk circuit to which the attendant is connected. 3.4.2 Attendant Console Features. 3.4.2.1 Split Calling. The attendant shall be able to converse privately with either the calling or the called party on all calls. Section J, Attachment 1 Page 15 of 21 95 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425. 21 March 95 3.4.2.2 Busy Verification. The attendant shall be able to determine whether a busy station line is actually in service. A warning tone shall first be placed on the line being verified before completing the talking path. The attendant shall be able to release the connection after busy verification. 3.4.2.3 Call Transfer. The attendant shall be able to transfer trunk calls to and from any station line. The attendant shall be able to transfer any trunk call to a conference circuit. 3.4.2.4 Call Hold. The attendant shall be able to place an incoming call on hold. 3.4.2.5 Class of Service Override. The attendant shall be able to override any line or trunk class of service marking for the purpose of accessing and switching the circuit. 3.4.2.6 Conference Calls. The attendant shall be able to establish user defined conference calls of up to six parties. 3.5 Station Features for Administrative Telephones. The following station features shall be assignable to administrative office phones: 3.5.1 Call Transfer. Subscribers shall be able to transfer any in progress call to another station without assistance from the attendant. 3.5.2 Call Hold. Subscribers shall be able to place an in-progress call on hold. 3.5.3 Three-way Conference. Properly class marked subscribers shall be able to place a call on hold and then add a third party to an in progress local or trunk call without attendant assistance. 3.6 Premise Equipment. 3.6.1 Telephone Instruments. All telephone instruments shall be new, full size, fully modular, DTMF instruments. The contractor shall provide message waiting capability for all instruments with message waiting specified in the SOW. The message waiting feature shall use a visual means to alert the station user of message waiting. All instruments shall be of the same neutral Section J, Attachment 1 Page 16 of 21 96 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425. 21 March 95 color as agreed to by the LFM. Telephone instruments shall, as a minimum, consist of the base unit with DTMF keypad, handset, handset cord and fully modular mounting cord. 3.7 Distribution System. Government furnished outside (black) cable that is available for contractor use to interconnect billeting buildings to the Main Distribution Frame shall be identified by the base Communications Squadron. The contractor shall be responsible for providing and installing any other additional outside cable required. The contractor shall provide and install all new inside (building) cable, conduits, ducts, distribution frames, terminal equipment, terminal blocks, and any other hardware necessary to provide complete telecommunication service. Demarcation points of government furnished black cable will be at the terminal blocks in each building unless otherwise specified in the SOW. New standard, fully modular jacks and plugs shall be provided by the contractor for all installations and relocation of terminal equipment. The contractor shall provide complete service to, and interface at, the government specified demarcation points for those pre-wired buildings, if any, that are identified in the appendices for each site. 3.7.1 Distribution System Design. The distribution system shall consist of transmission channels along with any associated terminals, splicing, etc., required to provide electrical connectivity from the terminal equipment to the DF. The distribution plant shall be sized as specified in the delivery order. The distribution plant shall be designed with all lines and spares being "fixed count" (i.e., dedicated and accessible at the MDF) with no multiple connections except as specified in the SOW. All outside plant cable pairs shall be terminated on gas tube protectors at the DF and the terminal end. 3.7.2 Cable and Trenching. All outside cable shall be filled and direct buried or underground in new conduit and ducts. Gopher resistant cable, if required, will be specified in the SOW. All road/driveway crossings shall be accomplished by boring/accupunch method unless otherwise approved, in writing, by the contracting officer after contractor coordination with base roads and ground agencies. All buried cable crossing under roads, streets, parking lots, driveways, railroads, etc., that bears vehicular traffic shall be placed in protective conduit. The contractor shall accomplish all trenching IAW REA standards specified in paragraph 2 and shall be responsible for performing all backfilling, reseeding, repaving, or any other service and material to restore surfaces to their original condition. All outside cable terminations shall be enclosed in Section J, Attachment 1 Page 17 of 21 97 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425. 21 March 95 weathertight enclosures, and all outdoor splices shall be direct buried using filled, sealed enclosures. The use of buried distribution terminals is prohibited. Any indoor filled cable shall not exceed 50 feet, shall be in conduit, and shall run directly to the house terminal block. All indoor splices shall be enclosed in a proper type of indoor splice enclosure. Filled cable run indoors shall not be run between floors or inside walls, nor shall it be terminated on protective devices if such device is part of the Main Distribution Frame (MDF) or an Intermediate Distribution Frame (IDF). If a conduit is available, it shall be used for cable entrance. The cable shall be run to the protected terminal upwards in a vertical direction wherever possible and be sealed to prevent jelly leakage. Where a cable enters a facility through an exterior wail, it shall be properly sealed on both sides of entry to prevent any kind of leakage. The contractor shall ensure cable installation does not cause mechanical stress or strain to the cable, or result in sharp edges, burrs, or other projections which may be injurious to the insulation or jackets of the wiring. In addition, the contractor shall provide ground level (flush), telephone warning, splice, and route signs at all underground/buried splice locations and all changes of direction in excess of 30 degrees. 3.7.3 House Wire. House wire shall be extended from punch down terminal blocks at the outside plant terminal location to intermediate terminal points within each facility. Each station shall be provided with two individual pairs of wires (4 conductors) from the building terminal. Station lines shall be terminated on standard 2 pair flush mounted modular jacks at all locations except on masonry walls. RJ-11 or similar jacks may be used on masonry wall locations. Jacks for desk type phones shall be mounted no higher than 12 inches from floor level. Jacks for wall type phones shall be mounted no lower than 52 inches and no higher than 56 inches from the floor level. The contractor shall route all house wire on the interior of the buildings. The contractor shall install all house wire so that it is concealed inside walls, ceilings, or other parts of the permanent structure. Where house wire can not be concealed, it shall be placed in color coordinated raceways with the proper appliance for installing flush mounted jacks, and require the approval of the BFM prior to installation. 4. QUALITY CONTROL. 4.1 Quality Control Program. The contractor shall establish a quality control program to assure that the LFTS meets all of the performance criteria in this specification. This program shall include physical inspections and functional testing of the LFTS before, during and after cutover. Section J, Attachment 1 Page 18 of 21 98 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425 21 March 95 4.2 Quality Assurance. The government Quality Assurance Evaluator (QAE) (the base lodging manager) and the Contracting Officer's Technical Representative (COTR) will monitor the installation progress to insure that the LFTS meets the requirements of the SOW and EPS. 4.3 Installation Testing. The contractor shall perform an installation test of the complete LFTS to ensure requirements of the SOW and EPS are met or exceeded. Government representatives will be allowed to witness all inspections and tests to assure conformance with the SOW and EPS. The contractor shall demonstrate to the government representative, all requirements of the SOW and EPS, prior to acceptance testing. The contractor shall notify the Contracting Officer no later than 2 weeks prior to installation testing to allow sufficient time for a government representative to observe. No official installation testing will take place prior to a government representative arriving on site.(Reference CDRL sequence number A008). 5. PREPARATION FOR DELIVERY. 5.1 Packaging shall be IAW the terms of the contract. 6. NOTES. 6.1 Acronyms. BCE: Base Civil Engineer. LFM: Lodging Facility Manager. LFTS: Lodging Facility Telecommunications System. BCO: Base Communications Officer. CDRL: Contract Data Requirements List. Section J, Attachment 1 Page 19 of 21 99 CSPO/PGE EPS-93F-CSPO-015A Scott AFE IL 62225-5425. 21 March 95 COTR: Contracting Officer Technical Representive DTMF: Dual Tone Multi Frequency. EPS: Equipment Performance Specification. FAM: Functional Area Monitor. FCA: Functional Configuration Audit. IDF: Intermediate Distribution Frame. IAW: In Accordance With. MDF: Main Distribution Frame. PCA: Physical Configuration Audit. QAE: Quality Assurance Evaluator. SIMS: Services Information Management System. SOW: Statement of Work. 6.2 EFI&T. EFI&T, as used in this EPS, is defined as a contractor responsibility to engineer, design, furnish, install, test, and maintain a system or single item of equipment to provide a service to the government. 6.3 Point of Contact (POC). The LFM or authorized representative shall be the sole focal point for all service requests. 6.4 Attendants. Attendants will be provided by the LFM. Section J, Attachment 1 Page 20 of 21 100 CSPO/PGE EPS-93F-CSPO-015A Scott AFB IL 62225-5425. 21 March 95 6.5 Paragraph Referencing. Any reference to a paragraph is understood to include all subparagraphs. 6.6 Response Time. All response times for work requests, outages, etc. are based upon consecutive clock hours, unless otherwise stated, and shall begin from the time that the contractor is first notified, verbally or in writing, whichever occurs first, If verbally notified, a follow-up written verification will be forwarded. 6.7 Outside Plant. That portion of the LFTS extending outward from the MDF up to and including terminal blocks and intermediate distribution frames but excluding premise equipment. 6.8 Premise Equipment. Premise equipment includes telephones, telephone cables, modular jacks (usually flush mounted), grey wire runs to the intermediate distribution frame or terminal blocks. 6.9 Inside Plant. That portion of the LFTS extending inward from, and including, the MDF. 6.10 Two-Way Lines. All lines shall be two-way unless stated otherwise. 6.11 Demarcation Points. All government specified demarcation points will be identified by the BCO during the contractor's site survey. 6.12 Disclaimer for Government Provided Drawings. Government provided drawings are for the purpose of establishing a conceptual basis to enable contractors to prepare a suitable proposal. Contractors choosing to use any or all information therein shall do so only if and when their engineering and design considerations so dictate. The contractor shall not depend on government provided information to determine cable lengths, condition of cable and other equipment, building construction or other physical considerations. These items must be determined by the contractor by site visits and physical surveys. Section J, Attachment 1 Page 21 of 21 101 SECTION J LIST OF ATTACHMENTS
ATCH# TITLE PAGES - -------------------------------------------------------------------------------- 1 Equipment Performance Specification For a European 1-21 Lodging Facility Telecommunications System (LFTS) EPS-93F-CSPO-015A CSPO/PGE Scott AFB IL 62225-5425 2 DD Form 1423, Contract Data Requirements List 1-3 (A001-A0011) 3 DD Form 1664, Data Item Description Telecommunication Systems Installation Plan 1-3 Cutover Plan 1 Post-Cutover Quality Control Report 1 Comm-Computer Systems Installation Records 1-4 (CSIRs) Training Plan 1-2 Subscriber Education Pamphlet 1 Installation and Acceptance Test Plan 1-5 Test/lnspection Reports 1-5 Subscriber Ed. Pamphlet Standard Telephone Inst. 1 Subscriber Ed. Pamphlet LT1-Line Telephone Inst. 1 4 Appendix A - Ramstein Air Base Lodging Requirements 1-10 5 Appendix B - Rhein Main Air Base Lodging Requirements 1-5 6 Appendix C - Aviano Air Base Lodging Requirements 1-5
J-1 102 CONTRACT DATA REQUIREMENTS LIST FORM APPROVED QMB NO. 0704-0188 - ------------------------------------------------------------------------------- [ILLEGIBLE COPY] - ------------------------------------------------------------------------------- A. CONTRACT LINE ITEM NO. - ------------------------------------------------------------------------------- B. EXHIBIT - ------------------------------------------------------------------------------- C. CATEGORY: TDP TM OTHER - ------------------------------------------------------------------------------- D. SYSTEM/ITEM - ------------------------------------------------------------------------------- E. CONTRACT/PR NO. - ------------------------------------------------------------------------------- F. CONTRACTOR - ------------------------------------------------------------------------------- 1. DATA ITEM NO. A001 - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM Telecommunications System Installation Plan - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (Data Accountant Document No.) DI-GDRQ-80150 - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE Para. 3.8.3 - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE USAFE/SVFS - -------------------------------------------------------------------------------- 7. DD 259 REQ yes - -------------------------------------------------------------------------------- 8. APP CODE A - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY One/R - -------------------------------------------------------------------------------- 11. AS OF DATE N/A - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- USAFE/SVFS 1 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] 1 1 - -------------------------------------------------------------------------------- 16. REMARKS See DID DD Form 1664, Telecommunications System Installation Plan. Plan shall be provided 30 days after contract award. - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- 1. DATA ITEM NO. A002 - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM Cutover Plan - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (Data Accountant Document No.) DI-MGMT-80355 - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE Para. 3.8.4 - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE - -------------------------------------------------------------------------------- 7. DD 259 REQ yes - -------------------------------------------------------------------------------- 8. APP CODE A - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY One/R - -------------------------------------------------------------------------------- 11. AS OF DATE N/A - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- USAFE/SVFS 1 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] 1 1 - -------------------------------------------------------------------------------- 16. REMARKS See DID DD Form 1664, Cutover Plan. Plan to be provided 90 days after contract award. - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- 1. DATA ITEM NO. A003 - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM Post-Cutover Quality Control Report - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (Data Accountant Document No.) DI-QCIC-80135 - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE Para. 3.8.4 - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE - -------------------------------------------------------------------------------- 7. DD 250 REQ - -------------------------------------------------------------------------------- 8. APP CODE A - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY One/R - -------------------------------------------------------------------------------- 11. AS OF DATE N/A - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- USAFE/SVFS 1 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] 1 1 - -------------------------------------------------------------------------------- 16. REMARKS See DID DD Form 1664, Post-Cutover Quality Control Report. Plan shall be provided 45 days before Acceptance Testing begins. - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- 1. DATA ITEM NO. A004 - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM Comm-Computer Systems Installation Records (CSIRs) - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (??????????????????????????????) DI-DRPR-80151A - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE Para. 3.10 - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE - -------------------------------------------------------------------------------- 7. DD 250 REQ - -------------------------------------------------------------------------------- 8. A?? CODE - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY One Time - -------------------------------------------------------------------------------- 11. AS OF DATE N/A - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- USAFE/SVFS 1 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] 1 1 - -------------------------------------------------------------------------------- 16. REMARKS See DID DD Form 1664, Communications-Computer Systems Installation Records (CSTRs). Records shall be provided 15 days prior to final acceptance. - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- G. PREPARED BY WAYNE P. SELLERS - -------------------------------------------------------------------------------- H. DATE 25 Jan 96 - -------------------------------------------------------------------------------- I. APPROVED BY - -------------------------------------------------------------------------------- J. DATE - -------------------------------------------------------------------------------- DD FORM 1423, JUN 90 (EF) PREVIOUS EDITIONS ARE OBSOLETE. Page 1 of 3 Pages. 103 CONTRACT DATA REQUIREMENTS LIST FORM APPROVED QMB NO. 0704-0188 - ------------------------------------------------------------------------------- [ILLEGIBLE COPY] - ------------------------------------------------------------------------------- A. CONTRACT LINE ITEM NO. - ------------------------------------------------------------------------------- B. EXHIBIT - ------------------------------------------------------------------------------- C. CATEGORY: TDP TM OTHER - ------------------------------------------------------------------------------- D. SYSTEM/ITEM - ------------------------------------------------------------------------------- E. CONTRACT/PR NO. - ------------------------------------------------------------------------------- F. CONTRACTOR - ------------------------------------------------------------------------------- 1. DATA ITEM NO. A005 - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM Training Plan - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (Data Accountant Document No.) DI-ILSS-80143 - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE Para. 3.13 - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE - -------------------------------------------------------------------------------- 7. DD 250 REQ - -------------------------------------------------------------------------------- 8. AFF CODE A - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY One/R - -------------------------------------------------------------------------------- 11. AS OF DATE N/A - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- USAFE/SVFS 1 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] 1 1 - -------------------------------------------------------------------------------- 16. REMARKS See DID DD Form 1664, Training Plan. Plan shall be provided 60 days after contract award. - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- 1. DATA ITEM NO. A006 - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM Traffic Measurement and Analysis - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (Data Accountant Document No.) - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE Para. 3.1.7, 3.2.4, and 3.8.4.2 - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE - -------------------------------------------------------------------------------- 7. DD 250 REQ - -------------------------------------------------------------------------------- 8. AFF CODE A - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY One/R - -------------------------------------------------------------------------------- 11. AS OF DATE N/A - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- USAFE/SVFS 1 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] 1 1 - -------------------------------------------------------------------------------- 16. REMARKS Format and content will be proposed by the contractor using the requirements in Section C, paragraph 3.2.4 and reviewed and accepted by the Government. Plan shall be provided 90 days after contract award date. - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- 1. DATA ITEM NO. A007 - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM Subscriber Education Pamphlet - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (Data Accountant Document No.) DI-MISC-80129/T - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE Para. 3.13.5 and 3.14 - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE - -------------------------------------------------------------------------------- 7. DD 250 REQ - -------------------------------------------------------------------------------- 8. AFF CODE A - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY One/R - -------------------------------------------------------------------------------- 11. AS OF DATE N/A - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- USAFE/SVFS 1 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] 1 1 - -------------------------------------------------------------------------------- 16. REMARKS See DID DD Form 1664, Subscriber Education Pamphlet. Pamphlet shall be provided 15 days prior to acceptance start date. - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- 1. DATA ITEM NO. A008 - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM Installation and Acceptance Test Plan (IATP) - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (Data Accountant Document No.) DI-QCIC-80154A - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE Para. 4.3 and 4.4 - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE - -------------------------------------------------------------------------------- 7. DD 250 REQ - -------------------------------------------------------------------------------- 8. AFF CODE A - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY One/R - -------------------------------------------------------------------------------- 11. AS OF DATE N/A - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- USAFE/SVFS 1 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] 1 1 - -------------------------------------------------------------------------------- 16. REMARKS See DID DD Form 1664, Installation and Acceptance Test Plan (IATP). Plan shall be provided 15 days prior to acceptance start date. - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- G. PREPARED BY WAYNE P. SELLERS - -------------------------------------------------------------------------------- H. DATE 26 Jan 96 - -------------------------------------------------------------------------------- I. APPROVED BY - -------------------------------------------------------------------------------- J. DATE - -------------------------------------------------------------------------------- DD FORM 1423, JUN 90 (EF) PREVIOUS EDITIONS ARE OBSOLETE. Page 2 of 3 Pages 104 CONTRACT DATA REQUIREMENTS LIST FORM APPROVED QMB NO. 0704-0188 - ------------------------------------------------------------------------------- [ILLEGIBLE COPY] - ------------------------------------------------------------------------------- A. CONTRACT LINE ITEM NO. - ------------------------------------------------------------------------------- B. EXHIBIT - ------------------------------------------------------------------------------- C. CATEGORY: TDP TM OTHER - ------------------------------------------------------------------------------- D. SYSTEM/ITEM - ------------------------------------------------------------------------------- E. CONTRACT/PR NO. - ------------------------------------------------------------------------------- F. CONTRACTOR - ------------------------------------------------------------------------------- 1. DATA ITEM NO. A0009 - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM Test/Inspection Reports - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (Data Acquisition Documentation No.) DI-NDTI-80809A - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE Para. 4.4.1 - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE - -------------------------------------------------------------------------------- 7. DD 250 REQ - -------------------------------------------------------------------------------- 8. APT CODE A - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY One/R - -------------------------------------------------------------------------------- 11. AS OF DATE N/A - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- USAFE/SVFS 1 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] 1 1 - -------------------------------------------------------------------------------- 16. REMARKS See DID DD 1664, Test/Inspection Reports. Plan shall be provided within 15 days prior to acceptance start date at all sites. - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- 1. DATA ITEM NO. A0010 - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM Subscriber Ed. Pamphlet Standard Telephone Inst. - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (Data Acquisition Documentation No.) DI-MISC-80129/T - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE Para. 3.13.5 and 3.14 - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE - -------------------------------------------------------------------------------- 7. DD 250 REQ - -------------------------------------------------------------------------------- 8. APT CODE - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY One/R - -------------------------------------------------------------------------------- 11. AS OF DATE N/A - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- USAFE/SVFS 1 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] 1 1 - -------------------------------------------------------------------------------- 16. REMARKS See DID DD 1664, Subscriber Education Pamphlet Standard Telephone Instrument. Pamphlet shall be provided 15 days prior to acceptance start date. - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- 1. DATA ITEM NO. A0011 - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM Subscriber Ed.Pamphlet LT1-Line Telephone - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (Data Acquisition Documentation No.) DI-QCIC-80129/T - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE Para. 3.13.5 and 3.14 - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE - -------------------------------------------------------------------------------- 7. DD 250 REQ - -------------------------------------------------------------------------------- 8. APT CODE A - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY One/R - -------------------------------------------------------------------------------- 11. AS OF DATE N/A - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- USAFE/SVFS 1 1 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] 1 1 - -------------------------------------------------------------------------------- 16. REMARKS See DID DD 1664, Subscriber Education Pamphlet LT1-Line Telephone Instrument. Pamphlets shall be provided 15 days prior to acceptance start date. - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- 1. DATA ITEM NO. - ------------------------------------------------------------------------------- 2. TITLE OF DATA ITEM - ------------------------------------------------------------------------------- 3. SUBTITLE - ------------------------------------------------------------------------------- 4. AUTHORITY (Data Acquisition Documentation No.) - ------------------------------------------------------------------------------- 5. CONTRACT REFERENCE - ------------------------------------------------------------------------------- 6. REQUIRING OFFICE - -------------------------------------------------------------------------------- 7. DD 250 REQ - -------------------------------------------------------------------------------- 8. APT CODE - -------------------------------------------------------------------------------- 9. DIST STATEMENT REQUIRED - -------------------------------------------------------------------------------- 10. FREQUENCY - -------------------------------------------------------------------------------- 11. AS OF DATE - -------------------------------------------------------------------------------- 12. DATE OF FIRST SUBMISSION - -------------------------------------------------------------------------------- 13. DATE OF SUBSEQUENT SUBMISSION - -------------------------------------------------------------------------------- 14. DISTRIBUTION b. COPIES ------------------------------------ a. ADDRESSEE Final Draft --------------------------- Req Repro ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 15. TOTAL [arrow] - -------------------------------------------------------------------------------- 16. REMARKS - -------------------------------------------------------------------------------- 17. PRICE GROUP - -------------------------------------------------------------------------------- 18. ESTIMATED TOTAL PRICE - -------------------------------------------------------------------------------- G. PREPARED BY WAYNE P. SELLERS - -------------------------------------------------------------------------------- H. DATE 25 Jan 96 - -------------------------------------------------------------------------------- I. APPROVED BY - -------------------------------------------------------------------------------- J. DATE - -------------------------------------------------------------------------------- DD FORM 1423, JUN 90 (EF) PREVIOUS EDITIONS ARE OBSOLETE. Page 3 of 3 Pages. 105 - -------------------------------------------------------------------------------- DATA ITEM DESCRIPTION Form Approved OMB No. 0704-0188 - -------------------------------------------------------------------------------- Public reporting burden for the collection of information is estimated to average 110 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188), Washington, DC 20503. 1. TITLE 2. IDENTIFICATION NUMBER TELECOMMUNICATION SYSTEMS INSTALLATION PLAN DI-GDRQ-80150 - -------------------------------------------------------------------------------- 3. DESCRIPTION/PURPOSE 3.1 This plan details the contractor's methods and site specific plans for installation of the telecommunications system. It provides the Government the opportunity to review the contractor's plans so any problems can be identified and resolved prior to installation start. - --------------------------------------------------------------------------------
4. APPROVAL DATE 5. OFFICE OF PRIMARY RESPONSIBILITY (OPR) 6a. DTIC APPLICABLE 6b. GIDEP APPLICABLE (YYMMDD) 96/04/07 F/AFCC-TSFMO
- -------------------------------------------------------------------------------- 7. APPLICATION/INTERRELATIONSHIP 7.1 This Data Item Description (DID) contains the format and content preparation instructions for the data product generated by the specific and discrete task requirement for this data included in the contract. - -------------------------------------------------------------------------------- 8. APPROVAL LIMITATION 9a. APPLICABLE FORMS 9b. AMSC NUMBER F3813 - -------------------------------------------------------------------------------- 10. PREPARATION INSTRUCTIONS 10.1 Contract. This data item is generated by the contract which contains a specific and discrete work task to develop this data product. 10.2 General. The Telecommunications System Installation Plan (TSIP) shall contain a detailed description of the methods and procedures the contractor intends to use in installing the system. It shall detail the exact configuration the system shall be installed in. It shall also contain any site specific plans for unique installation requirements at the applicable location. The plan shall be standalone to the maximum extent possible, references to other documents shall be kept to any absolute minimum. 10.3 Contents. The plan shall include the following topics: a. List of equipment components to be installed. b. Drawings and diagrams of proposed floor plan layouts. c. Drawings of installation details. d. Power requirements and cabling. e. Installation schedule and implementation flowchart. f. Detailed installation standards and procedures. (Continued on page 2) - -------------------------------------------------------------------------------- 11. DISTRIBUTION STATEMENT - -------------------------------------------------------------------------------- DD FORM 1664, APR 89 (EF-V1) (PerFORM PRO) PREVIOUS EDITIONS ARE OBSOLETE. Page 1 of 3 Pages 106 DI-GDRQ-80150 10. PREPARATION INSTRUCTIONS (Continued) 10.3.1 Hardware/Software List. The hardware/software list shall be provided as an appendix to the TSIP. The list shall identify all hardware items and software items/modules to be delivered and installed by the contractor. The hardware/software list shall contain the following information for each hardware item and software package: a. Manufacturer's or vendor's part nomenclature and brief functional description. b. Manufacturer's or vendor's part number. c. Quantity. d. Equipment frame, shelf, position-slot number (hardware only). The hardware/software list shall be segregated into major functional groups (e.g., line base units, trunk base units, processor groups, software packages that correspond to the breakout of established contract line items). When an item consists of several lower level sub-assemblies, modules or units. the listing shall identify the corresponding part nomenclatures, part numbers and quantities down to the lowest replaceable unit. The physical location of each hardware item shall be identified by equipment cabinet, frame, shelf, card slot position etc. A master list shall be included which provides a listing of all hardware and software items by part number and their total quantity. 10.3.2 Floor Plan Layout. The floor plan layout shall be provided as a set of scaled drawings which indicate where and how the contractor proposes to layout all equipment bays, cable racks, main distribution frame, and miscellaneous equipment including the battery room, telephone service center and attendant room. All equipment and layout dimensions and measurements shall be specified. Both front and top view shall be included. 10.3.3 Installation Detail Drawings. Installation detail drawings shall include detailed indications of how the contractor proposes to install the equipment. These drawings shall detail how the equipment will interface government-furnished or commercial equipment, specifying demarcation points of interconnections. All connections required to locate, position, mount or attach equipment to the floor, walls or ceiling shall be specified in detail. Schematic or wiring diagrams of equipment bay interconnection shall be included. Drawings shall include terminal block layouts of the MDF, both vertical and horizontal sides. 10.3.4 Power and Cable Requirements. The power requirement and cable layouts shall be detailed in a separate set of drawings. Cable layouts shall include lists of cable sixes, lengths and wire gauges, exact termination locations, cable routings in racks, trenches, trays or any other location. All power distribution cables or systems shall be detailed including battery rack and rectifier cabling diagrams, and distribution to equipment bays and racks. Information shall be provided on power requirements such as size and capacity of rectifiers, batteries, and any power boards to be furnished by the contractor. 10.3.5 Installation Schedule and Implementation Flowchart. The installation schedule shall cover the overall schedule and milestone dates such as delivery of equipment installation start, installation testing start, etc. An implementation flowchart shall be provided which indicates which critical tasks must be accomplished and in which particular order. 10.3.6 Detailed Installation Standards and Procedures. The detailed narrative shall include all standards, methods and procedures the contractor intends to use to install the system. The narrative shall detail each step required to install the major subsystems. The narrative will tie together the schedule, flowchart, drawings and equipment list into an overall description of the installation plans. All tables and illustrations shall be clearly understandable and logically arranged. The contractor's format is acceptable. PAGE 2 OF 3 107 10.4 Drawings Format. The drawings can be prepared in accordance with American National Standards Institute Engineering Drawings and Related Documentation Practices. All drawings shall be rise "D" or "E". When contractor symbols, referenced designations, codes, standards, abbreviations. etc., are referenced on drawings, they shall, if a government- or nationally-recognized industry standard is applicable, include a cross reference to the government or industry standard on the drawing or in a document furnished to the government. If a government- or nationally-recognized industry standard is not applicable, the contractor symbols, referenced designations. etc., shall be explained on the drawings or in a document referenced on the drawing. A legend shall be provided to interpret all drafting symbols. 10.5 Revisions. Proposed revisions to the TSIP shall include the following information in the following format: a. Addresses. b. Originator. Shall include: (1) Organization/company requesting the revision. (2) Representative's name and phone number. (3) Representative's signature. (4) Date of request. c. Revision Request. Shall include: (1) Revision number. (These numbers will be in sequential order beginning with V001.) (2) Documents affected. (3) Contract number. (4) Indicate whether the revision is installation, removal, and/or relocation. (5) Proposed date the revision will take effect. (6) Location(s) affected by the revisions. (7) Reason for the revision - include risks - avoid generalities. (8) Nature of the revision - include whether temporary or permanent, method to be used, project impact, risk, etc. (9) Government action(s) required. PAGE 3 OF 3 108 - -------------------------------------------------------------------------------- DATA ITEM DESCRIPTION Form Approved OMB No. 0704-0188 - -------------------------------------------------------------------------------- Public reporting burden for the collection of information is estimated to average 110 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188), Washington, DC 20503. - -------------------------------------------------------------------------------- 1. TITLE 2. IDENTIFICATION NUMBER CUTOVER PLAN DI-MGMT-80355 - -------------------------------------------------------------------------------- 3. DESCRIPTION/PURPOSE 3.1 The cutover plan is designed to supply information on the conditions and actions necessary to ensure a successful cutover of any new system. - --------------------------------------------------------------------------------
4. APPROVAL DATE 5. OFFICE OF PRIMARY RESPONSIBILITY (OPR) 6a. DTIC APPLICABLE 6b. GIDEP APPLICABLE (YYMMDD) 88/10/07 HQ EEG/EIEWS
- -------------------------------------------------------------------------------- 7. APPLICATION/INTERRELATIONSHIP 7.1 This Data Item Description contains the format and content preparation instructions for the data product generated by the specific and discrete task requirement for this data included in the contract. - -------------------------------------------------------------------------------- 8. APPROVAL LIMITATION 9a. APPLICABLE FORMS 9b. AMSC NUMBER F3813 - -------------------------------------------------------------------------------- 10. PREPARATION INSTRUCTIONS 10.1 Content and Forms: The content of the cutover plan shall be as shown and shall be provided in the contractor's format. The plan shall include: a. A set of conditions which must exist prior to start of cutover. b. A detailed priority listing of actions/events that must occur for a successful cutover. c. The responsibilities of the contractor. d. The responsibilities of the government. e. The responsibilities of other telecommunications agencies. f. Time phasing of actions/events. - -------------------------------------------------------------------------------- 11. DISTRIBUTION STATEMENT - -------------------------------------------------------------------------------- DD FORM 1664, APR 89 (EF-V1) (PerFORM PRO) PREVIOUS EDITIONS ARE OBSOLETE. Page 1 of 1 Pages 109 - -------------------------------------------------------------------------------- DATA ITEM DESCRIPTION Form Approved OMB No. 0704-0188 - -------------------------------------------------------------------------------- Public reporting burden for this collection of information is estimated to average 110 hours per response, including the time for reviewing instructions, searching among data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding the burden estimate or any other aspect of this collection of information, including suggestions for reducing the burden, to Washington Headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188), Washington, DC 20503. - -------------------------------------------------------------------------------- 1. TITLE 2. IDENTIFICATION NUMBER POST-CUTOVER QUALITY CONTROL REPORT DI-QCIC-80135 - -------------------------------------------------------------------------------- 3. DESCRIPTION/PURPOSE 3.1 This report provides data for evaluating the performance of a system after installation completion and cutover and evaluating the contractor's service record. This report will be used by the government to evaluate the contractor's quality control. - --------------------------------------------------------------------------------
4. APPROVAL DATE 5. OFFICE OF PRIMARY RESPONSIBILITY (OPR) 6a. DTIC APPLICABLE 6b. GIDEP APPLICABLE (YYMMDD) 86/04/07 F/AFCC-TSPNO
- -------------------------------------------------------------------------------- 7. APPLICATION/INTERRELATIONSHIP 7.1 This Data Item Description contains the format and content preparation instructions for the data product generated by the specific and discrete task requirement for this data included in the contract. - -------------------------------------------------------------------------------- 8. APPROVAL LIMITATION 9a. APPLICABLE FORMS 9b. AMSC NUMBER F3798 - -------------------------------------------------------------------------------- 10. PREPARATION INSTRUCTIONS 10.1 Contract. This data time is generated by the contract which contains a specific and discrete work task to develop this data product. 10.2 Contents. The report shall include the following information: a. Total line and trunk outages reported for the month. b. List of all lines and trunks not repaired within specified time limits. c. Total number of routine service requests received from the base information systems officer (BISO) for the month. d. Total number of emergency service requests received from the BISO for the month and total man-hours utilized. e. List of all service requests not repaired within specified time limits. f. Overall status of the system. g. Deficiencies of the system. h. Corrective actions taken or planned for the above deficiencies. i. Recommended changes to ensure the system continues to meet all requirements. j. Major and catastrophic failures with corrective actions taken or scheduled. - -------------------------------------------------------------------------------- 11. DISTRIBUTION STATEMENT - -------------------------------------------------------------------------------- DD FORM 1664, APR 89 (EF-V1) (PerFORM PRO) PREVIOUS EDITIONS ARE OBSOLETE. Page 1 of 1 Pages 110 - -------------------------------------------------------------------------------- DATA ITEM DESCRIPTION Form Approved OMB No. 0704-0188 - -------------------------------------------------------------------------------- Public reporting burden for the collection of information is estimated to average 110 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services. Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188), Washington, DC 20503. - -------------------------------------------------------------------------------- 1. TITLE 2. IDENTIFICATION NUMBER COMMUNICATIONS-COMPUTER SYSTEMS INSTALLATION RECORDS DI-DRPR-80151A (CSIRs) - -------------------------------------------------------------------------------- 3. Description/Purpose 3.1 CSIRs are drawings and records of telecommunications equipment installed in buildings and on the facility. CSIRs are used for planning, programming, and supporting Communications-Computer System (C-CS) operations and maintenance, systems integration, and future engineering and installation efforts. CSIRs reflect what, when, where, and how C-CS are installed, show current equipment configuration and interconnecting cabling, and show assigned circuitry for a particular facility, building or location. (Continued on - --------------------------------------------------------------------------------
4. APPROVAL DATE 5. OFFICE OF PRIMARY RESPONSIBILITY (OPR) 6a. DTIC APPLICABLE 6b. GIDEP APPLICABLE (YYMMDD) 94/01/25 F/CSPO-PGLB
- -------------------------------------------------------------------------------- 7. APPLICATION/INTERRELATIONSHIP 7.1 This Data Item Description (DID) contains the format and content preparation instructions for the data product generated by the specific and discrete task requirement as delineated in the contract. 7.2 CSIRs will be maintained for use to support C-CS life-cycle management. 7.3 This DID supersedes DI-DRPR-80151. - -------------------------------------------------------------------------------- 8. APPROVAL LIMITATION 9a. APPLICABLE FORMS 9b. AMSC NUMBER F6984 - -------------------------------------------------------------------------------- 10. PREPARATION INSTRUCTIONS 10.1 Content. The records shall be for the inside and outside telephone portion of the telecommunications system. Inside plant consists of all dial central office switching and associated equipment, attendant console and working area, main distribution frame, and support equipment contained in the central office facility. Where distributed switching is used, each location having switching related equipment shall be part of the inside plant. Outside plant consists of all telephone and data distribution cables including building "house" cables (other than individual station wire to instruments), duct banks carrying cables, manholes, handholes, terminals, distribution frames, carrier equipment and other fixed installations. All splices, terminations, clear caps, pressure and ground points on the cable distribution system shall be identified and clearly marked on the drawings. The CSIRs consist of the following. a. Base Layout Map. This is a scaled grided map for a particular base, site, or station. The grid overlay shall cover the base proper with as few grids as possible and be arranged in the best position to show C-CS features, not necessarily on the basis of compass, magnetic or survey points. The grid shall be oriented to allow the building housing the telephone central office to appear as near the center of a subgrid as possible. The Government will provide scale and grid identification. The base layout map shall show the entire physical base boundary and all remote locations which are technically a part of the main base. The base layout map shall contain location and identifications of all existing facilities, building, structures, avenues of transportation on and connecting to the base, including all access openings in the boundary which connect to identified major transportation routes, highways, railroads, streets, and canals. Off-base property shall be shown in its exact geographical relation to the base proper by use of broken extension and dimension lines. (Continued on page 2) - -------------------------------------------------------------------------------- 11. DISTRIBUTION STATEMENT DISTRIBUTION STATEMENT A: Approved for public release, distribution is unlimited. - -------------------------------------------------------------------------------- DD FORM 1664, APR 89 (EF-V1) (PerFORM PRO) PREVIOUS EDITIONS ARE OBSOLETE. Page 1 of 4 Pages 111 DI-DRPR-80151A Block 3, Description/Purpose (continued) 3.2. CSIRs are used in conjunction with facility records for other equipment commodities to ensure that complete records are available of all information systems on a base or station. Block 10, Preparation Instructions (continued) b. Building layout drawing. This is the key drawing to the family of drawings associated with a complex building and shall identify all associated building drawing records. The drawing shall be a building outline drawing contained on one sheet scaled sufficiently to depict internal and external access openings. It shall show the "house" cable layout, terminal locations, and terminal cable counts. Where terminal layouts are extensive (greater than 100 pairs), or involve cross connects, a face view of the terminal layout is required. c. Floor plan drawing. This drawing contains a scaled plan view of a room or an area as identified by the building layout drawing. The drawing shall show the exterior walls, and the location of all fixed partitions and method of entrance of outside cable, through ports, conduits, or wave guides. When it is critical to the placement of equipment, the drawing shall also show wall thickness, direction of door swing, access openings, ceiling height and other required dimensions. Any restriction to installation, maintenance, or operation shall be noted on the drawing. Heavy lines, with Floor Plan Item (FPI) numbers, shall identify the front of racks and equipment. A corresponding table shall describe the equipment by FPI and short title. d. Face equipment drawing. This drawing is an elevation view of equipment racks, consoles, and cabinets identified on the floor plan drawing with the P1 number. The drawings shall include arrangement of components, showing control and indicators, layout of circuit cards, power distribution panels showing fuse, circuit breaker and safety switch layout, test positions and other similar information necessary to characterize that equipment cabinet or rack. e. Cable vault drawing. This drawing shows location, racking cabling, splices, steps access ports, and ceiling sleeves in a cable vault. This drawings shall show the relationship of the vault to the building, an elevation view showing lengths, width, headroom, and duct arrangement. It shall indicate arrangement of cables on the racks, locations of valves, pressure plugs, sleeves, splices, and the manner in which the cables enter the vertical side of the main distributing frame. Cables shall be identified by the cable type, number and count. f. Cable list drawing. This drawing is a tabular or list form to show major cable runs and power cables. This drawing shall include, cable number and type, starting and ending points, length of cable runs, and all figures required to supplement tabular data. g. Cable rack drawing. This drawing shows the placement of cable racks, runways, and raceways used to route interconnecting cables for the equipment and to route cables to and from the main distribution frame. h. Cross-connect drawing. This drawing is to depict wiring cross-connection between equipment and their remote components (i.e. jumpers on a distribution frame, building entrance terminals, and at user equipment). i. Distribution frame drawing. This drawing show the horizontal and vertical layout arrangement of various types of frames such as main, intermediate and combined. The drawing shall include the frame type, cables and pair counts on each vertical, and terminal block identification for both vertical and horizontal sides. j. Schematic diagram. This diagram shows the electrical path of a circuit with the use of symbols to represent components. The diagram shows the equipment contained in the central office, including line/trunk card layout and traffic density. The power system, power distribution, and grounding system shall be indicated on separate sheets. PAGE 2 OF 4 112 DI-DRPR-80151 A k. Cable diagram. This diagram shows detailed cable layouts in gritted sections to the scale specified by the government. Diagrams shall show all cables installed, cable identification, terminals, manholes, lengths between manholes, poles, and splices. l. Manhole diagram. These diagrams show each manhole and handhold used in the underground distribution system. The diagram shall include overall dimensions of each wall of the structure, location of conduit and stout entries, cable racks, pulling irons, bonding and grounding hardware, type of drainage and any other equipment pertinent to the manhole. The diagram shall also include the physical layout of cables, cable type and size, cable number and count, splice closure type and size, type of splice connectors with number of banks for modular connectors, and conduit size and type. m. Key sheets. These sheets list all drawing records associated with the inside plant telephone central office by title, drawing number and any pertinent remarks. 10.2 Symbols and abbreviations. Government or nationally recognized standard symbols shall be used. A cross references table showing each symbol and its meaning shall be included. 10.3 Drawing number system. This requirement applies to Air Force only. The numbering system employs a five element format. a. Geographical location indicator (GELOC). The first element denotes the precise location of the installation to which the drawing applies. The government will provide the specific GELOC. b. Category. The second element categorizes the drawing record according to its application. There are six categories as follows: (1) Standard drawings S. Drawings that depict C-CS data applicable to more than one system, facility, equipment, or installation method. (2) Planning drawings P. Drawings that depict preliminary data to identify operational and programming requirements for a C-CS facility. (3) Transportable system drawings T. Drawings that depict C-CS design data peculiarly applicable to a transportable or mobile system or facility. (4) Grid drawings G. Drawings that depict the portion of C-CS facilities located outside the physical confines of buildings. (5) Building drawings B. Drawings that depict the portions of C-CS facilities located within specific buildings. (6) Mixed drawings M. Drawings that depict the portions of C-CS facilities located both inside and outside of buildings. c. Base address or serial number. The third element is a five digit serial number directly related to the category element (1) Standard and transportable drawings (categories S and T). The government will provide a five digit serial number. (2) Building drawings (category B). The building number assigned by the base, preceded by sufficient zeros to total five digits. PAGE 3 OF 4 113 DI-DRPR-8015lA (3) Grid drawings (category G). The specific grid location of C-CS facilities outside of buildings. The grid number is determined from a base layout map. The first two digits identify the horizontal row and the last three digits identify the vertical row containing the specific grid. (4) Mixed drawings (category M). The serial number shall be 00000. (5) Planning drawings (category P). Determined by the content according to category definition for S, T, B, M. and G drawings. d. Function. The fourth element classifies a drawing according to the predominant type of graphic illustration or information it presents. The government will provide the function identifiers. e. B facility code. The fifth element identifies the C-CS facility depicted on a drawing. The government will provide the facility codes. When move than one C-CS is depicted, the code shall be 000. PAGE 4 OF 4 114 - -------------------------------------------------------------------------------- DATA ITEM DESCRIPTION Form Approved OMB No. 0704-0188 - -------------------------------------------------------------------------------- Public reporting burden for the collection of information is estimated to average 110 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services. Directorate for Information Operations and Reports. 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188), Washington, DC 20503. - -------------------------------------------------------------------------------- 1. TITLE 2. IDENTIFICATION NUMBER TRAINING PLAN DI-ILSS-80143 - -------------------------------------------------------------------------------- 3. Description/Purpose 3.1 The training plan provides relevant information on contractor provided training. It allows the government to review the proposed training and comment on it before approval. - --------------------------------------------------------------------------------
4. APPROVAL DATE 5. OFFICE OF PRIMARY RESPONSIBILITY (OPR) 6a. DTIC APPLICABLE 6b. GIDEP APPLICABLE (YYMMDD) 88/10/07 HQ EEG/EIEWS
- -------------------------------------------------------------------------------- 7. APPLICATION/INTERRELATIONSHIP 7.1 This data item description contains the format and content preparation instructions for the data product generated by the specific and discrete task requirement for this data included in the contract. - -------------------------------------------------------------------------------- 8. APPROVAL LIMITATION 9a. APPLICABLE FORMS 9b. AMSC NUMBER F3806 - -------------------------------------------------------------------------------- 10. PREPARATION INSTRUCTIONS 10.4 Contract. This data item is generated by the contract which contains a specific and discrete work task to develop this data product. 10.2 General. The training plan shall provide information on the training to be provided government personnel. The plan shall include the following information: a. Course description. b. Prerequisites (if required). c. Course length (including time devoted to each area of course). d. Method of presentation (show breakdown of methods, i.e., lecture, demonstration hands-on and directed study). e. Method of evaluation. Establish minimum acceptable written and performance standards and method of evaluation of directed study. A plan shall be included to show that each student achieved at least minimum course objectives by written and performance tests. f. Lists of manuals or training equipment required (contractor-provided documents or materials shall be included). g. Recommended sizes of course. (Continued on page 2) - -------------------------------------------------------------------------------- 11. DISTRIBUTION STATEMENT - -------------------------------------------------------------------------------- DD FORM 1664, APR 89 (EF-V1) (PerFORM PRO) PREVIOUS EDITIONS ARE OBSOLETE. Page 1 of 2 Pages 115 DI-ILSS-80143 10. PREPARATION INSTRUCTIONS (Continued) h. Recommended location of training and type of facility required (i.e. classroom, auditorium, switchroom, etc.) i. List of measurable objectives (tasks) required by graduates to demonstrate successful completion of course. j. Proposed schedule for training courses. k. Number of hours of "hands-on" training to be provided each student. 10.2 Course Description. The course description shall be a narrative explanation of the subject matter of the specific type(s) of course(s). The course format, objective, and training materials shall be described in sufficient detail to ensure the students will receive required training. A proposed syllabus of the course(s) shall be included. PAGE 2 OF 2 116 - -------------------------------------------------------------------------------- DATA ITEM DESCRIPTION Form Approved OMB No. 0704-0188 - -------------------------------------------------------------------------------- Public reporting burden for the collection of information is estimated to average 110 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services. Directorate for Information Operations and Reports. 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188), Washington, DC 20503. - -------------------------------------------------------------------------------- 1. TITLE 2. IDENTIFICATION NUMBER SUBSCRIBER EDUCATION PAMPHLET DI-MISC-80129/T - -------------------------------------------------------------------------------- 3. Description/Purpose 3.1 The pamphlet contains information on operation of switching system station features. It will be used by the government for education of base users. - --------------------------------------------------------------------------------
4. APPROVAL DATE 5. OFFICE OF PRIMARY RESPONSIBILITY (OPR) 6a. DTIC APPLICABLE 6b. GIDEP APPLICABLE (YYMMDD) 88/10/07 HQ EEG/EIEWS
- -------------------------------------------------------------------------------- 7. APPLICATION/INTERRELATIONSHIP 7.1 This data item description contains the format and content preparation instructions for the data product generated by the specific and discrete task requirement for this data included in the contract. - -------------------------------------------------------------------------------- 8. APPROVAL LIMITATION 9a. APPLICABLE FORMS 9b. AMSC NUMBER F3792 - -------------------------------------------------------------------------------- 10. PREPARATION INSTRUCTIONS 10.1 Contract. This data item is generated by the contract which contains a specific and discrete work task to develop this data product. 10.2 General. The pamphlet shall contain all information necessary to instruct users on the use of switching system station features (e.g., call forwarding, consultation hold, call transfer, etc.). The pamphlet shall contain any special instructions on the use of special instruments required to use certain features. Dialing instructions for all types of calls and all types of features available shall be included. The pamphlet shall be prepared in the contractor's format. - -------------------------------------------------------------------------------- 11. DISTRIBUTION STATEMENT - -------------------------------------------------------------------------------- DD FORM 1664, APR 89 (EF-V1) (PerFORM PRO) PREVIOUS EDITIONS ARE OBSOLETE. Page 1 of 1 Pages 117 - -------------------------------------------------------------------------------- DATA ITEM DESCRIPTION Form Approved OMB No. 0704-0188 - -------------------------------------------------------------------------------- Public reporting burden for the collection of information is estimated to average 110 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services. Directorate for Information Operations and Reports. 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188), Washington, DC 20503. - -------------------------------------------------------------------------------- 1. TITLE 2. IDENTIFICATION NUMBER INSTALLATION AND ACCEPTANCE TEST PLAN (IATP) DI-QCIC-80154A - -------------------------------------------------------------------------------- 3. Description/Purpose 3.1 The IATP is the overall plan and procedures for installation and testing of a telecommunications system. The IATP provides a basis for testing physical and functional aspects to confirm technical compliance. - --------------------------------------------------------------------------------
4. APPROVAL DATE 5. OFFICE OF PRIMARY RESPONSIBILITY (OPR) 6a. DTIC APPLICABLE 6b. GIDEP APPLICABLE (YYMMDD) 94/01/25 F/CSPO/PGLB
- -------------------------------------------------------------------------------- 7. APPLICATION/INTERRELATIONSHIP 7.1 This Data Item Description (DID) contains the format and content preparation instructions for the data product generated by the specific and discrete task requirements as delineated in the contract. 7.2 This DID is applicable to acquisitions of telecommunications equipment. 7.3 This DID supersedes DI-QCIC-80154 and DI-QCIC-80155. - -------------------------------------------------------------------------------- 8. APPROVAL LIMITATION 9a. APPLICABLE FORMS 9b. AMSC NUMBER F6985 - -------------------------------------------------------------------------------- 10. PREPARATION INSTRUCTIONS 10.1 Reference Documents. The applicable issue of the documents cited herein, including their approval dates and dates of any applicable amendments, notices, and revisions shall be as specified in the contract. 10.2 Format and content. The IATP shall contain the following: 10.2.1 Title Page. The title page shall contain the following information: a. Title b. Contract Data Requirements List (CDRL) data item number. c. Base Name d. Identification of project e. Contract Number f. Contractor g. Date (Continued Page 2) - -------------------------------------------------------------------------------- 11. DISTRIBUTION STATEMENT DISTRIBUTION STATEMENT A: Approved for public release, distribution is unlimited. - -------------------------------------------------------------------------------- DD FORM 1664, APR 89 (EF-V1) (PerFORM PRO) PREVIOUS EDITIONS ARE OBSOLETE. Page 1 of 5 Pages 118 DI-QCIC-80154A Block 10. Preparation Instruction(Continued) 10.2.2 Table of contents. The table of contents shall identify all paragraphs and the corresponding page number. 10.2.3 Introduction. The IATP shall include an introduction which contains the following: a. A description of the overall project. b. A flowchart of consecutively numbered events identifying installation and acceptable activities, and interrelationships for each installation location. The introduction shall include a brief description of each numbered event. c. The scope of what is to be inspected or tested and to what extent in terms of preshakedown, shakedown, operational, system interoperability, type I (pre-installation), type II (installation), or type III (acceptance) testing. d. A description of any special tests such as bit error rate. Integrated Services Digital Network (ISDN) related tests, network related tests, return loss measurements, computer checkout, site adaptation, interfaces, and adjustments or alignment checks. e. Roles and responsibilities of all major participants including government, associate contractors, vendor, and local telco personnel. f. Milestones and scheduling to identify installation phases and expected start and completion of system inspection and testing. The schedule shall begin at installation start, cover pre-cutover installation testing and post-cutover acceptance testing, and finish with system commissioning. g. Security guidelines (if applicable). h. Types of reports required to flag problems and recommended: (1) preparer. (2) method of transmission, (3) frequency, and (4) distribution addresses. i. Procedures for emergency reporting of problems or waivers. 10.2.4 Part I inside plant. Part 1 shall apply to the inside plant or switch portion and shall contain the following sections. 10.2.4.1 Master test list. The master test list shall list all tests to be performed in the order they are to be accomplished as outlined in the flowchart of installation. Each central office and remote switching terminal location shall have a separate list. This listing shall include the following. a. Building location where testing is to accomplished. b. Equipment Performance Specifications (EPS) reference. c. Test title. d. Documentation location within this plan. e. Equipment location designator and nomenclature (if applicable). 10.2.4.2 Test validation sheets. Sheets that will be used to document individual tests shall include the following: a. Item number. b. Test title. c. Equipment location designator and nomenclature (if applicable). PAGE 2 OF 5 119 DI-QCIC-80154A d. Reference of the test procedures to be used and EPS references. e. Expected results, required measurements and space for actual measurements and annotations. f. Pass or fail block for each piece of equipment tested. g. Space for remarks. h. Space to describe circuit pack failures including: (1) Circuit pack number. (2) Circuit pack location. (3) Test procedure section and paragraph. (4) Description of failure. i. Government and contractor witness initials block for each separate testable requirement. j. Blocks for government and contractor signatures and date. 10.2.4.3 Test Procedures. This section shall detail step-by-step test procedures to include observations, parameters, expected test results, and equipment or personnel safety warnings and hazards. 10.2.4.3.1 Pre-shakedown tests. This section shall contain instructions for ensuring that the installation is properly completed. Pre-shakedown instructions shall describe the following: a. Physical inspection to: (1) Determine the completeness of the installation. (2) Check the condition of the equipment. (3) Verify the specified placement of the equipment. (4) Insure that the installation meets required safety standards. b. Mechanical and electrical preliminary measurements to verify the proper mounting of equipment and to confirm the adequacy and stability of the voltage, frequency and other characteristics of the primary power. c. Preliminary equipment alignments and adjustment needed after confirmation of compliance with the installation specifications and before the shakedown, operational, and system interoperability test. 10.2.4.3.2 Shakedown tests. This section shall include procedures for determining whether the equipment meets the performance specifications in the installed environment and to detect and eliminate parts and material before the operational and system interoperability tests. 10.2.4.3.3 Operational tests. This section shall procedures for performing the test required to demonstrate that all equipment is performing within the prescribed specifications during precutover installation test. This section shall include a block diagram of the facility clearly defining signal wave forms. voltage levels, digital message formats, tolerances, etc., at all interfaces. This section shall describe in sequential order, the types and purpose of tests which comprise the overall operational test, such as group tests, equipment tests, basic tests, simulated tests, computer program tests (including site adaptation) and live tests. Table column headings and contents shall be as follows. a. Step. Individual steps of the test procedures in numerical sequence. b. Test setup. All information pertaining to switch and control settings of the facility, test equipment, and external Communications-Computer Systems (C-CS) equipment, special intercabling and other data related to the implementation of the step, except the actions contained in the "action" column. c. Action. The point of test of display (underlined for emphasis) and the action or actions to provide the response under the "normal indication" column. PAGE 3 OF 5 120 DI-QCIC-80154A d. Normal indication. The normal indication to be observed (such as DC and AC voltages, currents, and wave forms) at the point of test or display underlined in the "action" column. Acceptable tolerances with all wave form indications. When the indication is a wave form other than a continuous sine wave, the wave form shall be a legible photograph or line drawing prepared from the photograph or observation. Pertinent amplitudes, pulse widths, rise and fall times, (with acceptable tolerances) shall be from the illustration and test equipment control setting information provided in the "test setup " column. e. Authority. The document name, number, chapter, and paragraph containing the authority for the value or description of the normal indication. f. Notes. Explanatory notes, cautions and references, as appropriate. 10.2.4.3.4 System interoperability tests. This shall include procedures for performing the tests required to demonstrate that all equipment is performing within the prescribed specifications during an in-service system interoperability test. Format and content are described in 10.2.4.3.3. 10.2.4.3.5 Performance tests. This section shall contain a test sheet for recording all failures and outages reported during the performance test. It shall contain a section for recording all system failures and replaced components during the performance test. Test sheets shall note the start of the consecutive testing period. 10.2.5 Part 2 outside plant and premise equipment. Part 2 shall apply to the outside plant and premise equipment portion and shall contain the following sections. 10.2.5.1 Master test list. The master test list shall list all inspections and tests to be performed during the pre-installation, installation, and acceptance period of the distribution system. The list shall be in type I (pre-installation), type II (installation), and type III (acceptance) sequence. The listing shall include the following information: a. Sequence order (type I, type II, type III). b. Inspection or test to be performed and the equipment item to be tested. c. EPS reference. d. Page number of validation sheet within the plan. e. Test equipment to be used. 10.2.5.2 Inspection procedures. This section shall detail step-by-step pre-installation, installation, and acceptance inspection procedures. This includes observations, what to inspect on each item, references to be used during inspection, notes, cautions, safety warnings, and hazards. 10.2.5.3 Test procedures. This section shall detail step-by-step pre-installation, installation, and acceptance test procedures. This includes observations, parameter, expected test results or measurements, necessary test equipment, notes, cautions, safety warnings, and hazards. 10.2.5.4 Inspection validation sheets. Sheets that will be used to document individual inspection accomplishment shall include the following: a. Item inspected (i.e., manhole, cable, terminal). b. Pass or fail block. c. Space for recording the results of the inspection. d. Reference of the inspection procedures to be used. PAGE 4 OF 5 121 DI-QCIC-80154A e. Space for recording corrective action, if required. f. Government and contractor witness initial block. g. Blocks for government and contractor signatures and date. h. Space for remarks. 10.2.5.5 Test validation sheets. Sheets that will be used to document individual test accomplishment shall include the following: a. Main cable number, fiber optic link or equipment tested. b. Individual pair number, with separate block for tip and ring or individual fiber, as applicable. c. Test title. d. Test equipment used. e. Pass or fail block. f. Reference of the test procedures to be used. g. EPS reference. h. Required measurements with space for actual measurements and annotations. i. Space to describe discrepancies. j. Space to describe cause of discrepancies. k. Space to describe corrective actions. l. Government and contractor witness initial block. m. Blocks for government and contractor signatures and date. n. Space for remarks. 10.2.6 Appendices. An appendix shall reference source material contained in open literature or contract deliverables. PAGE 5 of 5 122 - -------------------------------------------------------------------------------- DATA ITEM DESCRIPTION Form Approved OMB No. 0704-0188 - -------------------------------------------------------------------------------- Public reporting burden for the collection of information is estimated to average 110 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services. Directorate for Information Operations and Reports. 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188), Washington, DC 20503. - -------------------------------------------------------------------------------- 1. TITLE 2. IDENTIFICATION NUMBER TEST/INSPECTION REPORTS DI-NDTI-80809A - -------------------------------------------------------------------------------- 3. Description/Purpose 3.1 The Test/Inspection Report is used to determine compliance with system requirements, performance objectives, specifications, or test/inspection plans; whether the tests/inspections are conducted at contractor, government or independent facilities. 3.2 The report should document test/inspection results, findings, and analyses that will enable the government or contracting agency to evaluate and determine subsequent actions. - --------------------------------------------------------------------------------
4. APPROVAL DATE 5. OFFICE OF PRIMARY RESPONSIBILITY (OPR) 6a. DTIC APPLICABLE 6b. GIDEP APPLICABLE (YYMMDD) 91/03/25 F/AFSC-TE
- -------------------------------------------------------------------------------- 7. APPLICATION/INTERRELATIONSHIP 7.1 This Data Item Description (DID) is a broad consolidation of a number of superseded DIDs that specifies a uniform content and format to be used in the preparation of test/inspection reports covering test/inspections on systems, subsystems, components, parts, materials, processes, and equipment as specified. 7.2 This DID contains the format and content preparation instructions for the data product generated by the specific and discrete task requirement as delineated in the contract. 7.3 This DID is applicable to contracts requiring tests/inspections to be performed for the purpose of developmental, operational, or environmental evaluation, acceptance or quality conformance inspection, and item qualification. - -------------------------------------------------------------------------------- 8. APPROVAL LIMITATION 9a. APPLICABLE FORMS 9b. AMSC NUMBER F6040 - -------------------------------------------------------------------------------- 10. PREPARATION INSTRUCTIONS 10.1 Format Requirements. The test/inspection report format shall be contractor selected consistent with the following requirements. 10.1.1 Media. The test/inspection report shall be provided by electronic transmission or on either magnetic media or durable quality paper, and shall present the data in a clean and legible manner. The test and numeric data shall be capable of being typewritten or printed, using non-exotic typefaces, on 8 1/2 by 11 inch standard white paper. Photographs, pictorials, graphics, and drawings shall be presented in high contrast black and white or color. If the media is paper, black ink should be used on white bond paper, and the report shall be bound such that pages may be removed or inserted without damage or mutilation. The media shall be in the Computer Aided Logistics Support (CALS) format as specified in MIL-STD-1840. 10.1.2 Format. The test/inspection report format shall present the data in an effective and logically organized arrangement. The text shall be single spaced and shall use correct English grammar, spelling, capitalization, and punctuation. Numerical data shall use Arabic numerals and the units of measure shall be identified and defined. Acronyms, codes, abbreviations, signs, and symbols shall be defined. Photographics, pictorial, graphic and drawing formats may be used for purposes of illustration. Attachments, tables, figures, footnotes, and illustrations shall be identified and referenced in the text. Oversize pages shall be capable of being folded to the dimensions of the volume. Unless effective presentations would be degraded; the initial format arrangement shall be used for all subsequent submissions. 10.1.3 Reproduction. The test/inspection report shall be capable of being photographically reproduced in black on white copy sufficiently clear and sharp for further reproduction. Ditto, hectograph, color or reproduction processes not reproducable photographically shall not be required for reproduction of the test/inspection report. (Continued on page 2) - -------------------------------------------------------------------------------- 11. DISTRIBUTION STATEMENT DISTRIBUTION STATEMENT A: Approved for public release; distribution is unlimited. - -------------------------------------------------------------------------------- DD FORM 1664, APR 89 (EF-V1) (PerFORM PRO) PREVIOUS EDITIONS ARE OBSOLETE. Page 1 of 5 Pages 123 DI-NDTI-80809A BLOCK 7. APPLICATION/INTERRELATIONSHIP (continued) 7.4. This DID should be tailored on the DD Form 1423 Contract Data Requirements List (CDRL) to the applicable program requirement, when requiring media prepared in the Computer Aided Logistics Support (CALS) format as specified in MIL-STD-1840A and its related specifications. This DID is applicable whenever success criteria and test/inspection methods have been prescribed (i.e., where there is a specification or comparable document). This Data Item Description is applicable for both flight and ground tests/inspections. 7.5 This DID is normally used for engineering test and evaluation, pre-qualification, qualification, and other developmental tests/inspections in the specifications as well as quick-look, interim, and final summary reports of test/inspection results, and findings related to the completion of a program milestone period (such as the completion of demonstration/validation and the start of full scale development). 7.6 The requirements contained in the DID should be tailored consistent with the program phase and the contractual testing/inspection requirements. 7.7 This DID supersedes DID's DI-E-1150, DI-T-1780, DI-T-1787, DI-T-1906, DI-R-2057/DI-R-2063, DI-T-2072, DI-T-5329, DI-T-5426, DI-T-5439A, UDI-T-21332, UDI-T-23668, UDI-T-23790, DI-T30720, DI-T-30736, DI-QCIC-80139, DI-QCIC 80140, DI-QCIC-80141, DI-NDTI-80604, DI-MISC-80654, DI-NDTI-80809, AND DI-RELI-80939. BLOCK 10. PREPARATION INSTRUCTIONS (continued) 10.2 Content requirements. The test/inspection report shall contain the following information: 10.2.1 Cover and title page. The following information shall appear on the outside front cover and title page: a. Report date. b. Report number (contractor's or government, if assigned) c. Contract number/CLIN number or sequence number (if applicable) d. Contractor's name and address, and commercial and government entity (CASE) code. e. Type of test/inspection (e.g., first article, quality conformance, developmental evaluation, qualification, environmental (specify); acceptance, or other). f. Identification (e.g., national stock number (NSN), nomenclature, model/part/serial number) of item tested/inspected. g. Name and address of test/inspection facility. h. Date or period of test/inspection. i. Name and address of requiring government and activity. j. Security classification, downgrading and declassifying information (if applicable) 10.2.2 Table of contents. The table of contents shall identify the following: a. The title and starting page of each major section, paragraph, and appendix of the report. b. The page, identifying number, and title of each illustration (e.g., figure, table, photograph, chart, and drawing). 10.2.3. Introduction. The introduction shall include the following information: 10.2.3.1 Purpose of the test/inspection. The specific purpose of the test/inspection as specified in the contract tasking document if the contract does not identify a specific test/inspection purpose, the contractor's purpose shall be stated. 10.2.3.2 Item tested/inspected. Complete identification of the item tested/inspected including the following: a. Nomenclature b. National stock number (NSN). PAGE 2 OF 5 124 DI-NDTI-80809A c. Model/part/serial number. d. Type of item (e.g., prototype, production item, laboratory model). e. Serial or lot number. f. Applicable engineering changes. g. Production item specification (if applicable). h. Date of manufacture. 10.2.3.3. Test/inspection requirements. Complete identification of the test/inspection requirements correlated to contractual requirements and the requirements documentation, including the following: a. Required test/inspection parameters measured. b. Performance requirements, acceptance or compliance limits, and environmental criteria. 10.2.4. Summary. Complete test/inspection report summary including the following: a. A brief discussion of the significant test/inspection results, observations, conclusions, and recommendations covered in greater detail elsewhere in the report. b. Proposed corrective actions and schedules for failures or problems encountered. c. Identification of deviations, departures, or limitations encountered referenced to the contract requirements. d. Tables, graphs, illustrations, or charts as appropriate to simplify the summary data. 10.2.5. Reference documents. Complete identification of all documents referenced in the test/inspection report including the following (as applicable): a. Prior test/inspection reports on the same item. b. Test/inspection plan and procedure documents. c. Requirement specifications and standards. d. Prior certification of compliance. e. Contractor's file designation where test/inspection records are maintained. f. Input parameters used. The applicable issue of the documents cited therein, including their approval dates and dates of any applicable amendments, notices, and revisions, shall be as specified in the contract. 10.2.6. Body of report. The body of the test/inspection report shall be as follows: 10.2.6.1. Test Equipment identification. Complete identification for each item of test equipment used in the test/inspection including the following: a. Nomenclature. b. Model number. c. Serial number. d. Manufacturer. e. Calibration status. f. Accuracy data. g. Comments (if applicable). 10.2.6.2. Test/inspection facility installation and set-up. Drawing, illustrations, and photographs may be used for clarification. Complete description of the physical set-up (e.g. item, test/inspection facility, and equipment used in conducting the test/inspection) to include the following: a. Location/orientation of item. b. Location/orientation/settings of test equipment and instrumentation. c. Location/orientation/settings of senors and probes. PAGE 3 OF 5 125 DI-NDTI-80809A d. Location/orientation of interconnections, cables, and hook-ups. e. Electrical power, pneumatic, fluidic, and hydraulic requirements. 10.2.6.3 Test/Inspection procedures. Complete description of the procedures used in conducting the test/inspection include the following: a. Item selection and inspection that verified suitability for test/inspection. b. Summarized sequence of testing/inspection steps, including a description of how the item was operated during the test/inspection, and any control conditions imposed. c. Data reduction techniques employed. 10.2.6.4 Test/inspection results and analysis. A copy of all test/inspection results and analysis to include the following: 10.2.6.4.1 Recorded data. The actual recorded data (e.g., log book entries, oscillographs, instrument readings, and plotter graphs). If the recorded data is extensive, provide it in an appendix. 10.2.6.4.2 Test/inspection results. Identification of all test/inspection results to include the following: a. Matrices comparing results achieved against test/inspection objectives or requirements. b. A discussion of these matrices as to their significance, and how they compare to any prior tests/inspections. c. Calculation examples. d. Tabulation of the recorded data (reference 10.2.6.4.1) reduced the related test/inspection procedure generating the data and test requirements. e. Discussion of anomalies, deviations, discrepancies, or failures, including their impact, causes, and proposed corrective actions. The discussion shall address discrepancies between design requirements and the tested/inspected configuration. 10.2.6.5 Conclusions. Test/inspection conclusions distinguish between objective and subjective to include the following: a. The effectiveness of the test/inspection procedures in measuring item performance, b. The success or failure of the item to meet required test/inspection objectives. c. The need for repeat, additional, or alternative testing/inspection. d. The need for item re-design or further development. e. The need for improved test/inspection procedures, techniques, or facilities. f. The adequacy and completeness of the test/inspection requirements. 10.2.6.6 Recommendations. Recommendations appropriate to the test/inspection results and conclusions including the following: a. Acceptability of the item tested/inspected (pass or fail). b. Additional testing/inspection required. c. Redesign required. d. Problem resolution. e. Test/inspection procedure or facility improvements. f. Disposition of items tested/inspected. g. Documentation changes required. h. Testing/inspection improvements. 10.2.7 Authentication. The following certifications shall be included, as applicable. 10.2.7.1 Authentication of test/inspection results. A statement that the test/inspection was performed in accordance with applicable specifications, test/inspection plans, and procedures, and that the results are true and accurate. The PAGE 4 OF 5 126 DI-NDTI-80809A authentication shall include the signature of the contractor personnel that performed the test(s)/inspection(s). Any government witnesses, and a contractor representative authorized to make such certification. 10.2.7.2 Authentication of prior validation. A statement identifying those requirements not tested/inspected or measured that were previously validated. Include identification of the date and method employed for such validation (e.g., prior test/inspection, analytical verification, equivalent item, etc.). The authentication shall include the signature of a contractor representative authorized to make such authentication and any government witness. 10.2.7.3 Authentication of acceptability. A statement that the item tested/inspected either passed or failed item acceptability requirements as delineated in applicable specifications. The authentication shall include the signature of a contractor representative authorized to make such authentication and any government witness. 10.2.8 Appendices. Appendices shall be used to append detailed test/inspection data, drawings, photographs, or other documentation too voluminous to include in the main body of the report. This includes referenced documentation not previously provided by the Government, and test/inspection reports from any associated test/inspection activity that may have performed some of the testing/inspecting requirements. 127 - -------------------------------------------------------------------------------- DATA ITEM DESCRIPTION Form Approved OMB No. 0704-0188 - -------------------------------------------------------------------------------- Public reporting burden for the collection of information is estimated to average 110 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services. Directorate for Information Operations and Reports. 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188), Washington, DC 20503. - -------------------------------------------------------------------------------- 1. TITLE 2. IDENTIFICATION NUMBER SUBSCRIBER EDUCATION PAMPHLET DI-MISC-80129/T STANDARD TELEPHONE INSTRUMENT - -------------------------------------------------------------------------------- 3. DESCRIPTION/PURPOSE 3.1 The pamphlet contains information on operation of standard telephone instruments. It will be used by the government for education of base users. - --------------------------------------------------------------------------------
4. APPROVAL DATE 5. OFFICE OF PRIMARY RESPONSIBILITY (OPR) 6a. DTIC APPLICABLE 6b. GIDEP APPLICABLE (YYMMDD) 88/10/07 HQ EEG/EIEWS
- -------------------------------------------------------------------------------- 7. APPLICATION/INTERRELATIONSHIP 7.1 This data item description contains the format and content preparation instructions for the data product generated by the specific and discrete task requirement for this data included in the contract. - -------------------------------------------------------------------------------- 8. APPROVAL LIMITATION 9a. APPLICABLE FORMS 9b. AMSC NUMBER F3817 - -------------------------------------------------------------------------------- 10. PREPARATION INSTRUCTIONS 10.1 Contract. This data item is generated by the contract which contains a specific and discrete work task to develop this data product. 10.2 General. The pamphlet shall contain all information necessary to instruct users on the use of standard telephone instruments. The pamphlet shall contain any special instructions on the use of special instruments required to use certain features. Dialing instructions for all types of calls and all types of features available shall be included. The pamphlet shall be prepared in the contractor's format. - -------------------------------------------------------------------------------- 11. DISTRIBUTION STATEMENT - -------------------------------------------------------------------------------- DD FORM 1664, APR 89 (EF-V1) (PerFORM PRO) PREVIOUS EDITIONS ARE OBSOLETE. Page 1 of 1 Pages 128 - -------------------------------------------------------------------------------- DATA ITEM DESCRIPTION Form Approved OMB No. 0704-0188 - -------------------------------------------------------------------------------- Public reporting burden for the collection of information is estimated to average 110 hours per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services. Directorate for Information Operations and Reports. 1215 Jefferson Davis Highway, Suite 1204, Arlington, VA 22202-4302, and to the Office of Management and Budget, Paperwork Reduction Project (0704-0188), Washington, DC 20503. - -------------------------------------------------------------------------------- 1. TITLE 2. IDENTIFICATION NUMBER SUBSCRIBER EDUCATION PAMPHLET LT1-LINE TELEPHONE DI-QCIC-80129/T INSTRUMENT - -------------------------------------------------------------------------------- 3. DESCRIPTION/PURPOSE 3.1 The pamphlet contains information on operation of multi-line telephone instruments. It will be used by the Government for education of base users. - --------------------------------------------------------------------------------
4. APPROVAL DATE 5. OFFICE OF PRIMARY RESPONSIBILITY (OPR) 6a. DTIC APPLICABLE 6b. GIDEP APPLICABLE (YYMMDD) 88/10/07 HQ EEG/EIEWS
- -------------------------------------------------------------------------------- 7. APPLICATION/INTERRELATIONSHIP 7.1 This Data Item Description (DID) contains the format and content preparation instructions for the data product generated by the specific and discrete task requirement for this data included in the contract. - -------------------------------------------------------------------------------- 8. APPROVAL LIMITATION 9a. APPLICABLE FORMS 9b. AMSC NUMBER F3803 - -------------------------------------------------------------------------------- 10. PREPARATION INSTRUCTIONS 10.1 Contract. This data item is generated by the contract which contains a specific and discrete work task to develop this data product. 10.2 General. The pamphlet shall contain all information necessary to instruct users on the use of multi-line station features. The pamphlet shall contain any special instructions on the use of special instruments required to use certain features. - -------------------------------------------------------------------------------- 11. DISTRIBUTION STATEMENT - -------------------------------------------------------------------------------- DD FORM 1664, APR 89 (EF-V1) (PerFORM PRO) PREVIOUS EDITIONS ARE OBSOLETE. Page 1 of 1 Pages 129 APPENDIX A RAMSTEIN AIR BASE LODGING REQUIREMENTS 1. INTERFACE REQUIREMENTS. 1.1 Services Information Management System (SIMS): The Services Information Management System (SIMS) (reference EPS paragraph 3.2.6), Government Furnished Equipment (GFE), is a Wang computer located at Ramstein AB, Building 2408, that shall be used for the Ramstein South area. All other SIMS interfaces shall be to the SIMS computer located in Building 305 at Ramstein AB. The Wang equipment will be replaced by the government with a UNIX open architecture system. Interface is required. 1.2 Defense Switching System (DSN): The base telephone switch for Ramstein AB is a Siemens KNS-4100. Coordination for interface and cross-connect points with the on base and off base common carrier(s) shall be the responsibility of the contractor. 1.3 Commercial German (Deutsche Bundepost) Telephone System: The contractor shall comply with all Deutsche Bundepost (DBP) standards and specifications when interfacing with commercial networks. Coordination for interface and cross-connect points with the on base and off base common carrier(s) shall be the responsibility of the contractor. 1.4 DELETED. 1.5 Automatic Call Distribution (ACD). The reservation office is located in building 305 and consists of five agents and one supervisor. Instruments for the reservation office were not included in the above instrument counts. 1.6 Attendant Consoles. The location of the four attendant console(s) IAW EPS paragraph 3.4 shall be as follows: One attendant console shall be located in each of the following buildings: 305, 538, 2408, and 1018. The specific locations within these buildings shall be coordinated with the LFM prior to installation. The LFTS shall be set up so all calls to the attendant originating in the North area buildings are routed to the attendant console in building 305, from the Prime Knight area routed to building 538, from the South area to building 2408, and from the General Cannon Hotel to building 1018. 1.7 Administrative Terminal (AT). The AT shall be located in building 305. The specific location within building 305 shall be coordinated with the LFM prior to installation. 1.8 Billing System Access. The contractor shall provide a means to access the telephone billing system to be located in building 305. Each front desk area (in buildings 305, 538, 2408, 1018) shall be able to access the billing system. The specific location of the billing system and billing system access terminal shall be coordinated with the LFM prior to installation. Section J, Attachment 4 Appendix A, Page 1 of 10 130 1.9 Message Waiting/Voice Mail: The voice mail system shall be equipped with 650 voice mailboxes (one for each room/suite and administrative position). 1.10 Switching System Location: The switching system shall be located in Building 305, Room 1. Approximately 225 sq. feet of floor space has been reserved for housing switching equipment including the UPS, IDF, and other necessary miscellaneous equipment/bays. The government provided room has a maximum floor loading capability of at least 250 lb./sq. ft. Floor loading capability in excess of this, shall be the contractor's responsibility. 1.11 Utility Support: The government will provide 220 VAC, 50 Hz, three-phase power with a 30 Amp breaker on each phase for the LFTS and terminate the power cables at one location. In addition, the government will provide room lighting and receptacle wall outlets (110 volt AC). The contractor shall be responsible for providing any relocation or modification to government provided lighting, room wiring, and receptacle outlets. The contractor shall provide and terminate the power distribution system to all LFTS equipment. Section J, Attachment 4 Appendix A, Page 2 of 10 EX-10.5 4 LETTER AGREEMENT DATED MARCH 11, 1997 1 Exhibit 10.5 USFI, INC. 1212 Avenue of the Americas New York, New York 10036-9998 11 March 1997 Mr. Franz Hruby Mr. Wolfgang Schlick Mr. Georg F. Hofer TelePassport Telekom GmbH Gentlemen: This letter will confirm our mutual understanding with respect to the sale by you (collectively the "Shareholders") to USFI, Inc. or its successor ("USFI") of all of the issued and outstanding stock (the "Stock") of TelePassport Telekom GmbH, an Austrian corporation ("Telekom"). Each of you agrees that neither you nor Telekom will contact or talk to any other party (other than your attorneys and financial advisers with respect to the sale contemplated hereby) about the sale of Telekom or the stock thereof from the date hereof through the earlier of the Closing (as hereinafter defined) or 31 July 1997. Pursuant to the terms and conditions of this Agreement, the Shareholders agree to sell, transfer and convey by notarial deed or other appropriate instrument of conveyance satisfactory to USFI, Inc. ("USFI") and USFI agrees to buy 100% of the shares of Telekom in exchange for the consideration detailed below. The Shareholders understand that it is contemplated that TelePassport Inc., a Delaware corporation, will succeed to the business of USFI and will engage in an initial public offering (the "IPO") of its Class B stock (one vote per share) (the "Class B Stock"). The rights of USFI under the Agreement may be assigned to any affiliate without the prior written consent of the Shareholders. Reference herein to USFI and to the stock to be delivered to the Shareholders hereby shall, where applicable, mean TelePassport Inc. and its Class B Stock. The closing of the sale of the Stock (the "Closing") shall be contingent on the closing of the IPO and shall occur simultaneously with the closing of the IPO, subject to the terms and conditions herein. A. The purchase price for the Stock shall be $300,000, payable in Class B Stock (valued at the per share IPO offering price). The stock will be issued 40% to Franz Hruby ("Hruby"), 40% to Wolfgang Schlick ("Schlick") and 20% to Georg Hofer ("Hofer). All of the shares (the "Escrow Shares") shall be issued at Closing and shall immediately be deposited in escrow with Baer Marks & Upham LLP, as escrow agent (the "Escrow Agent") pursuant to an escrow agreement (the "Escrow Agreement") substantially in the form attached hereto as Exhibit A (together with executed stock powers). The Escrow - 1 - 2 Mr. Franz Hruby Mr. Wolfgang Schlick Mr. Georg F. Hofer Shares attributable to each of the Shareholders shall vest ratably over the period of 36 months from Closing at the rate of 1/36 per month, subject to the terms of the Escrow Agreement and the following: (1) in the event the Escrow Agent receives a Buyer Return Notice (as defined in the Escrow Agreement) that Hruby, Schlick and/or Hofer was terminated from his employment with Telekom (or in the case of Hofer, TelePassport GmbH) for "Cause" (as defined in the Employment Agreement) or otherwise resigned from such employment, then all of the remaining unvested Escrow Shares attributable to him held by the Escrow Agent shall cease to vest and the Escrow Agent shall return such unvested shares to USFI, (2) in the event the Escrow Agent receives a Buyer Claim Notice (as defined in his respective Escrow Agreement) that any of the Shareholders are in material breach of any of the terms or provisions of this Agreement which survive the Closing, then the Escrow Agent shall cease to release the remaining unvested Escrow Shares attributable to any such Shareholder pursuant to the monthly vesting schedule until Escrow Shares (valued at the market value of the shares based upon the average closing sale price for the 20 trading days ending 5 trading days prior to the Buyer Claim Notice) equal to the amount of damages or losses claimed to be incurred by Buyer pursuant to such notice ("Holdback Shares") shall have been withheld for resolution of such dispute pursuant to the Escrow Agreement and the balance of the unvested Escrow Shares after deducting the Holdback Shares shall continue to be released each month pursuant hereto, and (3) in the event of the death or Disability (as such term is defined in the respective Employment Agreement of Hruby or Schlick referred to in Paragraph E hereof or in Hofer's Employment Agreement with TelePassport GmbH) the Escrow Shares then held in escrow for such Shareholder shall immediately vest and except for any Escrow Shares then subject to a Buyer Claim Notice shall thereupon be distributed to such Shareholder. "Dollars" or $ when used herein shall refer to US dollars. The resale of the Class B Stock issued to the Shareholders hereunder will be subject to a lock-up agreement required by TelePassport Inc.'s underwriters from all of USFI's executives (anticipated to be 180 days) and to United States securities regulations and all stock certificates delivered will carry the normal legend to such effect. B. USFI will provide through purchase or lease (equipped, furnished and installed) Teles ISDN routers costing approximately $100,000 and the Shareholders will guarantee one long-term contract for each of the additional routers. A long-term contract is at least twelve months in length. Each contract carries an approximate guaranteed value of $60,000. The liability which is created for the purchase or lease of the router inventory supplied by USFI will not be considered a liability under this agreement. C. Telekom is presently indebted to the Shareholders in the aggregate amount of $91,171. At, or prior to the closing of the IPO, the Shareholders shall cause Telekom to repay Hruby and Schlick advances to the Company which shall not exceed $78,671 to Hruby - 2 - 3 Mr. Franz Hruby Mr. Wolfgang Schlick Mr. Georg F. Hofer and $12,500 to Schlick. All other loans, advances or other payables to Shareholders will be contributed to capital. USFI acknowledges that upon the Closing, the Shareholders shall have no obligation with respect to the liabilities of Telekom which are set forth in Schedule H(ii) hereof. To this end, USFI agrees that at Closing (i) TelePassport Inc. shall cause all personal guarantees of Shareholders to any bank in respect of such liabilities described on Schedule H(ii) to be cancelled and, if necessary, replaced by an entity other than the Shareholders or repaid. D. At Closing, Hruby and Schlick shall sign employment agreements with Telekom for a term of three (3) years, substantially in the form attached hereto as Exhibit B (the "Employment Agreements") at an initial base salary of fifty thousand dollars ($50,000). During the term of the employment agreements, Hruby and Schlick will be eligible to receive an annual bonus as determined by the shareholders of Telekom or their designee. The base salary will be reviewed once every twelve months and adjusted to at least a minimum amount necessary to keep current with increases in cost of living in Austria. The usual USFI protective documents executed by other executive officers of USFI with comparable responsibilities, such as Code of Ethics substantially in the form attached hereto as Exhibit C, shall be attached thereto and be a part thereof. D.1 In addition to the base salary detailed above, the Employment Agreements of Hruby and Schlick will provide, among other things for such employees to share equally, (i) an override of 1 1/2% of TelePassport revenue generated in Austria by agents; and (ii) an override of 2 1/2% of TelePassport revenue generated in Austria by direct sales to customers in Austria, provided that, to the extent other employees of Telekom participate in commissions, they will be paid out of the percentages in (i) and (ii) above. D.2 Hruby and Mr. Pearson, on behalf of USFI, will discuss the possible granting of options to acquire USFI stock to employees of Telekom. D.3 100% of the non-TelePassport commissions received with respect to persons who are customers of Telekom as of the Closing or who are located in Austria and become customers after Closing will become revenue of Telekom. E. Hruby and Schlick's Employment Agreements will provide for a benefits package (health, medical and life insurance) consistent with the requirements of Austrian law, to the extent - 3 - 4 Mr. Franz Hruby Mr. Wolfgang Schlick Mr. Georg F. Hofer such benefits cover Austrian residents, as well as such other benefits as TelePassport generally provides to employees with comparable responsibilities, provided that the aggregate cost of all the benefits to each of Hruby and Schlick shall not exceed the aggregate cost of benefits to any similar employee in the United States. F. Hruby and Schlick agree that between the date hereof and until the earlier to occur of (i) termination of this Agreement if a Closing does not occur by 31 July 1997 and (ii) termination of his employment by Telekom, pursuant to the terms of the Employment Agreement if a Closing does occur, they will refer all reasonable business opportunities relating to the telecommunications industry wherever located, including those in Germany and Austria, to USFI for evaluation and acceptance by USFI (within a reasonable time) if it so elects. G. This Agreement may be converted by both sides into a more formal contract form. This Agreement is to be governed by the laws of the United States, except that Austrian law shall apply to the transfer of the Stock by notarial deed or other instrument of conveyance. The parties agree that jurisdiction for any dispute between them shall be in the state or federal courts in the State of New York and that service of process in any such dispute may be served by mail. To the extent that accounting principles are needed to understand this document, the accounting principles of the United States apply. Where there are language difficulties, this original English document shall prevail. H. Each Shareholder represents, warrants and covenants that: a) all information supplied by them with respect to Telekom, including but not limited to financial statements, is and will be true and correct; b) Telekom has no liabilities except as reflected in the financial statements delivered to USFI or which are immaterial and arose in the ordinary course of business after the date of any such financial statements; all of such liabilities being described on Schedule H(ii) hereto; c) Telekom has no material obligations and is not a party to any material contract other than those obligations and contracts that are listed on Schedule H(iii) hereto; Telekom has no contracts or other arrangements with any Shareholder, any of his family members or any entities affiliated with any Shareholder or his family members which cannot be terminated without any penalty or additional costs; d) the execution, delivery and performance of this Agreement does not require the consent of any person or party and will not conflict with, violate or result in a default under any agreement, contract, license or understanding to which any Shareholder or - 4 - 5 Mr. Franz Hruby Mr. Wolfgang Schlick Mr. Georg F. Hofer Telekom is a party or by which either is bound other than such consents that are listed on Schedule H(iv) hereto; e) between the date hereof and the Closing, the Shareholders will cause Telekom to operate only in the ordinary course and consistent with past practices and will not permit Telekom to incur or suffer to exist any material obligation or liability or increase the compensation payable to any person by more than 5% without the consent of USFI; f) no later than 30 days after the close of each calendar month, Shareholders shall cause Telekom to deliver to USFI an income statement for the previous month and a balance sheet as of the last day of that month; g) the Stock represents all of the issued and outstanding shares of Telekom. The Stock is owned of record and beneficially by the Shareholders and is validly issued, fully-paid and non-assessable. There are no outstanding securities convertible into, exchangeable for or providing a right to acquire equity securities of Telekom. The sale of the Stock pursuant hereto will provide USFI at Closing with legal and valid title to such shares, free of all liens, security interests or other encumbrances; h) The Shareholders acknowledge that any right they may have to the TelePassport name or any derivative thereof is being conveyed to USFI pursuant to this Agreement; the Shareholders have no knowledge of any claim to the TelePassport name by any of them or any other person or party; the Shareholders have not granted or conveyed to any person or party (other than USFI pursuant hereto) any direct or indirect rights relating to the TelePassport name (or any derivative thereof); and i) the representations and warranties contained herein will be true and correct on the date of Closing as though made on such date. I. This Agreement shall terminate if the IPO closing does not occur on or before 31 July 1997, provided, however, that any party whose breach of any provision of this Agreement caused or resulted in the failure of the Closing hereunder to occur simultaneously with the IPO closing shall not be relieved from liability with respect hereto. Paragraphs A, C, F, G, H, I, J, K and L of this Agreement shall survive the execution and delivery of this Agreement and Closing and shall remain in full force and effect, provided that any claim with respect to the breach of any provision of Paragraph H (other than clause (g) thereof) must be asserted prior to the later of (a) one year from the date of Closing or (b) 90 days after completion of the audit of Telekom's financial statements for the year ended December 31, 1997. J. For the applicable periods specified in this Paragraph J, each of the Shareholders agrees - 5 - 6 Mr. Franz Hruby Mr. Wolfgang Schlick Mr. Georg F. Hofer that he shall not, without USFI's prior written consent, directly or indirectly: (1) Own, manage, control or participate in the ownership, management or control of, or be employed or engaged by or otherwise affiliated or associated with, whether as a sole proprietor, shareholder (except as a passive holder of not more than three (3) percent of the outstanding shares of a corporation or other entity), owner, partner, joint venturer, employee, agent, manager, salesman, consultant, advisor, independent contractor, officer, director, promotor or otherwise, whether or not for compensation, with respect to any corporation, partnership, proprietorship, firm, association or other business entity, including, without limitation, any not-for-profit entity, which is engaged in (a) any telecommunications business presently conducted by USFI or any of its affiliates, or (b) any other telecommunications business conducted by USFI or any of its affiliates during the applicable period specified in paragraph (4) of this Paragraph J, (each such business described in clauses (a) and (b) above hereinafter referred to individually and collectively as the "Business"). (2) Solicit any past, present or prospective customers or suppliers of Telekom, USFI or any of their affiliates, or other persons in a business relationship with Telekom, USFI or any of their affiliates for business or patronage in any way relating to any aspect of any of the Business, other than on behalf of Telekom, USFI or their affiliates in the course of his employment. He shall not request, directly or indirectly, customers or suppliers of Telekom, USFI or any of their affiliates, or other persons in a business relationship with Telekom, USFI or any of their affiliates, to cancel, curtail or divert their business with Telekom, USFI or any of their affiliates, or otherwise take action with respect to such customers or suppliers or other persons which might have an adverse effect on the Business. (3) Induce or attempt to induce any person who is an employee, officer or agent of Telekom, USFI or any of their affiliates to terminate or otherwise adversely affect such relationship with such entities, nor shall he solicit for employment, employ or engage, directly or indirectly, for on behalf of him or any third party, any such employee, officer or agent. (4) The provisions of paragraph (1) of this Paragraph J shall be operative and binding for a period beginning as of the Closing and ending (a) on the 6 month anniversary of the respective termination of Hruby and Schlick's employment, as the case may be, with Telekom in the event he resigns or is terminated with Cause (in accordance with the terms and provisions of the Employment Agreement) or (b) upon expiration of the term of the respective Employment Agreement provided he gives notice (in accordance with the terms of his Employment Agreement) to Telekom at least 90 days prior to such expiration that he does not intend to continue his employment with Telekom or any affiliate after such - 6 - 7 Mr. Franz Hruby Mr. Wolfgang Schlick Mr. Georg F. Hofer expiration, or if he gives such notice less than 90 days prior to such expiration, then 90 days after such notice is given. The provisions of paragraphs (2) and (3) of this Paragraph J shall be operative and binding for a period commencing as of the Closing and ending on the second anniversary of Hruby or Schlick's (as the case may be) termination of employment with Telekom (in accordance with his Employment Agreement). Hruby and Schlick acknowledge that the Business is conducted on a worldwide basis and agree therefore that each of the respective covenants set forth in this Paragraph J shall not be restricted by geographic region. K. The parties hereto acknowledge that the damages incurred by either if the other breaches this Agreement will not only be substantial but also irreparable and that the legal remedy of damages will be insufficient. Accordingly, the parties agree that in addition to any other remedies which may be available to them, they shall be entitled to specific performance of this Agreement and/or injunctive relief (including a preliminary injunction or temporary retraining order). L. If any term or provision of this Agreement is finally determined by a court of law to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other provisions of this Agreement shall nevertheless remain in full force and effect. Please confirm your agreement with the foregoing by countersigning a copy of this Agreement where indicated below and returning it to us. Very truly yours, USFI, INC. By:_______________________________ Agreed to: /s/ Franz Hruby - -------------------------------------- FRANZ HRUBY /s/ Wolfgang Schlick - -------------------------------------- WOLFGANG SCHLICK /s/ Georg F. Hofer - -------------------------------------- GEORG F. HOFER - 7 - 8 EXHIBIT A ESCROW AGREEMENT (omitted) EXHIBIT B EMPLOYMENT AGREEMENTS (omitted) EXHIBIT C CODE OF ETHICS (omitted) (OMITTED) SCHEDULE H(ii) List of Liabilities - 3 - (OMITTED) SCHEDULE H(iii) MATERIAL CONTRACTS - 4 - (OMITTED) SCHEDULE H(iv) REQUIRED CONSENTS - 5 - EX-10.6 5 SHARE PURCHASE AGREEMENT DATED MARCH 14, 1997 1 Exhibit 10.6 SHARE PURCHASE AGREEMENT THIS SHARE PURCHASE AGREEMENT, dated as of March 14, 1997, is made between and among USFI, INC. a Delaware Corporation ("Buyer") and STEPHEN CHARLES EDWARDS ("Edwards") and MICHAEL PETER RILEY ("Riley" and together with Edwards, jointly and severally, "Sellers"), each an individual resident in Great Britain. RECITAL: Sellers own 100 ordinary shares of (Pound Sterling)1 (One Pound) par value (the "Shares"), of Hercules Consultants, Limited, a company limited by shares and incorporated in England and Wales (the "Company"), which Shares are represented by Sellers to constitute 100% of all the issued share capital of the Company. The Sellers desire to sell and the Buyer to purchase, the Shares. AGREEMENT: In consideration of the mutual promises, covenants and other agreements contained herein, the parties hereto hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. The following terms, as used herein, have the following meanings: "Affiliate" of any Person means any other Person directly or indirectly through one or more intermediary Persons, controlling, controlled by or under common control with such Person. "Applicable Year" means either Year 3 or Year 4, as Sellers shall elect in a written notice received by Buyer not later than the date corresponding to the 15th day of the month 2 which is thirty (30) months subsequent to the Closing; and shall mean Year 3 if no such notice is timely received. "Authorization" means any license, permit, authorization, certificate or approval of, or any required registration or filing with, any Governmental Authority necessary in connection with the conduct of the Business by the Company. "Balance Sheet" has the meaning set forth in Section 3.7 of this Agreement. "Business" means the current and disclosed-as-presently-contemplated business and operations of the Company, including without limitation, the sale and/or provision of international telecommunications services. "Business Assets" means all properties, privileges, interests and claims, real and personal, tangible and intangible, of every type and description, including goodwill, owned by the Company or otherwise used or useful in connection with the Business, including, without limitation, (i) all Contracts, Authorizations and other intangibles, including but not limited to customer lists and records, all rights and claims of the Company with respect to the Business, computer software and Intellectual Property Rights; (ii) all tangible personality, inventory, telecommunications switching equipment, hardware and other personal property owned or leased by the Company; (iii) all freehold property, leaseholds, fixtures and other interests in freehold property owned or leased by the Company; and (iv) all books and records of the Company. "Closing" has the meaning set forth in Section 2.4 of this Agreement. "Company" has the meaning set forth in the Recital hereof. "Contract" means any written or oral material contract, agreement (including, without limitation, agency agreements and reseller agreements), indenture, note, bond, instrument, -2- 3 lease, conditional sale contract, mortgage, license, franchise, commitment or other binding arrangement, (i) to which the Company is a party or (ii) to which any of the Business Assets or Purchased Stock is or may be subject. "Competitor" has the meaning set forth in Section 5.5(b) of this Agreement. "Disclosure Letter" means the disclosure letter dated the date of this Agreement from the Sellers to the Buyer and delivered to the Buyer by Sellers concurrent with the execution of this Agreement. "Edwards Employment Agreement" means the Employment Agreement between the Company and Edwards, dated the Closing Date in the form attached hereto as EXHIBIT B. "Edwards Non-Compete Agreement" means the Non-Competition Agreement between the Buyer and Edwards, dated the Closing Date in the form attached hereto as EXHIBIT C. "Final Payment Date" means the date forty-five (45) days after the earliest date upon which the Final Payment Formula Price can be calculated. "Final Payment Formula Price" means an amount in U.S. Dollars calculated by multiplying the Company's Annual Revenue in the Applicable Year by twenty percent (20%). "Annual Revenue" shall mean, in respect of any completed year, (a) Net Profits of the Company earned in such year in respect of its customer premise equipment sales plus (b) such year's telecommunications revenues received by the Company or Buyer in respect to sales to customers in the United Kingdom of 1xxx, VPN, debit and calling card and dedicated access services and such other services as may become available for sale under the TelePassport brand name throughout the United Kingdom, and without regard to whether such services were sold by -3- 4 employees of the Company or by other operations of Buyer, provided, however, that any such revenues which derive from (i) acquisitions and mergers effected by Buyer, or any of its Affiliates, post-Closing (including by the Company), (ii) callback technology, (iii) other telecommunication carriers or switch-based resellers, (iv) any traffic that is carried on the TelePassport network that is transmitted through the U.K. and (v) services provided to U.S. Air Force or other military bases, would be excluded from this calculation (notwithstanding that the Company shall have responsibility for servicing such U.S. bases at the expense, and from the budget, of the applicable, to-be-indicated, Buyer Affiliate). For purposes of the foregoing computation, revenues in pound sterling will be converted to U.S. Dollars on the basis of the average of the exchange rates for Pound Sterling to U.S. Dollars on the spot market for each business day of December of the Applicable Year (i.e. the total of the daily exchanges divided by the number of days). "Governmental Authority" means any government or political subdivision thereof, whether in the United Kingdom, United States, any of their respective political subdivisions or any other jurisdiction, or any agency or instrumentality of any such government or political subdivision, or any court or arbitrator. "Intellectual Property Rights" means all patents, trademarks, copyrights, service marks, tradenames, software and source codes owned, used by or licensed to the Company, or otherwise related to or useful in the business, all applications for any of the foregoing, and all permits, grants, licenses and other present and future rights relating to any and all of the foregoing. -4- 5 "IPO" means the proposed initial public offering of TelePassport Stock in the U.S. capital markets. "IPO Price" means the price per share of TelePassport Stock at the closing of the IPO. "Law" means any law, statute, code, ordinance, rule, regulation or requirement of any Governmental Authority. "Liability" means any direct or indirect indebtedness, liability, claim, loss, damage, deficiency, obligation or responsibility, fixed or unfixed, liquidated or unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise. "Lien" means any mortgage, lien, pledge, charge, claim, easement, right of way, security interest or other restriction or encumbrance of any kind whatsoever. "Market Price" for TelePassport Stock shall mean the average closing price of a share of the TelePassport Stock on the principal securities exchange (including but not limited to the Nasdaq Stock Market or the Nasdaq National Market) on which such shares are traded for the ten (10) trading days immediately preceding the Final Payment Date, or if the shares are not traded on a securities exchange, Market Price shall be deemed to be the average of the high bid and low asked price of the shares in the over-the-counter market for the ten (10) trading days immediately preceding the date as of the Final Payment Date. "Net Profits" shall mean an amount equal to the revenue of the Company after deducting its cost of goods sold and all installation costs. "Order" means any order, judgment, decision, award, decree or writ or any Governmental Authority. -5- 6 "Person" means an individual, corporation, partnership, joint venture, association, trust, unincorporated organization or other entity. "Required Consent" means any authorization, consent, approval, license, exemption, Order, or other action by any Governmental Authority or any party to any Contract which is necessary in connection with the execution and delivery of this Agreement and/or the consummation of the transaction contemplated hereby. "Riley Non-Compete Agreement" shall mean the Non-Competition Agreement between Riley and the Buyer, dated the Closing Date, in the form attached hereto as EXHIBIT A. "Shares" has the meaning set forth in the Recital to this Agreement. "Tax" (including, with correlative meaning, the terms "Taxes" and "Taxable") means (i) any net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, value-added, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits tax, alternative or add-on minimum tax, customs duty or other tax, fee, assessment or charge of any kind whatsoever, together with any interest and any penalty, addition to tax or additional amount imposed by any domestic or foreign Taxing Authority, with respect to the Company; and (ii) any liability of the Company for the payment of any amounts of the type described in the immediately preceding clause (i) as a result of a contractual obligation to indemnify any other Person. "Taxable Year" means, with respect to any Tax assessed against or payable by the Company, the calendar or fiscal year, or shorter period, for which such Tax is computed and the Tax Return for such Tax is made. -6- 7 "Taxing Authority" means any Governmental authority or quasigovernmental authority responsible for the imposition of any Tax. "Tax Return" has the meaning specified in Section 3.12 hereof. "TelePassport Stock" means the Class B Common Stock, $.01 par value, one vote per share, of TelePassport Inc., a Delaware corporation. "Year 3" shall mean the third calendar year subsequent to the year in which the Closing occurs. "Year 4" shall mean the fourth calendar year subsequent to the year in which the Closing occurs. ARTICLE 2 PURCHASE AND SALE OF STOCK 2.1 Purchase and Sale. (a) Under the terms and subject to the conditions set forth herein, Sellers agrees to transfer and deliver to Buyer, and Buyer agrees to purchase, acquire and accept from Sellers, the Shares. (b) The Shares shall be transferred to Buyer, free and clear of all Liens, as follows: (i) at the Closing: from Edwards, 40 shares of the Shares; and from Riley, 40 shares of the Shares. (ii) on the Final Payment Date: from Edwards, 10 shares of the Shares; and from Riley, 10 shares of the Shares. 2.2 Consideration. Subject to the terms and conditions of this Agreement, the parties agree that Buyer shall pay Sellers as follows for the Shares: -7- 8 (a) At the Closing: (i) an aggregate cash payment equal to US$250,000 (the "Cash Payment"); and (ii) shares of TelePassport Stock with an aggregate value of $1,000,000, established by pricing the shares at the IPO Price (the "Initial Payment Stock" and, together with the Cash Payment, the "Initial Payment"). (b) On the Final Payment Date: either of the following, to be determined in Buyer's sole discretion: (i) shares of TelePassport Stock with an aggregate value, established by pricing the Shares at the Market Price, equal to the Final Payment Formula Price (such shares of TelePassport Stock, the "Final Payment Stock"); or (ii) an aggregate cash payment made in U.S. Dollars in an amount equal to the Final Payment Formula Price (such cash payment or the Final Payment Stock, as the case shall be, the "Final Payment"). 2.3 Restrictions on TelePassport Stock. Resale or transfer of shares of TelePassport Stock received as Initial Payment Stock or Final Payment Stock shall be subject, in each case, to provisions of then applicable securities laws and the shares legended to reflect this restriction. Sellers further acknowledge the representations made in Section 3.21, below. 2.4 Closing. The closing of the transactions contemplated hereby (the "Closing") shall take place at the offices of Buyer at 10:00 A.M., local time, on the first business day thirty (30) calendar days after the date of the closing of the IPO, or at such other time and place upon which -8- 9 Sellers and Buyer may agree (the time and date of the Closing being hereinafter called the "Closing Date"), provided that such date shall not be later than July 31, 1997. 2.5 Loan; Additional Investment. (a) Buyer shall make a loan in two advances to the Company in the principal amount of $250,000. The first advance shall be made in the principal amount of $100,000 contemporaneous with the execution and delivery of this Agreement by the parties hereto, and the second advance shall be made in the principal amount of $150,000 promptly after closing of the IPO. In each case, use of the loan proceeds shall be limited to working capital purposes and the advances shall each be evidenced by a promissory note in the form of EXHIBIT D hereto, mutatis mutandis, to be executed and delivered by the Company concurrently with each respective advance. (b) Upon the Closing, Buyer shall make a capital contribution to the Company in an amount equal to US$250,000, which shall be provided by converting the loan referred to in (a) above into a capital contribution. Proceeds of such contribution to capital shall be used, in part, to repay in full director loans, in an aggregate principal amount not exceeding (pound)50,000, extended by Sellers to the Company, and the balance for working capital only. No additional shares shall be issued to any party as a result of such capital contribution. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLERS Sellers hereby represent and warrant to Buyer as follows: 3.1 Title to and Status of the Shares. Sellers own and hold title to the Shares free and clear of all Liens of any kind. The Shares are not subject to any restrictions on transferability other than restrictions imposed by applicable securities laws. There are no outstanding options, -9- 10 warrants, calls or other rights to purchase or acquire from Sellers or the Company, or any plans, contracts or commitments providing for the issuance of, or the granting of rights to any Person to acquire: (i) any capital stock of the Company or (ii) any securities convertible into or exchangeable for any capital stock of the Company. The Company is not obligated to purchase, repurchase, redeem or otherwise acquire any outstanding shares of its capital stock. 3.2 Authority Relative to this Agreement. Sellers have all requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Sellers, and constitutes the legal, valid and binding obligation of Sellers, enforceable against Sellers in accordance with its terms except as may be limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights generally. 3.3 Existence and Power. The Company is a company limited by shares duly organized, validly existing and in good standing under the laws of its jurisdiction of the U.K. and has all requisite company power and authority to carry on its business as now conducted. The Company is duly qualified to do business as a foreign company and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification advisable. 3.4 No Conflicts; Consents. The execution, delivery and performance of this Agreement by Sellers and the consummation of the transaction contemplated hereby will not (i) violate any provision of the Company's regulations or any other organizational documents of the Company; (ii) with respect to either Sellers or the Company require any consent, approval or action of, or any filing with or any notice to, any Governmental Authority or any other Person; -10- 11 (iii) violate, conflict with or result in the breach of any of the terms of, or otherwise cause the termination of or give any other party the right to terminate, or constitute (with or without notice or lapse of time) a default under, any Contract, or result in the creation of any Lien upon the Shares or upon any of the Business Assets; (iv) violate any Order against, or binding upon Sellers or the Company, or upon the Company's securities, the Business or the Business Assets; (v) violate any Law; or (vi) violate or result in the revocation or suspension of, or a limitation under, any Authorization. 3.5 Subsidiaries, etc. The Company does not directly or indirectly own any interest in any other Person except as set forth on SCHEDULE 3.5. There are no outstanding obligations of the Company to purchase or otherwise acquire any securities of or interest in any other Person. 3.6 Capitalization. The authorized share capital of the Company consists of 100 ordinary shares of (pound)1 par value. There are no shares held by the Company in its treasury. Sellers owns beneficially and of record 100% of the issued shares of the Company, all of which are duly authorized and validly issued, fully paid and nonassessable and none of which was issued in violation of any preemptive rights. There are no outstanding (i) securities of the Company convertible into or exchangeable for shares of capital stock or voting or non-voting securities of the Company or any other Person, or (ii) options, warrants or other rights to acquire from the Company, and no obligation of the Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company. There are no outstanding obligations of the Company to repurchase, redeem or otherwise acquire any of its securities. -11- 12 3.7 Financial Statements; Liabilities. (a) Sellers have furnished Buyer with the Company's audited balance sheets as at March 31, 1995, and March 31, 1996 (the later of such dates being hereinafter referred to as the "Balance Sheet Date"), and the Company's audited income statements for each of the two years ended March 31, 1996 (the "Company's Financial Statements"). The Company's Financial Statements have been prepared from the books and records of the Company in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved and fairly present the financial position of the Company as at the dates thereof and the results of its operations for the periods presented. (b) Sellers have furnished Buyer with the Company's statement of accounts receivable and trade payables as at December 31, 1996 and shall, at earliest practicable time, provide to Buyer the unaudited balance sheet of the Company as of March 31, 1997, and the Company's unaudited income statement for the year ended March 31, 1997 (the "Company's 1996 Financial Statements"). The Company's 1996 Financial Statements will be prepared from the books and records of the Company in accordance with generally accepted accounting principles applied on a consistent basis and will fairly present the financial position of the Company as at March 31, 1997, and the results of its operations for the year ended March 31, 1997. (c) The Company has no outstanding Liabilities other than those set forth in the balance sheet dated March 31, 1996, and those incurred in the ordinary course of business since March 31, 1996. -12- 13 3.8 Absence of Certain Changes. Except as set forth on SCHEDULE 3.8 hereto, since the Balance Sheet Date, the Company has conducted its business only in the ordinary course, and there has not been: (a) any change in any method of accounting or accounting practice by the Company; (b) any material adverse change or event that has had or may have a material adverse effect on the Business, the Business Assets, or the financial condition or prospects (financial or otherwise) of the Company; (c) any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of the Company, or any grant to any executive officer or other employee of the Company of any increase in compensation or in severance or termination pay; (d)(i) any incurrence, assumption or guarantee by the Company of any Liability, or (ii) the making of any loan, advance or capital contribution by the Company to, or investment in, any Person; (e) any termination or failure to renew, or any threat to terminate or fail to renew, any Contract that is or was material to the Business, or the Business Assets, prospects, condition (financial or otherwise) or the results of operation of the Company; or (f) any sale, transfer or disposition of assets or any material Contract entered into by the Company. -13- 14 3.9 Business Assets. (a) The Sellers warrant that the Company has good and clear title to all of the Business Assets, free and clear of all title defects, Liens and claims or any nature. The Company does not own any real property. (b) Machinery and Equipment. SCHEDULE 3.9(B) sets forth a list of each piece of machinery, furniture and equipment of the Company with an original cost in excess of (pound)800; (c) Accounts Receivable. All the accounts receivable of the Company (i) will represent actual indebtedness incurred by the applicable account debtor; (ii) have arisen in the ordinary course of the Business; and (iii) will be subject on the Closing Date to no prior assignment or Liens or to any deduction or offset; (d) Insurance. SCHEDULE 3.9(D) is a list and brief description of all casualty, liability, business interruption and other insurance policies and fidelity bonds held by the Company. All such policies and bonds are in full force and effect and, to the best knowledge of Sellers, there is no threat by any of the insurers to terminate, or materially increase the premiums payable under, any of such policies or bonds. The Company is in full compliance with the conditions contained in such policies and bonds. (e) Contracts. The Company has no obligations in respect of Contracts except as described in SCHEDULE 3.9(E). Each Contract described on SCHEDULE 3.9(E) is a valid and binding obligation of the parties thereto and in full force and effect, and will continue in full force and effect following the transactions contemplated by this Agreement, in each case without the breach of any terms or conditions thereof or the forfeiture or impairment of any rights thereunder and, except as set forth on SCHEDULE 3.9(E), without the consent, approval or act of, or the making of any filing with, any other Person. The Company has performed all material -14- 15 obligations required to be performed by it to date under the Contracts and is not (with or without the lapse of time or the giving of notice, or both) in breach or default in any material respect thereunder. To the best knowledge of Sellers, each of the other parties to the Contracts has performed all material obligations required to be performed by it to date under the Contracts, and is not (with or without the lapse of time or the giving of notice, or both) in breach or default thereunder. Sellers know of no, and have received no notice of any, intention of any party to terminate any Contract. The Company is not a party to nor is it bound by any provision of any Contract which materially and adversely affects or could materially and adversely affect the Company's operations, earnings, assets, properties, Liabilities, Business or prospects or its condition, financial or otherwise. Neither the Worldcom Platinum Dealership Agreement nor the MFS [commission Agreement] requires the Company, by its respective terms, to trade exclusively with Worldcom or MFS with respect to the services provided thereunder. True and complete copies of each of the Contracts have been delivered to Buyer. (f) Customers. SCHEDULE 3.9(F) sets forth the name and address of each of the Company's customers that accounted for ten percent or more of the Company's revenues in any of the [three] years ended December 31, 1996 and the amount of the Company's revenues from each such customer in each of such years. Except as set forth in SCHEDULE 3.9(F), no customer named in SCHEDULE 3.9(F) has refused to honor any of its commitments to purchase products or services provided by the Company or has provided the Company with any indication of material dissatisfaction with the quality, performance or price of the Company's products or services, and there has been no material adverse change with respect to the relationship of the Company with any such customer. -15- 16 3.10 Intellectual Property. SCHEDULE 3.10 is a true and complete list of all Intellectual Property Rights held or owned by the Company. The Company owns or has perpetual rights to use, without payment, all such Intellectual Property Rights. No Intellectual Property Rights or any other such right owned by or licensed to the Company is subject to any outstanding order, judgment, decree, stipulation or agreement restricting the use or licensing thereof. The Company has not been sued or charged in writing with or been a defendant in any claim, suit, action, or proceeding relating to the Business or any of the Business Assets which involves a claim of infringement of any intellectual property rights of any other Person during the three years preceding the date hereof; and Sellers has no knowledge of any such charge or claim or of any infringement during the three years preceding the date hereof by any other Person of any Intellectual Property Rights, or of any action by the Company that would constitute an infringement of any intellectual property rights of another Person. 3.11 Claims and Proceedings. (a) There are no outstanding Orders against or involving the Company or the Business Assets; (b) there are no actions, suits or claims or legal, administrative or arbitral proceedings or investigations (collectively, "Claims") pending or threatened against or involving the Company, the Business or any of the Business Assets, nor is there any fact, event or circumstance that would give rise to any such Claim; and (c) There are no Claims pending or threatened that would give rise to any right of indemnification on the part of any stockholder, director or officer of the Company or the heirs, executors or administrators of such stockholder, director or officer, against the Company or any successor to the business of the Company. -16- 17 3.12 Taxes. The Company has duly and timely filed all Tax reports, returns, statements and forms (collectively, "Tax Returns") required to be filed with any Taxing Authority with respect to any period prior to the date hereof. All such Tax Returns are complete and correct as filed, and the Company has duly paid in full all Taxes and other charges shown as due on such Tax Returns or which otherwise have become due whether or not shown on any such Return. Neither Sellers nor the Company have received notice from any Taxing Authority of any claim or claims for additional Taxes which are claimed to be due from the Company and there are no audits, examinations, suits or claims pending or threatened against the Company in respect of any Tax. There are no liens or levies in favor of any Taxing Authority upon any of the Purchased Stock, Business Assets or any other property or assets of the Company. There are no outstanding agreements or waivers extending the statutory period of limitation applicable to any income tax return of the Company of any period. 3.13 Employee Benefits Plans. Except as set forth on SCHEDULE 3.13 hereto, on the date hereof and within the past five years the Company has not maintained, sponsored, contributed or been party to any employee pension benefit or retirement plan or any other employee benefit plan, arrangement or agreement (exclusive of group health, life and hospitalization insurance coverage), including, without limitation, arrangements providing for benefits in the event of a change of ownership or control of the Company. 3.14 Officers, Directors and Employees. Except for individuals or officers set forth on Schedule 3.14, the Company is not a party to any contract or agreement with any labor organization or other employee representative, and no such contract or agreement is being negotiated. -17- 18 3.15 Potential Conflicts of Interest. No officer, director or stockholder of the Company, and no spouses, lineal descendants or Affiliates of such officers, directors or stockholders owns, directly or indirectly, any interest in, or is an officer, director, employee or consultant of, any Person which is a competitor of the Company; or has any interest in any Business Assets; or has any cause of action or other claim whatsoever against, or owes any amount to, the Company. 3.16 Creditors; Suppliers. (a) SCHEDULE 3.16 sets forth the name and address of each of the Company's present creditors and other persons to whom any Liabilities are owed together with the amount of such Liability. (b) The relationship of the Company with its suppliers are good commercial relationships; the Company is not in arrears in the payment of the sums due for any of such services. 3.17 Compliance with Laws. The Company is not in violation of any applicable Order or Law, nor do any facts or circumstances exist which, with or without the giving of notice or the passage of time, would constitute a violation of any applicable Order or Law. The Company has not made any illegal payment or consideration to any Person. 3.18 Authorizations. The Company has all Authorizations necessary to conduct the Business as presently conducted. 3.19 Finders, Fees. There is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Sellers or the Company who might be entitled to any fee or commission from Buyer or any of its Affiliates upon consummation of the transactions contemplated hereby. -18- 19 3.20 Disclosure. Neither this Agreement, the Schedules and Exhibits hereto, the Balance Sheet, nor any financial statements, documents, certificates or statements furnished or to be furnished to Buyer by or on behalf of Sellers or the Company in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact of omits to state a material fact required in order to make the statements contained herein or therein not misleading or necessary to provide Buyer with adequate information as to the condition of the properties, assets and liabilities of the Company. There are no facts which adversely affect or which could adversely affect the Business, Business Assets, operations or prospects of the Company which have not been set forth herein, or in any Schedule or Exhibit hereto, or in any certificate or written statement furnished or to be furnished to Buyer. 3.21 Investment Intent. Each of Sellers (a) is acquiring the TelePassport Stock as an investment and not with a view towards the further distribution or sale thereof; (b) will not sell or otherwise transfer any of the TelePassport Stock without registration under the Securities Act of 1933 or applicable state securities laws or pursuant to an exemption therefrom; (c) acknowledges that Buyer has not made any oral or written representations with respect to the TelePassport Stock; (d) will provide such information and execute and deliver such documents as may reasonably be necessary to comply with any and all laws and regulations to which TelePassport is subject; and (e) acknowledges that the certificate evidencing the TelePassport Stock will be legended to reflect that the shares evidenced thereby have not been registered and to refer to the terms and provisions set forth in this Agreement. -19- 20 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to the Sellers that: 4.1 Existence and Power. Buyer is a corporation duly organized and validly existing under the laws of the State of Delaware and has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by Buyer have been duly and validly authorized and approved by all necessary corporate action and no other corporate proceedings on the part of Buyer are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Buyer and constitutes the valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms, except as such obligations and their enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights generally. 4.2 No Conflicts; Consents. The execution, delivery and performance of this Agreement by Buyer and the consummation of the transactions contemplated hereby will not (i) violate any provision of the articles of incorporation or Bylaws of Buyer; (ii) require Buyer to obtain any consent, approval or action of, or make any filing with or give any notice to, and Governmental Authority or any other Person; (iii) violate, conflict with or result in the breach of any of the terms of, or otherwise cause the termination of or give any other party the right to terminate, or constitute (with or without notice or lapse of time) a default under any contract or -20- 21 agreement to which Buyer is a party; (iv) violate any Order against, or binding upon, Buyer; or (v) subject to obtaining any required consents of any Governmental Authority, violate any Law. 4.3 Finders; Fees. There is no investment banker, broker, finder, or other intermediary retained by Buyer who might be entitled to any fee or commission from the Sellers, the Company or any other respective Affiliates upon consummation of the transactions contemplated hereby. ARTICLE 5 COVENANTS AND AGREEMENTS 5.1 Conduct of Business. From the date hereof through the Closing Date, Sellers covenant and agree: (a) To cause the Company to operate the Business only in the ordinary course consistent with past transactions. (b) No action of the type described or referred to in Section 3.8 hereof will be taken. Without limiting the generality of the foregoing, no officer, employee, consultant or independent contractor will be hired by the Company without Buyer's written approval, except for employees hired to replace those whose employment with the Company is terminated, and whose wages and benefits are substantially the same as those of the replaced employee. (c) No bonus, profit sharing, pension, retirement or other similar arrangement or plan for employees shall be instituted or agreed to by the Company; no increase in the compensation payable or to become payable to any employee, officer or director of the Company shall be made other than incremental annual increases consistent with past practice of the Company; no bonus, percentage of compensation or other like benefit shall be accrued to or for -21- 22 the credit of any employee, officer or director of the Company and no bonus, pension, retirement or similar benefit or arrangement shall be made or agreed to for any employee. (d) Sellers shall cause the Company to preserve intact its business organization and its relationships with all customers, suppliers and other Persons. (e) Sellers shall cause the Company to conduct its affairs in such a manner so that their representations and warranties contained herein shall continue to be true and correct on and as of the Closing Date as if made on and as of the Closing Date. (f) The Company shall not enter into any contract, agreement, indenture, note, bond, instrument, lease, conditional sale contract, mortgage, license, franchise, commitment or other binding arrangement, which individually or in the aggregate obligate the Company to make payments of (pound)5,000 or more over the term thereof, without Buyer's prior written approval, which approval shall not be unreasonably withheld or delayed. 5.2 Corporate Examinations and Investigations. (a) Prior to the Closing Date, Sellers agrees that the Buyer shall be entitled, through its authorized representatives, to make such investigation of the properties, premises, businesses and operations of the Company and such examination of the books, records and financial condition of the Company as it wishes. Any such investigation and examination shall be conducted at reasonable times, under reasonable circumstances and upon reasonable notice, and the Sellers shall, and shall cause the Company and its key personnel to, cooperate fully therein. No investigation by the Buyer shall diminish or obviate any of the representations, warranties, covenants or agreements of Sellers contained in this Agreement. Sellers shall make available and shall cause the Company to make available to Buyer's authorized representatives during such period, without causing any undue interruption -22- 23 in the operations of the Company, all such information and copies of such documents concerning the affairs of the Company as such representatives may reasonably request, shall permit Buyers' representatives access to the properties of the Company and all parts thereof and to their respective customers, suppliers, contractors and others, and shall cooperate and cause the Company to cooperate fully in connection with such review and examination. (b) Prior to May 31, 1997, Sellers shall deliver to Buyer the Company's audited balance sheet and profit and loss account as at and for the year ended March 31, 1997 issued by Grant Thornton, the Company's regular registered auditors, and shall contain no material qualifications and shall not evidence any material adverse change in the Company's business since March 31, 1996. (c) Buyer agrees that Sellers shall be given a copy of TelePassport Inc.'s securities registration statement under the United States federal Securities Act of 1933, on Form S-1, together with any amendments thereto. Exhibits thereto shall be made available to Sellers, as they may request. Buyer represents that on the registration statement's effective date, it will contain no untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. 5.3 Filings and Authorizations. Sellers and Buyer shall, promptly after the execution and delivery of this Agreement, file or supply, or cause to be filed or supplied, all notifications, reports and other information required to be filed or supplied or otherwise appropriate in connection with obtaining any of the Required Consents. Sellers and Buyer shall cooperate with each other in connection with such filings and furnish each other with copies of such filings and -23- 24 any correspondence received from any Governmental Authority in connection therewith. Sellers and Buyer shall, as promptly as practicable, make or cause to be made, all such other filings and submissions under such laws, rules and regulations applicable to it and Affiliates, as may be required for it to consummate the transactions contemplated hereby in accordance with the terms of this Agreement. In addition to the foregoing, Sellers shall cooperate with Buyer and cause the Company to make or file such tariffs, applications, notifications, petitions, requests or other filings or submissions with any such Governmental Authority as Buyer shall reasonably recommend. Buyer and Sellers shall each bear one-half of any required filing fees. 5.4 Efforts to Consummate. (a) Subject to the terms and conditions hereof, each party hereto, without payment or further consideration, shall use its reasonable, good faith efforts to take or cause to be taken all action and to do or cause to be done all things necessary, proper or advisable under applicable Laws to consummate and make effective, as soon as practicable, the transactions contemplated hereby including, but not limited to, the obtaining of all consents, authorizations, orders and approvals of any third party, whether private or governmental, required in connection with such party's performance of such transactions, and each party hereto shall cooperate with each other in all of the foregoing. 5.5 Negotiations With Others; Noncompetition. From and after the date hereof unless and until this Agreement shall have been terminated in accordance with its terms Sellers shall not, directly or indirectly, (a) become or act as proprietor, partner, stockholder, joint venturer or investor in, manager or consultant of, or otherwise engage in any business activity or make use of any technology which shall compete in whole or in part, directly or indirectly, with the Business; (b) solicit or divert any of the Company's customers or prospective customers to or on -24- 25 behalf of any other provider of international telecommunications services which compete with the Business (a "Competitor"); (c) employ or retain, or assist with the employment or retention of, any former or current employee or agent of the Company, by or on behalf of Sellers or any Competitor; or (d) refer any employee or agent of the Company to any Competitor. 5.6 Notices of Certain Events. Sellers shall promptly notify Buyer of: (a) any notice or other communication from any Person with respect to any consent that is or may be required in connection with the transactions contemplated hereby: (b) any notice or other communication from any Governmental Authority in connection with the transactions contemplated hereby; and (c) any event, condition or circumstance occurring from the date hereof until the Closing Date that would constitute a violation or breach of any representation or warranty, whether made as of the date hereof or as of the Closing Date, or that would constitute a violation or breach of an covenant of Sellers contained in this Agreement. 5.7 Confidentiality. (a) Sellers shall hold in strict confidence, and shall use best efforts to cause their respective representatives to hold in strict confidence, unless compelled to disclose by judicial or administrative process, or by other requirements of law, the terms and conditions of the transaction contemplated hereby and all information concerning Sellers and Buyer which is created or obtained prior to, on or after the dates hereof in connection with the transactions contemplated hereby; Sellers shall not use or disclose to others, or permit the use or disclosure of, any such information created or obtained except to the extent that such information can be shown to have been (i) previously known by Sellers, (ii) in the public domain through no fault of Sellers; and Sellers shall not release or disclose such information to any other Person. -25- 26 (b) If the transactions contemplated hereby are not consummated, all such confidences shall be maintained except (i) as required by law or (ii) to the extent such information comes into the public domain through no fault of Sellers. In addition to the foregoing, if requested by Buyer, Sellers shall return to Buyer all tangible evidence of such information regarding Buyer. (c) In addition to (a) and (b) above, the parties explicitly acknowledge that they have mutually executed and delivered a Non-Disclosure Agreement dated as of October 21, 1996, and hereby reaffirm their respective obligations thereunder in connection herewith. Further, Sellers acknowledge that any information relating in any way to the transaction contemplated hereby or to the IPO (including the fact that such offering is contemplated) shall be treated as "INFORMATION" under the Non-Disclosure Agreement cited above, and each party agrees to indemnify and hold harmless the other and its Affiliates from any claims or other liability which may arise by a breach by such first party of its non-disclosure obligations. 5.8 Government Filings. All information contained in any and all filings to be made by Sellers or Buyer in connection with the transactions contemplated hereby shall comply in all material respects with the requirements of such Laws and the rules and regulations promulgated thereunder. 5.9 Expenses. Except as otherwise specifically provided herein, the parties to this Agreement shall bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of agents, representatives, counsel and accountants. -26- 27 ARTICLE 6 CONDITIONS TO CLOSING 6.1 Conditions to the Obligations of Buyer and Sellers. The obligations of both Buyer and Sellers to consummate the transactions contemplated hereby are subject to the satisfaction of the following conditions: (a) There shall not be in effect any provision of any applicable Law nor any Order or injunction which would prohibit the consummation of the transactions contemplated hereby. (b) No suit, action or proceeding before any court or any Governmental Authority shall have been commenced or instituted by any Person or shall be pending against the Company, Buyer or Sellers or any of their respective affiliates, associates, officers or directors, which suit, action or proceeding seeks to restrain, prevent, change or delay in any material respect the transactions contemplated hereby or seeks to challenge any of the terms or provisions of this Agreement or seeks damages in connection with any of such transactions or seeks to restrain or prevent the ownership and operation by Buyer after the Closing Date of the Shares. (c) The Required Consents shall have been obtained, except for those approvals, authorizations and consents which, if not obtained, would not, individually or in the aggregate, have a material adverse effect on the Business, the Business Assets or the prospects (financial or otherwise) of the Company. 6.2 Conditions to the Obligations of Sellers. All obligations of Sellers hereunder are subject, at the option of Sellers, to the fulfillment prior to or at the Closing of each of the following further conditions: -27- 28 (a) Buyer shall have performed in all material respects all of its obligations hereunder required to be performed by it on or prior to the Closing Date. (b) The representations and warranties of Buyer contained in this Agreement and in any certificate or other writing delivered by Buyer pursuant hereto shall be true and correct in all material respects on and as of the Closing Date as if made at and as of such time. (c) Buyer shall have executed and delivered the Edwards Employment Agreement. (d) Sellers shall have received an opinion dated the Closing Date from Baer Marks & Upham LLP, counsel to Buyer, substantially in the form of EXHIBIT F hereto. 6.3 Conditions to the Obligations of Buyer. All obligations of Buyer hereunder are subject, at its option, to the fulfillment prior to or at the Closing of each of the following further conditions: (a) Sellers and the Company shall have performed and complied in all material respects with all agreements, obligations and covenants required by this Agreement to be performed or complied with by either or both of them at or prior to the Closing Date. (b) The representations and warranties of Sellers contained in this Agreement and in any certificate or other writing delivered by or on behalf of Sellers pursuant hereto shall be true and correct in all material respects on and as of the Closing Date as if made at and as of such time. (c) Sellers shall have delivered to Buyer one or more certificates representing such of the Shares as is to be delivered at the Closing, together with duly executed stock powers -28- 29 endorsed in blank or such other instrument of conveyance as shall be reasonably satisfactory to Buyer, together with any necessary stock transfer stamps attached thereto. (d) Sellers shall have delivered to Buyer such other documents relating to the Company's corporate existence, authority, good standing, absence of Liens, and such other matters as Buyer or its counsel may reasonably request. (e) Each other party thereto shall have executed and delivered the Edwards Employment Agreement and Edwards and Riley shall have executed and delivered the Edwards Non-Compete Agreement and the Riley Non-Compete Agreement, respectively. (f) Buyer shall have received an opinion dated the Closing Date of Brooke Blain Russell, counsel to the Sellers, substantially in the form of EXHIBIT E hereto. (g) There shall have been no material adverse change in the affairs and prospects of the Business, as represented, between the date hereof and the Closing Date. (h) Buyer shall have completed its due diligence investigation of the assets and the financial, operating and business affairs and prospects of the Company, and Buyer shall have been satisfied, in its sole discretion, with its findings. (i) The IPO shall have closed. (j) The Buyer shall have received a letter of resignation, effective as of the Closing Date, executed by each director of the Company. (k) The Buyer shall have received the Company's audited 1996 Financial Statement in accordance with the terms set forth in respect thereto above. (i) The Barclays Bank PLC charge over the Company's assets, dated March 2, 1994, shall have been irrevocably released. -29- 30 ARTICLE 7 POST-CLOSING UNDERTAKINGS 7.1 Survival of Representations and Warranties. (a) Notwithstanding any right of Buyer to fully investigate the affairs of the Company and notwithstanding any knowledge of facts determined or determinable by Buyer pursuant to such investigation or right of investigation, Buyer has the right to rely fully upon the representations, warranties, covenants and agreements of Sellers contained in this Agreement, or listed or disclosed on any Schedule hereto or in any instrument delivered in connection with or pursuant to any of the foregoing. All representations and warranties of Sellers, on the one hand, and Buyer, on the other, shall survive the execution and delivery of this Agreement and the Closing hereunder for the applicable statute of limitations period. (b) All covenants and agreements of any party hereto which are to be performed to any extent on or before the Closing Date shall not survive the Closing hereunder; all covenants and agreements of any party hereto to be performed to any extent on or after the Closing Date shall survive the Closing without limitation. 7.2 Obligation of Sellers to Indemnify. Sellers shall indemnify, defend and hold harmless Buyer (and its directors, officers, employees, Affiliates, successors and assigns) from and against all claims, losses, liabilities, damages, deficiencies, judgments, settlements, costs of investigation, assessments and other expenses, including interest, penalties and reasonable attorneys' fees and disbursements (collectively, "Losses"), based upon, arising out of or otherwise in respect of any inaccuracy in or any breach of any representation, warranty, covenant or -30- 31 agreement of Sellers contained in this Agreement or in any document or other papers delivered pursuant to this Agreement. 7.3 Obligation of Buyer to Indemnify. Buyer agrees to indemnify, defend and hold harmless Sellers from and against any Losses based upon, arising out of or otherwise in respect of any inaccuracy in any representation, warranty, covenant or agreement of Buyer contained in this Agreement or in any document or other papers delivered pursuant to this Agreement. 7.4 Notice and Opportunity to Defend. Promptly after receipt by any party hereto (the "Indemnitee") of notice of any demand, claim or circumstance which, with or without the lapse of time, would or might give rise to a claim or the commencement (or threatened commencement) of any action, proceeding or investigation (an "Asserted Liability") that may result in a Loss, the Indemnitee shall give notice thereof (the "Claims Notice") to the party obligated to provide indemnification pursuant to Section 7.2 or 7.3 (the "Indemnifying Party"). Each Claims Notice shall describe the Asserted Liability in reasonable detail and shall indicate the amount (estimated, if necessary, and to the extent feasible) of the Loss that has been or may been suffered by the Indemnitee. (a) The Indemnifying Party may elect to compromise or defend, at its own expense and by its own counsel, any Asserted Liability. If the Indemnifying Party elects to compromise or defend such Asserted Liability, it shall within thirty days (or sooner, if the nature of the Asserted Liability so requires) notify the Indemnitee of its intent to do so, and the Indemnitee shall cooperate, at the expense of the Indemnifying Party, in the compromise of, or defense against, such Asserted Liability. If the Indemnifying Party elects not to compromise or defend the Asserted Liability, fails to notify the Indemnitee of its election as herein provided or -31- 32 contests its obligation to indemnify under this Agreement, the Indemnitee may pay, compromise or defend such Asserted Liability. Notwithstanding the foregoing, the Indemnitee may not settle or compromise any claim over the objection of the other; provided, however, that consent to settlement or compromise shall not be reasonably withheld. In any event, the Indemnitee and the Indemnifying Party may participate, at their own expense, in the defense of any such Asserted Liability. If the Indemnifying Party chooses to defend any claim, the Indemnitee shall make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense. (b) Notwithstanding anything in Section 7.4 to the contrary, in the case of any Asserted Liability by any supplier, distributor, sales agent or customer of the Company with respect to the Business conducted by the Company prior to the Closing in connection with which Buyer may make a claim for indemnification pursuant to Section 7.2, Buyer promptly shall give a Claims Notice with respect thereto but, unless Buyer and the Indemnifying Party otherwise agree, Buyer shall have the exclusive right at its option to defend, at its own expense, any such matter, subject to the duty of Buyer to consult with the Indemnifying Party and its attorneys in connection with such defense and provided that no such matter shall be compromised or settled by Buyer without the prior consent of the Indemnifying Party, which consent shall not be unreasonably withheld. The Indemnifying Party shall have the right to recommend in good faith to Buyer proposals to compromise or settle claims brought by a supplier, distributor, sales agent or customer, and Buyer agrees to present such proposed compromises or settlements to such supplier, distributor or customer. All amounts required to be paid in connection with any such Asserted Liability pursuant to the determination of any Governmental Authority, and all amounts -32- 33 required to be paid in connection with any such compromise or settlement consented to by the Indemnifying Party, shall be borne and paid by the Indemnifying Party. The parties agree to cooperate fully with one another in the defense, compromise or settlement of any such Asserted Liability. 7.5 Tax Impact. If any payment by Sellers pursuant to Section 7 of this Agreement is required to be reported by Buyer or any of its Affiliates as income, then the amount of such payment shall be increased so that on an after-tax basis the payment received by Buyer or such Affiliate is an amount equal to the sum it would have received had Buyer or such Affiliate not been required to report such payment as income. For purposes of this Section 7.5, Taxes owed by Buyer or such Affiliate with respect to payments pursuant to Section 7 of this Agreement will be calculated using the maximum statutory rate (or rates, in the case of an item of income taxable for purposed of more than one Tax) applicable to the taxable year in which Buyer or such Affiliate is required to include such indemnification as income. 7.6 Limitation of Liability. Notwithstanding anything to the contrary contained herein, the obligation of Sellers to indemnify Buyer for an inaccuracy in or breach of any representation or warranty (a "Warranty Claim") shall be limited as follows: (a) The Sellers shall have no liability to the extent that the facts and circumstances giving rise to the Warranty Claim have been fairly disclosed in the Disclosure Letter or this Agreement; (b) No liability shall attach to the Sellers until the aggregate amount of all Warranty Claims exceeds (Pound Sterling)5,000; -33- 34 (c) Except for a Warranty Claim with respect to Section 3.1 or 3.6 for which there shall be no time limit, no Warranty Claim shall be brought unless written particulars thereof (stating in reasonable details the specific matters in respect of which the Warranty Claim is made) shall have been provided in writing to the Sellers prior to the fifth anniversary of the Closing; (d) No liability shall attach to the Buyer in respect of any Warranty Claim to the extent that such Warranty Claim relates to any loss for which the Buyer or the Company is indemnified by insurance; and (e) The Buyer acknowledges that, except for representations and warranties or other information provided herein or delivered pursuant to this Agreement, it has not relied in relation to the purchase of the Shares on any information (written or oral) or warranties or representations of any descriptions supplied either by the Sellers or the Company or the officers, agents, employees or advisers of any of them in relation to the assets and liabilities of the Company, their value or amount, or the business or affairs of the Company or otherwise. ARTICLE 8 BREACH AND TERMINATION 8.1 Termination of Agreement. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing: (a) by mutual written consent of Sellers and Buyer; (b) by Buyer, if there has been a material misrepresentation or breach of any covenant or warranty on the part of Sellers of any of the representations and warranties contained herein; or -34- 35 (c) by Sellers on the one hand, or Buyer on the other hand if (i) any condition to such party's obligations hereunder (which is within the other party's control) becomes incapable of fulfillment through no fault of such party and is not waived by such party; (ii) if the Closing shall not have occurred on or before July 31, 1997; provided that no party may terminate this Agreement pursuant to this clause if such party's failure to fulfill any of its obligations under this Agreement shall have been the reason that the Closing shall not have occurred on or before said date or (iii) if there shall be any law or regulation that makes consummation of the transactions contemplated hereby illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Buyer, Sellers or the Company from consummating the transactions contemplated hereby is entered and such judgment, injunction, order or decree shall become final and non-appealable. 8.2 Effect of Termination; Right to Proceed. In the event that this Agreement shall be terminated pursuant to Section 8.1, all further obligations of the parties under this Agreement shall terminate without further liability of any party hereunder except (i) to the extent that any condition to a party's obligations hereunder became incapable of fulfillment because of the breach by a party of its obligations hereunder and except (ii) that the agreements contained in Section 5.7 shall survive the termination hereof. In the event that a condition precedent to its obligation is not met, nothing contained herein shall be deemed to require any party to terminate this Agreement, rather than to waive such condition precedent and proceed with the transactions contemplated hereby. 8.3 Termination of Employment. Notwithstanding anything herein to the contrary, and in addition to any other remedies available to Buyer hereunder or otherwise, in the event of a -35- 36 material inaccuracy of any representation or breach of any warranty made by Sellers in this Agreement or any other agreement, certificate or other document delivered by Sellers pursuant hereto, Buyer shall have the right, at its option, to terminate Edwards' employment with the Company, and such termination shall for all purposes be deemed to be a termination for cause under the Edwards Employment Agreement. ARTICLE 9 MISCELLANEOUS 9.1 Notices. (a) Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally by hand, telecopied, mailed (by registered or certified mail, postage prepaid, return receipt requested) or delivered by Federal Express or other recognized overnight international courier as follows: (i) if to Buyer, one copy to: TelePassport Inc. 1212 Avenue of the Americas 12th floor New York, NY U.S.A. 10036-9998 Telecopier: (212) 764-1838 Attention: Mr. James D. Pearson (ii) if to Sellers, one copy to: c/o Tom Edwards Brooke Blain Russell The Smokery Greenhill's Rents Cowcross Street London ELIM 6BN DX46613 Barbican Telecopier: 01714902325 -36- 37 (b) Each such notice or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in Section 9.1(a) or (ii) if given certified, first class mail, postage prepaid, or by personal or overnight delivery, when delivered at the address specified in Section 9.1(a). Any party by notice given in accordance with this Section 9.1 to the other parties may designate another address (or telecopier number) or Person for receipt of notices hereunder. 9.2 Entire Agreement. This Agreement (including the Schedules and Exhibits hereto), the Employment Agreements and the collateral agreements executed in connection with the consummation of the transactions contemplated hereby contain the entire agreement between the parties with respect to the subject matter hereof and related transactions and supersede all prior agreements, written or oral, with respect thereto. 9.3 Waivers and Amendments; Non-Contractual Remedies; Preservation of Remedies. This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by all of the parties hereto or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. Nor shall any waiver on the part of any party of any such right, power or privilege, nor any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. The rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies that any party may otherwise have at law or in equity. The rights and remedies of any party based upon, arising out of or otherwise in respect of any inaccuracy in or breach of any representation, warranty, covenant or agreement -37- 38 contained in this Agreement shall in no way be limited by the fact that the act, omission, occurrence or other state of facts upon which any claim of any such inaccuracy or breach is based may also be the subject matter of any other representation, warranty, covenant or agreement contained in the Agreement (or in any other agreement between the parties) as to which there is no inaccuracy or breach. 9.4 Governing Law; Jurisdiction. (a) This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such State, without regard to the conflict of laws rules thereof. Any action brought to enforce any rights under this Agreement shall be brought in any state or federal court within the State of New York, and each party hereby agrees to submit to the jurisdiction of each such court, and waives the defenses of lack of personal jurisdiction and forum non conveniens. (b) Sellers acknowledges that irreparable damage would result if this Agreement is not specifically enforced and that, therefore, the rights and obligations of Sellers under this Agreement, including without limitation Sellers's obligations to sell the Purchased Stock, may be enforced by a decree of specific performance issued by a court of competent jurisdiction. 9.5 Designated Affiliate. Buyer shall have the right (a) to cause one or more Affiliates or direct or indirect subsidiaries designated by it (the "Designated Affiliate" or "Designated Affiliates") to carry out all or part of the transactions contemplated hereby to be carried out by Buyer, and (b) to assign this Agreement to any Affiliate, including, but not limited to, TelePassport Inc., provided that in the event of any such assignment the assignee shall assume -38- 39 all obligations of Buyer hereunder. In connection with and as a condition to such assignment Sellers and the assignees shall enter into an agreement pursuant to which such assignee shall assume Buyer's obligations under this Agreement. 9.6 Binding Effect; No Assignment. This Agreement and all of its provisions, rights and obligations shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, heirs and legal representatives. Except as otherwise provided in Section 9.5, this Agreement may not be assigned by a party without the express written consent of the others and any purported assignment, unless so consented to, shall be void and without effect. Nothing herein express or implied is intended or shall be construed to confer upon or to give anyone other than the parties hereto and their respective heirs, legal representatives and successors any rights or benefits under or by reason of this Agreement. Accordingly, no party that has not executed this Agreement shall have any right to enforce any of the provisions of this Agreement. 9.7 Exhibits and Schedules. All Exhibits and Schedules attached hereto are hereby incorporated by reference into, and made a part of, this Agreement. 9.8 Severability. If any provisions of this Agreement for any reason shall be held to be illegal, invalid or unenforceable, such illegality shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such illegal, invalid or unenforceable provision had never been included herein. 9.9 Counterparts. The Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which shall together constitute one and the same instrument. -39- 40 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date set forth above. SELLERS: /s/ Stephen Charles Edwards /s/ Michael Peter Riley - ---------------------------- ------------------------- Stephen Charles Edwards Michael Peter Riley BUYER: USFI, INC. By: /s/ James D. Pearson ---------------------- James D. Pearson President -40- 41 EXHIBITS (omitted) A Form of Riley Non-Compete Agreement B Form of Edwards Employment Agreement C Form of Edwards Non-Compete Agreement D Form of Promissory Note E Form of Opinion of Seller's counsel F Form of Opinion of Baer Marks & Upham LLP SCHEDULES (omitted) 3.5 Subsidiaries 3.8 Changes 3.9(b) Equipment 3.9(d)Insurance 3.9(e)Contracts 3.9(f)Customers 3.10 Intellectual Property 3.13 Benefit Plans 3.14 Employment Agreements 3.16 Creditors -41- EX-10.7 6 LETTER AGREEMENT DATED MARCH 1, 1997: GEORG HOFER 1 Exhibit 10.7 USFI, INC. 1212 Avenue of the Americas New York, New York 10036-9998 As of 1 March 1997 Mr. Georg F. Hofer c/o TelePassport GmbH Schwindstrasse 3 D-60325 Frankfurt a. M Germany Dear Georg: Reference is made to the Memorandum of Understanding dated October 17, 1996 (the "MOU") between us with respect to the sale by you of 100% of the shares of capital stock (the "Stock") of TelePassport GmbH, a corporation organized under the laws of Germany (Registration No. HR B 38781 of the local court of Frankfurt) (the "GmbH"). This letter will confirm our mutual understanding to replace and supersede the MOU with this letter agreement. By signing this letter agreement (the "Agreement"), you confirm that this Agreement is valid, legal and binding upon you, and that neither you nor GmbH (upon instructions from you) will contact or discuss with any other party (other than your attorneys, financial and other advisers with respect to the sale contemplated hereby) any proposal for a sale of GmbH or the stock thereof from the date hereof through the earlier of the Closing (as hereinafter defined) or 31 July 1997. Pursuant to the terms and conditions of this Agreement, you ("Hofer") agree to sell, transfer and convey by notarial deed, and USFI, Inc. ("USFI") agrees to buy 100% of the shares of GmbH in exchange for the consideration detailed below. Hofer understands that it is contemplated that TelePassport Inc., a Delaware corporation, will succeed to the business of USFI and will engage in an initial public offering (the "IPO") of its Class B stock (one vote per share) (the "Class B Stock"). The rights of USFI under the Agreement may be assigned to any affiliate without the prior written consent of Hofer. Reference herein to USFI and to the stock to be delivered to Hofer hereby shall, where applicable, mean TelePassport Inc. and its Class B Stock. The closing of the sale of the Stock (the "Closing") shall be contingent on the closing of the IPO and shall occur simultaneously with the closing of the IPO, subject to the terms and conditions herein. A. The purchase price for the Stock shall be $4,000,000, payable as follows: Three hundred thousand dollars ($200,000) of the purchase price will be paid in cash at the Closing and the balance in Class B Stock (valued at the per share IPO offering price) of which Class B Stock equal in value to $2,600,000 shall be issued at Closing and shall vest immediately and Class B Stock equal in value to $1,200,000 (the "Escrow Shares") shall be issued at Closing and shall immediately be deposited in escrow with Baer Marks & Upham LLP, as escrow agent (the "Escrow Agent") pursuant to an escrow agreement (the "Escrow Agreement") substantially in the form attached hereto as Exhibit A (together with executed stock powers). The Escrow Shares 2 Mr. Georg F. Hofer Effective as of 1 March 1997 Page 2 shall vest ratably over the period of 36 months from Closing at the rate of 1/36 per month, subject to the terms of the Escrow Agreement and the following: (1) in the event the Escrow Agent receives a Buyer Return Notice (as defined in the Escrow Agreement) that Hofer was terminated from his employment with GmbH for "Cause" (as defined in the Employment Agreement) or otherwise resigned from such employment, then all of the remaining unvested Escrow Shares held by the Escrow Agent shall cease to vest and the Escrow Agent shall return such unvested shares to USFI, (2) in the event the Escrow Agent receives a Buyer Claim Notice (as defined in the Escrow Agreement) that Hofer is in material breach of any of the terms or provisions of this Agreement which survive the Closing, then the Escrow Agent shall cease to release the remaining unvested Escrow Shares pursuant to the monthly vesting schedule until Escrow Shares (valued at the market value of the shares based upon the average closing sale price for the 20 trading days ending 5 trading days prior to the Buyer Claim Notice) equal to the amount of damages or losses claimed to be incurred by Buyer pursuant to such notice ("Holdback Shares") shall have been withheld for resolution of such dispute pursuant to the Escrow Agreement and the balance of the unvested Escrow Shares after deducting the Holdback Shares shall continue to be released each month pursuant hereto, and (3) in the event of the death or Disability (as such term is defined in the Employment Agreement of Hofer referred to in Paragraph E hereof) the Escrow Shares then held in escrow shall immediately vest and except for any Escrow Shares then subject to a Buyer Claim Notice shall thereupon be distributed to Hofer. "Dollars" or $ when used herein shall refer to US dollars. The resale of the Class B Stock issued to Hofer hereunder will be subject to a lock-up agreement required by TelePassport Inc.'s underwriters from all of USFI's executives (anticipated to be 180 days) and to United States securities regulations and all stock certificates delivered will carry the normal legend to such effect. B. It is anticipated that (a) GmbH will generate for USFI during the six calendar months immediately preceding the closing of the IPO minimum TelePassport gross USFI TelePassport Callback, Express, GNS and Tele 2 revenues of three million eight hundred and ninety thousand dollars ($3,890,000) and (b) if USFI provides through purchase or lease (equipped, furnished and installed) 60 Teles ISDN routers (approximately five hundred thousand dollars US purchase price for the lot), GmbH will generate additional revenue of five hundred thousand dollars ($500,000) during the same period and also enter into one long-term contract for each of the 60 routers. A long- term contract is at least twelve months in length. Each contract carries an approximate guaranteed value of $60,000. The liability which is created for the purchase of the router inventory will not be considered a liability under this Agreement. C. GmbH is presently indebted to Hofer in the amount of DM 162,400. At, or prior to the closing of the IPO, Hofer shall cause GmbH to repay him the amount of such loan which shall not exceed DM 170,000. USFI acknowledges that upon the Closing, Hofer shall have no obligation with respect to the liabilities of GmbH which are set forth in Schedule M(ii) hereof. To this end, USFI 3 Mr. Georg F. Hofer Effective as of 1 March 1997 Page 3 agrees that at Closing (i) the personal guarantees of Hofer to USFI in respect of any loans made by USFI to GmbH prior to Closing shall be cancelled, and (ii) TelePassport Inc. shall cause all personal guarantees of Hofer to any bank in respect of such liabilities described on Schedule M(ii) to be cancelled and, if necessary, replaced by an entity other than Hofer or repaid. D. GmbH will be paid commissions twice monthly through the IPO closing, the first portion of $50,000 to be paid before the tenth day of each following month and the balance by the 30th day of each such following month. USFI shall use reasonable efforts to provide commission statements and billing records on data files to GmbH by the 20th day of each following month. USFI acknowledges that to the extent it is unable to provide such information within this time period, it could effect Hofer's ability to cause GmbH to comply with the provisions of Paragraph M(vi). In the event of any such delay by USFI, GmbH shall continue to use its good faith efforts to comply with such provisions. E. At Closing, Hofer shall sign an employment agreement with GmbH for a term of three (3) years, substantially in the form attached hereto as Exhibit B (the "Employment Agreement"), and pursuant thereto Hofer shall hold the office of Geschaeftsfehrer of USFI GmbH, USFI Austria and GmbH at an initial base salary of one hundred fifty thousand dollars ($150,000). During the term of the employment agreement, Hofer will be eligible to receive an annual bonus as determined by the shareholders of GmbH or their designee. The base salary will be reviewed once every twelve months and adjusted to at least a minimum amount necessary to keep current with increases in cost of living in Germany. The usual USFI protective documents executed by other executive officers of USFI with comparable responsibilities, such as Code of Ethics substantially in the form attached hereto as Exhibit C, shall be attached thereto and be a part thereof. Upon the Closing, Hofer will receive options to acquire 75,000 shares of Class B Stock at the IPO offering price and on the terms generally accorded to other USFI employees. The parties acknowledge and agree that such 75,000 shares assumes 30,000,000 shares of capital stock of TelePassport Inc. are outstanding on the closing of the IPO (after giving effect to such closing, including the exercise of the underwriters' over-allotment option and the Class B Stock issued to Hofer hereby) and if the actual number of shares outstanding is different, the 75,000 shall be adjusted proportionately and consistent with options granted to other employees. The parties acknowledge and agree that the number of shares of stock of TelePassport Inc. currently contemplated to be outstanding on the IPO closing (after giving effect to such closing, including the exercise of the underwriters' over-allotment option and the Class B Stock issued to Hofer hereby) is 18,000,000. E.1 Hofer and Mr. Pearson, on behalf of USFI, will discuss the possible granting of options to acquire USFI stock to employees of GmbH. E.2 At Closing, Hofer and USFI shall enter into a "piggyback" registration rights agreement in the form of Exhibit E covering the shares of Class B Stock issued to Hofer hereby. 4 Mr. Georg F. Hofer Effective as of 1 March 1997 Page 4 F. A USFI GmbH corporate mid-size vehicle will be made available for Hofer's use as is customary in Germany during the term of employment with GmbH pursuant to the Employment Agreement. G. An apartment will be made available to Hofer during the period of employment pursuant to the Employment Agreement as is customary in Germany at his level. The approximate rent and services is two thousand five hundred DM (One thousand seven hundred dollars USD). H. Hofer's employment agreement will provide for a benefits package (health, medical and life insurance) consistent with the requirements of German law, to the extent such benefits cover German residents, and commensurate with those generally provided to other executive officers of TelePassport Inc. with comparable responsibilities, provided that the aggregate cost of all the benefits to Hofer shall not exceed the aggregate cost of such benefits to any such executive officer in the United States, adjusted for cost differences for such benefits between Germany and the United States. I. If USFI or one of its affiliates does not purchase TelePassport Telekom GmbH (TelePassport Austria) within 60 days of the closing of the IPO, Hofer agrees to divest himself from his ownership position in TelePassport Telekom GmbH (TelePassport Austria) and from TelePassport AG, Vaduz, Liechtenstein within 120 days after he receives written notice from USFI that such purchase will not occur. J. At Closing, Hofer will also convey or cause to be conveyed all rights Hofer may directly or indirectly have in the TelePassport name (or any derivative thereof) throughout the world and USFI will acquire such rights from Hofer in exchange for payment to Hofer or his designee an aggregate amount equal to the sum of the direct costs incurred by Hofer in acquiring, maintaining and conveying the TelePassport name or any derivative thereof (and any rights related thereto), including legal fees (the "Intellectual Property Price"). The Intellectual Property Price shall be determined by Hofer in good faith but shall not exceed $19,100. K. Hofer agrees that between the date hereof and until the earlier to occur of (i) termination of this Agreement if a Closing does not occur by 31 July 1997 and (ii) termination of his employment by GmbH, pursuant to the terms of the Employment Agreement if a Closing does occur, he will refer all reasonable business opportunities relating to the telecommunications industry wherever located, including those in Germany and Austria, to USFI for evaluation and acceptance by USFI (within a reasonable time) if it so elects. L. This Agreement may be converted by both sides into a more formal contract form. This Agreement is to be governed by the laws of the United States, except that German law shall apply to the transfer of the Stock by notarial deed. The parties agree that jurisdiction for any dispute between them shall be in the state or federal courts in the State of New York and that service of process in any such dispute may be served by mail. To the extent that accounting principles are 5 Mr. Georg F. Hofer Effective as of 1 March 1997 Page 5 needed to understand this document, the accounting principles of the United States apply. Where there are language difficulties, this original English document shall prevail. M. Hofer represents, warrants and covenants that: (i) all information supplied by Hofer with respect to GmbH, including but not limited to financial statements, is and will be true and correct; (ii) GmbH has no liabilities except as reflected in the financial statements delivered to USFI or which are immaterial and arose in the ordinary course of business after the date of any such financial statements; all of such liabilities being described on Schedule M(ii) hereto; (iii) GmbH has no material obligations and is not a party to any material contract other than those obligations and contracts that are listed on Schedule M(iii) hereto; GmbH has no contracts or other arrangements with Hofer, any of his family members or any entities affiliated with Hofer or his family members other than Hofer's existing employment agreement without any penalty or additional costs with GmbH which shall terminate at the Closing; (iv) the execution, delivery and performance of this Agreement does not require the consent of any person or party and will not conflict with, violate or result in a default under any agreement, contract, license or understanding to which Hofer or GmbH is a party or by which either is bound other than such consents that are listed on Schedule M(iv) hereto; (v) between the date hereof and the Closing, Hofer will cause GmbH to operate only in the ordinary course and consistent with past practices and will not permit GmbH to incur or suffer to exist any material obligation or liability or increase the compensation payable to any person by more than 5% without the consent of USFI; (vi) no later than 30 days after the close of each calendar month, Hofer shall cause GmbH to deliver to USFI an income statement for the previous month and a balance sheet as of the last day of that month; (vii) the Stock represents all of the issued and outstanding shares of GmbH. The Stock is owned of record and beneficially by Hofer and is validly issued, fully-paid and non-assessable. There are no outstanding securities convertible into exchangeable for or having a right to acquire equity securities of GmbH. The sale of the Stock pursuant thereto will provide USFI at Closing with legal and valid title to such shares, free of all liens, security interests or other encumbrances; (viii) Hofer has the power to cause the conveyance of the TelePassport name to USFI pursuant to this Agreement; Hofer has no knowledge of any claim to the TelePassport name by any other person or party; Hofer has not granted or conveyed to any person or party (other than USFI 6 Mr. Georg F. Hofer Effective as of 1 March 1997 Page 6 pursuant hereto) any direct or indirect rights relating to the TelePassport name (or any derivative thereof); and (ix) the representations and warranties contained herein will be true and correct on the date of Closing as though made on such date. N. Between the date hereof and the Closing, USFI agrees to loan to GmbH a minimum of $300,000 in the aggregate and, at the sole discretion of USFI, a maximum of $500,000 in the aggregate, at such times, in such amounts, for such purposes, and secured in such manner, as USFI shall reasonably approve. Interest on such loans will be at the rate of 12% per annum. If the Closing does not occur by July 31, 1997, such loans shall be repaid not later than September 30, 1997. Such loans to GmbH by USFI shall be evidenced by one or more promissory notes executed by GmbH, substantially in the form attached hereto as Exhibit D, and all obligations of GmbH thereunder shall be absolutely guaranteed by Hofer personally. Upon the execution and delivery of this Agreement, USFI shall provide a loan to GmbH in the amount of $200,000 pursuant to the terms hereof, which shall be part of the $300,000 principal amount required to be provided to GmbH hereby. O. This Agreement shall terminate if the IPO closing does not occur on or before 31 July 1997, provided, however, that any party whose breach of any provision of this Agreement caused or resulted in the failure of the Closing hereunder to occur simultaneously with the IPO closing shall not be relieved from liability with respect hereto. Paragraphs A, I, K, L, M, N, O, P, Q and R of this Agreement shall survive the execution and delivery of this Agreement and Closing and shall remain in full force and effect, provided that any claim with respect to the breach of any provision of Paragraph M (other than clause (vii) thereof) must be asserted prior to the later of (a) one year from the date of Closing or (b) 90 days after completion of the audit of GmbH's financial statements for the year ended December 31, 1997. P. For the applicable periods specified in this Paragraph P, Hofer shall not, without USFI's prior written consent, directly or indirectly, engage in any of the following: (1) Hofer shall not own, manage, control or participate in the ownership, management or control of, or be employed or engaged by or otherwise affiliated or associated with, whether as a sole proprietor, shareholder (except as a passive holder of not more than three (3) percent of the outstanding shares of a corporation or other entity), owner, partner, joint venturer, employee, agent, manager, salesman, consultant, advisor, independent contractor, officer, director, promotor or otherwise, whether or not for compensation, with respect to any corporation, partnership, proprietorship, firm, association or other business entity, including, without limitation, any not-for-profit entity, which is engaged in (a) any telecommunications business presently conducted by USFI or any of its affiliates, or (b) any other telecommunications business conducted by USFI or any of its affiliates during the applicable period specified in paragraph (4) of this Paragraph P, 7 Mr. Georg F. Hofer Effective as of 1 March 1997 Page 7 (each such business described in clauses (a) and (b) above hereinafter referred to individually and collectively as the "Business"). (2) Hofer shall not solicit any past, present or prospective customers or suppliers of GmbH, USFI or any of their affiliates, or other persons in a business relationship with GmbH, USFI or any of their affiliates for business or patronage in any way relating to any aspect of any of the Business, other than on behalf of the GmbH, USFI or their affiliates in the course of Hofer's employment. Hofer shall not request, directly or indirectly, customers or suppliers of GmbH, USFI or any of their affiliates, or other persons in a business relationship with GmbH, USFI or any of their affiliates, to cancel, curtail or divert their business with GmbH, USFI or any of their affiliates, or otherwise take action with respect to such customers or suppliers or other persons which might have an adverse effect on the Business. (3) Hofer shall not induce or attempt to induce any person who is an employee, officer or agent of GmbH, USFI or any of their affiliates to terminate or otherwise adversely affect such relationship with such entities, nor shall Hofer solicit for employment, employ or engage, directly or indirectly, for on behalf of Hofer or any third party, any such employee, officer or agent. (4) The provisions of paragraph (1) of this Paragraph P shall be operative and binding for a period beginning as of the Closing and ending (a) on the 6 month anniversary of the termination of Hofer's employment with GmbH in the event Hofer resigns or is terminated with Cause (in accordance with the terms and provisions of the Employment Agreement) or (b) upon expiration of the term of the Employment Agreement provided Hofer gives notice (in accordance with the terms of the Employment Agreement) to GmbH at least 90 days prior to such expiration that he does not intend to continue his employment with GmbH or any affiliate after such expiration, or if Hofer gives such notice less than 90 days prior to such expiration, then 90 days after such notice is given. The provisions of paragraphs (2) and (3) of this Paragraph P. shall be operative and binding for a period commencing as of the Closing and ending on the second anniversary of Hofer's termination of employment with GmbH (in accordance with the Employment Agreement). Hofer acknowledges that the Business is conducted on a worldwide basis and agrees therefore that each of the respective covenants set forth in this Paragraph P. shall not be restricted by geographic region. Q. The parties hereto acknowledge that the damages incurred by either if the other breaches this Agreement will not only be substantial but also irreparable and that the legal remedy of damages will be insufficient. Accordingly, the parties agree that in addition to any other remedies which may be available to them, they shall be entitled to specific performance of this Agreement and/or injunctive relief (including a preliminary injunction or temporary retraining order). R. If any term or provision of this Agreement is finally determined by a court of law to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other provisions of this Agreement shall nevertheless remain in full force and effect. 8 Mr. Georg F. Hofer Effective as of 1 March 1997 Page 8 S. Hofer agrees to permit USFI's accountants Ernst & Young to immediately commence the audit of the financial statements of GmbH and agrees to cooperate with them in connection therewith. Please confirm your agreement with the foregoing by countersigning a copy of this Agreement where indicated below and returning it to us. If we do not receive a countersigned copy of this Agreement, the MOU shall remain in effect unmodified by this Agreement. Very truly yours, USFI, INC. By: /s/ James D. Pearson ------------------------------ Name: Title: Agreed to: /s/ GEORG F. HOFER - ------------------ GEORG F. HOFER 9 EXHIBIT A Escrow Agreement (omitted) EXHIBIT B Employment Agreement (omitted) EXHIBIT C Code of Ethics (omitted) EXHIBIT D Promissory Note (omitted) EXHIBIT E Registration Rights Agreement (omitted) SCHEDULE M(ii) Liabilities (omitted) SCHEDULE M(iii) Material Contracts (omitted) SCHEDULE M(iv) Required Consents (omitted) EX-10.18 7 PROVIDER RESELLER AGREEMENT DATED MARCH 4, 1997 1 Exhibit 10.18 USFI PROVIDER RESELLER AGREEMENT USFI PROVIDER RESELLER AGREEMENT (the "Agreement"), dated as of March 4, 1997, by and among USFI Network K.K., a corporation organized under the laws of Japan ("USFI"), A.T. Net K.K., a corporation organized under the laws of Japan ("Reseller") and Asahi Telecom Co., Ltd., a corporation organized under the laws of Japan ("Asahi"): WHEREAS, USFI provides Direct Dial Telephone Services and custom applications; WHEREAS, Reseller desires to utilize USFI's services exclusively for the transmission of its CUSTOMERS' telephone calls to international points; and WHEREAS, USFI and Reseller desire to enter into this Agreement on the terms and conditions hereinafter set forth, including the attachments hereto which are incorporated by reference and made a part hereof, NOW, THEREFORE, in consideration of the mutual agreements and understandings herein contained, the parties hereby agree as follows: 1. The Services Provided by USFI 1.1 USFI agrees to provide international telephone services to Reseller in accordance with the terms and conditions of this Agreement to the countries set forth in Attachment 1. 1.2 USFI will endeavor to accommodate Reseller's international call volume provided that Reseller provides USFI with sufficient advance notice of its capacity requirements. 1.3 USFI, at its expense, together with its connecting carriers, will install, provide, operate and maintain facilities, consisting of computer hardware and software, switching equipment and transmission equipment (the "facilities") so as to provide telephone services between USFI's designated switch and the international destinations. 2. Rates and Charges 2.1 USFI will provide service to Reseller from USFI's designated switch site to the countries listed in Attachment 1 (List of Rates and Countries) at the rates set forth in said Attachment. 2 2.2 Reseller acknowledges and agrees that USFI may, upon reasonable notice, change or modify from time to time its rates (including available discounts), other terms, and its general policies; provided, that, no increase in rates may be imposed except for increases that are commensurate with increases in the underlying carrier's charges. For purposes of this paragraph, "reasonable notice" shall mean the minimum required notice for international tariffs filed under Federal Communications Commission of the United States. USFI will notify Reseller promptly of any such changes. 2.3 Reseller will be obligated to pay for all telephone transmissions via the facilities and for all other charges in accordance with Attachment 1. Each call will be billed in increments consistent with the standards of Japanese carriers. For purposes of this Agreement, the time of each call will begin when the answer supervision is returned to USFI by the overseas administration or local telephone company indicating that the call has been answered and will end when the supervision is returned indicating that the caller has disconnected. 3. Duties of Reseller 3.1 Reseller is solely responsible for establishing its customer charges and billing its customers for international direct dial telephone services provided via the facilities, and for all applicable taxes associated therewith. 3.2 Reseller will pay all of its own operating expenses, and other expenses including applicable taxes and fees. 3.3 Reseller will be responsible for the payment of all sums owed to USFI pursuant to this Agreement regardless of whether Reseller has been paid for such charges by its customers. Reseller acknowledges that USFI will not be liable for any losses or damages suffered by Reseller or any of its customers in connection with the incurrence of such charges. 4. Term of Agreement Unless terminated earlier by either party in accordance with the provisions hereof, this Agreement shall have a term of six (6) years commencing on the date set forth on the first page of this Agreement. Thereafter, the term of this Agreement will be automatically renewed for successive terms of one year each unless either party provides written notice of its intent not to renew this Agreement at least thirty (30) days prior to the expiration of the then current term. 5. Termination 5.1 Either party may terminate this Agreement upon written notice to the other party in the event of a failure by such other party to perform any of its material -2- 3 obligations hereunder and the continuation of such failure for a period of 30 days after written notice thereof, provided that the terminating party is not then in breach of its material obligations hereunder, and provided further that no notice of termination shall relieve either party of any obligations arising or accruing hereunder prior to the date of such notice. 5.2 Notwithstanding anything in this Agreement to the contrary, the failure of USFI to provide services to Reseller hereunder shall not constitute grounds for termination of this Agreement where such failure arises out of or is attributable to equipment failure, accident, regulatory, judicial or other governmental action or inaction, war, vandalism, civil riot or commotion, work stoppage or slowdown or other labor disturbance, destruction of facilities, fire, earthquake, storm, or the failure of any common carrier or utility, for any reason, to provide adequate carriage, transmission or other services to USFI or any of its affiliates, provided that such failure is cured within thirty days after the occurrence, if such event is temporary in nature, of the event or condition giving rise to such failure, or if such failure is incapable of being cured within such thirty day period, that USFI has undertaken diligent efforts to cure such failure as soon as practicable. 6. Relationship of Parties 6.1 It is expressly understood and agreed that Reseller is an independent contractor, shall not represent itself as having any power to bind USFI, shall not hold itself out as an employee or agent of USFI for any purpose, and shall not assume or create any obligation whatsoever, expressed or implied, on behalf of USFI. Nothing in this Agreement shall be deemed to establish a relationship of agency between USFI and Reseller nor with any of their agents or employees for any purpose whatsoever. This Agreement shall not be construed to create a partnership between USFI and Reseller, or any other form of legal association or arrangement which would impose liability upon one party for the act or failure to act of any other party, or which would require the parties to file taxes jointly. 6.2 As an independent contractor, Reseller shall be responsible for all liabilities incurred in connection with the conduct of its business or the offering of USFI's services to its customers, including but not limited to, all income and franchise taxes on the compensation it receives, as well as all of its employees' employment taxes, insurance and fringe benefits. Reseller shall indemnify and hold USFI harmless from and against any and all such liabilities. 7. International Services Provider 7.1 Reseller agrees that except in the circumstances hereinafter described in this paragraph, USFI and any successor thereto or affiliate thereof (collectively the "USFI Group") shall be the provider to Reseller, Asahi and any successor thereto or affiliates thereof (collectively, the "A.T. Net Group") of international long distance services ("International Services"). -3- 4 7.2 Notwithstanding the provisions of Paragraph 7.1: (a) if the USFI Group is unable to process calls due to the fact that no electricity passes through the USFI-Group's switch ("system failure"), the A.T. Net Group shall be entitled to switch customers to some other carrier during the time the USFI Group is unable to process calls. Such switching shall cease (and the customers returned to the USFI Group) at such time as a member of the USFI Group shall have given Reseller notice (which need not be in writing) that the system failure has been corrected; (b) in the event of a problem concerning the quality of International Services, a member of the USFI Group will discuss such matter with Reseller with a view to resolving it promptly; (c) if any of KDD, IDC or ITJ offer to Reseller or Asahi international rates that are lower than those offered by the USFI Group, the USFI Group shall have the right to either match those rates or decide to utilize such other carrier itself and the parties will discuss and decide how the savings gained shall be allocated; and (d) if any customer of the A.T. Net Group in the domestic market demands that its international calls be carried by a provider other than a member of the USFI Group, the A.T. Net Group shall be entitled, in its discretion, to route such customer to the international carrier designated by such customer; provided, that, when the revenues from such "other" carrier customers that would have accrued to the USFI Group if such customers had not designated an "other" carrier exceed 30% (or, from and after the date that A.T. Net closes a public offering of its shares, 50%) of the quarterly gross revenues to the USFI Group from the A.T. Net Group signed customers, the advance consent of a member of the USFI Group to the provision of an "other" carrier to such customers exceeding 30% (or, from and after the date that A.T. Net closes a public offering of its shares, 50%) shall be required. Such consent will be provided or not provided in the good faith discretion of the USFI Group. Upon request the A.T. Group will provide a member of the USFI Group access to the appropriate records to verify the foregoing amounts. 7.3 Subject to the provisions of Paragraph 7.4, paragraph 13 of the USFI Provider Reseller Agreement, entitled "Limitations of Liability", shall apply to the provision of International Services as if specifically set forth herein at length. 7.4 If, in accordance with the provisions of Paragraph 7.2(a) above, the A.T. Net Group switches customers to other carriers as a result of a system failure, the following provisions shall apply: (a) The A.T. Net Group shall be required to give written notice to USFI of the switching indicating the period thereof, the name of the alternate carrier used and the rates charged by it. -4- 5 (b) The A.T. Net Group will be required to use an alternate carrier that is the lowest cost provider available. (c) USFI-Japan agrees to reimburse A.T. Net for 70% of its incremental cost (that is, the difference between the rates payable by the A.T. Net to USFI-Japan and the rates, if higher, paid by the A.T. Net Group to the alternate carrier) in using the alternate carrier for as long as the system failure continues except that USFI-Japan shall have no liability (i) if the system failure is attributable to a force majeure event of a type described in Paragraph 13.2 of the Reseller Agreement or (ii) if interruptions in service, for maintenance, do not exceed six (6) hours per month. USFI-Japan agrees to give A.T. Net advance notice of the periods during which the system will be shut down for maintenance. (d) USFI-Japan shall have the option, in its sole discretion, to be released from the liability provisions set forth in Paragraph 7.4(c) above by releasing the A.T. Net Group from the provisions of Paragraph 7.1 above. 8. TelePassport Name and Logo Reseller acknowledges and agrees that the "TelePassport" name and logo is the property of USFI and its affiliates. Reseller agrees to use its best efforts to cause (i) the TelePassport logo to be clearly displayed on its invoices to customers and (ii) such invoices to clearly state that TelePassport is the provider of international long distance service. Such display will be submitted to USFI for prior approval. 9. Payment Terms 9.1 USFI shall invoice Reseller on a monthly basis. All payments hereunder are due and payable in full within thirty (30) days after date of invoice. 9.2 All payments under this Agreement shall be made in the currency of the invoice to an account designated by USFI. All past due balances shall bear interest at an annual rate of eighteen percent (18%) or, if lower, the maximum rate permitted by applicable law from the due date until paid in full. 10. Taxes Any and all applicable federal, state or local use, excise, sales or privilege taxes, duties or similar liabilities, chargeable to or against USFI and arising out of or attributable to the services provided to the Reseller hereunder shall be charged to and payable by the Reseller in addition to the regular rates set forth in Attachment 1. -5- 6 11. Suspension of Service 11.1 Except for material charges under dispute subject to resolution herein, if payment in full of any invoice is not made by Reseller within sixty (60) days after the date of the invoice therefor, USFI shall have, in addition to all other rights available to it under this Agreement or otherwise, the right, effective three (3) business days after written notice of the same is given to Reseller, to suspend any or all services provided hereunder to Reseller until payment is made. "Business days" as defined herein relates to days in which the banks in Tokyo are open for business. 11.2 After the effective date of suspension, Reseller has five (5) business days to cure suspension of service though payment in full of invoice, in which case service will be restored promptly; otherwise, this Agreement may be terminated by USFI while reserving all rights to collection under this Agreement. 12. Dispute Resolution The parties shall co-operate to investigate promptly any dispute concerning the accuracy of any billing data, rates or any amount payable under this Agreement. In the event of the parties being unable to reach agreement ten (10) business days after the date upon which the relevant invoice or portion thereof is due for payment and the dispute is material, then the following procedure shall be followed: 12.1 In good faith, the complainant shall provide the other party with written notification of the existence of the dispute, which will include details of the nature and magnitude of the dispute, date(s) when the dispute began and recommendations in order to resolve the dispute. 12.2 Upon receipt, the other party shall respond within ten (10) business days of receipt of the dispute notice, endeavor to address and respond to the points raised by the complainant with recommendations on how to resolve the dispute, and notify accordingly the complainant. 12.3 On receipt of a response by the other party, the complainant shall have fourteen (14) days in which to respond. Any resolution to the dispute will be retroactive to the date of the first day of notification by the complainant. 12.4 Both parties will endeavor to resolve any dispute, including but not limited to addressing this dispute to a higher level executive, if necessary. 12.5 Absent any resolution herein, both parties may agree to terminate this Agreement with ninety (90) days notice or, in the absence of such an agreement, such dispute shall be litigated in accordance with the provisions of Paragraph 18 hereof. -6- 7 13. Limitations of Liability 13.1 USFI SHALL HAVE NO LIABILITY FOR ANY COSTS, DAMAGES, OR CHARGES ARISING FROM THE RENDERING OF ADVICE IN CONNECTION WITH THE LOCAL OPERATING ENVIRONMENT, TAX, SALES, PRICING, MARKETING, OR BILLING MATTERS, OR ANY OTHER MANAGEMENT OR CONSULTING SERVICES, OR OUT OF DELAYS IN RESTORATION OF THE SERVICES TO BE PROVIDED UNDER THIS AGREEMENT OR OUT OF MISTAKES, ACCIDENTS, OMISSIONS, INTERRUPTIONS, OR ERRORS OR DEFECTS IN TRANSMISSION IN THE PROVISION OF SWITCHED OR PRIVATE LINE SERVICES OR ANY OTHER TELECOMMUNICATIONS SERVICES. 13.2 NEITHER USFI NOR ANY OF ITS EMPLOYEES, OFFICERS, SHAREHOLDERS, DIRECTORS AND AFFILIATES SHALL HAVE ANY LIABILITY TO RESELLER OR TO ANY OTHER PERSON OR ENTITY WHATSOEVER FOR ANY COSTS, DAMAGES, OR CHARGES SUFFERED OR INCURRED, INCLUDING, WITHOUT LIMITATION, LOST PROFITS AND INCIDENTAL, ACTUAL OR PUNITIVE DAMAGES, ON ACCOUNT OF ERRORS, INTERRUPTIONS, DELAYS, FAILURES OR DEFECTS OF ANY NATURE WHATSOEVER IN THE TRANSMISSION OF SERVICES PURSUANT TO THIS AGREEMENT, WHETHER OR NOT ARISING OUT OF OR RELATED TO ERRORS, OMISSIONS, ACCIDENTS, REGULATORY, JUDICIAL OR OTHER GOVERNMENTAL ACTION OR INACTION, ILLEGALITY, ACTS OF GOD, WAR, VANDALISM, CIVIL RIOT OR COMMOTION, WORK STOPPAGE OR SLOWDOWN OR OTHER LABOR DISTURBANCE, DESTRUCTION OF FACILITIES, OR THE FAILURE OF ANY COMMON CARRIER OR UTILITY, FOR ANY REASON, TO PROVIDE ADEQUATE CARRIAGE, TRANSMISSION OR OTHER SERVICES TO USFI OR ANY OF ITS AFFILIATES. 13.3 USFI HEREBY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS AND IMPLIED, AND MAKES NO REPRESENTATIONS, AS TO THE DESCRIPTION, QUALITY, MERCHANTABILITY, COMPLETENESS OR FITNESS FOR ANY PURPOSE WHATSOEVER OF ANY OF THE SERVICES PROVIDED HEREUNDER. 14. Protection of Confidential Information and Proprietary Property 14.1 Reseller and USFI agree that, except as required by the rules and regulations of the United States Federal Communications Commission or any other governmental authority having jurisdiction, Reseller will, during the term of this Agreement and thereafter, keep secret and retain in the strictest confidence, and cause its employees, agents and/or representatives to keep secret and retain in the strictest confidence, all -7- 8 proprietary information relating to or provided by USFI, including, without limitation, trade secrets, "know-how", lists, rates, pricing policies, and any other business information pertaining to the business of USFI. 14.2 Reseller acknowledges and agrees that it shall not have any right to, nor will it, use any of the trade names, trademarks or other proprietary rights of USFI without written permission from USFI. Nothing in this clause should be construed as limiting Reseller from naming USFI as its supplier, or from using such fact in its promotions, provided that all promotional materials identifying, describing or referring to USFI in any manner shall be submitted to USFI for approval prior to dissemination, publication, or use thereof. 15. Compliance with Laws Reseller shall, at its expense, secure and maintain in full force and effect any and all licenses, permits and authorizations, and make all reports and other filings, which are required or otherwise appropriate in connection with the provision of services pursuant to this Agreement, and shall take any and all other actions necessary to ensure that the provision of telephone services pursuant to this Agreement and to customers of Reseller, does not violate or conflict with any applicable law, rule or regulation of any governmental or quasi-governmental authority having jurisdiction over the subject matter hereof. Reseller's liability for charges incurred hereunder is absolute and shall not be affected by any such violation or any failure by Reseller to comply with the provisions hereof. 16. Indemnity Except as otherwise provided in this Agreement, Reseller and USFI shall each indemnify and hold the other harmless from and against any and all liabilities, costs, damages and expenses, including without limitation attorneys' fees and disbursements, incurred by reason of or arising out of or attributable to the breach by such party of any provision hereof or the failure by such party to perform any of its obligations hereunder. 17. Governing Law This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such State. 18. Litigation Subject to the provisions of Paragraph 12, the parties agree that the Tokyo District Court shall have the exclusive first-instance jurisdiction over all disputes or controversies arising out of or in conjunction with this Agreement. The prevailing party in -8- 9 any such litigation shall be entitled to an award of its reasonable attorneys' fees, costs and disbursements. 19. Notices All notices or other communications required or provided herein shall be in writing and if (i) from a member of the USFI-Group to a member of the A.T. Net Group shall be in Japanese and (ii) from a member of the A.T. Net Group to a member of the USFI-Group shall be in English, and in each case shall be deemed given five (5) days after mailing, if mailed by certified mail, registered mail, return receipt requested, postage prepaid, or on the date of delivery if delivered personally or by a reputable overnight courier, or on the date of facsimile transmission, if transmitted by telecopier, in each case addressed to the party for whom intended as follows (or to such other address as may be given by notice in accordance with this Paragraph 19): To USFI: USFI Network K.K. Ferrare Building, Fifth Floor 1-24-15 Ebisu, Shibuya-ku, Tokyo 150 JAPAN Attention: Michele Matsuda Telecopier: (03) 5447-8010 To Reseller: A.T. Net K.K. Asahi Telecom Building 3-4-14 Nihonbashi-Ningyocho Chuo-ku, Tokyo 103 Japan Attention: Mikiya Nemoto Telecopier: (03) 5641-5349 20. Assignment 20.1 This Agreement shall not be transferable or assignable by Reseller, nor shall Reseller have the right to hire or contract with any agents, representatives, or employees to perform its obligations under this Agreement, without the prior written consent of USFI. Any other purported transfer or assignment shall render this Agreement null and void at the election of USFI. This Agreement may be assigned by USFI without the consent of Reseller to any subsidiary or affiliated company of USFI or to any other firm. 20.2 Nothing expressed herein or implied hereby is intended or shall be construed to confer upon or give to any person or entity other than USFI and Reseller and -9- 10 their respective successors and permitted assigns any rights or remedies by reason of this Agreement. 21. Representations Reseller represents and warrants that it has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder, that all such action has been duly and validly authorized by all necessary proceedings, and that this Agreement constitutes the legal, valid and binding obligation of Reseller, enforceable in accordance with its terms, except that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights. Reseller further represents and warrants that the execution and delivery of this Agreement, the performance by Reseller of its obligations hereunder and the provision of the services provided hereunder to its own customers, will not violate or be in conflict with any statute, law or any judgment, decree, order, regulation or rule of any court or governmental authority. 22. Integration This Agreement constitutes the entire agreement between USFI and Reseller concerning the subject matter contained herein and supersedes any and all prior agreements between the parties with respect to such subject matter. In entering into this Agreement, neither Reseller nor USFI is relying upon any representations or warranties which are not set forth in this Agreement. 23. Unenforceable Provisions In case any provision in this Agreement shall be held invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions hereof will not in any way be affected or impaired thereby. 24. Modification and Waiver This Agreement may be amended only by a written instrument which references this Agreement and which is signed by all signatories to this Agreement. No waiver of any term or condition of this Agreement shall operate as a continuing waiver nor shall any failure to enforce any provision hereof operate as a waiver of such provision or any other provision hereof. -10- 11 IN WITNESS WHEREOF, the parties hereto have duly executed this USFI Provider Agreement as of the date above written. USFI NETWORK K.K. By: /s/ Michele Matsuda ------------------------------------- Michele Matsuda President A.T. NET K.K. By: /s/ Mikiya Nemoto ------------------------------------- Mikiya Nemoto President ASAHI TELECOM CO., LTD. By: /s/ Mikiya Nemoto ------------------------------------- Mikiya Nemoto Executive Vice President -11- 12 USFI PROVIDER RESELLER AGREEMENT ATTACHMENT #1 (omitted) EX-10.19 8 SECURITIES PURCHASE AGREEMENT DATED MARCH 4, 1997 1 Exhibit 10.19 SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT ("Agreement") dated as of March 4, 1997 among USFI Network K.K., a Japanese corporation ("USFI-Network), Nihon- TelePassport K.K., a Japanese corporation ("NTP"), USFI-Japan, L.L.C., a Delaware limited liability company ("USFI-Japan"), USFI, INC., a New York corporation ("USFI"), Asahi Telecom Co., Ltd., a Japanese corporation ("Asahi") and A.T. Net K.K., a Japanese corporation ("A.T. Net"): WHEREAS, USFI-Japan and Asahi are the sole shareholders of NTP, a corporation formed for the purposes of providing certain telephone services in Japan, and are also parties to certain agreements related to the operations of NTP and providing for certain rights and obligations of the parties thereto, including but not limited to a Shareholders' Agreement dated as of March 13, 1995 and an Omnibus Restructuring Agreement dated as of September 23, 1996 the (the "Omnibus Agreement"); WHEREAS, USFI-Japan, USFI-Network and Asahi have agreed to the sale of USFI-Japan's interest in NTP to Asahi and the acquisition of certain assets of NTP by USFI-Network pursuant to the terms of a NTP Purchase and Sale (the "P&S Agreement") being entered into concurrently herewith; and WHEREAS, in connection with the P&S Agreement the parties hereto have agreed to enter into certain ancillary agreements and have agreed on certain rights and obligations with respect to A.T. Net, a wholly-owned subsidiary Asahi, as set forth herein, NOW, THEREFORE, the parties agree as follows: 1. Grant of Option In consideration of the termination of the Omnibus Agreement in accordance with the P&S Agreement and in particular the provisions of Sections 6.4 and 8.2 of the Omnibus Agreement, A.T. Net agrees to the terms of this Agreement and A.T. Net hereby grants to USFI-Network an option (the "Option") to acquire pursuant to the terms of Paragraph 2 hereof shares of the common stock of A.T. Net, which shares when added to all issued and outstanding shares and shares which are otherwise subject to outstanding subscriptions, options, warrants or any other obligation of A.T. Net to issue shares of common stock as well as A.T. Net's plans to issue shares to Banks as referred to in Schedule 8.4 hereof shall represent 10% of the outstanding capital stock of A.T. Net on a fully-diluted basis. 2. Terms of Option 2.1 The Option exercise price (the "Exercise Price") shall equal 360,000,000 yen divided by the number of shares subject to the Option (as computed pursuant to Paragraph 1 hereof). 2 2.2 The Option may be exercised, in whole or part, at any time by notice (the "Exercise Notice") in writing by USFI-Network to A.T. Net on or before March 31, 1997. If the Option is exercised, A.T. Net and Asahi will take all action necessary under the Japanese Commercial Code and A.T. Net's Articles of Incorporation to issue to USFI-Network such number of A.T. Net common shares as are specified in the Exercise Notice at the Exercise Price. The Exercise Price shall be paid on or before May 31, 1997, provided that if the presently contemplated initial public offering of stock of TelePassport Inc., a Delaware corporation, is not closed by May 31, 1997, such payment date shall be extended to a date which is 60 days after the closing of such public offering, but in any event to not later than July 31, 1997. It is agreed that in the event USFI-Network exercises the Option and then fails to make payment of the Exercise Price the sole remedy of A.T. Net shall be the cancellation of any rights USFI-Network may have to shares of A.T. Net that are subject to the Option. USFI-Network shall keep A.T. Net advised of the progress of the public offering. 2.3 Within ten days of receipt of payment of the Exercise Price, A.T. Net shall issue to USFI-Network certificates representing the shares of common stock attributable thereto. 2.4 If between the date hereof and the date of issuance of shares pursuant to the Option, A.T. Net shall issue or authorize the issuance of any additional shares of common stock or securities convertible into common stock, the number of shares subject to the Option and the Exercise Price shall be adjusted so that at all times the number of shares subject to the Option shall equal 10% of the sum of all issued and outstanding shares and shares which are otherwise subject to outstanding subscriptions, options, warrants or other obligations of A.T. Net to issue shares, and the Exercise Price shall be adjusted so that the aggregate Exercise Price for all shares shall not exceed 360,000,000 yen. 3. Directorship 3.1 Effective on the execution of this Agreement, USFI-Network shall be permitted to designate one director (the "USFI Director") to the Board of Directors of A.T. Net for so long as the USFI Provider Reseller Agreement dated the date hereof between USFI-Network, A.T. Net and Asahi (the "USFI Provider Reseller Agreement") is in effect. 3.2 USFI-Network shall have the right to designate, remove and designate the replacement of the USFI Director. Asahi agrees to vote its shares of A.T. Net and to cause any holders under its control to vote in favor of the election of the USFI Director and Asahi and A.T. Net agree to use their best efforts to cause the other shareholders of A.T. Net to vote their shares in favor of the USFI Director. 4. First Refusal Until A.T. Net common stock is registered and publicly traded in either the United States or Japan, prior to any sale by USFI-Network, USFI-Network will give notice to Asahi of its intention to sell its shares and the proposed sales price therefor. Asahi shall have -2- 3 the right (which it may assign to all or some of its shareholders) to elect, by notice given to USFI-Network within five business days of receipt of the notice from USFI-Network to purchase at the proposed sale price all of the shares (but not less than all) that USFI-Network proposes to sell. If no notice to purchase is received within said five business day period by USFI-Network it shall be free for a period of 180 days to sell the shares it proposed to sell at a price equal to 90% or higher of the proposed sales price. If a notice of purchase is received a closing with respect to the sale shall take place at the offices of Asahi five business days after receipt by USFI-Network of the notice to purchase. 5. Minority Protection 5.1 From and after the date that USFI-Network has exercised the Option and has contributed at least 180,000,000 yen to the capital of A.T. Net, Asahi and A.T. Net agree that: (a) except with the consent of USFI-Network: (i) A.T. Net will not issue shares of stock to any other party at a price per share of less than the product of (A) 5/3 and (B) the Exercise Price, rounded down to the nearest ten thousands, except for (1) not more than an aggregate of 1% of the issued and outstanding shares of A.T. Net issued to directors, officers and employees at such purchase price as the Board of Directors of A.T. Net may determine and (2) shares issued to persons who on the date hereof are the shareholders of Asahi which may be issued at a purchase price of not less than the Exercise Price per share; (ii) A.T. Net will not, directly or indirectly, enter into any transaction with Asahi or any other affiliate, except on terms that are no less favorable to A.T. Net than those A.T. Net would obtain in a comparable arm's-length transaction with a third party that is not a stockholder or affiliate; (iii) A.T. Net will not, directly or indirectly, redeem, purchase or otherwise acquire any of its equity securities unless it has provided all shareholders on a pro rata basis among shareholders an opportunity to have their shares of stock redeemed, purchased or otherwise acquired on the same terms; and (iv) A.T. Net will not, directly or indirectly, make any distributions on its capital stock other than on a pro rata basis. (b) A.T. Net will: (i) provide USFI-Network with such information concerning its business or operations as USFI-Network shall reasonably request provided that such information is in its possession or under its control; and -3- 4 (ii) provide to USFI-Network within 45 days after the end of each fiscal quarter (other than the fourth fiscal quarter), the unaudited consolidated balance sheet of A.T. Net as at the end of such period and the related unaudited consolidated statements of income, surplus and cash flows for such period and year-to-date and within 90 days after the end of each fiscal year, the audited consolidated balance sheet of A.T. Net as at the end of such year and the related audited consolidated statements of income, surplus and cash flows for such year. Such statements may be prepared in Japanese and in accordance with generally accepted Japanese accounting practices. 5.2 No member of the A.T. Net Group (as defined herein) shall conduct any local or domestic long distance voice and facsimile telecommunication services including those permitted by a Special Type II registration or a Type I license (or any similar or successor licenses to the foregoing) other than through A.T. Net. The provisions of this Paragraph 5.2 shall terminate and be of no further force or effect as such time as the shares of both Asahi and A.T. Net are registered and publicly traded either in the United States or in Japan. 5.3 The provisions of Paragraph 5.1 shall terminate and be of no further force or effect at such time as the shares of A.T. Net are registered and publicly traded either in the United States or in Japan. 6. Tag Along Rights In the event Asahi proposes to sell any of its shares in A.T. Net, Asahi shall give written notice of the proposed sale to USFI-Network, which notice shall include the name of the proposed purchaser, the number of shares proposed to be sold, the sales price and any other material terms. Asahi agrees that USFI-Network shall have the right to elect by notice in writing to Asahi given within five business days of receipt of the notice from Asahi, to sell the same percentage of the shares held by it as Asahi proposes to sell of the shares held by it, at the same price and to the same purchaser on the same terms. In the event of such election by USFI-Network, Asahi shall cause such purchaser to effectuate such purchase concurrent with the purchase from Asahi. USFI-Network's rights under this Paragraph 6 shall terminate on the earlier to occur of (i) the date when A.T. Net common stock is registered and publicly traded in either the United States or Japan, or (ii) the sale by USFI-Network of any of its shares of A.T. Net other than pursuant to the provisions of this Paragraph 6. 7. Pre-Emptive Rights 7.1 If, at any time prior to the date when A.T. Net common stock is registered and publicly traded in either the United States or Japan, A.T. Net proposes to offer, issue, sell or otherwise dispose of shares of any class or series of common stock or preferred stock, or options, rights, warrants, conversion rights or appreciation rights relating thereto, or any other type of equity security (collectively, "Equity Securities") to any entity, company or person, (a) A.T. Net shall, prior to any such offer, issuance, sale or other disposition, give written notice (a "Offer Notice") to USFI-Network setting forth the purchase price of such Equity Securities, the type and aggregate number of Equity Securities or rights to acquire Equity -4- 5 Securities to be so offered, issued, sold or otherwise disposed of, the terms and conditions of such offer, issuance, sale or other disposition and the rights, powers and duties inhering in such additional Equity Securities or rights to acquire Equity Securities, and (b) USFI-Network shall have the right (the "Purchase Right") to acquire the percentage of such Equity Securities or rights to acquire Equity Securities proposed to be so offered, issued, sold or otherwise disposed of equal to the number of shares of common stock then held by USFI-Network, divided by the aggregate number of shares of A.T. Net common stock outstanding immediately prior to such offer, issuance, sale or other disposition of Equity Securities; provided, however, that the terms and conditions of this Paragraph 7 shall not apply to any offer, issuance, sale or other disposition of Equity Securities issued by A.T. Net in a public offering after which such shares will be publicly traded in the United States or Japan. 7.2 USFI-Network may exercise such Purchase Right, in whole or in part, on the terms and conditions and for the purchase price set forth in the Offer Notice, by giving to A.T. Net notice to such effect, within 30 days after the giving of the Offer Notice. After the expiration of such 30 days period, A.T. Net shall have the right to offer, issue, sell and otherwise dispose of any or all of the Equity Securities referred to in the applicable Offer Notice as to which no Purchase Right has been exercised but only upon the terms and conditions, and for a purchase price not lower than the purchase price, set forth in the Offer Notice. If A.T. Net does not offer, issue, sell or otherwise dispose of the Equity Securities referred to in the applicable Offer Notice on the terms and conditions set forth in such Offer Notice within 120 days after the expiration of such 30-day period, then any subsequent proposal by A.T. Net to offer, issue, sell or otherwise dispose of such Equity Securities shall be subject to this Paragraph 7. 8. Representations and Warranties Asahi and A.T. Net, jointly and severally, represent and warrant that: 8.1 A.T. Net is a corporation duly organized and validly existing under the laws of Japan and has all requisite corporate power and authority to carry on its business as it is now being conducted. 8.2 A.T. Net has full corporate power and authority to execute and deliver this Agreement and each other agreement, document, instrument or certificate contemplated by this Agreement or to be executed by A.T. Net in connection with the consummation of the transactions contemplated by this Agreement (all such other agreements, documents, instruments, and certificates required to be executed by A.T. Net being hereinafter referred to, collectively, as the "Corporation Documents"), and to perform fully its obligations hereunder and thereunder. The execution, delivery and performance by A.T. Net of this Agreement and each of the Corporation Documents has been duly authorized by all necessary corporate action on the part of A.T. Net. The Agreement has been, and each of the Corporation Documents will be duly executed and delivered by A.T. Net, and this Agreement constitutes, and the Corporation Documents when so executed and delivered will constitute, legal, valid and -5- 6 binding obligations of A.T. Net, enforceable against A.T. Net in accordance with their respective terms. 8.3 None of the execution and delivery by A.T. Net of this Agreement and the Corporation Documents, or the consummation of the transactions, contemplated hereby or thereby, or compliance by A.T. Net with any of the provisions hereof and thereof will (a) conflict with, or result in the breach of, any provision of the articles of incorporation of A.T. Net, (b) conflict with, violate, result in the breach or termination of, or constitute a default or give rise to any right of termination or acceleration or right to increase the obligations or otherwise modify the terms under any contract, license or order to which A.T. Net is a party or by which it or any of its properties or assets is bound or subject, (c) constitute a violation of any law applicable to A.T. Net, or (d) result in the creation of any lien upon the assets of A.T. Net. No consent, waiver, approval, order, permit or authorization of, or declaration or filing with, or notification to, any person, including, without limitation, any governmental body, is required on the part of A.T. Net in connection with the execution, delivery or performance of this Agreement or the Corporation Documents, or the compliance by A.T. Net with any of the provisions hereof or thereof. 8.4 The authorized capital stock of A.T. Net consists of 4,000 shares of common stock, of which 4,000 shares are currently issued and outstanding. All of the outstanding capital stock of A.T. Net has been validly issued, is fully paid and non-assessable and is owned, beneficially and of record, by Asahi. SCHEDULE 8.4 hereto sets forth the capitalization of A.T. Net after giving effect to the additional issuances of shares referred to therein. Prior to the payment of the Exercise Price, Asahi agrees to invest the additional 100,000,000 yen referred to on Schedule 8.4. Except as otherwise provided in this Agreement, no authorized but unissued shares, no treasury shares and no other outstanding shares of capital stock of A.T. Net are subject to any option, warrant, right of conversion or purchase or any similar right. Except as otherwise provided in this Agreement, A.T. Net is not a party to or bound by any agreements, or understandings with respect to the voting, issuance, sale or transfer of any Equity Securities of A.T. Net, or, any agreement restricting the transfer or hypothecation of any such Equity Securities. 8.5 The shares deliverable upon exercise of the Option, when issued and paid for in accordance with the Option, will be duly and validly issued, fully paid and nonassessable. 8.6 All information delivered by Asahi or A.T. Net to USFI-Network or any of its affiliates with regard to the business, operations and financial condition of A.T. Net is true and correct in all material respects and all budgets and projections have been and will be based on good faith estimates of management. 8.7 Asahi and A.T. Net each has the power and authority, to the extent legally allowed, to permit USFI-Network and its affiliates to obtain the benefits of the Special Type II registration and to provide international and national telecommunications services in -6- 7 Japan as contemplated by this Agreement and the P&S Agreement entered into concurrently herewith. 8.8 USFI-Network will not as a shareholder or otherwise have any liability or obligations with respect to the debts, liabilities and obligations of A.T. Net. 8.9 Set forth on SCHEDULE 8.9 is a list, as of the date hereof, of all agreements, contracts, promissory notes and other instruments, other than contracts with customers entered into in the ordinary course of A.T. Net's business (collectively, "Contracts") binding on A.T. Net or to which A.T. Net is a party: (a) that have been entered into with any affiliate of A.T. Net or (b) pursuant to the terms of which A.T. Net is to make or receive payments or incur liability in excess of 5,000,000 Yen per annum. All of such Contracts are valid, subsisting, in full force and effect and no party thereto has committed a default thereunder in any material respect nor, to the knowledge of A.T. Net, does any condition exist that with notice or lapse of time or both would constitute a default thereunder. A.T. Net has delivered to USFI-Network a copy of all of such Contracts. 8.10 Except as set forth on SCHEDULE 8.10, A.T. Net has no indebtedness to any person, firm, corporation, governmental body or any other entity. Schedule 8.10 also sets forth a description of any such indebtedness and the amount thereof. 9. Special Type II Registration A.T. Net and Asahi agree to enter into arrangements with USFI-Network, its affiliates and successors, and their customers for the provision of services governed by their Special Type II registration to the fullest extent permitted by law. Such arrangements will be at no cost to any such person unless A.T. Net or Asahi is required to incur a cost in connection with the provision of the service in which event such cost shall be reimbursed. A.T. Net and Asahi agree to fully cooperate with USFI-Network, its affiliates, successors and customers with respect to the provision of such services. Such cooperation shall include but not be limited to the execution and filing with the appropriate governmental authority of such documents or instruments as may be required to evidence the arrangements referred to in this Paragraph 9. Nothing herein contained shall prevent USFI or USFI-Network and its affiliates and successors from applying for or obtaining a Special Type II registration or any filing, registration or license covering similar services. Each member of the A.T. Net Group agrees, upon the request of USFI-Network, to use its best efforts to assist the USFI Group in applying for and obtaining such a registration in the name of the applicable member of the USFI Group. 10. Private Lines 10.1 USFI-Network and A.T. Net agree, in compliance with applicable law, to lease an international private line or lines (individually or collectively "IPL") between the USFI-Network point of presence ("POP") in the New York metropolitan area (presently in New York City) (the "NYPOP") and USFI's POP in Ebisu (the "TPOP"). The size of the IPL will be determined by USFI-Network engineers after consultation with A.T. Net. A.T. Net shall -7- 8 pay the cost of its portion of the IPL and the equipment needed therefor and USFI-Network shall pay the cost of its portion of the IPL and the equipment needed therefor. A.T. Net agrees to use its best efforts to meet the technical specifications necessary for the interconnection of A.T. Net's equipment with the IDNX equipment used by USFI-Network. 10.2 If USFI-Network or an affiliate, in conjunction with a Category 1 provider in Japan, should gain indefeasible right of use ownership in a fiber optic ocean cable during the term of the arrangements described in paragraph 10.1, at the option of USFI-Network, the IPL shall be rolled onto the indefeasible right of use. A.T. Net will pay an amount which is not greater than what A. T. Net would be required to pay for the IPL and USFI-Network will pay the balance. Cancellation charges of the lease will be paid by USFI-Network. 10.3 A.T. Net and USFI-Network will further discuss and agree upon details of the arrangements to implement the provisions of this Paragraph 10. 11. No Impairment Neither A.T. Net nor Asahi shall by any action including, without limitation, amending its articles of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Agreement, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of USFI-Network hereunder. Without limiting the generality of the foregoing, A.T. Net and Asahi will take all such action as may be necessary or appropriate in order that A.T. Net may validly and legally issue fully paid and nonassessable shares of common stock upon the exercise of the Option and use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable A.T. Net to perform its obligations hereunder. 12. Reseller Agreement 12.1 USFI-Network, Asahi and A.T. Net shall execute a Reseller Agreement in the form of Exhibit B to the P&S Agreement entered into concurrent herewith pursuant to which, among other things, Asahi and A.T. Net shall be granted the right to resell the international long distances services of USFI-Network. In consideration of the execution of this Agreement by USFI, USFI-Japan and USFI-Network as well as such other agreements as may be entered into by any of them concurrently with the execution of this Agreement, Asahi, and A.T. Net agree on their own behalf, and on behalf of all of their affiliates, that except in the circumstances hereinafter described in this paragraph, USFI, USFI-Network and any successor thereto or affiliate thereof (collectively the "USFI Group") shall be the provider to A.T. Net, Asahi and any successor thereto or affiliate thereof (collectively, the "A.T. Group") of international long distance services ("International Services") as provided in such Reseller Agreement. -8- 9 12.2 Notwithstanding the provisions of Paragraph 12.1: (a) if the USFI-Group is unable to process calls due to the fact that no electricity passes through the USFI-Group's switch ("system failure"), the A.T. Net Group shall be entitled to switch customers to some other carrier during the time the USFI-Group is unable to process calls. Such switching shall cease (and the customers returned to the USFI-Group) at such time as a member of the USFI-Group shall have given A.T. Net notice (which need not be in writing) that the system failure has been corrected; (b) in the event of a problem concerning the quality of International Services, a member of the USFI-Group will discuss such matter with A.T. Net with a view to resolving it promptly; (c) if any of KDD, IDC, ITJ or other Japanese Type I telecommunications carrier offer to A.T. Net or Asahi international rates that are lower than those offered by the USFI-Group, the USFI-Group shall have the right to either match those rates or decide to utilize such other carrier itself and the parties will discuss and decide how the savings gained shall be allocated. (d) if any customer of the A.T. Net Group in the domestic market demands that its international calls be carried by a provider other than a member of the USFI-Group, the A.T. Net Group shall be entitled, in its discretion, to route such customer to the international carrier designated by such customer; provided, that, when the revenues from such "other" carrier customers that would have accrued to the USFI-Group if such customers had not designated an "other" carrier exceed 30% (or, from and after the date A.T. Net closes a public offering of its shares, 50%) of the quarterly gross revenues to the USFI-Group from the A.T. Net Group signed customers, the advance consent of a member of the USFI-Group to the provision of an "other" carrier to such customers exceeding 30% (or, from and after the date A.T. Net closes a public offering of shares, 50%) shall be required. Such consent will be provided or not provided in the good faith discretion of the USFI-Group. Upon request the A.T. Group will provide a member of the USFI-Group access to the appropriate records to verify the foregoing amounts. 12.3 Subject to the provisions of Paragraph 12.4, paragraph 13 of the USFI Provider Reseller Agreement, entitled "Limitations of Liability", shall apply to the provision of International Services as if specifically set forth herein at length. 12.4 If, in accordance with the provisions of Paragraph 12.2(a) above, the A.T. Net Group switches customers to other carriers as a result of a system failure, the following provisions shall apply: (a) The A.T. Net Group shall be required to give written notice to USFI of the switching indicating the period thereof, the name of the alternate carrier used and the rates charged by it. -9- 10 (b) The A.T. Net Group will be required to use an alternate carrier that is the lowest cost provider available. (c) USFI-Japan agrees to reimburse A.T. Net for 70% of its incremental cost (that is, the difference between the rates payable by the A.T. Net to USFI-Japan and the rates, if higher, paid by the A.T. Net Group to the alternate carrier) in using the alternate carrier for as long as the system failure continues except that USFI-Japan shall have no liability (i) if the system failure is attributable to a force majeure event of a type described in Paragraph 13.2 of the Reseller Agreement or (ii) if interruptions in service, for maintenance, do not exceed six (6) hours per month. USFI-Japan agrees to give A.T. Net advance notice of the periods during which the system will be shut down for maintenance. (d) USFI-Japan shall have the option, in its sole discretion, to be released from the liability provisions set forth in Paragraph 12.4(c) above by releasing the A.T. Net Group from the provisions of Paragraph 12.1 above. 13. TelePassport Name and Logo A.T. Net acknowledges and agrees that the "TelePassport" name and logo is the property of USFI and its affiliates. A.T. Net agrees to use its best efforts to cause (i) the TelePassport logo to be clearly displayed on its invoices to customers and (ii) such invoices to clearly state that TelePassport is the provider of international long distance service. Such display will be submitted to USFI for prior approval. 14. Miscellaneous The parties agree that: 14.1 The provisions of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of any amendment, by the parties thereto or, in the case of a waiver, by the party against whom the waiver is to be effective. Any such waiver shall be effective only to the extent specifically set forth in such writing. 14.2 The headings in this Agreement have been inserted for convenience of reference only and shall not control or affect the meaning or construction of this Agreement. 14.3 This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by the others. 14.4 In case any provision in this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or unenforceability of the remaining provisions hereof will not in any way be affected or impaired thereby. -10- 11 14.5 This Agreement shall be governed and construed in accordance with the laws of New York. The parties hereby agree that all disputes or controversies arising out of or in conjunction with this Agreement shall be litigated in the courts of Japan. The prevailing party in any such litigation shall be entitled to an award of reasonable attorneys' fees, costs and disbursements. 14.6 This Agreement has been executed and delivered in a text using the English language. 14.7 Any and all notices and other communications required or provided herein (i) from a member of the USFI-Group to a member of the A.T. Net Group shall be in Japanese and (ii) from a member of the A.T. Net Group to a member of the USFI-Group shall be in English, and in each case shall be deemed to have been duly given if in writing and delivered personally, or given by reputable overnight delivery service, or by telecopier, addressed to the respective parties as follows: (a) If to USFI, USFI-Japan or USFI Network, to: USFI Network K.K. Ferrare Building, Fifth Floor 1-24-15 Ebisu, Shibuya-ku, Tokyo 150 JAPAN Attention: Michele Matsuda Telecopier: (03) 5447-8010 with a copy to: USFI, Inc. 1212 Avenue of the Americas 12th Floor New York, New York 10036-9998 Attention: James D. Pearson Telecopier: (212) 719-2834 (b) If to Asahi or A.T. Net to: Asahi Telecom Co., Ltd. Asahi Telecom Building 3-4-14 Nihonbashi-Ningyocho Chuo-ku, Tokyo 103 Japan Attention: Mikiya Nemoto Telecopier: (03) 5641-5349 -11- 12 (c) If to NTP, to each of the above parties. Unless otherwise provided, the effective date of all notices shall be the date of receipt thereof. The above addresses may be changed at any time hereafter by the giving of 10 days' prior notice thereof as hereinabove provided. 14.8 Any rights granted hereunder to USFI-Network may, at its sole election, be exercised by any affiliate designated by USFI-Network. Subject to the foregoing, this Agreement shall not be assignable by any party without the consent of the other parties, provided that no such consent shall be required in connection with an assignment of this Agreement together with the transfer of all or substantially all of the assets of the assigning party or in connection with the assignment to an affiliate. No such assignment shall relieve the assigning party from any obligation hereunder. 14.9 As used herein, the term "Business Day" means days in which banks in New York and Tokyo are open for business. 14.10 This Agreement constitutes the entire agreement among the parties concerning the subject matter hereof and supersedes any and all prior and contemporaneous agreements among the parties with respect to the subject matter hereof. -12- 13 IN WITNESS WHEREOF, the undersigned have executed and delivered this Securities Purchase Agreement as of the date set forth above. USFI, INC. By: /s/ James D. Pearson ------------------------------------------ Name: James D. Pearson Title: President and Chief Executive Officer USFI-JAPAN, L.L.C. By: /s/ James D. Pearson ------------------------------------------ Name: James D. Pearson Title: Manager USFI NETWORK K.K. By: /s/ Michele Matsuda ------------------------------------------ Name: Michele Matsuda Title: President NIHON TELEPASSPORT K.K. By: /s/ Michele Matsuda ------------------------------------------ Name: Michele Matsuda Title: President ASAHI TELECOM CO., LTD. By: /s/ Mikiya Nemoto ------------------------------------------ Name: Mikiya Nemoto Title: Executive Vice President A.T. NET K.K. By: /s/ Mikiya Nemoto ------------------------------------------ Name: Mikiya Nemoto Title: Vice President -13- 14 SCHEDULE 8.4 SHAREHOLDERS (omitted) Schedule 8.9 MATERIAL CONTRACTS (omitted) Schedule 8.10 INDEBTEDNESS AS OF JANUARY 31, 1997 (omitted) EX-10.20 9 PURCHASE AND SALE AGREEMENT DATED MARCH 4, 1997 1 Exhibit 10.20 NTP PURCHASE AND SALE AGREEMENT NTP PURCHASE AND SALE AGREEMENT ("Agreement") dated as of March 4, 1997 among NIHON TELEPASSPORT K.K., a Japanese corporation ("NTP"), USFI, INC., a New York corporation ("USFI"), USFI-JAPAN, L.L.C., a Delaware limited liability company ("USFI-Japan"), USFI NETWORK K.K., a Japanese corporation ("USFI-Network"), ASAHI TELECOM CO., LTD., a Japanese corporation ("Asahi") and A.T. Net K.K., a Japanese corporation ("A.T. Net"): WHEREAS, USFI-Japan owns 51 shares (the "USFI Shares"), and Asahi owns 49 shares, of the outstanding capital stock of NTP and such shares constitute all of the issued and outstanding capital stock of NTP; WHEREAS, A.T. Net is a wholly-owned subsidiary of Asahi; WHEREAS, Asahi has agreed to purchase the USFI Shares from USFI-Japan, and USFI-Japan has agreed to sell such shares to Asahi; WHEREAS, NTP has agreed to sell certain of its assets to USFI-Network, and USFI-Network has agreed to purchase them; WHEREAS, the parties have agreed on certain other matters; and WHEREAS, the parties have reached agreement on the foregoing matters and wish to reduce such agreement to writing, NOW, THEREFORE, the parties hereto agree as follows: 1. Purchase and Sale of USFI Shares; Closing 1.1 Subject to the terms and conditions set forth herein, effective as of the Closing Date (as defined in Paragraph 1.6), USFI-Japan hereby sells, transfers and delivers to Asahi (or such designee of Asahi identified by Asahi in a written notice to USFI-Japan), and Asahi (or such designee, as applicable) hereby acquires and accepts from USFI-Japan, all of the USFI-Japan's right, title and interest in and to the USFI Shares. 1.2 The purchase price for the (a) USFI Shares and (b) any loans that may be owing by NTP to USFI-Japan, shall be 26,520,000 yen payable on the Closing Date by means of a wire transfer of same day funds to an account designated by USFI-Japan. 1.3 On the Closing Date, against payment by Asahi of such purchase price, USFI-Japan shall deliver to Asahi a stock certificate evidencing the USFI Shares. 2 1.4 USFI-Japan warrants and represents to Asahi that, upon delivery of the USFI Shares to Asahi, Asahi will acquire good title to such shares free and clear of any liens or encumbrances thereon other than any liens or encumbrances created by Asahi or any of its affiliates. 1.5 On the Closing Date, the designees of USFI-Japan on the Board of Directors of NTP shall resign. 1.6 Except as otherwise provided herein, the transactions contemplated hereby shall be consummated at the offices of Asahi as promptly hereafter as is practicable but, in no event, later than 3:00 p.m. (Tokyo time) on Wednesday, March 12, 1997. The date on which the transactions are so consummated is referred to herein as the "Closing Date". 2. Purchase and Sale of Certain Assets; Related Matters 2.1 Subject to the terms and conditions set forth herein, effective as of the Closing Date, NTP hereby sells, transfers and assigns to USFI-Network, and USFI-Network purchases, all of NTP's right, title and interest in and to the following assets and properties (the "Purchased Assets"): (a) those customers listed on SCHEDULE 2.1(A) hereto and all account information and records relating thereto (as the same may be replaced or modified in accordance with the provisions of Paragraph 3.2 hereof) (the "USFI Customers"); (b) the private line equipment owned by NTP installed at the switch owned by USFI-Network for the benefit of USFI Customers; (c) all rights in the NTP corporate name and any right which NTP may have had to use the name "TelePassport" or any similar name; (d) the prepaid and calling card business and all assets, agreements, customer records and other documents related thereto; and (e) those other assets of NTP described on SCHEDULE 2.1(e) hereto. 2.2 The purchase price for the Purchased Assets shall be 26,217,327 yen payable on the Closing Date by means of a wire transfer of same day funds to an account designated by NTP. 2.3 On the Closing Date, against payment by USFI- Network of such purchase price, NTP shall deliver to USFI-Network such documents or instruments that may -2- 3 be necessary or, in the opinion of USFI-Network, desirable to convey good title to the Purchased Assets to USFI-Network. 2.4 NTP warrants and represents to USFI-Network that, on the Closing Date, USFI-Network will acquire good title to the Purchased Assets free and clear of all liens and encumbrances, other than liens or encumbrances created by USFI- Network or its affiliates. 2.5 Neither USFI-Network nor any of its affiliates does hereby assume any liability or responsibility for the payment or other discharge of any liability or obligation of NTP, all of which liabilities and obligations shall remain the sole liability of NTP. Notwithstanding the foregoing provisions of this paragraph 2.5, USFI-Japan agrees to assume and be responsible for 51% of the amount of any liability which NTP may have to third parties (including any liability NTP may have for the payment of taxes) if any such liability is not known to NTP as of the Closing Date provided that USFI-Japan shall have no liability with respect thereto if a written notice describing such liability in reasonable detail is not given to USFI-Japan on or before June 30, 1997 and, provided, further, that this provision shall not inure to the benefit of any third party, but shall solely define the agreement of the parties hereto. 2.6 From and after December 31, 1996, neither NTP nor USFI-Japan (or any successor thereto) shall be obligated to pay any commission to Asahi (either under the Sales and Marketing Agreement dated as of March 13, 1995 between NTP and Asahi (the "1995 Sales and Marketing Agreement") or otherwise) with respect to any USFI Customer. 2.7 Effective as of the Closing Date, Asahi hereby sells, transfers and assigns to USFI-Network, and USFI purchases, for a purchase price of 1,000,000 yen payable on the Closing Date by means of a wire transfer of same day funds to an account designated by Asahi, all of Asahi's right, title and interest in and to dialers currently being used by USFI Customers. NTP hereby consents to such sale and surrenders and releases any rights that it may have under any outstanding leases (or other instruments) with respect to such dialers. 2.8 As to NTP's office lease, USFI-Japan shall be permitted to continue to occupy the premises until March 15, 1997. 2.9 Promptly after the Closing Date, but in no event later than April 15, 1997, NTP shall change its name to a name that does not include "USFI" or "Telepassport" therein. 2.10 On the Closing Date, NTP shall release from employment those employees identified on SCHEDULE 2.10 and USFI- Network shall offer employment to them. -3- 4 3. Settlement of Certain Obligations; Notices to Customers; Post-Closing Adjustments 3.1 The parties recognize that there are certain outstanding obligations owed by members of the A.T. Net Group (as defined herein) to members of the USFI-Group (as defined herein) and vice versa. The parties agree to use good faith efforts to determine the amount of such obligations on the Closing Date and to settle them on such date. To the extent they cannot be determined as of such date, the parties agree to determine and pay them no later than 90 days after the Closing Date. 3.2 Promptly after the Closing Date, NTP will cooperate with USFI-Network in sending out appropriate notices to the USFI Customers notifying them of the transfer. If any of such customers objects to being transferred to USFI-Network ("Objecting Customers"), NTP and USFI-Network will cooperate in good faith to identify among those customers being retained by NTP customers who would not so object, all with the intention of providing replacement customers to USFI-Network having a substantially equivalent value to the Objecting Customers. 4. Non Solicitation Covenants 4.1 For a period of two (2) years from the Closing Date (the "Restricted Period"), neither NTP, Asahi, A.T. Net nor any successor or affiliate thereof (collectively, the A.T. Net Group"), directly or indirectly, for itself or on behalf of any person, corporation, partnership, trust or any other entity (collectively, "person"), shall solicit any USFI Customer with respect to any domestic or international voice and facsimile telecommunications services that may then be provided to such customer by any of USFI, USFI-Japan, USFI-Network or any successor or affiliate thereof (collectively, the "USFI Group"). 4.2 During the Restricted Period, except in connection with the performance by USFI-Network of its obligations under the Sales and Marketing Agreement (as defined below), no member of the USFI Group, directly or indirectly, for itself or on behalf of any person shall solicit any customers of NTP ("Asahi Customers") with respect to any domestic or international voice and facsimile telecommunication services that may then be provided to such customer by any member of the A.T. Net Group. 4.3 (a) Each party acknowledges and agrees that the non-solicitation covenants set forth in Paragraphs 4.1 and 4.2 (the "Restrictive Covenants") are reasonable and valid in temporal scope and in all other respects. If any court or arbitrator determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full force and effect, without regard to the invalid or unenforceable parts. -4- 5 (b) If any court or arbitrator determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable for any reason, such court or arbitrator shall have the power to modify such Restrictive Covenant, or any part thereof, and, in its modified form, such covenant shall then be valid and enforceable. (c) In the event of a breach of any of the Restrictive Covenants, the plaintiff shall be entitled to a temporary restraining order, a preliminary injunction and/or a permanent injunction restraining the breaching party from breaching or continuing to breach any of said covenants. Nothing herein contained shall be construed as prohibiting the plaintiff(s) from pursuing any other remedies that may be available to it for such breach including the recovery of damages. 5. Protection of Customer Information Each Member of the A.T. Net Group agrees to retain in confidence and not to use or disclose any information concerning an USFI Customer and, except in accordance with the performance by USFI-Network of obligations under the Sales and Marketing Agreement, each member of the USFI Group agrees to retain in confidence and not to use or disclose any information concerning an A.T. Net Customer. 6. Tradenames and Trademarks Each member of the A.T. Net Group acknowledges that USFI is the sole owner of the trade mark "TelePassport" (the "Mark") and, except for rights specifically granted pursuant to a subsisting written agreement, USFI has the exclusive right to use the Mark. Each member of the A.T. Net Group specifically acknowledges that nothing contained in this Agreement shall be construed to vest in any such member any right, title or interest in or to the Mark or the goodwill now or hereafter associated therewith. Any and all goodwill associated with the Mark shall inure directly and exclusively to the benefit of USFI. Each member of the A.T. Net Group agrees that none of them shall, directly or indirectly, contest or aid in contesting the validity, ownership or use thereof by USFI or any of its affiliates or licensees, or take any action whatsoever in derogation of the rights claimed therein by such parties. 7. Further Assurances Each of the parties hereto shall execute such further documents and take such further action as shall be reasonably necessary to implement the provisions of Paragraphs 1, 2 and 3 herein. -5- 6 8. Dissolution of NTP Asahi shall have the right to determine, in its discretion, whether or not to liquidate NTP provided, that, no such liquidation shall occur until such time as the transfer of Purchased Assets (including, without limitation, the USFI Customers) shall have been fully completed. 9. Termination of Existing Agreements As of the Closing Date, the following agreements (as the same may have been amended) shall terminate, except for any accrued and unpaid routine payment obligations thereunder: 9.1 Shareholders Agreement dated March 13, between USFI and Asahi; 9.2 The 1995 Sales and Marketing Agreement; 9.3 The private label reseller agreement dated March 13, 1995 between USFI and NTP; and 9.4 The Omnibus Restructuring Agreement dated as of September 23, 1996 among NTP, USFI, USFI-Japan, USFI-Network and Asahi. 10. Ancillary Agreements 10.1 Concurrently with the execution and delivery hereof, the parties hereto have entered into the following additional agreements (the "Ancillary Agreements"): (a) Securities Purchase Agreement (the "Securities Purchase Agreement") among USFI-Network, USFI-Japan, USFI, Asahi and A.T. Net; (b) Reseller Agreement (the "USFI Provider Reseller Agreement") among USFI-Network, A.T. Net, and Asahi, pursuant to which A.T. Net will be granted the right to resell certain USFI-Network services; (c) Reseller Agreement between USFI-Network and NTP, pursuant to which NTP will be granted the right to resell certain USFI-Network services; and -6- 7 (d) Reseller Agreement (the "A.T. Net Provider Reseller Agreement") among USFI-Network, A.T. Net and Asahi, pursuant to which USFI-Network will be granted the right to resell certain A.T. Net services. 10.2 On or before March 31, 1997, the parties agree to enter a Sales and Marketing Agreement (the "Sales and Marketing Agreement") among USFI-Network, A.T. Net and Asahi, substantially in the form of EXHIBIT A hereto, pursuant to which USFI-Network will be appointed the agent of A.T. Net with respect to certain services offered by A.T. Net. In connection therewith, Asahi and A.T. Net agree that the compensation schedule annexed as Appendix A thereto will be completed consistent with the provisions of Paragraph 3.1 of the Sales and Marketing Agreement. 11. Provision of International Services 11.1 In consideration of the execution and delivery of this Agreement by USFI, USFI-Japan and USFI-Network as well as the Ancillary Agreements to which they are party, each member of the A.T. Net Group agrees that, except in the circumstances described in Paragraph 11.2 hereof, the USFI Group shall be the provider to the A.T. Net Group of international long distance services ("International Services") as provided in the USFI Provider Reseller Agreement. 11.2 Notwithstanding the provisions of Paragraph 11.1: (a) if the USFI-Group is unable to process calls due to the fact that no electricity passes through the USFI-Group's switch ("system failure"), the A.T. Net Group shall be entitled to switch customers to some other carrier during the time the USFI-Group is unable to process calls. Such switching shall cease (and the customers returned to the USFI-Group) at such time as a member of the USFI-Group shall have given A.T. Net notice (which need not be in writing) that the system failure has been corrected; (b) in the event of a problem concerning the quality of International Services, a member of the USFI-Group will discuss such matter with A.T. Net with a view to resolving it promptly; (c) if any of KDD, IDC, ITJ or other Japanese Type I telecommunications carrier offer to A.T. Net or Asahi international rates that are lower than those offered by the USFI-Group, the USFI-Group shall have the right to either match those rates or decide to utilize such other carrier itself and the parties will discuss and decide how the savings gained shall be allocated. (d) if any customer of the A.T. Net Group in the domestic market demands that its international calls be carried by a provider other than a member of the USFI-Group, the A.T. Net Group shall be entitled, in its discretion, to route such -7- 8 customer to the international carrier designated by such customer; provided, that, when the revenues from such "other" carrier customers that would have accrued to the USFI-Group if such customers had not designated an "other" carrier exceed 30% (or, from and after the date that A.T. Net closes a public offering of its shares, 50%) of the quarterly gross revenues to the USFI-Group from the A.T. Net Group signed customers, the advance consent of a member of the USFI-Group to the provision of an "other" carrier to such customers exceeding 30% (or, from and after the date that A.T. Net closes a public offering of its shares, 50%) shall be required. Such consent will be provided or not provided in the good faith discretion of the USFI-Group. Upon request the A.T. Group will provide a member of the USFI- Group access to the appropriate records to verify the foregoing amounts. 11.3 Subject to the provisions of Paragraph 11.4, paragraph 13 of the USFI Provider Reseller Agreement, entitled "Limitations of Liability", shall apply to the provision of International Services as if specifically set forth herein at length. 11.4 If, in accordance with the provisions of Paragraph 11.2(a) above, the A.T. Net Group switches customers to other carriers as a result of a system failure, the following provisions shall apply: (a) The A.T. Net Group shall be required to give written notice to USFI of the switching indicating the period thereof, the name of the alternate carrier used and the rates charged by it. (b) The A.T. Net Group will be required to use an alternate carrier that is the lowest cost provider available. (c) USFI-Japan agrees to reimburse A.T. Net for 70% of its incremental cost (that is, the difference between the rates payable by the A.T. Net to USFI-Japan and the rates, if higher, paid by the A.T. Net Group to the alternate carrier) in using the alternate carrier for as long as the system failure continues except that USFI-Japan shall have no liability (i) if the system failure is attributable to a force majeure event of a type described in Paragraph 13.2 of the Reseller Agreement or (ii) if interruptions in service, for maintenance, do not exceed six (6) hours per month. USFI-Japan agrees to give A.T. Net advance notice of the periods during which the system will be shut down for maintenance. (d) USFI-Japan shall have the option, in its sole discretion, to be released from the liability provisions set forth in Paragraph 11.4(c) above by releasing the A.T. Net Group from the provisions of Paragraph 11.1 above. -8- 9 12. Special Type II Registration A.T. Net and/or Asahi is registered as a Special Type II telecommunications carrier by the Ministry of Posts and Telecommunications. A.T. Net and Asahi agree to enter into arrangements with USFI-Network, its affiliates and successors, and their customers for the provision of services governed by their Special Type II registration to the fullest extent permitted by law. Such arrangements will be at no cost to any such person unless A.T. Net or Asahi is required to incur a cost in connection with the provision of the service in which event such cost shall be reimbursed. A.T. Net and Asahi agree to fully cooperate with USFI-Network, its affiliates, successors and customers with respect to the provision of such services. Such cooperation shall include but not be limited to the execution and filing with the appropriate governmental authority of such documents or instruments as may be required to evidence the arrangements referred to in this Paragraph 12. Nothing herein contained shall prevent USFI or USFI-Network and its affiliates and successors from applying for or obtaining a Special Type II registration or any filing, registration or license covering similar services. Each member of the A.T. Net Group agrees, upon the request of USFI-Network, to use its best efforts to assist the USFI Group in applying for and obtaining such a registration in the name of the applicable member of the USFI Group. 13. Additional Consideration In further consideration of the transactions contemplated hereby and by other agreements entered into concurrent herewith: 13.1 the A.T. Net Group agrees that if any member wishes to produce or market calling cards and prepaid cards, a member of the USFI-Group will be the provider of those cards. The USFI-Group and A.T. Net agree to further discuss the technical implementation of providing a card service, accessible from around the world and allowing both international and Japanese domestic calling. 13.2 the A.T. Net Group will develop and provide to its customers, at its expense, adapters that will route both domestic and international calls to an Asahi or A.T. Net PBX. Such PBX's will be located at the major access points of A.T. Net. The USFI-Group agrees to make available its engineers to work with the A.T. Net Group to develop the interfaces which will allow switching of international calls to a member of the USFI- Group. 13.3 A.T. Net will assist the USFI-Group in acquiring favorable rates from Japan Telecom, or some other supplier, for domestic private lines that will be used to transport the calls from the A.T. Net access points to the USFI- Group switch at Ebisu. -9- 10 14. Certain Representations Each party represents and warrants to the others that: 14.1 the execution and delivery of this Agreement and the fulfillment of the terms hereof (a) will not constitute a default under or conflict with any law, rule, ordinance, judgment, court order or any agreement or other instrument to which such party is a party or by which such party is bound and (b) do not require the consent of, notice to or filing with, any person or political body. 14.2 this Agreement constitutes the valid and binding obligation of such party enforceable against such party in accordance with its terms. 15. Miscellaneous The parties agree that: 15.1 the provisions of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and signed, in the case of any amendment, by the parties thereto or, in the case of a waiver, by the party against whom the waiver is to be effective. Any such waiver shall be effective only to the extent specifically set forth in such writing. 15.2 the headings in this Agreement have been inserted for convenience of reference only and shall not control or affect the meaning or construction of this Agreement. 15.3 this Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by the others. 15.4 in case any provision in this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or unenforceability of the remaining provisions hereof will not in any way be affected or impaired thereby. 15.5 this Agreement shall be governed and construed in accordance with the laws of New York. Each party hereby agrees that the Tokyo District Court shall have the exclusive first-instance jurisdiction over all disputes or controversies arising out of or in conjunction with this Agreement. The prevailing party in any such litigation shall be entitled to an award of reasonable attorneys' fees, costs and disbursements. -10- 11 15.6 this Agreement has been executed and delivered in a text using the English language. 15.7 any and all notices and other communications required or provided herein (a) from a member of the USFI-Group to a member of the A.T. Net Group shall be in Japanese and (b) from a member of the A.T. Net Group to a member of the USFI-Group shall be in English and, in each case. shall be deemed to have been duly given if in writing and delivered personally, or given by reputable overnight delivery service, or by telecopier, addressed to the respective parties as follows: (i) If to USFI, USFI-Japan or USFI Network, to: USFI Network K.K. Ferrare Building, Fifth Floor 1-24-15 Ebisu, Shibuya-ku, Tokyo 150 JAPAN Attention: Michele Matsuda Telecopier: (03) 5447-8010 (ii) If to Asahi or A.T. Net to: Asahi Telecom Co., Ltd. Asahi Telecom Building 3-4-14 Nihonbashi-Ningyocho Chuo-ku, Tokyo 103 Japan Attention: Mikiya Nemoto Telecopier: (03) 5641-5349 (iii) If to NTP, to each of the above parties. Unless otherwise provided, the effective date of all notices shall be the date of receipt thereof. The above addresses may be changed at any time hereafter by the giving of 10 days' prior notice thereof as hereinabove provided. 15.8 this Agreement shall not be assignable by any party without the consent of the other parties, provided that no such consent shall be required in connection with an assignment of this Agreement together with the transfer of all or substantially all of the assets of the assigning party or in connection with the assignment to an affiliate. No such assignment shall relieve the assigning party from any obligation hereunder. 15.9 Asahi agrees to cause any obligation hereunder or under any Ancillary Agreement that is imposed on a member of the A.T. Net Group (other than Asahi) to be fully performed by such member. -11- 12 15.10 Each member of the A.T. Net Group agrees: (a) not to disparage any member of the USFI Group or any of the services provided by the USFI-Group and (b) generally to speak or communicate in a positive way of the members of the USFI-Group and the services provided by them. Each member of the USFI-Group agrees: (i) not to disparage any member of the A.T. Net Group or any of the services provided by the A.T. Net Group and (ii) generally to speak or communicate in a positive way of the members of the A.T. Net Group and the services provided by them. 15.11 this Agreement constitutes the entire agreement among the parties concerning the subject matter hereof and supersedes any and all prior and contemporaneous agreements among the parties with respect to the subject matter hereof. -12- 13 IN WITNESS WHEREOF, the undersigned have executed and delivered this NTP Purchase and Sale Agreement as of the date set forth above. USFI, INC. By: /s/ James D. Pearson ------------------------------------- James D. Pearson President and Chief Executive Officer USFI-JAPAN, L.L.C. By: /s/ James D. Pearson ------------------------------------- James D. Pearson Manager USFI NETWORK K.K. By: /s/ Michele Matsuda ------------------------------------- Michele Matsuda President NIHON TELEPASSPORT K.K. By: /s/ Michele Matsuda ------------------------------------- Michele Matsuda President ASAHI TELECOM CO., LTD. By: /s/ Mikiya Nemoto ------------------------------------- Mikiya Nemoto Executive Vice President A.T. NET K.K. By: /s/ Mikiya Nemoto ------------------------------------- Mikiya Nemoto President -13- 14 Schedules to NTP Purchase and Sale Agreement (omitted) Exhibit A NTP Purchase and Sale Agreement (omitted) EX-10.21 10 PROVIDER RESELLER AGREEMENT DATED MARCH 4, 1997 1 Exhibit 10.21 USFI PROVIDER RESELLER AGREEMENT (FOR NTP) USFI PROVIDER RESELLER AGREEMENT FOR NTP (the "Agreement"), dated as of March 4, 1997, by and among USFI Network K.K., a corporation organized under the laws of Japan ("USFI"), Nihon Telepassport K.K., a corporation organized under the laws of Japan ("Reseller") and Asahi Telecom Co., Ltd., a corporation organized under the laws of Japan ("Asahi"): WHEREAS, USFI provides Direct Dial Telephone Services and custom applications; WHEREAS, Reseller desires to utilize USFI's services exclusively for the transmission of its CUSTOMERS' telephone calls to international points; and WHEREAS, USFI and Reseller desire to enter into this Agreement on the terms and conditions hereinafter set forth, including the attachments hereto which are incorporated by reference and made a part hereof, NOW, THEREFORE, in consideration of the mutual agreements and understandings herein contained, the parties hereby agree as follows: 1. The Services Provided by USFI 1.1 USFI agrees to provide international telephone services to Reseller in accordance with the terms and conditions of this Agreement to the countries set forth in Attachment 1. 1.2 USFI will endeavor to accommodate Reseller's international call volume provided that Reseller provides USFI with sufficient advance notice of its capacity requirements. 1.3 USFI, at its expense, together with its connecting carriers, will install, provide, operate and maintain facilities, consisting of computer hardware and software, switching equipment and transmission equipment (the "facilities") so as to provide telephone services between USFI's designated switch and the international destinations. 2. Rates and Charges 2.1 USFI will provide service to Reseller from USFI's designated switch site to the countries listed in Attachment 1 (List of Rates and Countries) at the rates set forth in said Attachment. 2 2.2 Reseller acknowledges and agrees that USFI may, upon reasonable notice, change or modify from time to time its rates (including available discounts), other terms, and its general policies; provided, that, no increase in rates may be imposed except for increases that are commensurate with increases in the underlying carrier's charges. For purposes of this paragraph, "reasonable notice" shall mean the minimum required notice for international tariffs filed under Federal Communications Commission of the United States. USFI will notify Reseller promptly of any such changes. 2.3 Reseller will be obligated to pay for all telephone transmissions via the facilities and for all other charges in accordance with Attachment 1. Each call will be billed in increments consistent with the standards of Japanese carriers. For purposes of this Agreement, the time of each call will begin when the answer supervision is returned to USFI by the overseas administration or local telephone company indicating that the call has been answered and will end when the supervision is returned indicating that the caller has disconnected. 3. Duties of Reseller 3.1 Reseller is solely responsible for establishing its customer charges and billing its customers for international direct dial telephone services provided via the facilities, and for all applicable taxes associated therewith. 3.2 Reseller will pay all of its own operating expenses, and other expenses including applicable taxes and fees. 3.3 Reseller will be responsible for the payment of all sums owed to USFI pursuant to this Agreement regardless of whether Reseller has been paid for such charges by its customers. Reseller acknowledges that USFI will not be liable for any losses or damages suffered by Reseller or any of its customers in connection with the incurrence of such charges. 4. Term of Agreement Unless terminated earlier by either party in accordance with the provisions hereof, this Agreement shall have a term of the earlier to occur of (i) the liquidation of Reseller or (ii) six (6) years commencing on the date set forth on the first page of this Agreement. Thereafter, the term of this Agreement will be automatically renewed for successive terms of one year each unless either party provides written notice of its intent not to renew this Agreement at least thirty (30) days prior to the expiration of the then current term. -2- 3 5. Termination 5.1 Either party may terminate this Agreement upon written notice to the other party in the event of a failure by such other party to perform any of its material obligations hereunder and the continuation of such failure for a period of 30 days after written notice thereof, provided that the terminating party is not then in breach of its material obligations hereunder, and provided further that no notice of termination shall relieve either party of any obligations arising or accruing hereunder prior to the date of such notice. 5.2 Notwithstanding anything in this Agreement to the contrary, the failure of USFI to provide services to Reseller hereunder shall not constitute grounds for termination of this Agreement where such failure arises out of or is attributable to equipment failure, accident, regulatory, judicial or other governmental action or inaction, war, vandalism, civil riot or commotion, work stoppage or slowdown or other labor disturbance, destruction of facilities, fire, earthquake, storm, or the failure of any common carrier or utility, for any reason, to provide adequate carriage, transmission or other services to USFI or any of its affiliates, provided that such failure is cured within thirty days after the occurrence, if such event is temporary in nature, of the event or condition giving rise to such failure, or if such failure is incapable of being cured within such thirty day period, that USFI has undertaken diligent efforts to cure such failure as soon as practicable. 6. Relationship of Parties 6.1 It is expressly understood and agreed that Reseller is an independent contractor, shall not represent itself as having any power to bind USFI, shall not hold itself out as an employee or agent of USFI for any purpose, and shall not assume or create any obligation whatsoever, expressed or implied, on behalf of USFI. Nothing in this Agreement shall be deemed to establish a relationship of agency between USFI and Reseller nor with any of their agents or employees for any purpose whatsoever. This Agreement shall not be construed to create a partnership between USFI and Reseller, or any other form of legal association or arrangement which would impose liability upon one party for the act or failure to act of any other party, or which would require the parties to file taxes jointly. 6.2 As an independent contractor, Reseller shall be responsible for all liabilities incurred in connection with the conduct of its business or the offering of USFI's services to its customers, including but not limited to, all income and franchise taxes on the compensation it receives, as well as all of its employees' employment taxes, insurance and fringe benefits. Reseller shall indemnify and hold USFI harmless from and against any and all such liabilities. 7. International Services Provider 7.1 Reseller agrees that except in the circumstances hereinafter described in this paragraph, USFI and any successor thereto or affiliate thereof (collectively -3- 4 the "USFI Group") shall be the provider to Reseller, Asahi and any successor thereto or affiliates thereof (collectively, the "A.T. Net Group") of international long distance services ("International Services"). 7.2 Notwithstanding the provisions of Paragraph 7.1: (a) if the USFI-Group is unable to process calls due to the fact that no electricity passes through the USFI-Group's switch ("system failure"), the A.T. Net Group shall be entitled to switch customers to some other carrier during the time the USFI-Group is unable to process calls. Such switching shall cease (and the customers returned to the USFI-Group) at such time as a member of the USFI-Group shall have given A.T. Net notice (which need not be in writing) that the system failure has been corrected; (b) in the event of a problem concerning the quality of International Services, a member of the USFI-Group will discuss such matter with A.T. Net with a view to resolving it promptly; (c) if any of KDD, IDC, ITJ or other Japanese Type I telecommunications carrier offer to A.T. Net or Asahi international rates that are lower than those offered by the USFI-Group, the USFI-Group shall have the right to either match those rates or decide to utilize such other carrier itself and the parties will discuss and decide how the savings gained shall be allocated. (d) if any customer of the A.T. Net Group in the domestic market demands that its international calls be carried by a provider other than a member of the USFI-Group, the A.T. Net Group shall be entitled, in its discretion, to route such customer to the international carrier designated by such customer; provided, that, when the revenues from such "other" carrier customers that would have accrued to the USFI-Group if such customers had not designated an "other" carrier exceed 30% (or, from and after the date A.T. Net closes a public offering of its shares, 50%) of the quarterly gross revenues to the USFI-Group from the A.T. Net Group signed customers, the advance consent of a member of the USFI-Group to the provision of an "other" carrier to such customers exceeding 30% (or, from and after the date A.T. Net closes a public offering of shares, 50%) shall be required. Such consent will be provided or not provided in the good faith discretion of the USFI-Group. Upon request the A.T. Group will provide a member of the USFI-Group access to the appropriate records to verify the foregoing amounts. 7.3 Subject to the provisions of Paragraph 7.4, paragraph 13 of the USFI Provider Reseller Agreement, entitled "Limitations of Liability", shall apply to the provision of International Services as if specifically set forth herein at length. 7.4 If, in accordance with the provisions of Paragraph 7.2(a) above, the A.T. Net Group switches customers to other carriers as a result of a system failure, the following provisions shall apply: -4- 5 (a) The A.T. Net Group shall be required to give written notice to USFI of the switching indicating the period thereof, the name of the alternate carrier used and the rates charged by it. (b) The A.T. Net Group will be required to use an alternate carrier that is the lowest cost provider available. (c) USFI-Japan agrees to reimburse A.T. Net for 70% of its incremental cost (that is, the difference between the rates payable by the A.T. Net to USFI-Japan and the rates, if higher, paid by the A.T. Net Group to the alternate carrier) in using the alternate carrier for as long as the system failure continues except that USFI-Japan shall have no liability (i) if the system failure is attributable to a force majeure event of a type described in Paragraph 13.2 of the Reseller Agreement or (ii) if interruptions in service, for maintenance, do not exceed six (6) hours per month. USFI-Japan agrees to give A.T. Net advance notice of the periods during which the system will be shut down for maintenance. (d) USFI-Japan shall have the option, in its sole discretion, to be released from the liability provisions set forth in Paragraph 7.4(c) above by releasing the A.T. Net Group from the provisions of Paragraph 7.1 above. 8. TelePassport Name and Logo Reseller acknowledges and agrees that the "TelePassport" name and logo is the property of USFI and its affiliates. Reseller agrees to use its best efforts to cause (i) the TelePassport logo to be clearly displayed on its invoices to customers and (ii) such invoices to clearly state that TelePassport is the provider of international long distance service. Such display will be submitted to USFI for prior approval. 9. Payment Terms 9.1 USFI shall invoice Reseller on a monthly basis. All payments hereunder are due and payable in full within thirty (30) days after date of invoice. 9.2 All payments under this Agreement shall be made in the currency of the invoice to an account designated by USFI. All past due balances shall bear interest at an annual rate of eighteen percent (18%) or, if lower, the maximum rate permitted by applicable law from the due date until paid in full. 10. Taxes Any and all applicable federal, state or local use, excise, sales or privilege taxes, duties or similar liabilities, chargeable to or against USFI and arising out of or attributable to the services provided to the Reseller hereunder shall be charged to and payable by the Reseller in addition to the regular rates set forth in Attachment 1. -5- 6 11. Suspension of Service 11.1 Except for material charges under dispute subject to resolution herein, if payment in full of any invoice is not made by Reseller within sixty (60) days after the date of the invoice therefor, USFI shall have, in addition to all other rights available to it under this Agreement or otherwise, the right, effective three (3) business days after written notice of the same is given to Reseller, to suspend any or all services provided hereunder to Reseller until payment is made. "Business days" as defined herein relates to days in which the banks in Tokyo are open for business. 11.2 After the effective date of suspension, Reseller has five (5) business days to cure suspension of service though payment in full of invoice, in which case service will be restored promptly; otherwise, this Agreement may be terminated by USFI while reserving all rights to collection under this Agreement. 12. Dispute Resolution The parties shall co-operate to investigate promptly any dispute concerning the accuracy of any billing data, rates or any amount payable under this Agreement. In the event of the parties being unable to reach agreement ten (10) business days after the date upon which the relevant invoice or portion thereof is due for payment and the dispute is material, then the following procedure shall be followed: 12.1 In good faith, the complainant shall provide the other party with written notification of the existence of the dispute, which will include details of the nature and magnitude of the dispute, date(s) when the dispute began and recommendations in order to resolve the dispute. 12.2 Upon receipt, the other party shall respond within ten (10) business days of receipt of the dispute notice, endeavor to address and respond to the points raised by the complainant with recommendations on how to resolve the dispute, and notify accordingly the complainant. 12.3 On receipt of a response by the other party, the complainant shall have fourteen (14) days in which to respond. Any resolution to the dispute will be retroactive to the date of the first day of notification by the complainant. 12.4 Both parties will endeavor to resolve any dispute, including but not limited to addressing this dispute to a higher level executive, if necessary. 12.5 Absent any resolution herein, both parties may agree to terminate this Agreement with ninety (90) days notice or, in the absence of such an agreement, such dispute shall be litigated in accordance with the provisions of Paragraph 18 hereof. -6- 7 13. Limitations of Liability 13.1 USFI SHALL HAVE NO LIABILITY FOR ANY COSTS, DAMAGES, OR CHARGES ARISING FROM THE RENDERING OF ADVICE IN CONNECTION WITH THE LOCAL OPERATING ENVIRONMENT, TAX, SALES, PRICING, MARKETING, OR BILLING MATTERS, OR ANY OTHER MANAGEMENT OR CONSULTING SERVICES, OR OUT OF DELAYS IN RESTORATION OF THE SERVICES TO BE PROVIDED UNDER THIS AGREEMENT OR OUT OF MISTAKES, ACCIDENTS, OMISSIONS, INTERRUPTIONS, OR ERRORS OR DEFECTS IN TRANSMISSION IN THE PROVISION OF SWITCHED OR PRIVATE LINE SERVICES OR ANY OTHER TELECOMMUNICATIONS SERVICES. 13.2 NEITHER USFI NOR ANY OF ITS EMPLOYEES, OFFICERS, SHAREHOLDERS, DIRECTORS AND AFFILIATES SHALL HAVE ANY LIABILITY TO RESELLER OR TO ANY OTHER PERSON OR ENTITY WHATSOEVER FOR ANY COSTS, DAMAGES, OR CHARGES SUFFERED OR INCURRED, INCLUDING, WITHOUT LIMITATION, LOST PROFITS AND INCIDENTAL, ACTUAL OR PUNITIVE DAMAGES, ON ACCOUNT OF ERRORS, INTERRUPTIONS, DELAYS, FAILURES OR DEFECTS OF ANY NATURE WHATSOEVER IN THE TRANSMISSION OF SERVICES PURSUANT TO THIS AGREEMENT, WHETHER OR NOT ARISING OUT OF OR RELATED TO ERRORS, OMISSIONS, ACCIDENTS, REGULATORY, JUDICIAL OR OTHER GOVERNMENTAL ACTION OR INACTION, ILLEGALITY, ACTS OF GOD, WAR, VANDALISM, CIVIL RIOT OR COMMOTION, WORK STOPPAGE OR SLOWDOWN OR OTHER LABOR DISTURBANCE, DESTRUCTION OF FACILITIES, OR THE FAILURE OF ANY COMMON CARRIER OR UTILITY, FOR ANY REASON, TO PROVIDE ADEQUATE CARRIAGE, TRANSMISSION OR OTHER SERVICES TO USFI OR ANY OF ITS AFFILIATES. 13.3 USFI HEREBY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS AND IMPLIED, AND MAKES NO REPRESENTATIONS, AS TO THE DESCRIPTION, QUALITY, MERCHANTABILITY, COMPLETENESS OR FITNESS FOR ANY PURPOSE WHATSOEVER OF ANY OF THE SERVICES PROVIDED HEREUNDER. 14. Protection of Confidential Information and Proprietary Property 14.1 Reseller and USFI agree that, except as required by the rules and regulations of the United States Federal Communications Commission or any other governmental authority having jurisdiction, Reseller will, during the term of this Agreement and thereafter, keep secret and retain in the strictest confidence, and cause its employees, agents and/or representatives to keep secret and retain in the strictest confidence, all -7- 8 proprietary information relating to or provided by USFI, including, without limitation, trade secrets, "know-how", lists, rates, pricing policies, and any other business information pertaining to the business of USFI. 14.2 Reseller acknowledges and agrees that it shall not have any right to, nor will it, use any of the trade names, trademarks or other proprietary rights of USFI without written permission from USFI. Nothing in this clause should be construed as limiting Reseller from naming USFI as its supplier, or from using such fact in its promotions, provided that all promotional materials identifying, describing or referring to USFI in any manner shall be submitted to USFI for approval prior to dissemination, publication, or use thereof. 15. Compliance with Laws Reseller shall, at its expense, secure and maintain in full force and effect any and all licenses, permits and authorizations, and make all reports and other filings, which are required or otherwise appropriate in connection with the provision of services pursuant to this Agreement, and shall take any and all other actions necessary to ensure that the provision of telephone services pursuant to this Agreement and to customers of Reseller, does not violate or conflict with any applicable law, rule or regulation of any governmental or quasi-governmental authority having jurisdiction over the subject matter hereof. Reseller's liability for charges incurred hereunder is absolute and shall not be affected by any such violation or any failure by Reseller to comply with the provisions hereof. 16. Indemnity Except as otherwise provided in this Agreement, Reseller and USFI shall each indemnify and hold the other harmless from and against any and all liabilities, costs, damages and expenses, including without limitation attorneys' fees and disbursements, incurred by reason of or arising out of or attributable to the breach by such party of any provision hereof or the failure by such party to perform any of its obligations hereunder. 17. Governing Law This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such State. 18. Litigation Subject to the provisions of Paragraph 12, the parties agree that the Tokyo District Court shall have the exclusive first-instance jurisdiction over all disputes or controversies arising out of or in conjunction with this Agreement. The prevailing party in -8- 9 any such litigation shall be entitled to an award of its reasonable attorneys' fees, costs and disbursements. 19. Notices All notices or other communications required or provided herein shall be in writing and if (i) from a member of the USFI-Group to a member of the A.T. Net Group shall be in Japanese and (ii) from a member of the A.T. Net Group to a member of the USFI-Group shall be in English, and in each case shall be deemed given five (5) days after mailing, if mailed by certified mail, registered mail, return receipt requested, postage prepaid, or on the date of delivery if delivered personally or by a reputable overnight courier, or on the date of facsimile transmission, if transmitted by telecopier, in each case addressed to the party for whom intended as follows (or to such other address as may be given by notice in accordance with this Paragraph 19): To USFI: USFI Network K.K. Ferrare Building, Fifth Floor 1-24-15 Ebisu, Shibuya-ku, Tokyo 150 JAPAN Attention: Michele Matsuda Telecopier: (03) 5447-8010 To Reseller: Nihon Telepassport K.K. Asahi Telecom Building 3-4-14 Nihonbashi-Ningyocho Chuo-ku, Tokyo 103 Japan Attention: Mikiya Nemoto Telecopier: (03) 5641-5349 20. Assignment 20.1 This Agreement shall not be transferable or assignable by Reseller, nor shall Reseller have the right to hire or contract with any agents, representatives, or employees to perform its obligations under this Agreement, without the prior written consent of USFI. Any other purported transfer or assignment shall render this Agreement null and void at the election of USFI. This Agreement may be assigned by USFI without the consent of Reseller to any subsidiary or affiliated company of USFI or to any other firm. 20.2 Nothing expressed herein or implied hereby is intended or shall be construed to confer upon or give to any person or entity other than USFI and -9- 10 Reseller and their respective successors and permitted assigns any rights or remedies by reason of this Agreement. 21. Representations Reseller represents and warrants that it has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder, that all such action has been duly and validly authorized by all necessary proceedings, and that this Agreement constitutes the legal, valid and binding obligation of Reseller, enforceable in accordance with its terms, except that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights. Reseller further represents and warrants that the execution and delivery of this Agreement, the performance by Reseller of its obligations hereunder and the provision of the services provided hereunder to its own customers, will not violate or be in conflict with any statute, law or any judgment, decree, order, regulation or rule of any court or governmental authority. 22. Integration This Agreement constitutes the entire agreement between USFI and Reseller concerning the subject matter contained herein and supersedes any and all prior agreements between the parties with respect to such subject matter. In entering into this Agreement, neither Reseller nor USFI is relying upon any representations or warranties which are not set forth in this Agreement. 23. Unenforceable Provisions In case any provision in this Agreement shall be held invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions hereof will not in any way be affected or impaired thereby. 24. Modification and Waiver This Agreement may be amended only by a written instrument which references this Agreement and which is signed by all signatories to this Agreement. No waiver of any term or condition of this Agreement shall operate as a continuing waiver nor shall any failure to enforce any provision hereof operate as a waiver of such provision or any other provision hereof. -10- 11 IN WITNESS WHEREOF, the parties hereto have duly executed this USFI Provider Agreement (for NTP) as of the date above written. USFI NETWORK K.K. By: /s/ Michele Matsuda -------------------------------- Name: Michele Matsuda Title: President NIHON TELEPASSPORT K.K. By: /s/ Mikiya Nemoto -------------------------------- Name: Mikiya Nemoto Title: ASAHI TELECOM CO., LTD. By: /s/ Mikiya Nemoto -------------------------------- Name: Mikiya Nemoto Title: Executive Vice President -11- 12 USFI PROVIDER RESELLER AGREEMENT (FOR NTP) ATTACHMENT #1 List of Rates and Countries (omitted) EX-10.22 11 PROVIDER RESELLER AGREEMENT DATED MARCH 4, 1997 1 Exhibit 10.22 A.T. NET PROVIDER RESELLER AGREEMENT A.T. NET PROVIDER RESELLER AGREEMENT (the "Agreement"), dated as of March 4, 1997, by and among USFI Network K.K., a corporation organized and existing under the laws of Japan ("Reseller"), A.T. Net K.K., a corporation organized under the laws of Japan, ("A.T. Net"): WHEREAS, A.T. Net is engaged in the business of providing telecommunications services which originate or terminate in Japan; WHEREAS, Reseller desires to utilize A.T. Net's services for the transmission of certain of its CUSTOMERS' telephone calls; and WHEREAS, A.T. Net and Reseller desire to enter into this Agreement on the terms and conditions hereinafter set forth, including the attachments hereto which are incorporated by reference and made a part hereof, NOW THEREFORE, in consideration of the mutual agreements and understandings herein contained, the parties hereby agree as follows: 1. The Services Provided by A.T. Net 1.1 A.T. Net agrees to provide telephone services to Reseller with respect to calls which originate or terminate in Japan in accordance with the terms and conditions of this Agreement. 1.2 A.T. Net will endeavor to accommodate Reseller's call volume provided that Reseller provides A.T. Net with sufficient advance notice of its capacity requirements. 1.3 A.T. Net, at its expense, together with its connecting carriers, will install, provide, operate and maintain facilities, consisting of computer hardware and software, switching equipment and transmission equipment (the "facilities") so as to provide telephone services between A.T. Net's designated switch and Reseller's designated switch. 2. Rates and Charges 2.1 A.T. Net will provide service to Reseller from A.T. Net's designated switch site to Reseller's designated switch and from Reseller's designated switch to termination points in Japan at the rates set forth in Attachment 1. 2 2.2 Reseller acknowledges and agrees that A.T. Net may, upon reasonable notice, change or modify from time to time its rates (including available discounts), other terms, and its general policies; provided, that, no increase in rates may be imposed except for increases that are commensurate with increases in the underlying carrier's charges. A.T. Net will notify Reseller promptly of any such changes. 2.3 Reseller will be obligated to pay for all telephone transmissions via the facilities and for all other charges in accordance with Attachment 1. Each call will be billed in increments consistent with the standards of Japanese carriers. For purposes of this Agreement, the time of each call will begin when the answer supervision is returned to A.T. Net by the overseas administration or local telephone company indicating that the call has been answered and will end when the supervision is returned indicating that the caller has disconnected. 3. Duties of Reseller 3.1 Reseller is solely responsible for establishing its customer charges and billing its customers for international direct dial telephone services provided via the facilities, and for all applicable taxes associated therewith. 3.2 Reseller will pay all of its own operating expenses, and other expenses including applicable taxes and fees. 3.3 Reseller will be responsible for the payment of all sums owed to A.T. Net pursuant to this Agreement regardless of whether Reseller has been paid for such charges by its customers. Reseller acknowledges that A.T. Net will not be liable for any losses or damages suffered by Reseller or any of its customers in connection with the incurrence of such charges. 4. Term of Agreement Unless terminated earlier by either party in accordance with the provisions hereof, this Agreement shall have a term of six (6) years commencing on the date set forth on the first page of this Agreement. Thereafter, the term of this Agreement will be automatically renewed for successive terms of one year each unless either party provides written notice of its intent not to renew this Agreement at least 120 days prior to the expiration of the then current term. 5. Termination 5.1 Either party may terminate this Agreement upon written notice to the other party in the event of a failure by such other party to perform any of its material obligations hereunder and the continuation of such failure for a period of 30 days after written notice thereof, provided that the terminating party is not then in breach of its material -2- 3 obligations hereunder, and provided further that no notice of termination shall relieve either party of any obligations arising or accruing hereunder prior to the date of such notice. 5.2 Notwithstanding anything in this Agreement to the contrary, the failure of A.T. Net to provide services to Reseller hereunder shall not constitute grounds for termination of this Agreement where such failure arises out of or is attributable to equipment failure, accident, regulatory, judicial or other governmental action or inaction, war, vandalism, civil riot or commotion, work stoppage or slowdown or other labor disturbance, destruction of facilities, fire, earthquake, storm, or the failure of any common carrier or utility, for any reason, to provide adequate carriage, transmission or other services to A.T. Net or any of its affiliates, provided that such failure is cured within thirty days after the occurrence, if such event is temporary in nature, of the event or condition giving rise to such failure, or if such failure is incapable of being cured within such thirty day period, that A.T. Net has undertaken diligent efforts to cure such failure as soon as practicable. 6. Relationship of Parties 6.1 It is expressly understood and agreed that Reseller is an independent contractor, shall not represent itself as having any power to bind A.T. Net, shall not hold itself out as an employee or agent of A.T. Net for any purpose, and shall not assume or create any obligation whatsoever, expressed or implied, on behalf of A.T. Net. Nothing in this Agreement shall be deemed to establish a relationship of agency between A.T. Net and Reseller nor with any of their agents or employees for any purpose whatsoever. This Agreement shall not be construed to create a partnership between A.T. Net and Reseller, or any other form of legal association or arrangement which would impose liability upon one party for the act or failure to act of any other party, or which would require the parties to file taxes jointly. 6.2 As an independent contractor, Reseller shall be responsible for all liabilities incurred in connection with the conduct of its business or the offering of A.T. Net's services to its customers, including but not limited to, all income and franchise taxes on the compensation it receives, as well as all of its employees' employment taxes, insurance and fringe benefits. Reseller shall indemnify and hold A.T. Net harmless from and against any and all such liabilities. 7. [Intentionally Omitted] 8. A.T. Net Name and Logo Reseller acknowledges and agrees that the "A.T. Net" name and logo is the property of A.T. Net and its affiliates. Reseller agrees to use its best efforts to cause (i) the A.T. Net logo to be clearly displayed on its invoices to customers and (ii) such invoices to clearly state that A.T. Net is the provider of domestic service. Such display will be submitted to A.T. Net for prior approval. -3- 4 9. Payment Terms 9.1 A.T. Net shall invoice Reseller on a monthly basis. All payments hereunder are due and payable in full within thirty (30) days after date of invoice. 9.2 All payments under this Agreement shall be made in the currency of the invoice to an account designated by A.T. Net. All past due balances shall bear interest at an annual rate of eighteen percent (18%) or, if lower, the maximum rate permitted by applicable law from the due date until paid in full. 10. Taxes Any and all applicable state or local use, excise, sales or privilege taxes, duties or similar liabilities, chargeable to or against A.T. Net and arising out of or attributable to the services provided to the Reseller hereunder, shall be charged to and payable by the Reseller in addition to the regular rates set forth in Attachment 1. 11. Suspension of Service 11.1 Except for material charges under dispute subject to resolution herein, if payment in full of any invoice is not made by Reseller within sixty (60) days after the date of the invoice therefor, A.T. Net shall have, in addition to all other rights available to it under this Agreement or otherwise, the right, effective three (3) business days after written notice of the same is given to Reseller, to suspend any or all services provided hereunder to Reseller until payment is made. "Business days" as defined herein relates to days in which the banks in Tokyo are open for business. 11.2 After the effective date of suspension, Reseller has five (5) business days to cure suspension of service though payment in full of invoice, in which case service will be restored promptly; otherwise, this Agreement may be terminated by A.T. Net while reserving all rights to collection under this Agreement. 12. Dispute Resolution The parties shall co-operate to investigate promptly any dispute concerning the accuracy of any billing data, rates or any amount payable under this Agreement. In the event of the parties being unable to reach agreement ten (10) business days after the date upon which the relevant invoice or portion thereof is due for payment and the dispute is material, then the following procedure shall be followed: 12.1 In good faith, the complainant shall provide the other party with written notification of the existence of the dispute, which will include details of the nature and magnitude of the dispute, date(s) when the dispute began and recommendations in order to resolve the dispute. -4- 5 12.2 Upon receipt, the other party shall respond within ten (10) business days of receipt of the dispute notice, endeavor to address and respond to the points raised by the complainant with recommendations on how to resolve the dispute, and notify accordingly the complainant. 12.3 On receipt of a response by the other party, the complainant shall have fourteen (14) days in which to respond. Any resolution to the dispute will be retroactive to the date of the first day of notification by the complainant. 12.4 Both parties will endeavor to resolve any dispute, including but not limited to addressing this dispute to a higher level executive, if necessary. 12.5 Absent any resolution herein, both parties may agree to terminate this Agreement with ninety (90) days notice or in the absence of such an agreement, such dispute shall be litigated in accordance with the provisions of Paragraph 18 hereof. 13. Limitations of Liability 13.1 A.T. NET SHALL HAVE NO LIABILITY FOR ANY COSTS, DAMAGES, OR CHARGES ARISING FROM THE RENDERING OF ADVICE IN CONNECTION WITH THE LOCAL OPERATING ENVIRONMENT, TAX, SALES, PRICING, MARKETING, OR BILLING MATTERS, OR ANY OTHER MANAGEMENT OR CONSULTING SERVICES, OR OUT OF DELAYS IN RESTORATION OF THE SERVICES TO BE PROVIDED UNDER THIS AGREEMENT OR OUT OF MISTAKES, ACCIDENTS, OMISSIONS, INTERRUPTIONS, OR ERRORS OR DEFECTS IN TRANSMISSION IN THE PROVISION OF SWITCHED OR PRIVATE LINE SERVICES OR ANY OTHER TELECOMMUNICATIONS SERVICES. 13.2 NEITHER A.T. NET NOR ANY OF ITS EMPLOYEES, OFFICERS, SHAREHOLDERS, DIRECTORS AND AFFILIATES SHALL HAVE ANY LIABILITY TO RESELLER OR TO ANY OTHER PERSON OR ENTITY WHATSOEVER FOR ANY COSTS, DAMAGES, OR CHARGES SUFFERED OR INCURRED, INCLUDING, WITHOUT LIMITATION, LOST PROFITS AND INCIDENTAL, ACTUAL OR PUNITIVE DAMAGES, ON ACCOUNT OF ERRORS, INTERRUPTIONS, DELAYS, FAILURES OR DEFECTS OF ANY NATURE WHATSOEVER IN THE TRANSMISSION OF SERVICES PURSUANT TO THIS AGREEMENT, WHETHER OR NOT ARISING OUT OF OR RELATED TO ERRORS, OMISSIONS, ACCIDENTS, REGULATORY, JUDICIAL OR OTHER GOVERNMENTAL ACTION OR INACTION, ILLEGALITY, ACTS OF GOD, WAR, VANDALISM, CIVIL RIOT OR COMMOTION, WORK STOPPAGE OR SLOWDOWN OR OTHER LABOR DISTURBANCE, DESTRUCTION OF FACILITIES, OR THE FAILURE OF ANY COMMON CARRIER OR UTILITY, FOR -5- 6 ANY REASON, TO PROVIDE ADEQUATE CARRIAGE, TRANSMISSION OR OTHER SERVICES TO A.T. NET OR ANY OF ITS AFFILIATES. 13.3 A.T. NET HEREBY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS AND IMPLIED, AND MAKES NO REPRESENTATIONS, AS TO THE DESCRIPTION, QUALITY, MERCHANTABILITY, COMPLETENESS OR FITNESS FOR ANY PURPOSE WHATSOEVER OF ANY OF THE SERVICES PROVIDED HEREUNDER. 14. Protection of Confidential Information and Proprietary Property 14.1 Reseller and A.T. Net agree that, except as required by the rules and regulations of the Ministry of Posts and Telecommunications or any other governmental authority having jurisdiction, Reseller will, during the term of this Agreement and thereafter, keep secret and retain in the strictest confidence, and cause its employees, agents and/or representatives to keep secret and retain in the strictest confidence, all proprietary information relating to or provided by A.T. Net, including, without limitation, trade secrets, "know-how", lists, rates, pricing policies, and any other business information pertaining to the business of A.T. Net. 14.2 Reseller acknowledges and agrees that it shall not have any right to, nor will it, use any of the trade names, trademarks or other proprietary rights of A.T. Net without written permission from A.T. Net. Nothing in this clause should be construed as limiting Reseller from naming A.T. Net as its supplier, or from using such fact in its promotions, provided that all promotional materials identifying, describing or referring to A.T. Net in any manner shall be submitted to A.T. Net for approval prior to dissemination, publication, or use thereof. 15. Compliance with Laws Reseller shall, at its expense, secure and maintain in full force and effect any and all licenses, permits and authorizations, and make all reports and other filings, which are required or otherwise appropriate in connection with the provision of services pursuant to this Agreement, and shall take any and all other actions necessary to ensure that the provision of telephone services pursuant to this Agreement and to customers of Reseller, does not violate or conflict with any applicable law, rule or regulation of any governmental or quasi-governmental authority having jurisdiction over the subject matter hereof. Reseller's liability for charges incurred hereunder is absolute and shall not be affected by any such violation or any failure by Reseller to comply with the provisions hereof. -6- 7 16. Indemnity Except as otherwise provided in this Agreement, Reseller and A.T. Net shall each indemnify and hold the other harmless from and against any and all liabilities, costs, damages and expenses, including without limitation attorneys' fees and disbursements, incurred by reason of or arising out of or attributable to the breach by such party of any provision hereof or the failure by such party to perform any of its obligations hereunder. 17. Governing Law This Agreement shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such State. 18. Litigation Subject to the provisions of Paragraph 12, the parties agree that the Tokyo District Court shall have the exclusive first-instance jurisdiction over all disputes or controversies arising out of or in conjunction with this Agreement. The prevailing party in any such litigation shall be entitled to an award of its reasonable attorneys' fees, costs and disbursements. 19. Notices All notices or other communications required or permitted hereunder shall be in writing and if (i) from Reseller to A.T. Net shall be in Japanese and (ii) from A.T. Net to Reller shall be in English, and in each case shall be deemed given five (5) days after mailing, if mailed by certified mail, registered mail, return receipt requested, postage prepaid or on the date of delivery if delivered personally or by a reputable overnight courier, or on the date of facsimile transmission if transmitted by telecopier, in each case addressed to the party for whom intended as follows (or to such other address as may be given in accordance with this Paragraph 19): To Reseller: USFI Network K.K. Ferrare Building, Fifth Floor 1-24-15 Ebisu Shibuya-ku, Tokyo 150 Japan Attention: Michele Matsuda Fax #: (03) 5447-8010 -7- 8 To A.T. Net: Asahi Telecom Co., Ltd. Asahi Telecom Building 3-4-14 Nihonbashi-Ningyocho Chuo-ku, Tokyo 103 Japan Attention: Mikiya Nemoto Telecopier: (03) 5641-5349 20. Assignment 20.1 This Agreement shall not be transferable or assignable by Reseller, nor shall Reseller have the right to hire or contract with any agents, representatives, or employees to perform its obligations under this Agreement, without the prior written consent of A.T. Net, provided that Reseller shall have the right to assign this Agreement to an affiliate or in connection with the sale of all or substantially all of its assets. Any other purported transfer or assignment shall render this Agreement null and void at the election of A.T. Net. This Agreement may be assigned by A.T. Net without the consent of Reseller to any subsidiary or affiliated company of A.T. Net. 20.2 Nothing expressed herein or implied hereby is intended or shall be construed to confer upon or give to any person or entity other than A.T. Net and Reseller and their respective successors and permitted assigns any rights or remedies by reason of this Agreement. 21. Representations Reseller represents and warrants that it has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder, that all such action has been duly and validly authorized by all necessary proceedings, and that this Agreement constitutes the legal, valid and binding obligation of Reseller, enforceable in accordance with its terms, except that such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights. Reseller further represents and warrants that the execution and delivery of this Agreement, the performance by Reseller of its obligations hereunder and the provision of the services provided hereunder to its own customers, will not violate or be in conflict with any statute, law or any judgment, decree, order, regulation or rule of any court or governmental authority. 22. Integration This Agreement constitutes the entire agreement between A.T. Net and Reseller concerning the subject matter contained herein and supersedes any and all prior agreements between the parties with respect to such subject matter. In entering into this -8- 9 Agreement, neither Reseller nor A.T. Net is relying upon any representations or warranties which are not set forth in this Agreement. 23. Unenforceable Provisions In case any provision in this Agreement shall be held invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions hereof will not in any way be affected or impaired thereby. 24. Modification and Waiver This Agreement may be amended only by a written instrument which references this Agreement and which is signed by all signatories to this Agreement. No waiver of any term or condition of this Agreement shall operate as a continuing waiver nor shall any failure to enforce any provision hereof operate as a waiver of such provision or any other provision hereof. -9- 10 IN WITNESS WHEREOF, the parties hereto have duly executed this A.T. Net Provider Reseller Agreement as of the date above written. USFI NETWORK K.K. By: /s/ Michele Matsuda ---------------------- Name: Michele Matsuda Title: President A.T. NET K.K. By: /s/ Mikiya Nemoto ---------------------- Name: Mikiya Nemoto Title: President -10- 11 ATTACHMENT #1 List of Rates (omitted) EX-27 12 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 1,088 0 6,960 790 0 7,624 6,396 667 13,880 14,128 0 0 0 0 15,718 13,880 36,550 36,550 29,880 0 8,804 790 0 (9,352) 0 (9,366) 0 0 0 (10,805) (1.43) 0
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