-----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, Cq2uBXoLNylBmR/5swSVQyyeRMRscoFC7aLR4mOSFuQLVpfDK1J1xCFrln0PDACZ Xl0jAO4AJaFdvHmi4pOlbQ== 0001005150-99-000224.txt : 19990402 0001005150-99-000224.hdr.sgml : 19990402 ACCESSION NUMBER: 0001005150-99-000224 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARTEC GLOBAL COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001043310 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 521660985 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23087 FILM NUMBER: 99580398 BUSINESS ADDRESS: STREET 1: 10411 MOTOR CITY DR CITY: BETHESDA STATE: MD ZIP: 20817 BUSINESS PHONE: 3013658959 MAIL ADDRESS: STREET 1: 10411 MOTOR CITY DR STREET 2: SUITE 300 CITY: BETHESDA STATE: MD ZIP: 20817 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 0-23087 STARTEC GLOBAL COMMUNICATIONS CORPORATION 10411 MOTOR CITY DRIVE BETHESDA, MD 20817 (301) 365-8959 DELAWARE 52-2099559 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF EACH CLASS: COMMON STOCK, PAR VALUE $0.01 PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Non-affiliates of Startec Global Communications Corporation held 5,364,324 shares of Common Stock as of March 19, 1999. The fair market value of the stock held by non-affiliates is $46,937,835 based on the sale price of the shares on March 19, 1999. As of March 19, 1999, 9,389,815 shares of Common Stock, par value $0.01, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the definitive Proxy Statement to be delivered to Stockholders in connection with the Annual Meeting of Stockholders are incorporated by reference into Part III. STARTEC GLOBAL COMMUNICATIONS CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 TABLE OF CONTENTS PART I. Item 1. Business................................................................................... 3 Item 2. Properties.................................................................................29 Item 3. Legal proceedings..........................................................................29 Item 4. Submission of matters to a vote of security holders........................................29 PART II. Item 5. Market for the registrant's common stock and related stockholder matters...................................................................29 Item 6. Selected financial data....................................................................31 Item 7. Management's discussion and analysis of financial condition and results of operations...................................................32 Item 7A. Quantitative and qualitative disclosure about market risk..................................................................................40 Item 8. Financial statements and supplementary data................................................41 Item 9. Changes in and disagreements with accountants on accounting and financial disclosure...................................................63 PART III. Item 10. Directors and executive officers...........................................................63 Item 11. Executive compensation.....................................................................63 Item 12. Security ownership of certain beneficial owners and management.................................................................63 Item 13. Certain relationships and related transactions.............................................63 PART IV. Item 14. Exhibits, financial statement schedules, and reports on Form 8-K...........................................................................63
PART I NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as "believes", "anticipates", "intends", or "expects". These forward-looking statements relate to the plans, objectives and expectations of Startec Global Communications Corporation (the "Company" or "Startec") for future operations. In light of the risks and uncertainties inherent in all forward-looking statements, the inclusion of such statements in this Form 10-K should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved or that any of the Company's operating expectations will be realized. The Company's revenues and results of operations are difficult to forecast and could differ materially from those projected in the forward-looking statements contained herein as a result of certain factors including, but not limited to, dependence on operating agreements with foreign partners, significant foreign and U.S.-based customers and suppliers, availability of transmission facilities, U.S. and foreign regulations, international economic and political instability, dependence on effective billing and information systems, customer attrition, significant industry competition and rapid technological change. These factors should not be considered exhaustive; the Company undertakes no obligation to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 1. BUSINESS OVERVIEW Startec is a rapidly growing, facilities-based international long distance telecommunications service provider. The Company markets its services to select ethnic residential communities located in major metropolitan areas in the United States and Europe and to leading international long distance carriers. The Company provides its services through a flexible, high-quality network of owned and leased transmission facilities, operating and termination agreements and resale arrangements. The Company currently owns and operates international gateway switching facilities in New York, New York and Los Angeles, California and is installing additional international gateway switching facilities in Miami, Florida, as well as at a second site in New York, New York. The Company expects to install multiple switches worldwide through 2000. The Company operates points-of-presence ("POPs") in the United States, Europe and Asia and plans to install additional POPs in the U.S., Canada, Europe and Asia during 1999 and 2000. Additionally, the Company owns capacity on 13 undersea fiber optic cables and plans to acquire additional capacity in cable systems linking North America with Europe, the Pacific Rim, Asia and Latin America, as well as linking the East Coast and West Coast of the United States. The Company also plans to invest in or acquire capacity on two satellite earth stations in 1999 located over the Pacific and Atlantic Oceans. As the Company executes its expansion strategy and encounters new marketing opportunities, management may elect to relocate or re-deploy certain switches, POPs and other network equipment to alternate locations. Startec was founded in 1989 to capitalize on opportunities to provide international long distance services to select ethnic communities in major U.S. metropolitan markets that generate substantial long distance traffic to their countries of origin. Until 1995, the Company concentrated its marketing efforts in the New York-Washington, D.C. corridor and focused on the delivery of international calling services to India. At the end of 1995, the Company expanded its marketing efforts to include the West Coast of the United States, and began targeting other ethnic groups in the United States, such as the Middle Eastern, Filipino and Russian communities. The Company once again expanded its marketing efforts geographically at the end of 1998 by marketing to ethnic segments in the United Kingdom and diversifying its customer base across a broader spectrum of ethnic groups, including the Caribbean, Latin American and Asian communities. International traffic generated by the Company currently terminates primarily in Asia, the Pacific Rim, the Middle East, Africa, Eastern and Western Europe and North America. The number of the Company's residential customers has grown from 10,675 as of December 31, 1995 to 122,057 as of December 31, 1998. The Company uses sophisticated database marketing techniques and a variety of media to reach its targeted residential customers, including focused print advertising in ethnic newspapers, advertising on ethnic radio and television stations, direct mail, sponsorship of ethnic events and customer referrals. The Company's strategy is to provide overall value to its customers and combine competitive pricing with high levels of service, rather than to compete on the basis of price alone. The Company's customer service center, which services the Company's residential customer base, is staffed by trained, multilingual customer service representatives, and operates 24 hours a day, seven days a week. The Company believes that its focused marketing programs and its dedication to customer service 3 enhance its ability to attract and retain customers in a low-cost, efficient manner. Residential customers access the Company's network by dialing a carrier identification code ("CIC") prior to dialing the number they are calling. This service, known as "dial-around" or "casual calling," enables customers to use the Company's services without changing their existing long distance carriers. For the year ended December 31, 1998 residential customers accounted for approximately 33% of the Company's net revenues. As part of its overall strategy, the Company seeks to increase the proportion of its net revenues derived from residential customers. In order to achieve economies of scale in its network operations and to balance its residential international traffic, in late 1995, the Company began marketing its excess network capacity to international carriers seeking competitive rates and high-quality transmission capacity. Since initiating its international wholesale services, the Company has expanded its number of carrier customers to 53 at December 31, 1998. For the year ended December 31, 1998, carrier customers accounted for approximately 66.7% of the Company's net revenues. The Company's mission is to become the leading provider of voice and data services to select ethnic communities located in major metropolitan areas in the U.S., Canada and Europe with significant international long distance usage to the emerging economies To achieve this goal, the Company is strategically building network facilities to allow it to manage the origination, transmission and termination pieces of a telephone call. In 1998, the Company's board of directors and stockholders approved a reorganization pursuant to which the Company's corporate structure would be realigned to that of a publicly traded Delaware holding company ("Reorganization"). Pursuant to the reorganization plan, subsequent to year end, all of the Company's assets were transferred into a Delaware subsidiary company ("New Parent"), with a subsequent transfer of those assets to multiple subsidiaries of the New Parent. The Company was then merged with and into the New Parent with the New Parent then assuming the Company's name. The merger did not have an impact on the consolidated financial statements of the Company. THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY The international telecommunications industry consists of transmissions of voice and data that originate in one country and terminate in another. The industry is undergoing a period of fundamental change, which has resulted in significant growth in the usage of international telecommunications services. From the standpoint of U.S.-based long distance carriers, the international market can be divided into two major segments: the U.S.-originated market, which consists of all international calls that either originate or are billed in the United States, and the overseas market, which consists of all calls billed outside the United States. According to industry sources and the Company's market research, the international telecommunications services market generated approximately $67 billion in revenues and 81 billion minutes of use during 1997. The international telecommunications market is currently recognized as one of the fastest growing and most profitable segments of the global telecommunications industry. According to industry estimates, international long distance minutes are projected to grow at approximately 17% per year through the year 2001. Based on publicly-available information, from 1990 to 1996, the U.S.-originated international telecommunications market grew at a compound annual growth rate of approximately 11% (from $7.6 billion to $14.1 billion) and is expected to grow at approximately 14% per year through 2001. The Company believes that the international telecommunications market will continue to experience strong growth for the foreseeable future as a result of the following developments and trends: o Global economic development and increased access to telecommunications services. The dramatic increase in the number of telephone lines around the world, stimulated by economic growth and development, government initiatives and technological advancements, is expected to lead to increased demand for international telecommunications services in those markets. o Liberalization of telecommunications markets. The continuing liberalization and privatization of telecommunications markets has provided, and continues to provide, opportunities for new carriers who desire to penetrate those markets, thereby increasing competition. o Reduced rates stimulating higher traffic volumes. The reduction of outbound international long distance rates, resulting from increased competition and technological advancements, has made, and continues to make, international calling available to a much larger customer base thereby stimulating increased traffic volumes. o Increased capacity. The increased availability of higher-quality digital undersea fiber optic cable has enabled international 4 long distance carriers to improve service quality while reducing costs. o Popularity and acceptance of technology. The proliferation of communications devices, including cellular telephones, and facsimile machines, as well as the increased level of Internet usage led to a general increase in the use of telecommunications services and stimulated demand for faster transmission of data. o Bandwidth needs. The demand for bandwidth-intensive data transmission services, including Internet-based demand, has increased rapidly and is expected to continue to increase in the future. Liberalization has encouraged competition, which in turn has prompted carriers to offer a wider selection of products and services at lower prices. In recent years, prices for international long distance services have decreased substantially and are expected to continue to decrease in many of the markets in which the Company currently competes. Several long distance carriers in the United States have introduced pricing strategies that provide for fixed, low rates for both domestic and international calls originating in the United States. The Company believes that revenue losses resulting from competition- induced price decreases have been more than offset by cost decreases, as well as an increase in telecommunications usage. For example, based on FCC data for the period 1990 through 1996, per minute settlement payments by U.S.-based carriers to foreign Postal, Telephone and Telegraph Companies ("PTT") fell 38.6%, from $0.70 per minute to $0.43 per minute. Over this same period, however, per minute international billed revenues fell only 30.2%, from $1.06 in 1990 to $0.74 in 1996. The Company believes that as settlement rates and costs for leased capacity continue to decline, international long distance will continue to provide high revenues and gross margin per minute. Regulatory and Competitive Environment In the United States, one of the first liberalized markets in the world, competition began in the late 1960's with MCI's authorization to provide long-distance service. The 1984 court-ordered dissolution of AT&T's monopoly over local and long distance telecommunications fostered the emergence of new U.S.-based long distance companies. Today, there are over 600 U.S.-based long distance companies, most of which are small- or medium-sized companies, serving residential and business customers and other carriers. Liberalization has occurred and is occurring elsewhere around the world, including in most EU nations, several Latin American nations and certain Asian nations. On February 15, 1997, the United States and 68 other countries signed the WTO Agreement and agreed to open their telecommunications markets to competition and foreign ownership starting January 1, 1998. These 69 countries represent approximately 90% of worldwide telecommunications traffic. The Company believes that the WTO Agreement will provide it with significant opportunities to compete in markets where the Company could not previously access, and to provide end-to-end, facilities-based services to and from these countries. Set forth below is a timetable summarizing the commitments made by parties to the WTO Agreement to implement its provisions. Special conditions and/or restrictions apply to those countries marked with an asterisk (*).
1998-1999 2000 and thereafter --------- ------------------- EUROPE Austria Netherlands Bulgaria Romania Belgium Norway Czech Republic Slovak Republic Denmark Portugal Greece Turkey Finland Spain Poland France Sweden Germany Switzerland Italy United Kingdom Luxembourg AMERICAS Brazil* El Salvador Antigua Jamaica Canada Guatemala Argentina Peru Chile Iceland Bolivia Trinidad Dominican Mexico Grenada Venezuela Republic ASIA/PACIFIC Australia Malaysia Brunei Thailand RIM Hong Kong* New Zealand Pakistan* Japan Philippines Singapore Korea AFRICA/MIDDLE Ivory Coast* Israel Senegal EAST Mauritius
5 The FCC has released an order that significantly changes U.S. regulation of international services in order to implement the United States' "open market" commitments under the WTO Agreement. Among other measures, the FCC's order (i) eliminated the FCC's Effective Competitive Opportunities ("ECO") test for applicants affiliated with carriers in WTO member countries, while imposing new conditions on participation by dominant foreign carriers, (ii) allowed non-dominant U.S.-based carriers to enter into exclusive arrangements with non-dominant foreign carriers and scaled back the prohibition on exclusive arrangements with dominant carriers and (iii) adopted rules that will facilitate approval of flexible alternative settlement payment arrangements. The Company believes that the FCC order will have the following effects on U.S.-based carriers: (i) fewer impediments to investments in U.S.-based carriers by foreign entities; (ii) increased opportunities to enter into innovative traffic arrangements with foreign carriers located in WTO member countries; (iii) new opportunities to engage in international simple resale ("ISR") to additional foreign countries; and (iv) modified settlement rates offered by foreign affiliates of U.S.-based carriers to U.S.-based carriers to comply with the FCC's settlement rate benchmarks. International Switched Long Distance Services International switched long distance services are provided through switching and transmission facilities that automatically route calls to circuits based upon a predetermined set of routing criteria. In the United States, an international long distance call typically originates on a local exchange carrier's ("LEC") network and is transported to the caller's domestic long distance carrier. The domestic long distance provider picks up the call and carries the call to its own or another carrier's international gateway switch, where an international long distance provider picks it up and sends it directly or through one or more other long distance providers to a corresponding gateway switch in the destination country. Once the traffic reaches the destination country, it is routed to the party being called through that country's domestic telephone network. International long distance carriers are often categorized according to ownership and use of transmission facilities and switches. No carrier utilizes exclusively-owned facilities for transmission of all of its long distance traffic. Carriers vary from being primarily facilities-based, meaning that they own and operate their own land-based and/or undersea cable, satellite-based facilities and switches, to those that are purely resellers of another carrier's transmission facilities. The largest U.S.-based carriers, such as AT&T, Sprint and MCI/WorldCom, primarily use owned transmission facilities and switches and may transmit some of their overflow traffic through other long distance providers, such as the Company. Only very large carriers have the transmission facilities and operating agreements necessary to cover the over 200 countries to which major long distance providers generally offer service. A significantly larger group of long distance providers own and operate their own switches but use a combination of resale agreements with other long distance providers and leased and owned facilities to transmit and terminate traffic, or rely solely on resale agreements with other long distance providers. Under Accounting Rate Mechanisms, which has been the traditional model for handling traffic between international carriers, traffic is exchanged under bilateral carrier agreements, or operating agreements, between carriers in two countries. Operating agreements generally are three to five years in length and provide for the termination of traffic in, and return of traffic to, the carriers' respective countries at a negotiated accounting rate, known as the Total Accounting Rate ("TAR"). In addition, operating agreements provide for network coordination and accounting and settlement procedures between the carriers. Both carriers are responsible for costs and expenses related to operating their respective halves of the end-to-end international connection. Settlement costs, which typically equal one-half of the TAR, are the fees owed to another international carrier for transporting traffic on its facilities. Settlement costs are reciprocal between each party to an operating agreement at a negotiated rate (which must be the same for all U.S.-based carriers, unless the FCC approves an exception). Additionally, the TAR is the same for all carriers transporting traffic into a particular country, but varies from country to country. The term "settlement costs" arises because carriers essentially pay each other on a net basis determined by the difference between inbound and outbound traffic between them. Under a typical operating agreement, each carrier owns or leases its portion of the transmission facilities between two countries. A carrier gains ownership rights in digital undersea fiber optic cables by: (i) purchasing direct ownership in a particular cable (usually prior to the time the cable is placed into service); (ii) acquiring an IRU in a previously installed cable; or (iii) by leasing or otherwise obtaining capacity from another long distance provider that has either direct ownership or IRUs in a cable. In situations in which a long distance provider has sufficiently high traffic volume, routing calls across cable that is directly owned by a carrier or in which a carrier has an IRU is generally more cost-effective than the use of short-term variable capacity arrangements with other long distance providers or leased cable. Direct ownership and IRUs, however, require a carrier to make an initial capital commitment based on anticipated usage. 6 In addition to using traditional operating agreements, an international long distance provider may use transit arrangements, resale arrangements and alternative transit/termination arrangements. Transit Arrangements. Transit arrangements involve a long distance provider in an intermediate country carrying the long distance traffic originating in a second country to the destination third country. Transit arrangements require agreement among all of the carriers of the countries involved in the transmission and termination of the traffic, and are generally used for overflow traffic or in cases in which a direct circuit is unavailable or not volume justified. Resale Arrangements. Resale arrangements typically involve the wholesale purchase and sale of transmission and termination services between two long distance providers on a variable, per minute basis. The resale of capacity was first permitted as a result of the deregulation of the U.S. telecommunications market, and has fostered the emergence of alternative international long distance providers that rely, at least in part, on transmission capacity acquired on a wholesale basis from other long distance providers. A single international call may pass through the facilities of multiple resellers before it reaches the foreign facilities-based carrier that ultimately terminates the call. Resale arrangements set per minute prices for different routes, which may be guaranteed for a set period of time or may be subject to fluctuation following notice. The international long distance resale market is continually changing as new long distance resellers emerge and existing providers respond to changing costs and competitive pressures. Alternative Transit/Termination Arrangements. As the international long distance market has become increasingly competitive, long distance providers have developed alternative transit/termination arrangements in an effort to decrease their costs of terminating international traffic. Some of the more significant of these arrangements include international simple resale ("ISR"), refiling and ownership of transmission and switching facilities in foreign countries, which enables a provider to terminate its traffic on its own facilities. With ISR, a long distance provider completely bypasses the accounting rates system by connecting an international leased private line to the public switched telephone network of a foreign country or directly to the premises of a customer or foreign partner. Although ISR is currently sanctioned by United States and other applicable regulatory authorities only on some routes, ISR services are increasing and are expected to expand significantly as liberalization continues in the international telecommunications market. As with transit arrangements, refiling involves the use of an intermediate country to carry the long-distance traffic originating in a second country to the destination third country. However, the key difference between transit and refile arrangements is that under a transit arrangement the operator in the destination country has a direct relationship with the originating operator and is aware of the transit arrangement, while with refiling, the operator in the destination country typically is not aware that the received traffic originated in another country with another carrier. Refiling of traffic takes advantage of disparities in settlement rates between different countries by allowing traffic to a destination country to be treated as if it originated in another country which enjoys lower settlement rates with the destination country, thereby resulting in a lower overall termination cost. In addition, new market access agreements, such as the WTO Agreement, have made it possible for many international long distance providers to establish their own switching facilities in certain foreign countries, allowing them to directly terminate traffic, including traffic which they have originated. Internet Telephony The Internet is an interconnected global computer network of tens of thousands of packet-switched networks using Internet protocols. Technology trends over the past decade have removed the distinction between voice and data segments. Traditionally, voice conversations have been routed on analog lines. Today, voice conversations are routinely converted into digital signals and sent together with other data over high-speed lines. In order to satisfy the high demand for low-cost communication, software and hardware developers began to develop technologies capable of allowing the Internet to be utilized for voice communications. Several companies now offer services that provide real-time voice conversations over the Internet ("Internet Telephony"). Current Internet Telephony does not provide comparable sound quality to traditional long distance service. The sound quality of Internet Telephony, however, has improved over the past few years. The FCC and most foreign regulators have not yet attempted to regulate the companies that provide the software and hardware for Internet Telephony, the access providers that transmit their data, or the service providers, as common carriers or telecommunications services providers. Therefore, the existing systems of access charges and international accounting rates, to which traditional long distance carriers are subject, are not imposed on providers of Internet Telephony services. As a result, such providers may offer calls at a significant discount to standard international calls. BUSINESS STRATEGY The Company's objectives are to (i) become the leading provider of voice and data services to select ethnic communities located in major metropolitan areas in the U.S., Canada and Europe with significant international long distance usage to the emerging economies; and (ii) leverage its residential telecommunications business to become a leading provider of wholesale carrier services on corresponding international routes. In order to achieve its objectives, the Company's strategy relies on the following elements: 7 o Expand the addressable market. The Company currently serves residential customers in 20 major metropolitan areas in the U.S. and four in Europe. The Company has also identified over 40 major markets outside the United States, primarily in Europe and Southeast Asia, which the Company believes are attractive for entry based on the demographic characteristics, traffic patterns, regulatory environment and availability of appropriate advertising channels. The Company anticipates entering up to 30 of these markets by the end of 2000. In addition, the Company seeks to increase its penetration of its existing and prospective markets by: (i) targeting additional ethnic communities; (ii) marketing additional routes to existing customers who principally use the Company's services for one route, and (iii) expanding its products and services to include "dial-1", prepaid card accounts and Internet access. Subsequent to year end 1998, the Company has strategically installed or acquired telecommunications equipment in Canada and five European cities which allows it to originate traffic from customers in these locations. o Achieve "first-to-market" entry of select ethnic residential markets. The Company believes that it enjoys significant competitive advantages by establishing a customer base and brand name in select ethnic residential communities ahead of its competitors. The Company intends to capitalize on its proven marketing strategy to further penetrate select ethnic residential communities in the United States, Canada and Europe ahead of its competitors. The Company selects its target markets based on favorable demographics with respect to long distance telephone usage, including geographic immigration patterns, population growth and income levels. Targeting select ethnic communities also enables the Company to aggregate traffic along certain routes (which reduces its costs) and to focus on rapidly expanding and deregulating telecommunications markets. The Company's target residential customer base is comprised of emigrants from emerging markets in Asia, Eastern Europe, the Middle East, the Pacific Rim, Latin America and Africa. o Expand international network facilities. The Company plans to expand its international network facilities during 1999 and through 2000 by deploying additional switches, installing POPs, securing additional ownership interests in undersea cable facilities and investing in domestic cable facilities, deploying ATM/Internet Protocol ("IP") capabilities in its network, investing in or acquiring two satellite earth stations and entering into operating agreements. By building network facilities and expanding operating agreements that enable it to carry an increasing percentage of its traffic on its own network, the Company believes that it will be able to reduce its transmission costs and reliance on other carriers and ensure greater control over quality of service. During the next three years, the Company expects to increase significantly the volume of its traffic that is originated, carried and terminated on-net. The Company intends to implement a network hubbing strategy, linking its existing and prospective customer base in the United States, Canada and Europe to call destinations in foreign countries through a network of foreign-based switches and POPs. As part of this hubbing strategy, the Company has installed international gateway switches and POPs throughout the United States, Europe and Asia. The POPs aggregate traffic originating from the region around the city in which it is located and route the traffic to the Company's international gateway switches. Each of the POPs contains telecommunications equipment that is scaleable to accommodate the traffic volume demands of each region. The Company also plans to continue to enhance its termination options through additional operating agreements, transit arrangements and, if appropriate opportunities arise, strategic acquisitions and alliances. The Company has also taken steps to improve the quality of its network by upgrading its network monitoring and customer service centers, and plans to install enhanced software that will enable it to better monitor call traffic routing, capacity and quality. o Maximize network utilization and efficiency through wholesale carrier business. The Company intends to continue to market its international long distance services to existing and new carrier customers. Because the Company's residential minutes of use are generated primarily during non-business hours or on weekends, the Company has substantial capacity to offer to international carriers. The significant carrier traffic volume that the Company generates allows it to capture additional revenues, to increase economies of scale and to improve network efficiency. o Build customer loyalty. The Company seeks to build long-term customer loyalty through tailored, in-language marketing efforts focusing on each target ethnic group's specific needs and cultural backgrounds, responsive customer service offering in-language services and involvement in its customers' communities through sponsorship of local events and other activities. The Company markets its residential services under the "Startec" name to enhance its name recognition and build brand loyalty in its target communities. The Company maintains a detailed information database of its customers, which it uses to monitor usage, track customer satisfaction and analyze a variety of customer behaviors, including retention and frequency of usage. 8 o Expand service offerings to customers. The Company intends to expand its service offerings to ethnic communities by: (i) deploying ATM/IP telephony throughout its network; (ii) creating Virtual Communities on its current Web site to connect customers from and in the emerging economies; (iii) offering Internet Access services to customers in the U.S.; and (iv) providing co-location and Web hosting facilities at its main international gateway sites in New York and Los Angeles as well as in Miami, where an international gateway site is scheduled to go online in the second quarter of 1999. o Pursue strategic acquisitions and alliances. In order to accelerate its business plan and take advantage of the rapidly changing telecommunications environment, the Company intends to carefully evaluate and pursue strategic acquisitions, alliances and investments. As part of its network deployment strategy, the Company is pursuing various acquisitions and alliances. In 1998 and early 1999, the Company completed four acquisitions. In September 1998, Startec acquired all of the outstanding stock of Trans Pacific Technology, Inc., a signatory owner of the Sea-Me-We-3 ("SMW-3") undersea cable consortium. The SMW-3 cable connects 34 countries across Europe, the Middle East, and Asia. In December 1998, Startec acquired all of the outstanding stock of PCI Communications, Inc. ("PCI"), a provider of voice, data and Internet services located on the island of Guam in the Pacific Rim. Through PCI, Startec obtained capacity on the TPC-5, Guam-Philippines and China-U.S. undersea fiber optic cables. The Company also intends to expand upon PCI's "dial-1" and ISP services, which it currently markets to residential and business customers in Guam, and will make the Guam location an Asian hub for Startec's network. Both acquisitions bolstered Startec's Asian network, improving its ability to transmit calls on its managed network. In December 1998, Startec acquired Global Communications GmbH ("Global") in Germany. Global has a Class IV nationwide telecommunications license for Germany, an interconnection agreement with Deutsche Telekom and a Siemens EWSD switch located in Dusseldorf. The Siemens EWSD switch has already completed the Interoperability (IOP) certification testing required by Deutsche Telekom, which typically takes 10 to 12 months to complete. In February 1999, the Company announced the acquisition of 64.6% of the outstanding shares of Phone Systems and Network, S.A ("PSN"), a French switch-based reseller of long distance services. PSN operates switches in Paris and Switzerland and has over 14,000 residential and business customers. Additionally, it holds the L34.1 license in France, allowing it to provide nationwide telecommunications services. In February 1999, the Company acquired a 20% ownership in a Nevada holding company with operations in Europe. These acquisitions, combined with the Global acquisition, have accelerated Startec's entry into the European markets and provide important licensing and network components. MARKET OPPORTUNITY According to industry sources, the international telecommunications industry generated approximately $67 billion in revenues and 81 billion minutes of use during 1997. Industry sources indicate that the international telecommunications market is one of the fastest growing and most profitable segments of the global telecommunications industry. It is estimated that by the end of 2001, this market will have expanded to $98 billion in revenues and 153 billion minutes of use, representing compound annual growth rates from 1997 of 10% and 17%, respectively. The highly competitive and rapidly changing international telecommunications market has created a significant opportunity for carriers that can offer high-quality, low-cost international long distance service. Based on industry estimates, approximately 70% of international long distance traffic was generated between North America and Western Europe in 1997. The Company's target market consists of a significant portion of the remaining 30% of the international long distance traffic, or approximately $20 billion in revenues and 24 billion minutes of use. The Company believes that international long distance usage in its target markets will grow at rates in excess of the international telecommunications market as a whole, primarily as a result of (i) continuing economic development in these markets with a corresponding investment in telephone and telecommunications infrastructure and (ii) continuing deregulation of these markets. CUSTOMERS The Company markets its international long distance services primarily to two customer groups: residential ethnic communities with significant international long distance usage and international long distance carriers. The Company's residential customers generally are members of ethnic groups that tend to be concentrated in major U.S. metropolitan areas, including Asian, Middle Eastern, Sub-Saharan African and European communities. The number of such customers has grown significantly over the past three years, from 10,675 as of December 31, 1995 to 122,057 as of December 31, 1998. Net revenues from residential customers accounted for approximately 33%, 33% and 37% of the Company's net revenues in the years ended December 31, 1998, 1997 and 1996, respectively. As part of its strategy, the Company seeks to increase the proportion of its net revenues derived from residential customers. The Company also offers wholesale telecommunications services to other international long distance carriers, which allows the Company to balance its residential customer base and efficiently use its network capacity. These carrier customers include first- and second-tier long distance carriers seeking competitive rates and high-quality transmission capacity. The number of the Company's 9 carrier customers has grown significantly since the Company first began marketing its services to this segment in late 1995. As of December 31, 1998, the Company had 53 carrier customers. Revenues from carrier customers accounted for 67%, 67% and 63% of the Company's net revenues in the years ended December 31, 1998, 1997 and 1996, respectively. During the year ended December 31, 1998, the Company's five largest carrier customers accounted for 61% of net revenues, with MCI/WorldCom accounting for 35% of net revenues. No other customer accounted for 10% or more of the Company's net revenues during 1997. In a number of cases, the Company provides services to carriers that are also suppliers to the Company. SERVICES AND MARKETING Residential Customers The Company generally provides international and interstate residential long distance customers with dial-around long distance service. Residential customers access Startec's network by dialing its CIC code before dialing the number they are calling, enabling them to use the Company's services at any time without changing their existing long distance carrier. The Company invests substantial resources in identifying and evaluating potential markets for its services. In particular, the Company seeks to identify ethnic groups with demographic profiles that suggest significant potential for high-volume international telecommunications usage. Once a market has been identified, the Company evaluates the opportunity presented by that market based upon factors that include the credit characteristics of the target group, switching requirements, network access and vendor diversity. Assuming that the target market meets the Company's criteria, the Company implements marketing programs targeted specifically at that ethnic group, with the goal of generating region-specific international long distance traffic. The Company markets its residential services under the "Startec" name through a variety of media, including focused print advertising in ethnic newspapers, advertising on ethnic radio and television stations, direct mail and sponsorship of ethnic events and customer referrals. The Company also sponsors and attends community events. Potential customers call a toll free number that appears in Company advertising and are connected to a multilingual customer service representatives. The Company uses this opportunity to obtain detailed information regarding, among other things, customers' anticipated calling patterns. The customer service representative then sends out a welcome pack explaining how to use Startec's services. Once the customer begins to use the services, the Company routinely monitors usage and periodically communicates with the customer to gauge service satisfaction. Startec also uses proprietary software to assist it in tracking customer satisfaction and a variety of customer behaviors, including turnover ("churn"), retention and frequency of usage. The Company's customer service center, which services the Company's residential customer base, is staffed by trained, multilingual customer service representatives, and operates 24 hours a day, seven days a week. The Company currently employs approximately 184 customer service representatives. Although the Company is sensitive to the role that the price of long distance service plays in consumer decision making, it generally does not attempt to be the low-price leader. Instead, the Company focuses on providing overall value to its customers, combining competitive pricing with high levels of service, customer representatives fluent in the customers' native languages, focused marketing campaigns directed at their ethnic groups, and involvement in their communities through sponsorship of local events and other activities. The Company believes that this strategy increases usage of Startec's services and enhances customer loyalty and retention. In addition to its current long distance services, the Company continually evaluates potential new service offerings in order to increase traffic and enhance customer loyalty and retention. New services the Company expects to introduce include Home Country Direct Services, which will provide customers with access to Startec's network from any country and will allow them to place either collect or credit/debit card calls; prepaid domestic and international calling cards, which may be used from any touchtone telephone in the United States, Canada or Europe, and "dial-1" service for U.S. customers. Carrier Customers To maximize the efficiency of its network capacity, the Company sells its international long distance services to other telecommunications carriers. Startec has been actively marketing its services to carrier customers since late 1995 and believes that it has established a high degree of credibility and valuable relationships with the leading carriers. The Company has a dedicated marketing team serving the carrier market, including approximately 31 carrier service representatives. In addition, the Company participates in international carrier membership organizations, trade shows, seminars and other events that provide its carrier marketing staff with additional opportunities to establish and maintain relationships with other carriers that are potential customers. The Company's strategy is to focus its marketing efforts on first- and second-tier carriers. The Company generally avoids providing services to lower-tiered carriers because of potential difficulties in collecting accounts receivable. Because carrier customers generally are extremely price sensitive, the Company closely tracks the prices of competitors serving the carrier market and monitors its own network costs to ensure optimal pricing for its carrier customers. 10 Future Service Offering The Company is incorporating state-of-the-art technology in its network infrastructure. It intends to expand its service offerings to ethnic communities by: (i) deploying ATM/IP telephony throughout its network; (ii) creating Virtual Communities on its current web site to connect customers from and in the emerging economies; (iii) offering Internet access services to customers in the U.S.; and (iv) providing co-location and web hosting facilities at its main international gateway sites in New York and Los Angeles as well as at its Miami international gateway site, which is scheduled to be operational in the second quarter of 1999. THE STARTEC GLOBAL NETWORK The Company provides its services through a flexible network of owned and leased transmission facilities, resale arrangements and a variety of operating agreements and termination arrangements, all of which allow the Company to terminate traffic in the over 200 countries that have telecommunications capabilities. The Company has been expanding its network to match increases in its long distance traffic volume and to support the needs of its customers. The network employs advanced switching technologies and is supported by monitoring facilities and the Company's technical support personnel. Customer Call Centers As a part of its dedication to customer service, the Company intends to build three customer service centers in Bethesda, Maryland, Guam and Europe in 1999. Each center will operate 24 hours a day, seven days a week and will accommodate approximately 150 customer service representatives. The Bethesda center will support the languages of the Middle East and Central Europe; the Guam center will support Asian languages, while the European center will support the languages of Western Europe. Switching and Transmission Facilities The Company currently operates a Nortel DMS 250/30 international gateway switch in New York City and a Nortel GSP international gateway switch in Los Angeles, California. The Company is also installing a Nortel GSP international gateway switch in Miami, as well as at a second site in New York, New York. In December 1998, the Company acquired a Siemens EWSD switch in Dusseldorf, Germany through the acquisition of Global Communications GmbH. In February 1999, the Company acquired a Telesoft Okoford switch in Paris, France through the acquisition of a majority interest in Phone Systems Network. The Company has also installed POPs in the U.S. and Europe. The POPs aggregate traffic originating from the region around the city in which it is located and route the traffic to the Company's international gateway switches. Each POP contains telecommunications equipment that is scaleable to accommodate the traffic volume demands of each region. The Company currently has 15 switch and POP sites in the U.S., Europe and Asia. The Company's international expansion strategy is predicated on the installation of multiple switches and POPs throughout the world. The Company plans to acquire multiple international gateway switches and POPs through 2000 to be installed in (i) Europe: the U.K., France, Germany, Spain, Belgium, Italy, Austria, Denmark, Ireland, Switzerland, Greece and Portugal; (ii) North America: the U.S., Canada, and Mexico; (iii) Asia and the Pacific Rim: Guam, Hong Kong, Singapore and India; and (iv) Latin and South America: Argentina and Brazil. These switches will be deployed in 1999 and 2000. As the Company executes its expansion strategy, encounters new marketing opportunities and employs new technology, management may elect to relocate or redeploy certain switches, POPs and other network equipment to alternate locations from what is described above. The Company generally installs switches and POPs in regions where it believes it can achieve one or more of the following goals: (i) originate calls from its own customer base, (ii) transmit calls originated elsewhere on its network to the call's final destination on a more cost-efficient basis, or (iii) terminate calls originated and carried on its own network. The Company intends to use the switches and POPs to be installed in the U.S., Canada and Europe primarily to carry calls originated in those countries by the Company's customers. The switches and POPs that the Company plans to install in Asia and the Pacific Rim and in Latin and South America will be used both as "hubbing" or transit sites and to terminate calls originated in other countries. Startec currently owns IRUs on 13 cable systems, including the Canus-1, Cantat-3, Columbus II, Gemini, TAT 12/13, TAT 14, Atlantic Crossing, TPC-5, Guam-Philippines, China-US, and FLAG cables, and is a signatory owner on the Columbus III and Sea-Me-We 3 cables. It accesses additional cables and satellite facilities through arrangements with other carriers. During 1999, the Company intends to invest in domestic land-based fiber optic cable facilities linking the East Coast and West Coast of the United States and in undersea fiber optic transmission facilities linking North America with Europe, the Pacific Rim, Asia and Latin America. The Company believes that it may achieve substantial savings by acquiring additional interests in fiber optic cable, which would reduce its dependence on leased cable access. Having an ownership interest rather than a lease interest in such cable enables the Company to increase its capacity without a significant increase in cost, by utilizing digital compression equipment, which it cannot do under leasing or similar access arrangements. Digital compression equipment enhances the traffic capacity of the undersea cable, 11 which permits the Company to maximize cable utilization while reducing the Company's need to acquire additional capacity. In addition to increasing its interests in fiber optic cable facilities, the Company intends to invest in or acquire two satellite earth stations in 1999, which will provide it with additional routing flexibility, and the ability to connect with carriers on lower-volume routes and carriers in countries where international cable capacity has not yet become available. The Company enters into lease arrangements and resale agreements with other telecommunications carriers when cost effective. The Company purchases switched minute capacity from various carriers and depends on such agreements for termination of its traffic. The Company currently purchases capacity from approximately 53 carriers. The Company's efforts to build additional switching and transmission capacity are intended to decrease the Company's reliance on leased facilities and resale agreements. As traffic across its owned facilities increases, management believes the Company will realize operating efficiencies and improve its margins. The Company intends to incorporate additional state-of-the-art facilities in its network architecture, including ATM/IP capabilities. The Company is evaluating a number of existing products for implementation into its network. By incorporating this technology, the Company expects to realize lower overall transmission costs. Operating Agreements and Other Termination Arrangements Startec attempts to retain flexibility and maximize its termination options by using a mix of operating agreements, transit and refile arrangements, resale agreements and other arrangements to terminate its traffic in the destination country. The Company's approach is designed to enable it to take advantage of the rapidly evolving international telecommunications market in order to provide low cost international long distance services to its customers. The Company's strategy is based on its ability to enter into and maintain: (i) operating agreements with PTTs in countries that have yet to become liberalized so that the Company would then be permitted to terminate traffic in, and receive return traffic from, that country; (ii) operating agreements with PTTs and emerging carriers in foreign countries whose telecommunications markets have liberalized so it can terminate traffic in such countries; (iii) resale agreements and transit and refile arrangements to terminate its traffic in countries with which it does not have operating agreements so as to provide the Company multiple options for routing traffic; and (iv) interconnection agreements with the PTT in each of the countries where the Company plans to have operating facilities so that it can terminate traffic in that country. As of December 31, 1998, Startec had 40 operating agreements, which will provide direct access to 36 countries after full implementation. At December 31, 1998, 23 of the 40 agreements have been implemented with the remainder to be implemented during 1999. These operating agreements allow the Company to terminate traffic at lower rates than by resale in markets where it cannot establish an on-net connection due to the current regulatory environment. The Company believes that it would not be able to serve its customers at competitive prices without such operating or interconnection agreements. In addition, these operating agreements provide a source of profitable return traffic for the Company. Termination of such operating agreements by certain of the Company's foreign carriers or PTTs could have a material adverse effect on the Company's business. Network Operations and Technical Support The Company uses proprietary routing software to maximize routing efficiency. Network operations personnel continually monitor pricing changes by the Company's carrier-suppliers and adjust call routing to make cost efficient use of available capacity. In addition, the Company provides 24-hour network monitoring, trouble reporting and response procedures, service implementation coordination and problem resolution, and has developed and uses proprietary software that enables it to monitor, on a minute by minute basis, all key aspects of its services. Recent software upgrades and additional network monitoring equipment have been installed to enhance the Company's ability to handle increased traffic and monitor network operations. While the Company performs the majority of the maintenance of its network, it also has service and support agreements with Nortel and Siemens covering its New York City, Los Angeles, Miami and Washington, D.C. switches. The Company depends upon third parties with respect to the maintenance of facilities which the Company leases and fiber optic cable lines in which it has an IRU or other use arrangements. The Company utilizes highly automated state-of-the-art telecommunications equipment in its network and has diverse alternate routes available in cases of component or facility failure, or in the event that cable transmission wires are inadvertently cut. Back-up power systems and automatic traffic re-routing enable the Company to provide a high level of reliability for its customers. Computerized automatic network monitoring equipment allows fast and accurate analysis and resolution of network problems. In general, the Company relies upon the utilization of other carriers' networks to provide redundancy in the event of technical difficulties in the network. The Company believes that this is a more cost effective strategy than purchasing or leasing its own redundant capacity. MANAGEMENT INFORMATION AND BILLING SYSTEMS The Company's operations use advanced information systems including call data collection and call data storage linked to a 12 proprietary reporting system. The Company also maintains redundant billing systems for rapid and accurate customer billing. The Company's systems enable it, on a real time basis, to determine cost effective termination alternatives, monitor customer usage and manage profit margins. The Company's systems also enable it to ensure accurate and timely billing and reduce routing errors. The Company's proprietary reporting software compiles call, price and cost data into a variety of reports, which the Company uses to re-program its routes on a real time basis. The Company's reporting software can generate additional reports, as needed, including customer usage, country usage, vendor rates, vendor usage by minute, dollarized vendor usage and loss reports. The Company has built multiple redundancies into its billing and call data collection systems. Two call collector computers receive redundant call information simultaneously, one of which produces a file every 24 hours for filing purposes while the other immediately forwards the call data to corporate headquarters for use in customer service and traffic analysis. The Company maintains these independent and redundant billing systems in order to verify billing internally and to ensure that bills are sent out on a timely basis. All of the call data, and resulting billing data, are continuously backed up on tape drive and redundant storage devices. Residential customers are billed for the Company's services through the LEC, with the Company's charges appearing directly on the bill each residential customer receives from the customer's LEC. The Company utilizes a third party billing company which has arrangements with the LECs to facilitate collections of amounts due to the Company from the LECs. The third party billing company receives collections from the LEC and transfers the sums to the Company, after withholding processing fees, applicable taxes, and provisions for credits and uncollectible accounts. As part of its strategy, the Company also plans to enter into its own billing and collection agreements directly with certain LECs, which management expects will provide the Company with opportunities to reduce the costs currently associated with billing and collection practices. Carrier customers are billed directly by the Company. COMPETITION The international telecommunications industry is intensely competitive and subject to rapid change precipitated by changes in the regulatory environment and advances in technology. The Company's success depends upon its ability to compete with a variety of other telecommunications providers in the United States and in each of its international markets, including the respective PTT in each country in which the Company operates or plans to operate in the future. Other competitors of the Company include large, facilities-based multinational carriers such as AT&T, Sprint and MCI/WorldCom and smaller facilities-based wholesale long distance service providers in the United States and overseas that have emerged as a result of deregulation, switched-based resellers of international long distance services and global alliances among some of the world's largest telecommunications carriers, such as Global One (Sprint, Deutsche Telekom and France Telecom). The telecommunications industry is also being impacted by a large number of mergers and acquisitions including recent announcements regarding a proposed joint venture between the international operations of AT&T and British Telecom, the proposed acquisition of TCI by AT&T, and the proposed mergers of SBC and Ameritech and GTE and Bell Atlantic. International telecommunications providers such as the Company compete on the basis of price, customer service, transmission quality, breadth of service offerings and value-added services. Residential customers frequently change long distance providers in response to competitors' offerings of lower rates or promotional incentives. In general, because the Company is currently a dial-around provider, its customers can switch carriers at any time. In addition, the availability of dial-around long distance services has made it possible for residential customers to use the services of a variety of competing long distance providers without the necessity of switching carriers. The Company's carrier customers generally also use the services of a number of international long distance telecommunications providers, and are especially price sensitive. In addition, many of the Company's competitors enjoy economies of scale that can result in a lower cost structure for termination and network costs, which could cause significant pricing pressures within the international communications industry. Several long distance carriers in the United States have introduced pricing strategies that provide for fixed, low rates for both international and domestic calls originating in the United States. Such a strategy, if widely adopted, could have an adverse effect on the Company's business, financial condition and results of operations if increases in telecommunications usage do not result or are insufficient to offset the effects of such price decreases. In recent years, competition has intensified causing prices for international long distance services to decrease substantially. Prices are expected to continue to decrease in most of the markets in which the Company currently competes. The Company believes, however, that these reductions in prices have been and will continue to be more than offset by reduction in the cost to the Company of providing such services. The Company expects that competition will continue to intensify as the number of new entrants increases as a result of the new opportunities created by the 1996 Telecommunications Act, implementation by the FCC of the United States' commitment to the WTO and changes in legislation and regulation in various foreign target markets. There can be no assurance that the Company will be able to compete successfully in the future. The telecommunications industry is also experiencing change as a result of rapid technological evolution, marked by the introduction of new product and service offerings and increasing satellite and undersea cable transmission capacity for services similar to those provided by the Company. Such technologies include satellite-based systems, such as those proposed by Iridium LLC and Globalstar, L.P., utilization of the Internet for international voice and data communications and digital wireless communication systems such as PCS. The Company is unable to predict which of many possible future product and service offerings will be important 13 to maintain its competitive position or what expenditures will be required to develop and provide such products and services. GOVERNMENT REGULATION Overview Startec's business is subject to varying degrees of regulation by United States regulatory authorities at the federal and state level, as well as by foreign regulatory authorities. In recent years, the regulation of the telecommunications industry has been in a state of flux as a result of the passage of new laws seeking to foster greater competition in telecommunications markets. In particular, comprehensive amendments to the Communications Act of 1934, as amended ("1934 Act") were made by the Telecommunications Act of 1996 ("1996 Act"). The purpose of the 1996 Act is to promote competition in all areas of telecommunications by reducing unnecessary regulation at both the federal and state levels to the greatest extent possible. State legislatures also have passed new laws increasing competition. The FCC and state public service commissions ("PSCs") have adopted many rules to implement new legislation and encourage competition. These changes, which are still incomplete, have created new opportunities for Startec and its competitors. U.S. federal laws, including common carriage requirements under the 1934 Act and the FCC's rules, apply to Startec's international and interstate facilities-based and resale telecommunications services. Applicable PSCs have jurisdiction under separate state statutes over telecommunications services originating and terminating within the same state. The FCC and the PSCs generally have the authority to condition, modify, cancel, terminate or revoke Startec's operating authority for failure to comply with federal and state laws and applicable rules, regulations and policies. Fines or other penalties also may be imposed for such violations. Any such action by the FCC and/or the PSCs could have a material adverse effect on Startec's business, financial condition and results of operations. In addition, the laws of other countries directly apply only to carriers doing business in those countries. Startec is affected indirectly by such laws insofar as it is doing business in foreign countries, and indirectly to the extent that such laws affect foreign carriers with which Startec does business. The following summary of regulatory developments and legislation does not purport to describe all present and proposed U.S. or foreign regulations and legislation affecting the telecommunications industry. Other existing regulations are currently the subject of judicial proceedings, legislative hearings or administrative proposals which could change, in varying degrees, the manner in which this industry operates. Neither the outcome of these proceedings, nor their impact upon the telecommunications industry or Startec can be predicted at this time. There can be no assurance that future regulatory judicial and legislative changes will not have a material adverse effect on Startec, that U.S. or foreign regulators or third parties will not raise material issues with regard to Startec's compliance or noncompliance with applicable laws and regulations, or that regulatory activities will not have a material adverse effect on Startec's business, financial condition and results of operations. 14 U.S. Federal Regulation INTERNATIONAL COMMON CARRIER SERVICES. In February 1997, 69 countries, including the United States, Japan, and all of the member states of the EU, signed the World Trade Organization Basic Telecommunications Services Agreement ("WTO Agreement") to facilitate competition in basic telecommunications services. The WTO Agreement entered into force on February 5, 1998. Pursuant to the terms of the WTO Agreement, signatories to the WTO Agreement have committed to varying degrees and within varying timeframes to allow access to their domestic and international markets to competing telecommunications providers, allow foreign ownership interests in existing telecommunications carriers and establish regulatory schemes to develop and implement policies to accommodate telecommunications competition. The FCC's new rules implementing the WTO Agreement, which took effect on February 9, 1998 generally ease restrictions on entry by foreign telecommunications carriers from WTO member countries into the U.S. and streamline FCC regulation of such carriers. Foreign entry restrictions and full FCC regulation remain in effect for foreign telecommunications carriers from non-WTO countries. The FCC's new policies implementing the WTO Agreement also address the applicability to companies from WTO member and non-member countries of equivalency and other reciprocity principles regarding international facilities-based and resale services, foreign ownership limitations and foreign carrier entry into the U.S. market. At the same time, telecommunications markets in many foreign countries are expected to be significantly liberalized, creating additional competitive market opportunities for U.S. telecommunications businesses such as Startec. Although many countries have agreed to make certain changes to increase competition in their respective markets, there can be no assurance that countries will enact or implement the legislation required to effect the changes to which they have committed in a timely manner or at all. Failure by a country to meet commitments made under the WTO Agreement may give rise to a cause of action for the injured foreign countries to lodge a trade dispute with the WTO. At this time, Startec is unable to predict the effect the WTO Agreement and related developments might have on its business, financial condition and results of operations. International telecommunications carriers are required to obtain authority from the FCC under Section 214 of the Communications Act in order to provide international service that originates or terminates in the United States. U.S. international common carriers also are required to file and maintain tariffs with the FCC specifying the rates, terms, and conditions of their services. In 1989, Startec received Section 214 authority from the FCC to acquire and operate satellite facilities for the provision of direct international service to Italy, Israel, Kenya, India, Iran, Saudi Arabia, Pakistan, Sri Lanka, South Korea and the United Arab Emirates. Startec was also authorized to resell services of other common carriers for the provision of switched voice, telex, facsimile and other data services, and for the provision of INTELSAT Business Services and international television services to various overseas points. On August 27, 1997, Startec was granted global facilities-based Section 214 authority under new FCC streamlined processing rules adopted in 1996 for international carriers. Startec is classified by the FCC as a non-dominant carrier on its international and domestic routes. A facilities-based global Section 214 authorization enables Startec to provide international basic switched, private 15 line, data, television and business services using authorized facilities to virtually all countries in the world. In March 1999, the FCC once again streamlined its rules for licensing and regulating international carriers. Among other things, under the most recent rules a carrier with global Section 214 authorization for facilities-based services will be allowed to utilize any foreign submarine cable system in its provision of facilities-based international services without additional authorization. Under FCC rules which took effect on February 9, 1998, upon entry into force of the WTO Agreement of February 5, 1998, the FCC replaced the "equivalency" test with a rebuttable presumption in favor of the provision of switched services over interconnected private lines ("international simple resale" or "ISR") to WTO member countries. The FCC will authorize the provision of ISR between the U.S. and a WTO member country if either the settlement rates for at least 50 percent of the settled U.S.-billed traffic between the U.S. and that country are at or below the FCC's benchmark settlement rate for that country, or the country satisfies the FCC's test for equivalent ISR policies. The FCC will authorize ISR between the U.S. and a non-WTO member country only if both the settlement rates for at least 50 percent of the settled U.S.-billed traffic between the U.S. and that country are at or below the FCC's benchmark settlement rate for that country, and the country satisfies the FCC's equivalency test. To date, the FCC has approved ISR for international services between the U.S. and eighteen foreign countries, including Australia, Austria, Belgium, Canada, Denmark, France, Germany, Hong Kong, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Sweden, Switzerland and the United Kingdom. It is possible that ISR may be approved for additional countries in the future. Pursuant to FCC rules and policies, Startec's authorization to provide service via ISR will be expanded automatically to include countries subsequently approved by the FCC for ISR. Startec must also conduct its international business in compliance with the FCC's international settlements policy ("IS Policy"). The IS Policy establishes the parameters by which U.S.-based carriers and their foreign correspondents settle the cost of terminating each other's traffic over their respective networks. The precise terms of settlement are established in a correspondent agreement (also referred to as an "operating agreement"), which also sets forth the term of the agreement, the types of service covered by the agreement, the division of revenues between the carrier that bills for the call and the carrier that terminates the call at the other end, the frequency of settlements, the currency in which payments will be made, the formula for calculating traffic flows between countries, technical standards, and procedures for the settlement of disputes. The amount of payments (the "settlement rate") is determined by the negotiated accounting rate specified in the operating agreement. Under the IS Policy, the settlement rate generally must be one-half of the accounting rate. Carriers must obtain waivers of the FCC's rules if they wish to use an accounting rate that differs from the prevailing rate or vary the settlement rate from one-half of the accounting rate. The IS Policy is designed to eliminate foreign carriers' incentives and opportunities to discriminate in their operating agreements among different U.S.-based carriers through a practice referred to as "whipsawing." Whipsawing involves a foreign carrier varying the accounting and/or settlement rate offered to different U.S.-based carriers for the benefit of the foreign carrier, which could secure various incentives by favoring one U.S.-based carrier over another. Under the uniform settlements policy, U.S.-based carriers can only enter into operating agreements that contain the 16 same accounting rate and settlement terms offered to all U.S.-based carriers in that country and provide for proportionate return traffic. When a U.S.-based carrier negotiates an accounting rate with a foreign carrier that is lower than the accounting rate offered to another U.S.-based carrier for the same service, the U.S.-based carrier with the lower rate must file a notification letter with the FCC. If a U.S.-based carrier does not already have an operating agreement in effect, it must file a request with the FCC to modify the accounting rate for that country to introduce service with the foreign correspondent in that country. A U.S.-based carrier also must request modification authority from the FCC for any proposal that is not prospective, that is not a simple reduction in the accounting rate, or that changes the terms and conditions of an existing operating agreement. The notification and modification procedures are intended to provide all U.S.-based carriers with an opportunity to compete in foreign markets on a nondiscriminatory basis. Among other efforts to counter the practice of whipsawing and inequitable treatment of similarly situated U.S.-based carriers, the FCC adopted the principle of proportionate return - which requires that the U.S. carrier terminate U.S.-inbound traffic in the same proportion as the U.S.-outbound traffic that it sends to the foreign correspondent - to assure that competing U.S.-based carriers have roughly equitable opportunities to receive the return traffic that reduces the marginal cost of providing international service. Consistent with its pro-competition policies, the FCC has prohibited U.S.-based carriers from agreeing to accept special concessions from any foreign carrier or administration with market power. A special concession is any arrangement that affects traffic flow to or from the U.S. that is offered exclusively by a foreign carrier or administration to a particular U.S. carrier that is not offered to similarly situated U.S. carriers authorized to serve a particular route. In 1996, the FCC amended the IS Policy to provide carriers with flexibility to introduce alternative payment arrangements that deviate from the IS Policy. As a result of the WTO Agreement, the FCC created a rebuttable presumption in favor of alternative payment arrangements with WTO member countries. On August 7, 1997, the FCC adopted revisions to reduce the level and increase enforcement of its international accounting "benchmark" rates, which are the FCC's target ceilings for prices that U.S. carriers should pay to foreign carriers for terminating U.S. calls overseas. While these rule changes may provide more flexibility to Startec to respond more rapidly to changes in the global telecommunications market, it will also provide similar flexibility to Startec's competitors. Startec intends, where possible, to take advantage of lowered accounting rates and more flexible settlement arrangements. As of December 31, 1998, Startec had operating agreements and interconnection arrangements with carriers in approximately 40 countries, primarily in emerging economies. FCC regulations require that U.S. international telecommunications carriers are required to file copies of their contracts with foreign correspondents, including operating agreements, with the FCC within 30 days of execution. Startec has filed, or will file, each of its operating agreements with the FCC as required. The FCC's rules also require Startec to file periodically a variety of reports regarding its international traffic flows and use of international facilities. Startec has on file and maintains with the FCC annual circuit status reports and traffic data reports. An FCC rulemaking proceeding is pending in which it has proposed to reduce certain reporting requirements of common carriers. Startec is unable to predict the outcome of this proceeding or its effect on Startec. 17 The FCC is currently considering whether to limit or prohibit the practice whereby a carrier routes, through its facilities in a third country, traffic originating from one country and destined for another country. The FCC has permitted third country calling where all countries involved consent to this type of routing arrangements, referred to as "transiting." Under certain arrangements referred to as "refiling," the carrier in the destination country does not consent to receiving traffic from the originating country and does not realize the traffic it receives from the third country is actually originating from a different country. The FCC to date has made no pronouncement as to whether refile arrangements comport either with U.S. or ITU regulations. It is possible that the FCC may determine that refiling, as defined, violates U.S. and/or international law. To the extent that Startec's traffic is routed through a third country to reach a destination country, such an FCC determination with respect to transiting and refiling could have a material adverse effect on Startec's business, financial condition and results of operations. The FCC also regulates the ability of U.S.-based international carriers affiliated with foreign carriers to serve markets where the foreign affiliate is dominant. Previously, U.S. carriers were required to report any investment by a foreign carrier of 10% or greater, and Startec reported the only foreign carrier investment in Startec at the time, an affiliate of Portugal Telecom. Under the FCC's new rules implementing the WTO Agreement, which took effect on February 9, 1998 the threshold for notification of affiliations with foreign carriers has been increased to 25%. Under the new rules, Startec is affiliated with Global Communications GmbH, a licensed carrier in Germany, and Phone Systems and Network, S.A., a licensed carrier in France. The FCC considers a foreign-affiliated U.S. carrier to be dominant on foreign routes where the foreign affiliate is a monopoly or has more than 50 percent market share in international or local telecommunications. None of the carriers with which Startec is affiliated are considered dominant in their foreign markets, and Startec is not regulated as dominant on any international route. The FCC may condition, modify or revoke any of the Section 214 authorizations granted to Startec for violations of the Communications Act, the FCC's rules and policies or the conditions of those authorizations or may impose monetary forfeitures for such violations. Any such action on the part of the FCC may have a material adverse effect on Startec's business, financial condition and results of operations. INTERNET SERVICES, IP TELEPHONY AND ADVANCED SERVICES. In the U.S., Internet services, including voice communications over the Internet or IP protocols ("Internet Telephony") currently are treated as enhanced services and may be provided on an unregulated basis. In December 1996, the FCC initiated a Notice of Inquiry (the "Internet NOI") regarding whether to impose regulations or surcharges upon providers of Internet access and information services. The Internet NOI specifically identifies Internet Telephony as a subject for FCC consideration. This proceeding remains pending. In April 1998, the FCC filed a report with Congress stating that Internet access falls into the category of information services, and should not be subject to common carrier regulation, including the obligation to pay access charges, but that the record suggests that some forms of Internet services may be more like telecommunications services than information services, and possibly should be subject to common carrier regulation. To date, all aspects of Internet Telephony remain unregulated. However, for the purpose of assisting in a 18 determination of whether reciprocal compensation for traffic bound for Internet service providers is due between competing local exchange carriers, FCC recently has determined that Internet services are interstate rather than local in nature. A petition for review of this decision has been filed by Bell Atlantic in the U.S. Court of Appeals for the Eighth Circuit. Controversy over this and related issues may lead to changes in federal or state regulatory treatment of Internet related services. Startec cannot predict the outcome of these proceedings. In addition, several efforts have been made to enact federal legislation that would either regulate or exempt from regulation services provided over the Internet. State public utility commissions may also retain jurisdiction to regulate the provision of intrastate Internet telephone services. If Congress, the FCC, or a state utility commission begins to regulate Internet Telephony, there can be no assurances that any such regulation will not materially adversely affect our business, financial condition or results of operations. Similarly, certain foreign governments have begun to consider more closely the regulatory status of Internet services, especially Internet Telephony. We cannot predict the likelihood that U.S. federal or state authorities or foreign governments will impose additional regulation on our Internet-related services, nor can we predict the impact that future regulation will have on our operations. The FCC also has initiated proceedings addressing the availability of advanced communications services to all Americans. In February 1999, the FCC issued a report in a inquiry proceeding concluding that no significant changes in existing policies are presently, but that it should continue to monitor the deployment of broadband services and issue another report in the year 2000. The Commission said that in the meantime it will continue to allocate, auction, and license more radio spectrum for uses that include broadband data transmission. In a related rulemaking, the FCC has developed new rules on a wide variety of issues associated with the provision of advanced services by wireline carriers. The FCC clarified that the interconnection, unbundling and resale obligations of incumbent local exchange carriers ("ILECs") under Section 251 of the 1996 Act extend to their provision of advanced services, and proposed measures to promote the deployment of advanced services by both ILECs and competitive local exchange carriers ("CLECs"). In rules adopted in March 1999, the FCC required expanded physical collocation rights for CLECs and strengthened the rights of CLECs to order unbundled network elements required to provide advanced services. However, the FCC also interpreted the 1996 Act as permitting ILECs to deploy advanced services through separate affiliates which would not be regulated as an ILEC. These new rules should enhance the flexibility of Startec's options for terminating advanced services, but Startec cannot predict the final outcome of these proceedings or any court appeals that might ensue. INTERSTATE INTEREXCHANGE SERVICES. Startec's provision of domestic long distance service in the United States is subject to regulation by the FCC and certain state PSCs, who regulate to varying degrees interstate and intrastate rates, respectively, ownership of transmission facilities, and the terms and conditions under which Startec's domestic services are provided. Startec must comply with the requirements of common carriage under the of 1934 Act. Pursuant to the 1934 Act, Startec is subject to the general requirement that its charges and regulations for communications services must be "just and reasonable" and that it may not make any "unjust or unreasonable discrimination" in its charges or regulations. Carriers such as Startec also are subject to a variety 19 of miscellaneous regulations that, for instance, govern the documentation and verifications necessary to change a consumer's long distance carrier, require the filing of periodic reports, and restrict interlocking directors and management. Startec also has filed domestic long distance tariffs with the FCC. The FCC also has jurisdiction to act upon complaints against any common carrier for failure to comply with its statutory obligations. The FCC has established different levels of regulation for dominant and non-dominant carriers. Among domestic common carrier service providers, only GTE, the RBOCs and other ILECs are classified as dominant carriers, and all other providers of domestic common carrier services, including Startec, are classified as non-dominant carriers. The 1996 Act provides the FCC with the authority to forebear from imposing any regulations it deems unnecessary, including requiring non-dominant carriers to file tariffs. In November 1996, in its first major exercise of regulatory forbearance authority granted by the 1996 Act, the FCC issued an order detariffing domestic interexchange services. The order required mandatory detariffing and gave carriers such as Startec nine months to withdraw federal tariffs and move to contractual relationships with its customers. This order was to take effect as of December 1997. On February 13, 1997, however, the U.S. Court of Appeals for the District of Columbia Circuit stayed the FCC's order pending judicial review. The appeals remain pending. Should the appeals fail and the FCC's order become effective, Startec may benefit from the elimination of FCC tariffs by gaining more flexibility and speed in dealing with marketplace changes. The absence of tariffs, however, will also require that Startec secure contractual agreements with its customers regarding many of the terms of its existing tariffs or face possible claims arising because the rights of the parties are no longer clearly defined. To the extent that Startec's customer base involves "casual calling" customers, the potential absence of tariffs could require Startec to establish contractual methods to limit potential liability. On August 20, 1997, the FCC partially reconsidered its order by allowing dial-around carriers such as Startec to maintain tariffs on file with the FCC. The 1996 Act directs the FCC, in cooperation with state regulators, to establish a Universal Service Fund ("USF") that will provide subsidies to carriers that provide service to under-served individuals and in high cost areas. A portion of carriers' contributions to the USF also will be used to provide telecommunications related facilities for schools, libraries and certain rural health care providers. The FCC released its order in June 1997. For the first and second calendar quarters of 1998, the FCC established payment rates for all interexchange carriers that amount to 3% to 4% of eligible intrastate, interstate, and international long distance service revenues. In July 1998, the FCC extended by six months, or to July 1, 1999, the date on which so-called "non-rural" LECs will first receive explicit subsidies for the services provided to rural subscribers. Implementation of the subsidy will increase burdens on interexchange carriers that must contribute to the USF. The FCC allows interexchange carriers to recover the international and interstate portions of these payments by passing the charges through to their customers. Certain features of the universal service funding mechanism have not yet been finalized, including the input values for the cost of network components and other parameters that will be used in econometric models to estimate non-rural carriers' reimbursable costs for providing 20 supported services. Also, the FCC's implementation of universal service requirements remains subject to judicial and additional FCC review. Startec is unable to predict the potential impact of these universal service funding reforms. Based upon its domestic interexchange revenues, Startec has applied to the FCC for a waiver of USF contribution requirements. Startec cannot predict the likelihood that its request will be granted. CASUAL CALLING ISSUES. The FCC has adopted new rules that expand the number of codes available for casual calling services. An increase in the number of codes available for casual calling allows for increased competition in the casual calling industry. In addition, the FCC is considering rules to require dominant local exchange carriers and competitive local exchange carriers to make billing arrangements available on a nondiscriminatory basis to casual calling service providers. The Company already has LEC billing arrangements in place but may wish to take advantage of rules the FCC may adopt to develop new billing arrangements with competing LECs. Competing casual calling providers without billing arrangements also would benefit from such a nondiscriminatory billing obligation. OTHER LEGISLATIVE AND REGULATORY INITIATIVES. The 1996 Act is designed to promote local competition through state and federal deregulation. As part of its pro-competitive policies, the 1996 Act frees the RBOCs from the judicial orders that prohibited their provision of long distance services outside of their operating territories ("LATAs"). The 1996 Act provides specific guidelines that allow the RBOCs to provide long distance inter-LATA service to customers inside its region, subject to a demonstration to the FCC and state regulators that the RBOC has opened up its local network to competition and met a "competitive checklist" of requirements designed to provide competing network providers with nondiscriminatory access to the RBOC's local network. Some RBOCs have filed applications with various state public utility commissions and the FCC seeking approval to offer in-region interLATA service. Some states have denied these applications while others have approved them. However, to date, even where the RBOCs' applications have received state approval the FCC has denied each of the RBOCs' applications brought before it. The grant of such authority could permit RBOCs to compete with Startec in the provision of domestic and international long distance services. On December 31, 1997, in striking down an FCC order concerning requests by SBC, US West and Bell Atlantic to enter the long distance market, a Federal District Court in Texas found unconstitutional certain provisions of the 1996 Act restricting the RBOCs from offering such services in their operating regions until they could demonstrate that their networks have been made available to competitive providers of local exchange service in those regions. In September 1998, the U.S. Court of Appeals for the Fifth Circuit reversed the District Court's decision that the challenged provisions of the 1996 Act were prohibited "bills of attainder." In January 1999, the U.S. Supreme Court declined to review the Fifth Circuit's decision. A separate petition remains pending at the Supreme Court for review of a decision by the U.S. Court of Appeals for the District of Columbia rejecting similar claims by BellSouth. To originate and terminate calls in connection with providing their services, long distance carriers such as Startec must purchase "access services" from ILECs or CLECs. Access charges 21 represent a significant portion of Startec's cost of U.S. domestic long distance services and, generally, such access charges are regulated by the FCC for interstate services and by PSCs for intrastate services. In May 1997, the FCC released an order that fundamentally restructured the "access charges" that ILECs charge to interexchange carriers and end user customers. Appeals by numerous parties were denied by the Eighth Circuit Court of Appeals on August 19, 1998. Subsequently, the FCC proposed various measures to accelerate reductions in ILEC access charges and to give ILECs increased flexibility to set prices in response to competition. Together, these actions could significantly reduce the prices of ILEC access services to Startec, as well as to its competitors. In implementing the local competition provisions of the 1996 Act, the FCC has promulgated a series of rules regarding interconnection between ILECs and CLECs. The issues addressed by the FCC have included requirements for non-discriminatory interconnection, access to unbundled network elements, physical collocation of equipment, transport and termination charges, pricing methodologies, resale requirements and access to rights of way. Most provisions of the FCC's orders adopting these interconnection rules were appealed, and numerous appeals were consolidated for consideration by the Eighth Circuit. In a decision released in July 1997 and modified in August 1997, the Court of Appeals upheld in part and reversed in part the FCC's orders. In addition, in August 1998, the Eighth Circuit issued a ruling in a related appeal upholding the FCC's regulations that "shared transport" be made available as an unbundled network element. On January 25, 1999, the U.S. Supreme Court reversed important portions of the Eighth Circuit's holding, ruling that the FCC properly exercised its authority under the 1996 Act in many respects. The Eighth Circuit Court of Appeals has not yet reinstated the FCC rules that the Supreme Court affirmed. Several ILECs have asked the Eighth Circuit not to reinstate those rules until it considers their argument that the FCC's pricing rules for network elements represent an unconstitutional taking of property without just compensation. Even if the Eighth Circuit recalls its prior mandate, it remains to be seen how soon or how vigorously the FCC will enforce its pricing rules for unbundled network elements. Certain other aspects of the FCC's interconnection orders were vacated by the Eighth Circuit but were not appealed to the Supreme Court; thus, they remain vacated. These include FCC rules that had directed ILECs to combine network elements requested by competitors whether or not those elements had previously been combined, and a provision requiring ILECs to provide interconnection superior in quality to those provided by the ILECs to themselves, when requested to do so by competitors. A trade association representing competitive long distance carriers has petitioned the Eighth Circuit to interpret the Supreme Court's decision as implying that the new combinations rule should be reinstated, even though it was not directly addressed by the Supreme Court. The ultimate resolution of local interconnection issues could enhance Startec's flexibility in terminating customer traffic. Certain additional provisions of the 1996 Act, and the rules that have been proposed to be adopted pursuant thereto, could materially affect the growth and operation of the telecommunications industry and the services provided by Startec. Further, certain of the 1996 Act's provisions have been, and likely will continue to be, judicially 22 challenged. Startec is unable to predict the outcome of such rulemakings or litigation or the substantive effect of the new legislation and the rulemakings on Startec's business, financial condition and results of operations. State Regulation INTRASTATE SERVICES Section 253 of the 1996 Act prohibits states and localities from adopting or imposing any legal requirement that may prohibit, or have the effect of prohibiting, the ability of any entity to provide any interstate or intrastate telecommunications services. The FCC has the authority to preempt any such state or local requirements to the extent necessary to enforce the open market entry requirements of the 1996 Act. States and localities may, however, continue to regulate the provision of intrastate telecommunications services, and, presumably, require carriers to obtain certificates or licenses before providing service. Startec generally is required to obtain certification from the relevant state PSC prior to the initiation of intrastate service and to file tariffs with such states. Through its subsidiary, Startec Global Licensing Company, Startec currently is authorized (or certification is not required) to provide service in 40 states and the District of Columbia. Additional applications for approval are pending in three states. In some states where Startec already is certified, it is seeking or may seek modification of its certification to provide facilities-based, in addition to resale, services. Although Startec intends and expects to obtain operating authority in each jurisdiction in which operating authority is required, there can be no assurance that one or more of these jurisdictions will not deny Startec's request for operating authority. Any failure to maintain proper federal and state certification or tariffs, or any difficulties or delays in obtaining required certifications could have a material adverse effect on Startec's business, financial condition and results of operations. Many states also impose various reporting requirements and/or require prior approval for transfers of control of certified carriers, corporate reorganizations, acquisitions of telecommunications operations, assignments of carrier assets, carrier stock offerings, and incurrence by carriers of significant debt obligations. Certificates of authority can generally be conditioned, modified, canceled, terminated, or revoked by state regulatory authorities for failure to comply with state law and/or the rules, regulations, and policies of the PSCs. Fines and other penalties also may be imposed for such violations. Any such action by the PSCs could have a material adverse effect on Startec's business, financial condition and results of operations. As Startec expands its operations into other states, it may become subject to the jurisdiction of their respective public service commissions for certain services offered by Startec. Startec monitors regulatory developments in all 50 states to ensure regulatory compliance. Foreign Regulation EUROPEAN UNION. As Startec has expanded its operations into Europe, it has become subject to the regulations established by various European governments. These regulations, in turn, are evolving within the context of a European-wide telecommunications framework established by the European Commission ("EC") for the entire European Union ("EU"). The EU consists of the following fifteen member states: Austria, Belgium, Denmark, Finland, France, Germany, Greece, 23 Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. The expansion by Startec of its business into any EU country may be directly or indirectly affected by the EC regulatory framework. EU member states are required to implement directives issued by the EC authorities (the EU Commission and the Council of the European Union) by passing national legislation. If an EU member state fails to effect such directives with national (or, as the case may be, regional, community or local) legislation and/or fails to render the provisions of such directives effective within its territory, the EC may take action against the EU member state, including in proceedings before the European Court of Justice, to enforce the directives. The EC and Council of the EU have issued a number of key regulations and directives establishing basic principles for the liberalization of the EU telecommunications market. The general framework for this liberalized environment has been set out in the EC's Services Directive (the "Services Directive"). The Services Directive sets out principles relating to restrictions on the number of licenses permitted and to procedures, fees, essential requirements and appeals. The Services Directive directs EU member states to permit the competitive provision of all telecommunications services with the exception of voice telephony (which does not include value-added services and voice services within closed user groups) and certain other services that have been gradually liberalized through subsequent amendments to the Services Directive. The Full Competition Directive, adopted in March 1996 (the "Full Competition Directive"), amended the Services Directive to set January 1, 1998 as the date by which all EU member states were required to remove all remaining restrictions on the provision of telecommunications services and telecommunications infrastructure, including voice telephony. Certain derogations from compliance with this timetable have been granted. The derogations granted by the EC are as follows: Luxembourg (July 1, 1998), Spain (November 30, 1998), Ireland (January 1, 2000), Portugal (January 1, 2000) and Greece (January 1, 2001). This basic framework has been advanced by a series of harmonization directives, which include the so-called Open Network Provision directive ("ONP"), which established the basic rules for access to the public network, the Leased Lines Directive, which required the incumbent carriers to lease lines to competitors and end-users and to establish cost accounting systems for those products by the end of 1993, the Licensing Directive of April 1997, which set out framework rules for the procedures associated with the granting of national authorizations for the provision of telecommunications services and for the establishment or operation of any infrastructure for the provision of telecommunications services, and the Interconnection Directive of June 1997, which sets out the regulatory framework for securing in the EU the interconnection of telecommunications networks. A 1998 amendment to the Interconnection Directive calls for the introduction of operator number portability by January 1, 2000 and extended the requirement of number portability to the entire fixed network. The amended Directive further requires the introduction of carrier preselection for at least all fixed network operators by January 1, 2000. 24 Each EU member state in which Startec currently conducts its business has a different regulatory regime, and Startec expects such differences to continue. Accordingly, we must obtain different approvals, where required, from country to country. As part of the EC commitment, all EU member states are also signatories to the WTO Agreement. AUSTRIA. Austria joined the EU in January 1995 and, consequently, became subject to the telecommunications directives of the EC, including the agreement for total market liberalization by January 1998. In compliance with the EU directives, in particular in response to an official EU directive warning Austria of the consequences of delaying deregulation, a new telecommunications law ("TKG 97") was passed by Parliament on August 1, 1997. The TKG 97 introduced full competition to the Austrian telecommunications market and established a new independent regulatory body, the Telekom Control Commission, to issue licenses and monitor compliance with telecom regulations. Under the TKG 97, an individual license is required only for the provision of public voice telephony services, leased lines offered to the public by means of a fixed telecommunications network, public mobile telephony services and other mobile communications provided using a mobile communications network. All other services, public or non-public, may be provided upon notification to the Telekom Control Commission. Currently, Internet telephony is not covered by the legal provisions for "public voice telephony service." Any operator or service provider can offer Internet services. Startec Global Communications U.K. Ltd. ("Startec UK"), a wholly owned subsidiary of Startec Global Communications Corporation, was incorporated on April 27, 1998. Startec UK holds various telecommunications licenses and/or authorizations that allow it to offer services both in the United Kingdom and other European countries. In Austria, Startec UK holds a license for the provision of voice telephone by self-operated telecommunications network in Austria. This license allows for interconnection to Telekom Austria AG, the former monopoly PTT, and for the provision of retail and wholesale services in Austria. CANADA. The Canadian market has been significantly liberalized over the past year. As of October 1, 1998, international voice service, previously provided exclusively by Teleglobe, was opened to full competition. The domestic long distance market also has become more competitive as a result of the break up of the Stentor Alliance, comprised of nine provincial incumbent local exchange carriers, and the announcement by other companies of their intent to offer nationwide long distance service. Additionally, the Canadian government has relaxed long distance routing restrictions so that carriers may now route domestic and international traffic according to the most economical route, even by transiting or hubbing through the United States. These market and regulatory changes will provide increased opportunity for competitive entry in both domestic and international long distance services markets. Section 16 of the Telecommunications Act restricts Canadian facilities based carriers to a maximum total of 46.7% of direct and indirect foreign ownership of voting shares. Startec Global Communications Company (Canada) ("Startec Canada"), was incorporated on July 29, 1998. Startec Canada has obtained a Class A License, enabling it to provide commercial and wholesale telecommunication services in Canada. Startec has also obtained extra-provincial 25 registrations in Nova Scotia, Ontario, Manitoba, Alberta and British Columbia. Startec currently offers retail prepaid services in British Columbia, Quebec and Ontario and wholesale carrier services nationwide. FRANCE. In July 1996, legislation was enacted providing for the immediate liberalization of all telecommunications activities in France, but maintaining a partial exception for the provision of voice telephony. Voice telephony was subsequently fully liberalized on January 1, 1998. The establishment and operation of public telecommunications networks and the provision of voice telephony are subject to individual licenses, which are granted by the minister in charge of telecommunications upon recommendation of France's independent regulatory authority, the Autorite de Regulation des Telecommunications ("ART"). Startec Global Communications Corporation recently purchased a 64.6% ownership interest in Phone Systems & Network, S.A. ("PSN"), a French company listed on the Nouveau Marche. (On March 18, 1999, the Company launched a public tender offer in order to acquire additional shares of the company.) PSN holds a Voice Telephony License (Section L34.1 of the French Post and Telecommunications Code) which allows it to provide deregulated communications services nationwide. The license also entitles PSN to obtain interconnect with the former monopoly carrier France Telecom, S.A. Currently, PSN provides prepaid and post-paid telecommunications services in France, the United Kingdom, Switzerland, Belgium and Germany. France is a key component of Startec's European expansion. The acquisition of PSN enables Startec to greatly accelerate its plans in the European market. GERMANY. The German Telecommunications Act of July 25, 1996 liberalized all telecommunications activities, but postponed effective liberalization of voice telephony until January 1, 1998. The German Telecommunications Act has been complemented by several Ordinances. The most significant Ordinances concern license fees, rate regulation, interconnection, universal service, frequencies and customer protection. Under the German regulatory scheme, licenses can be granted within four license classes. A license is required for operation of transmission lines that extend beyond the limits of a property and that are used to provide telecommunications services for the general public. The licenses required for the operation of transmission lines are divided into three infrastructure license classes: mobile telecommunications (license class 1), satellite (license class 2), and telecommunications services for the general public (license class 3). In addition to the infrastructure licenses, a license is required for operation of voice telephony services over self-operated telecommunications networks (license class 4). A class 4 license does not include the right to operate transmission lines. Startec Global Communications (Germany) GmbH ("Startec Germany"), is a wholly owned subsidiary of Startec. In December 1998, Startec Germany purchased Global Communications GmbH, a German carrier with Siemens EWSD switch located in Dusseldorf. Global Communications GmbH holds a Class 4 (Nationwide) license, and an interconnection agreement with Deutsche Telekom which allows the Company to provide a full range of telecommunication services and to obtain interconnection with Deutsche Telekom. An interconnection agreement with Deutsche Telekom has been signed with final physical 26 interconnect pending. Currently also, Startec Germany has installed a POP site in Frankfurt which is being upgraded to a Siemens EWSD switch. Startec offers wholesale and retail prepaid services in Germany. IRELAND. Ireland has recently accelerated the liberalization of its telecommunications market, implementing full competition a year ahead of schedule. On December 1, 1998 Ireland granted 29 new telecommunications licenses of which 21 were general licenses for public voice telephony. The Office of the Director of Telecommunications Regulation (ODTR), created by the Telecommunications (Miscellaneous Provisions) Act of 1996 is currently working on a broad range of regulatory initiatives to bring Ireland up to par with other European countries with more advanced liberalization regimes. In Ireland, Startec U.K. holds a General Telecommunications License, which allows Startec to offer retail and wholesale telecommunication services in Ireland and to interconnect to Telecom Eireann. THE NETHERLANDS. The Dutch Telecommunications Act of 1998 ("Dutch Telecom Act"), which became effective December 15, 1998, provides the current regulatory framework for the provision of telecommunications services in the Netherlands. The new regime closely parallels the EU Licensing Directive requiring individual licenses only for the use of spectrum. All other services including the installation and provision of public telecommunications networks, leased lines and broadcasting networks may be provided pursuant to registration. The newly enacted Dutch Telecom Act also facilitates the construction of telecommunications networks by giving registered carriers access to rights-of-way, subject to certain conditions. In the Netherlands, Startec holds a Special Network Access Registration, which allows for retail and wholesale services and interconnection with Royal KPN Netherlands, N.V. Startec has installed a POP in the Netherlands, and currently offers carrier wholesale and prepaid retail services to customers in the Netherlands. NEW ZEALAND. The New Zealand market is fully liberalized. In New Zealand, Startec UK holds a registration as an operator under the Telecommunications (International Services) Regulations 1994. Startec has not yet commenced services in New Zealand. SWITZERLAND. Switzerland is not a member of the EU. Nonetheless, a new Telecommunications Act was adopted by the Swiss Parliament in April 1997 and took effect on January 1, 1998, together with Ordinances containing more detailed regulations covering telecommunications services, frequency management, numbering, terminal equipment and license fees. The new Telecommunications Act liberalized the Swiss telecommunications market as of January 1, 1998. The newly enacted Swiss telecommunications regulatory framework facilitates market entry by: (1) applying a notification procedure for resellers; (2) applying a procedure for operators wishing to be granted a concession for the establishment and operation of transmission facilities; and (3) providing rights-of-way, subject to a procedure of authorization, over the public domain to facilities-based carriers. Pro-competitive regulation is also applicable in the area of numbering. 27 Startec Global Communications (Switzerland) GmbH ("Startec Switzerland"), a wholly owned subsidiary of Startec, was incorporated on August 5, 1998. Startec Switzerland holds a Registration for the Supply of Telecommunications Services in Switzerland, which allows for interconnection with Swisscom S.A. as well as for the provision of wholesale and retail services. Startec Switzerland has installed a POP site in Geneva through which retail prepaid and wholesale carrier services are provided in Switzerland. THE UNITED KINGDOM. The Telecommunications Act 1984 (the "U.K. Act") provides a licensing and regulatory framework for telecommunications activities in the United Kingdom, which are fully competitive. The Secretary of State for Trade and Industry at the Department of Trade and Industry (the "Secretary of Trade") is responsible for granting licenses under the U.K. Act and for overseeing telecommunications policy, while the Director General of Telecommunications (the "Director General") and his office are responsible, among other things, for enforcing the terms of such licenses. The Director General will recommend the grant of a license to operate a telecommunications network to any applicant that the Director General believes has a reasonable business plan, the necessary financial resources and where there are no other overriding considerations against the grant of a license. In December 1996, the British Government introduced the International Facilities License ("IFL") which authorizes holders to provide international telecommunications services over their own international infrastructure and/or by making use of IRUs in undersea cables. Startec U.K. holds an IFL which enables Startec to own telecommunications facilities entering the U.K. and gives Startec UK the rights and obligations to interconnect with British Telecom Communications at wholesale interconnect rates. Startec Global Communications Corporation also holds an International Simple Voice Resale ("ISVR") license in the U.K. Startec UK has a POP in London and is in the process of upgrading to a Siemens EWSD switch. Currently, Startec UK offers wholesale carrier and retail prepaid services in the U.K. 28 EMPLOYEES As of December 31, 1998, the Company had 338 full-time employees and 71 part-time employees. The Company's employees are not currently represented by a collective bargaining agreement. The Company believes that it has good relations with its employees. ITEM 2. PROPERTIES The following table sets forth certain information as of December 31, 1998, relating to facilities used by the Company. All of the properties are leased.
SQUARE DATE PLACED FOOTAGE IN SERVICE -------------- -------------- LEASED OFFICE SPACE CALL CENTERS ------------------- ------------ Bethesda, MD (1) 49,500 Bethesda, MD 1991 Bethesda, MD 43,700 Guam, United States 1996 Los Angeles, CA (2) 7,300 Los Angeles, CA 4,300 Guam, United States 8,000 London, UK 520 Frankfurt, Germany 9,000 Miami, Fl (2) 10,000 New York, NY (2) 2,100 Saipan 1,000
------------------------------------ (1) Headquarters of Startec Global Communications Corporation. (2) Facilities that house the switches ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in litigation incidental to the conduct of its business. The Company is not currently a party to any lawsuit or proceeding which, in the opinion of management, is likely to have a material adverse effect on the Company's business, financial condition or result of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Shares of the Company's Common Stock, par value $0.01 per share, were initially offered to the public on October 9, 1997 at a price of $12.00 per share. The common stock is listed on the NASDAQ National Market under the ticker symbol "STGC". The Company has not declared any cash dividends on the common stock. The Company intends to retain future earnings, if any, for use in its business and does not anticipate paying regular cash dividends on the common stock. 29 The following table sets forth, on a per share basis, the range of the high and low sale prices for the common stock as reported by the NASDAQ National Market, for the periods indicated during the two fiscal years ended December 31, 1998. Such prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and do not necessarily represent actual transactions. HIGH LOW ------------ ------------- 1997 4th Quarter (from 10/8/97).......... 22 3/8 14 1/2 1998 1st Quarter......................... 26 3/4 18 2nd Quarter......................... 29 1/8 8 11/16 3rd Quarter......................... 14 1/2 5 1/2 4th Quarter......................... 12 1/2 3 3/8 1999 1st Quarter (through 3/19/99).......10 7/16 7 5/8 As of March 19, 1999, there were approximately 42 stockholders of record of the Company's common stock. 30 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected historical financial data of the Company which have been derived from the Company's audited financial statements for the five most recent years ended December 31, 1998. The following information should be read in conjunction with the Company's selected financial statements and notes thereto presented elsewhere herein. See "Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." included herein.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Net revenues ................................................ $ 161,169 $ 85,857 $ 32,215 $ 10,508 $ 5,108 Cost of services............................................. 141,176 75,783 29,881 9,129 4,701 --------- --------- --------- --------- --------- Gross margin............................................... 19,993 10,074 2,334 1,379 407 General and administrative................................... 20,520 6,288 3,996 2,170 1,159 Selling and marketing expenses............................... 7,876 1,238 514 184 91 Depreciation and amortization................................ 2,253 451 333 137 90 --------- --------- --------- --------- --------- Income (loss) from operations ............................. (10,656) 2,097 (2,509) (1,112) (933) Interest income (expense), net............................... (7,404) (449) (321) (94) (46) --------- --------- --------- --------- --------- Income (loss) before taxes and extraordinary items......... (18,060) 1,648 (2,830) (1,206) (979) --------- --------- --------- --------- --------- Net income (loss)(1) ...................................... $ (18,574) $ 1,619 $ (2,830) $ (1,206) $ (979) ========= ========= ========= ========= ========= Basic earnings (loss) per common share(2): Income (loss) before extraordinary items .................. $ (2.02) $ 0.26 $ (0.52) $ (0.23) $ (0.21) Net income (loss)(1)....................................... (2.08) 0.26 (0.52) (0.23) (0.21) Weighted average common shares outstanding-basic........... 8,945 6,136 5,403 5,317 4,596 Diluted earnings (loss) per common share(2): Income (loss) before extraordinary items .................. $ (2.02) $ 0.25 $ (0.52) $ (0.23) $ (0.21) Net income (loss)(1)....................................... (2.08) 0.25 (0.52) (0.23) (0.21) Weighted average common and equivalent shares outstanding-diluted................................... 8,945 6,423 5,403 5,317 4,596 OTHER FINANCIAL DATA: EBITDA(3) ................................................... $ (8,403) $ 2,548 $ (2,176) $ (975) $ (843) Capital expenditures ........................................ 34,931 3,881 520 200 44 BALANCE SHEET DATA: Cash and cash equivalents ................................... $ 81,456 $ 26,114 $ 148 $ 528 $ 257 Working capital (deficit).................................... 81,414 25,735 (6,999) (3,744) (3,295) Total assets................................................. 225,982 51,530 7,327 4,044 1,954 Long term obligations........................................ 165,490 461 646 361 6 Total stockholders' equity (deficit)......................... 15,480 31,590 (6,089) (3,259) (2,803)
- ---------- (1) In 1998, the Company recognized a $514,000 extraordinary loss on the early extinguishment of debt. (2) Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding plus other dilutive securities. (3) EBITDA consists of earnings (loss) before interest, income taxes, depreciation and amortization. EBITDA should not be considered as a substitute for income from operations (loss), net income (loss), cash flow or other statement of income or cash flow data computed in accordance with GAAP or as a measure of a company's results of operations or liquidity. Although EBITDA is not a measure of performance or liquidity calculated in accordance with GAAP, the Company nevertheless believes that investors consider it a useful measure in assessing a company's ability to incur and service indebtedness. 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of the financial condition and results of operations should be read in conjunction with the financial statements, related notes, and other detailed information included elsewhere in this Form 10-K. Certain information contained below and elsewhere in this Form 10-K, including information regarding the Company's plans and strategy for its business, are forward-looking statements. See "Note Regarding Forward-Looking Statements." OVERVIEW Startec Global Communications, Inc. ("Startec" or the "Company") is a rapidly growing, facilities based international long distance telecommunications service provider. The Company markets its services to select ethnic residential communities in the United States and Europe and to leading international long distance carriers. The Company's annual revenues have increased more than fourteen-fold over the last four years from approximately $10.5 million for the year ended December 31, 1995 to approximately $161.2 million for the year ended December 31, 1998. The Company reported a 1998 net loss of $18.6 million, or $2.08 per diluted common share compared to net income of $1.6 million, or $0.25 per diluted common share in 1997. The number of the Company's residential customers increased from 10,675 customers as of December 31, 1995 to 122,057 customers as of December 31, 1998. Startec was founded in 1989 to capitalize on opportunities to provide international long distance services to select ethnic communities in major U.S. metropolitan markets that generate substantial long distance traffic to their countries of origin. Until 1995, the Company concentrated its marketing efforts in the New York-Washington, D.C. corridor and focused on the delivery of international calling services to India. At the end of 1995, the Company expanded its marketing efforts to include the West Coast of the United States, and began targeting other ethnic groups in the United States, such as the Middle Eastern, Filipino and Russian communities. The Company once again expanded its marketing efforts geographically at the end of 1998 by marketing to ethnic segments in the United Kingdom and diversifying its customer base across a broader spectrum of ethnic groups, including the Caribbean, Latin American and Asian communities. In order to achieve economies of scale in its network operations and balance its residential international traffic, the Company, in late 1995, began marketing its excess network capacity to international carriers seeking competitive rates and high quality capacity. Since initiating its international wholesale services, the Company has expanded its number of carrier customers to 53 at December 31, 1998. A key component of the Company's strategy is to build its own global network, which will allow it to originate, transmit and terminate a substantial portion of its calls utilizing network capacity the Company manages. The facilities currently owned by the Company only provide a cost advantage with respect to traffic origination costs. The Company anticipates that this network expansion will allow it to achieve a per-minute cost advantage. As the Company transitions from leasing to owning or managing its facilities, the Company's management believes economies in the per-minute cost of a call will be realized, while fixed costs will increase. The Company realizes a per-minute cost savings when it is able to originate calls on-net. For the year ended December 31, 1998 and 1997, approximately 65% and 60%, respectively, of the Company's residential revenues were originated on-net. As a higher percentage of calls are originated, transmitted and terminated on the Company's own facilities, per-minute costs are expected to decline, predicated on call traffic volumes. Revenues for telecommunication services are recognized as those services are rendered, net of an allowance for revenue that the Company estimates will ultimately not be realized. Revenues for return traffic received according to the terms of the Company's operating agreements with foreign PTTs, as described below, are recognized as revenue as the return traffic is received and processed. There can be no assurance that traffic will be returned to the United States or what impact changes in future settlement rates, allocations among carriers or levels of traffic will have on net payments received and revenues recorded by the Company. 32 Substantially all of the Company's revenues for the past three fiscal years have been derived from calls originated within the United States and terminated outside the United States. The percentages of net revenues attributable to traffic terminating on a region-by-region basis are set forth in the table below. For the year ended December 31, 1998 1997 1996 ------------- ------------ ------------- Asia/The Pacific Rim 44.8 % 49.0 % 43.0 % Middle East/North Africa 18.8 24.7 25.7 Sub-Saharan Africa 8.1 7.4 3.5 Eastern Europe 9.6 9.3 8.2 Western Europe 1.7 2.2 5.5 North America 3.5 4.0 11.5 Other 13.5 3.4 2.6 ------------- ------------ ------------- Total 100.0 % 100.0 % 100.0 % ============= ============ ============= The Company's cost of services consists of origination, transmission and termination expenses. Origination costs include the amounts paid to LECs, and, in areas where the Company does not have its own network facilities, to other telecommunication network providers for originating calls ultimately carried to the Company's switches. Transmission expenses are fixed month-to-month payments associated with capacity on domestic and international leased lines, satellites and undersea fiber optic cables. Leasing this capacity subjects the Company to price changes that are beyond the Company's control and to transmission costs that are higher than transmission costs on the Company's own network. As the Company builds its own transmission capacity, the risks associated with price fluctuations and the relative costs of transmission are expected to decrease; however, fixed costs will increase. When billing disputes between the Company and other telecommunication network providers arise, the Company accrues the full amount in dispute within cost of services and does not recognize a credit to cost of services until the dispute is resolved. The Company's experience to date has been that the resolution of such disputes occurs primarily in the fourth quarter of each year, and, therefore, the related adjustments to cost of services may have a disproportionate impact on its fourth quarter results of operations. Accordingly, adjustments to the Company's cost of services arising from the resolution of billing disputes with other telecommunication network providers may have a positive impact on gross margins in any particular year. Termination expenses consist of variable per minute charges paid to foreign PTTs and alternative carriers to terminate the Company's international long-distance traffic. Among its various foreign termination arrangements, the Company has entered into operating agreements with a number of foreign PTTs, under which international long distance traffic is both delivered and received. Under these agreements, the foreign carriers are contractually obligated to adhere to the policy of the FCC, whereby traffic from the foreign country to the United States is routed through U.S.-based international carriers such as the Company in the same proportion as traffic carried into the foreign country from the United States ("return traffic"). Mutually exchanged traffic between the Company and foreign carriers is reconciled through a formal settlement arrangement at agreed upon rates. The Company records the amount due to the foreign PTT as an expense in the period the traffic is terminated. When the Company receives return traffic in a future period, the Company generally realizes a higher gross margin on the return traffic as compared to the lower gross margin on the outbound traffic. Revenue recognized from return traffic was approximately $2.6 million, $1.4 million, and $1.1 million, or 2%, 2%, and 3% of net revenues in 1998, 1997, 1996, respectively. There can be no assurance that traffic will be delivered back to the United States or that changes in future settlement rates, allocations among carriers or levels of traffic will not adversely affect net payments received and revenues recorded by the Company. In addition to operating agreements, the Company utilizes alternative termination arrangements offered by third party vendors. The Company seeks to maintain vendor diversity for countries where traffic volume is high. These vendor arrangements provide service on a variable cost basis subject to volume. These prices are subject to changes, generally upon seven days' notice. As the international telecommunications marketplace has been deregulated, per-minute prices have fallen and, as a consequence, related per-minute costs for these services have also fallen. As a result, the Company has not been adversely affected by price reductions, although there can be no assurance that this will continue. The Company expects selling, general and administrative costs to increase as it develops its infrastructure to manage higher business volume. The Company expects to incur negative EBITDA and significant operating losses and net losses on an annual basis for the next several years as it incurs additional costs associated with the development and expansion of its network, the expansion of its marketing programs, its entry into new markets and the introduction of new telecommunications services, and, in the case of net losses, as a result of the interest expense associated with its financing activities. 33 RESULTS OF OPERATIONS The following table sets forth certain financial data as a percentage of net revenues for the periods indicated.
Years Ended December 31, ----------------------------------------- 1998 1997 1996 ------------ ------------ ----------- Net revenues...................................... 100.0 % 100.0 % 100.0 % Cost of services.................................. 87.6 88.3 92.8 ------------ ------------ ----------- Gross margin.................................. 12.4 11.7 7.2 General and administrative expenses............... 12.7 7.3 12.4 Depreciation and amortization..................... 1.4 0.5 1.0 ------------ ------------ ----------- Income (loss) from operations................... (6.6) 2.5 (7.8) Interest expense................................... (8.0) (0.9) (1.1) Interest income.................................... 3.4 0.3 0.1 ------------ ------------ ----------- Income (loss) before taxes and extraordinary item (11.2)% 1.9% (8.8)% ============= ============ =============
1998 compared to 1997 Net Revenues. Net revenues for the year ended December 31, 1998 increased approximately $75.3 million, or 88%, to approximately $161.2 million from $85.9 million for the year ended December 31, 1997. Residential revenue increased in comparative periods by approximately $25.1 million or 88%, to approximately $53.7 million for 1998 from approximately $28.6 million in 1997. The increase in residential revenue is due to an increase in residential customers to over 122,057 for December 1998 from approximately 71,500 for December 1997. Carrier revenue for 1998 increased approximately $50.2 million, or 88%, to approximately $107.5 million from approximately $57.3 million for 1997. The increase in carrier revenues is due to the execution of the Company's strategy to optimize its capacity on its facilities, which has resulted in sales to additional carrier customers and increased sales to existing carrier customers. Gross Margin. Gross margin increased approximately $9.9 million to approximately $20 million for the year ended December 31, 1998 from approximately $10.1 million for the year ended December 31, 1997. Gross margin improved as a percentage of net revenues for the year ended December 31, 1998 to 12.4% from 11.7% for the year ended December 31, 1997. Gross margin for 1998 was favorably impacted by rate adjustments which reduce termination costs. These rate adjustments occur routinely in the normal course of business. General and Administrative. General and administrative expenses for the year ended December 31, 1998 increased approximately $14.2 million or 225% to approximately $20.5 million from $6.3 million for the year ended December 31, 1997. The increase was primarily due to an increase in personnel to 409 at December 31, 1998 from 124 at December 31, 1997, and to a lesser extent, an increase in billing processing fees as a result of the increased residential customer base. As a percentage of net revenues, general and administrative expenses increased to 12.7% in 1998 from 7.3% in 1997 due to the Company's continued worldwide development and expansion. Selling and Marketing. Selling and marketing expenses for the year ended December 31, 1998 increased approximately $6.7 million or 558% to approximately $7.9 million from approximately $1.2 million for the year ended December 31, 1997. As a percentage of net revenues, selling and marketing expenses increased to 4.9% from 1.4% in the respective periods. The increase is primarily due to the Company's efforts to market to new customer groups. Depreciation and Amortization. Depreciation and amortization expenses for the year ended December 31, 1998 increased to approximately $2.3 million from approximately $451,000 for the year ended December 31, 1997, primarily due to increases in capital expenditures pursuant to the Company's strategy of expanding its network infrastructure. Interest expense. Interest expense for the year ended December 31, 1998 increased to approximately $12.8 million from approximately $762,000 for the year ended December 31, 1997, as a result of the Senior Notes and Warrants Offering consummated in 1998, the proceeds of which are being used to fund expansion and working capital needs. Interest income. Interest income for 1998 increased to $5.4 million from $313,000 in 1997. The increase is primarily due to the net proceeds from the Senior Notes and Warrants Offering consummated in 1998. Income (loss) before extraordinary item. Loss before extraordinary item for 1998 was $18.1 million compared to income before extraordinary item of $1.6 million in 1997 as a result of the items discussed above. Extraordinary loss. In December 1998, the Company repaid and extinguished an existing bank credit facility. In connection with the extinguishment, the Company recognized an extraordinary loss of $514,000, which represents the write-off of unamortized 34 deferred financing fees. Net Income (loss). Net loss was approximately $18.6 million in 1998 as compared to net income of approximately $1.6 million in 1997. 1997 Compared To 1996 Net revenues. Net revenues for the year ended December 31, 1997 increased approximately $53.7 million or 166.8%, to approximately $85.9 million from $32.2 million for the year ended December 31, 1996. Residential revenue increased in comparative periods by approximately $16.6 million or 138.3%, to approximately $28.6 million for the year ended December 31, 1997 from approximately $12.0 million in 1996. The increase in residential revenue was due to an increase in residential customers to over 71,500 at December 31, 1997 from approximately 27,800 at December 31, 1996. Carrier revenue for the year ended December 31, 1997 increased approximately $37.1 million or 183.7%, to approximately $57.3 million from approximately $20.2 million for the year ended December 31, 1996. The increase in carrier revenues was due to the execution of the Company's strategy to optimize capacity on its facilities, which resulted in sales to additional carrier customers and increased sales to existing carrier customers. Gross Margin. Gross margin increased approximately $7.8 million to approximately $10.1 million for the year ended December 31, 1997 from approximately $2.3 million for the year ended December 31, 1996. Gross margin improved as a percentage of net revenues for the year ended December 31, 1997 to 11.7% from 7.2% for the year ended December 31, 1996. The gross margin on residential revenue increased to approximately 14.9% for the year ended December 31, 1997 from approximately 10.1% for the year ended December 31, 1996, due to an increase in the percentage of residential traffic originated on-net and improved termination costs. In the year ended December 31, 1997, 59.8% of residential traffic originated on-net as compared to 44.9% for the year ended December 31, 1996. The reported gross margin for the years ended December 31, 1997 and December 31, 1996 included the effect of accrued disputed charges of approximately $67,000 and $1.4 million, respectively, which represented less than 1% and 5% of reported net revenues, respectively. General and administrative. General and administrative expenses for the year ended December 31, 1997 increased approximately $2.3 million or 57.5% to approximately $6.3 million from $4.0 million for the year ended December 31, 1996. As a percentage of net revenues, general and administrative expenses declined to 7.3% from 12.4% for the respective periods. The increase in dollar amounts was primarily due to an increase in personnel to 124 at December 31, 1997 from 54 at December 31, 1996, and to a lesser extent, an increase in billing processing fees as a result of the increased residential customer base. Selling and marketing. Selling and marketing expenses for the year ended December 31, 1997 increased approximately $686,000 or 133.5% to approximately $1.2 million from approximately $514,000 for the year ended December 31, 1996. As a percentage of net revenues, selling and marketing expenses declined to 1.4% from 1.6% in the respective periods. The increase in dollar amounts was primarily due to the Company's efforts to market to new customer groups. Depreciation and amortization. Depreciation and amortization expenses for the year ended December 31, 1997 increased to approximately $451,000 from approximately $333,000 for the year ended December 31, 1996, primarily due to increases in capital expenditures pursuant to the Company's strategy of expanding its network infrastructure. Interest expense. Interest expense for the year ended December 31, 1997 increased to approximately $762,000 from $337,000 for the year ended December 31, 1996, as a result of additional debt incurred by the Company to fund expansion and working capital needs. Net income. Net income was approximately $1.6 million in 1997 as compared to a net loss of approximately $2.8 million in 1996. LIQUIDITY AND CAPITAL RESOURCES For fiscal year 1998, the Company reported an increase in cash and cash equivalents of $55.3 million not including restricted cash and pledged securities of $44.2 million. This increase is primarily due to net proceeds from the issuance of senior notes ("Senior Notes") of $155 million. The Company plans to fund its future capital and operating requirements through a combination of operating cash flow, and debt and equity financing. The Company plans to utilize these sources of capital to further expand and develop the Company's existing network and fund capital acquisitions. 35 As a result of completing the Senior Notes and Warrants Offering and the Company's pursuant expansion, the Company expects that it will incur negative EBITDA and significant operating losses and net losses on an annual basis for the next several years, as it incurs additional costs associated with the development and expansion of its marketing programs and its entry into new markets, the introduction of new telecommunications services, and as a result of the interest expense associated with its financing activities. The Company's principal cash requirements will be for capital expenditures related to the Company's network development plan, and for interest payments on the Senior Notes. Approximately $52 million of the net proceeds of the Senior Notes was used to purchase the pledged securities, which will assure holders of the Senior Notes that they will receive all scheduled cash interest payments through November 2001. The Company may be required to obtain additional financing in order to pay interest in the Senior Notes after November 2001 and to repay the Senior Notes at their maturity. Capital acquisitions and expenditures During 1998, the Company installed a new Nortel GSP international gateway switch and an Internet Protocol in Los Angeles for approximately $4.6 million. The Company is also installing a Nortel GSP international gateway switch in Miami, as well as at a second site in New York City. The Company has also installed POPs in the U.S. and Europe. The POPs aggregate traffic originating from the region around the city in which it is located and route the traffic to the Company's international gateway switches. Each POP contains telecommunications equipment that is scaleable to accommodate the traffic volume demands of each region. The Company currently has 15 switch and POP sites in the U.S., Europe and Asia. Moreover, the Company plans to invest in or acquire two satellite earth stations during 1999. The Company's international expansion strategy is predicated on the installation of multiple switches and POPs throughout the world. The Company plans to acquire multiple international gateway switches and POPs through 2000 to be installed in (i) Europe: the U.K., France, Germany, Spain, Belgium, Italy, Austria, Denmark, Ireland, Switzerland, Greece and Portugal; (ii) North America: the U.S., Canada, and Mexico; (iii) Asia and the Pacific Rim: Guam, Hong Kong, Singapore and India; and (iv) Latin and South America: Argentina and Brazil. These switches will be deployed in 1999 and 2000. As the Company executes its expansion strategy, encounters new marketing opportunities and employs new technology, management may elect to relocate or redeploy certain switches, POPs and other network equipment to alternate locations from what is described above. The Company generally installs switches and POPs in regions where it believes it can achieve one or more of the following goals: (i) originate calls from its own customer base, (ii) transit calls originated elsewhere on its network to the call's final destination on a more cost-efficient basis, or (iii) terminate calls originated and carried on its own network. The Company intends to use the switches and POPs to be installed in Canada and Europe primarily to carry calls originated in those countries by the Company's customers. The switches and POPs that the Company plans to install in Asia and the Pacific Rim and in Latin and South America will be used both as "hubbing" or transit sites and to terminate calls originated in other countries. Also during 1998, Startec negotiated the acquisition of capacity on 11 fiber optic cable systems across the Atlantic and Pacific oceans. Startec now has capacity on 13 cable systems, including signatory ownership in the Sea-Me-We-3 undersea fiber optic cable. Startec also signed an agreement to purchase capacity in the Trans Atlantic undersea cable, TAT-14. Additionally, the Company purchased DS-3 capacity on the Gemini transatlantic cable between New York and the United Kingdom. Through these cables, Startec will have access to key cities in Europe and Asia. Securing ownership interests at the signatory level in undersea fiber optic cable allows the Company to manage transmission capacity as well as transmission costs. In addition to the cable capacity acquisitions, Startec has secured 40 operating agreements in 36 different countries as of December 31, 1998. Twenty-three of these operating agreements have been implemented as of December 31, 1998. In November 1998, the Company acquired PCI Communications, Inc. ("PCI") for $2.65 million. PCI is a provider of voice and data services located in the Pacific Rim island of Guam. PCI has signatory status on the TPC-5, Guam-Philippines and China-U.S. cables. The acquisition accelerates the Company's network deployment in the Asia-Pacific region and will also allow Startec to access a U.S. based satellite line of sight that extends from Southeast Asia to Central Europe. In December 1998, the Company acquired Global Communications GmbH of Germany ("Global") for $5.4 million. Global has a Class IV nationwide telecommunications license for Germany, an interconnection agreement with Deutsche Telekom and a Siemens EWSD switch located in Dusseldorf. In February 1999, the Company acquired a 64.6% ownership in Phone Systems and Network Inc. of France ("PSN") for approximately $3.8 million in cash and 425,000 shares of Startec common stock for a total consideration of $7.6 million. PSN is a facilities based provider in France, with switches in Paris and Switzerland. PSN also provides services on a switchless reseller basis in Belgium. Common shares of PSN are traded on the Nouveau Marche exchange in France. 36 In February 1999, the Company acquired a 20% ownership in a Nevada holding company which has operations in Europe. The Company was acquired for approximately $1.2 million. Concurrent with the acquisition, Startec received a $2.5 million note payable from the company convertible at the Company's option into common shares equivalent to an additional 28% fully diluted ownership. The Company's business strategy contemplates aggregate capital expenditures (including capital expenditures, working capital and other general corporate purposes) of approximately $87.5 million through December 31, 1999. Of such amount, the Company intends to use approximately $79.5 million to fund capital expenditures to expand and develop the Company's network. The Company regularly reviews opportunities to further its business strategy through strategic alliances with, investment in, or acquisitions of businesses that it believes are complementary to the Company's current and planned operations. The Company's ability to consummate strategic alliances and acquisitions, and to make investments that may be of strategic significance to the Company, may require the Company to obtain additional debt and/or equity financing. There can be no assurance that the Company will be successful in arranging such financing on terms it considers acceptable or at all. Although the Company intends to implement the capital spending plan described above, it is possible that unanticipated business opportunities may arise which the Company's management may conclude are more favorable to the long-term prospects of the Company than those contemplated by the current capital spending plan. Capital transactions In December 1998, Startec entered into a credit facility for up to $35 million with NTFC Capital Corporation ("NTFC Facility"), a financing arm of GE Capital. The line of credit is flexible and may be used to finance switches, associated telecommunications equipment, undersea fiber optic cables, and the expansion of facilities in the Company's targeted marketing areas. Each borrowing under the NTFC Facility bears interest at a fixed rate equal to the average yield to maturity of the five-year Treasury Note plus the Rate Adjustment (as defined in the agreement). Individual borrowings under the NTFC Facility are amortized over 60 months from the date of advance with a final maturity of all outstanding amounts of January 2004. As of December 31, 1998, approximately $8.9 million bearing interest at 8.91% was outstanding. Principal and interest payments of approximately $184,000 are due monthly in arrears. In May 1998, the Company issued $160 million of 12% Senior Notes yielding net proceeds of approximately $155 million, of which approximately $52.4 million was used to purchase securities which are pledged and restricted for use as the first six interest payments due on the Senior Notes. As part of the offering, the Company issued warrants to purchase 200,226 shares of common stock. The warrants are exercisable subsequent to November 1998 at an exercise price of $24.20 per share. The Company intends to apply approximately $102 million to fund capital expenditures through the end of the first quarter of 2000 to expand and develop the Company's network, including the purchase and installation of switches and related network equipment (including software and hardware upgrades for current equipment), the acquisition of fiber optic cable facilities, and investments in and the acquisition of satellite earth stations. The Senior Notes are unsecured and require semi-annual interest payments which began November 1998. After taking into account the net proceeds to the Company from the Senior Notes and the purchase of the pledged securities together with the Company's cash on hand and anticipated cash from operations, the Company expects that it will need approximately $40 million of additional financing to complete its capital spending plan through the end of 2000. Although the Company believes that it should be able to obtain this required financing from traditional sources, such as bank lenders, asset-based financiers or equipment vendors, there can be no assurance the Company will be successful in arranging such financing on terms it considers acceptable or at all. In the event that the Company is unable to obtain additional financing, it will be required to limit or curtail its expansion plans. The implementation of the Company's strategic plan, including the development and expansion of its network facilities, expansion of its marketing programs, and funding of operating losses and working capital needs, will require significant investment. The Company expects that the net proceeds of the Senior Notes and Warrants Offering together with cash on hand and cash flow from operations, will provide the Company with sufficient capital to fund currently planned capital expenditures and anticipated operating losses through the end of the first quarter 2000. There can be no assurance that the Company will not need additional financing sooner than currently anticipated. The need for additional financing depends on a variety of factors, including the rate and extent of the Company's expansion and new markets, the cost of an investment in additional switching and transmission facilities and ownership rights in fiber optic cable, the incurrence of costs to support the introduction of additional or enhanced services, and increased sales and marketing expenses. In addition, the Company may need additional financing to fund unanticipated working capital needs or to take advantage of unanticipated business opportunities, including acquisitions, investments or strategic alliances. The amount of the Company's actual future capital requirements also will depend upon many factors that are not within the Company's control, including competitive conditions and regulatory or other government actions. In the event that the Company's plans or assumptions 37 change or prove to be inaccurate or the Company's capital resources prove to be insufficient to fund the Company's growth and operations, then some or all of the Company's development and expansion plans could be delayed or abandoned, or the Company may be required to seek additional financing or to sell assets, to the extent permitted by the terms of the Senior Notes. The Company completed an Initial Public Offering of 3,277,500 shares of its common stock ("Common Stock") in October 1997 ("Initial Public Offering"), the net proceeds of which (after underwriting discounts, commissions and other professional fees) approximated $35.0 million. The Company used a portion of the net proceeds to acquire cable facilities and switching, compression and related telecommunications equipment. Proceeds were also used for marketing programs, to pay down debt, for working capital and general corporate purposes. The Company may seek to raise such additional capital from public or private equity or debt sources. There can be no assurance that the Company will be able to obtain additional financing or, if obtained, that it will be able to do so on a timely basis or on terms favorable to the Company. If the Company is able to raise additional funds through the incurrence of debt, it would likely become subject to additional restrictive financial covenants. In the event that the Company is unable to obtain such additional capital or is unable to obtain such additional capital on acceptable terms, the Company may be required to reduce the scope of its expansion, which could adversely affect the Company's business, financial condition and results of operations, its ability to compete and its ability to meet its obligations under the Senior Notes. Cash flows The Company's liquidity requirements arise from cash used in operating activities, purchases of network equipment and payments on outstanding indebtedness. As a result of the Senior Notes and Warrants Offering, the Company's cash and cash equivalents increased to approximately $81.4 million at December 31, 1998 from approximately $26.1 million at December 31, 1997. Net cash used by operating activities was approximately $25.5 million for 1998, and $1.7 million for 1997. The decrease in cash from operations was primarily the result of the net loss and an increase in accounts receivable, which was partially offset by an increase in accounts payable and accrued expenses. Net cash used in investing activities was approximately $37.6 million and $3.9 million for 1998 and 1997, respectively. Net cash used in investing activities for 1998 was primarily related to acquisitions and capital expenditures made in connection with its network expansion. Net cash provided by financing activities was approximately $118.4 million and $31.6 million for 1998 and 1997, respectively. Cash provided by financing activities for 1998 primarily resulted from the Senior Notes and Warrants Offering. Year 2000 compliance Many of the world's computer systems (including those in non-information technology equipment and systems) currently record years in a two-digit format. If not addressed, such computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to business disruptions in the U.S. and internationally (the "Y2K" issue). A number of the Company's technology systems are affected by the Y2K issue. To ensure that the Company will be Y2K compliant before the new millenium, the Company formed a Y2K compliance team in the fourth quarter of 1997 and allocated corporate resources to determine the extent which the Y2K issue affected the Company and to formulate a Y2K compliance plan. Since then, the Company has been reviewing its embedded technology and infrastructure equipment, as well as non-embedded technology equipment to identify those that contain two-digit year codes, and is in the process of upgrading its infrastructure and corporate facilities to achieve Y2K compliance. In addition, the Company is actively working with its suppliers, vendors and customers to assess their compliance and remediation efforts and the Company's exposure to Y2K problems that may be caused by the failure of such suppliers, vendors and customers to become Y2K compliant in a timely manner. The Company is proceeding on a schedule which it believes will allow it to be Y2K compliant by the end of the third quarter of 1999. The Company is focusing on three major areas of concern for the Y2K issue: embedded technology and infrastructure equipment, non-embedded technology equipment and third party suppliers compliance. The Y2K compliance team created a five stage process for becoming Y2K compliant. The five process stages are (1) compiling a complete inventory of all date sensitive technology equipment; (2) prioritizing systems affected based on revenues, strategic issues, and risk exposure; (3) performing modification of affected systems; (4) completing testing of modified systems; and (5) performing implementation of modified systems. The Company has completed the inventory of its date sensitive technology equipment and is in various stages of prioritizing and testing a number of the affected systems. Embedded technology and infrastructure equipment. The embedded technology and infrastructure equipment area of concern 38 consists primarily of switches, POPs, fiber optic cables and various platforms. Much of this equipment is purchased from third party vendors and has been certified by the vendor to be Y2K compliant. The certified pieces of equipment, such as many of the switches need only to be individually tested by the Vendor and/or the Company to ensure compliance. Much of the infrastructure equipment contains both embedded and non-embedded technology requiring duplicative efforts. Portions of this equipment, such as the Magellan platform, have had their non-embedded technology certified as compliant while the embedded technology is non-compliant. All embedded technology systems and infrastructure equipment are scheduled to be Y2K compliant by the end of the third quarter of 1999. In addition, in order to protect against the acquisition of additional non-compliant products, the Company now requires suppliers to warrant that products sold or licensed to the Company are Y2K compliant. However, there can be no assurance of the accuracy or completeness of any such representations made to the Company. Non-embedded technology equipment. Non-embedded technology systems include predominately applications software and interfacing software. Much of this equipment has previously been upgraded to Y2K compliance through software upgrades and the purchase of new systems. Specific areas of concern for non-embedded technology include the software monitoring and managing the Company's call center and customer care database as well as network support. Expenditures regarding non-embedded technology are not expected to be material. Nonetheless, the Company is in the process of prioritizing those systems that are not Y2K compliant and upgrading or replacing non-compliant systems. All non-embedded technology systems are scheduled to be Y2K compliant by the end of August 1999. Newly consummated acquisitions. The Company is rapidly expanding through increased capital expenditures and acquisitions of companies. Upon acquisition, acquired companies become subject to the five step process of becoming Y2K compliant as discussed above. Time lines for dates of completion of the Company's Y2K compliance process are developed individually for each acquisition. Currently, all companies that have been acquired by the Company to date are on schedule to be Y2K compliant by December 1999, however, there can be no assurance that all acquired companies will be Y2K compliant by 2000. Third party suppliers. The Company is currently communicating with its critical suppliers, vendors and customers about their plans and progress in addressing the Y2K issue. Detailed evaluations of the most critical third parties have been initiated. The Company is also in the process of evaluating and prioritizing the environments in which the Company operates. Many of the Company's residential and commercial markets include areas of emerging economies where the Y2K compliance issue does not appear to be a priority. The Company plans to monitor progress made in these areas to mitigate any future exposure however, the Company has limited, if any, control over the progress made by these third parties, and therefore, is unable to predict the potential effect on the Company's operations if the third parties in these foreign markets fail to address the Y2K issue. These evaluations will be followed by the development of contingency plans, commencing in the second quarter of 1999, with completion expected by the end of the third quarter of 1999. Risk and contingency plan. There are many risks associated with the Y2K issue, including the possibility of a failure of the Company's routing and compression equipment, computer, and non-information technology systems. Such failures could have a material adverse effect upon the Company and may cause systems malfunctions, incorrect or incomplete transaction processing, the inability to reconcile accounting books and records, the inability of the Company to manage its business as well as potentially losing customers and increasing risk associated with litigation. In addition, even if the Company successfully becomes Y2K compliant, it can be materially and adversely affected by failures of third parties to become Y2K compliant. The failure of third parties with which the Company has financial or operational relationships such as LECs, carriers, cable suppliers, billing agents, satellite facilities, equipment suppliers, financial institutions, payroll contractors, regulatory agencies and utility companies, to become Y2K compliant in a timely manner could result in material adverse effects on the Company's results of operations. The Company is currently working diligently to become Y2K compliant by the third quarter of 1999. However, there can be no assurance that the Company will be successful in taking corrective action in a timely manner. The Company has started to develop contingency plans with regard to its key technology systems, although there can be no assurance that these contingency plans will successfully avoid a service disruption. The Company intends to document Y2K contingency plans as part of its Y2K risk mitigation efforts by the end of July 1999. Costs. Total costs incurred up to December 31, 1998 specifically associated with becoming Y2K compliant have been less than $300,000. The total estimated specific costs of becoming Y2K compliant is estimated to be less than $1.5 million. These costs will be included in the Y2K compliance costs once the specific Y2K components can be identified and allocated. Costs associated with the identification and testing of third party compliance will also be included once such costs can be identified. Readers are cautioned that certain of the statements made herein with respect to the Y2K issue are forward-looking statements. These statements, which include statements concerning the Company's expectations about future costs and timely completion of its Y2K modifications are subject to uncertainties that could cause actual results to differ materially from what has been discussed above. Factors that could influence the amount of future costs and the effective timing of remediation efforts include the success of the Company in identifying embedded technology and infrastructure equipment as well as non-embedded equipment that contain two-digit year codes, the nature and amount of programming and testing required to upgrade or replace each of the affected systems and equipment, the nature and amount of testing, verification, the rate and magnitude of related labor costs, and the success of the Company's suppliers, in addressing the Y2K issue. 39 Recent accounting pronouncements Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires the reporting of comprehensive income (loss) in addition to net income (loss) from operations. Comprehensive income is a more inclusive reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net loss. The adoption of SFAS No. 130 had no impact on the Company" net loss, as reported, and comprehensive loss. In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), was issued which redefines how operating segments are determined and requires disclosures of certain financial descriptive information about a company's operating segments. The January 1, 1998 adoption of SFAS No. 131 currently has had minimal impact on the required disclosures and descriptive information about the Company's operations. The Company operates in a single business segment managed on a regional basis. Currently, operating segments outside the North American region are immaterial. In March 1998, Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was issued which provides guidance on addressing whether and under what conditions the costs of internal use software should be capitalized. SOP 98-1 is effective for all transactions entered into in fiscal years beginning after December 15, 1998; however, earlier adoption is encouraged. The Company adopted the guidelines of SOP 98-1 on January 1, 1998, pursuant to which the Company capitalized approximately $910,000 for 1998. In April 1998, Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), was issued which requires that entities expense costs of start-up activities as incurred. The Company adopted SOP 98-5 on January 1, 1998 and expensed approximately $166,000 of start-up costs incurred for organizational activities associated with the Company's facilities in the United Kingdom in 1998. Effects of inflation 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk, including changes in interest rates, and to foreign currency exchange rate risks. The Company does not hold any financial instruments for trading purposes. The Company believes that its primary market risk exposure relate the effects that changes in interest rates have on its investments and those portions of its outstanding indebtedness that do not have fixed rates of interest. In this regard, changes in interest rates affect the interest earned on the Company's investments in cash equivalents, which consist primarily of demand deposits and money market accounts, and U.S. Government obligations which have been purchased by the Company and pledged to make certain interest payments on the Senior Notes. In addition, changes in interest rates impact the fair value of the Company's long-term debt obligations (including the Senior Notes). As of December 31, 1998, the fair value of the Senior Notes was approximately $144 million and the fair value of the securities pledged to make certain interest payments on the Senior Notes was approximately $45.18 million. Changes in interest rates also affect the Company's borrowings under its vendor financing facility with NTFC, which provides that each borrowing under the facility bears interest at a fixed rate equal to the average yield to maturity of the five-year Treasury Note plus an agreed-upon rate adjustment. The Company's foreign operations to date have not been material, and, therefore any foreign exchange rate fluctuations relating to the Company's results of foreign operations have also not been material. The Company has not entered into foreign currency exchange forward contracts or other derivative arrangements to manage risks associated with foreign exchange rate fluctuations. Foreign exchange rate fluctuations exposure may increase in the future as the size and scope of the Company's foreign operations increases. Additional information relating to the fair value of certain of the Company's financial assets and liabilities is included in Note 11 in the Notes to Consolidated Financial Statements. 40 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants........................................................................42 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996...........................................................................43 Consolidated Balance Sheets as of December 31, 1998 and 1997....................................................44 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and 1996.............................................45 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996..............................................................................................46 Notes to Consolidated Financial Statements......................................................................47
41 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Startec Global Communications Corporation: We have audited the accompanying consolidated balance sheets of Startec Global Communications Corporation (a Maryland corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Startec Global Communications Corporation and subsidiaries, as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Washington, D.C. February 23, 1999 42 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ------------- ------------ ------------ Net revenues................................................. $161,169 $ 85,857 $ 32,215 Cost of services............................................. 141,176 75,783 29,881 ------------- ------------ ------------ Gross margin........................................... 19,993 10,074 2,334 General and administrative expenses.......................... 20,520 6,288 3,996 Selling and marketing expenses............................... 7,876 1,238 514 Depreciation and amortization................................ 2,253 451 333 ------------- ------------ ------------ Income (loss) from operations.......................... (10,656) 2,097 (2,509) Interest expense............................................. (12,830) (762) (337) Interest income.............................................. 5,426 313 16 ------------- ------------ ------------ Income (loss) before income taxes...................... (18,060) 1,648 (2,830) Income tax provision......................................... - 29 - ------------- ------------ ------------ Income (loss) before extraordinary item................ (18,060) 1,619 (2,830) Extraordinary item-loss on early extinguishment of debt...... (514) - - ------------- ------------ ------------ Net income (loss)...................................... $ (18,574) $ 1,619 $ (2,830) ============= ============ ============ Basic earnings (loss) per common share: Income (loss) before extraordinary item...................... $ (2.02) $ 0.26 $ (0.52) Extraordinary item-loss on early extinguishment of debt...... (0.06) - - ------------- ------------ ------------ Basic earnings (loss) per common share....................... $ (2.08) $ 0.26 $ (0.52) ============= ============ ============ Diluted earnings (loss) per common share: Income (loss) before extraordinary item...................... $ (2.02) $ 0.25 $ (0.52) Extraordinary item-loss on early extinguishment of debt...... (0.06) - - ------------- ------------ ------------ Diluted earnings (loss) per common share..................... $ (2.08) $ 0.25 $ (0.52) ============= ============ ============
The accompanying notes are an integral part of these consolidated statements. 43 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, ---------------------- 1998 1997 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents....................................................... $ 81,456 $ 26,114 Accounts receivable, net of allowance for doubtful accounts of $2,659 and $2,353, respectively.................................................. 40,370 16,980 Accounts receivable, related party.............................................. 684 377 Other current assets............................................................ 3,916 1,743 --------- --------- Total current assets................................................. 126,426 45,214 Property and equipment, net of accumulated depreciation and amortization of $3,493 and $1,240, respectively........................................... 43,525 5,184 Restricted cash and pledged securities......................................... 44,336 180 Intangibles, net and other long term assets.................................... 11,695 952 --------- --------- $ 225,982 $ 51,530 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................................ $ 36,273 $ 15,420 Accrued expense................................................................. 6,845 3,728 Vendor financing................................................................ 1,476 -- Capital lease obligations....................................................... 402 331 Note payable to individuals and other........................................... 16 -- --------- --------- Total current liabilities............................................ 45,012 19,479 Senior notes.................................................................... 158,022 -- Vendor financing, net of current portion........................................ 7,409 -- Capital lease obligations, net of current portion............................... 59 417 Note payable to individuals and other........................................... -- 44 --------- --------- Total liabilities.................................................... 210,502 19,940 --------- --------- STOCKHOLDERS' EQUITY: Common stock, $0.01 par value; 20,000,000 shares authorized, 8,964,815 and 8,811,999 shares issued and outstanding, respectively................. 90 88 Additional paid-in capital...................................................... 39,632 37,221 Unearned compensation........................................................... (190) (241) Accumulated deficit............................................................. (24,052) (5,478) --------- --------- Total stockholders' equity........................................... 15,480 31,590 --------- --------- $ 225,982 $ 51,530 ========= =========
The accompanying notes are an integral part of these consolidated balance sheets. 44 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
VOTING NONVOTING COMMON STOCK COMMON STOCK ------------------ ---------------- ADDITIONAL PAID-IN UNEARNED ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT --------- --------- ------- --------- ----------- ------------- ------------ Balance at December 31, 1995 5,381 $ 54 22 $ 22 $ 932 $ - $ (4,267) Net loss................................. - - - - - - (2,830) -------- --------- ------- --------- ----------- ------------- ----------- Balance at December 31, 1996 5,381 54 22 22 932 - (7,097) Net income............................... - - - - - - 1,619 Conversion of nonvoting common shares to voting common shares....... 17 - (17) (17) 17 - - Purchase and retirement of nonvoting common shares......................... - - (5) (5) (40) - - Net proceeds from initial public offering.3,278 33 - - 34,961 - - Exercise of employee stock options..... 136 1 - - 143 - - Unearned compensation pursuant to issuance of stock options............. - - - - 385 (385) - Amortization of unearned compensation - - - - - 144 - Warrants issued in connection with equity and debt placement............. - - - - 823 - - -------- --------- ------- --------- ----------- ------------- ----------- Balance at December 31, 1997 8,812 88 - - 37,221 (241) (5,478) Net loss................................. - - - - - - (18,574) Amortization of unearned compensation. - - - - - 51 - Exercise of employee stock options....... 129 2 - - 260 - - Shares issued in repayment of note payable to individual............ 24 - - - 44 - - Warrants issued in connection with - Senior Notes Offering................. - - - - 2,107 - - -------- --------- ------- --------- ----------- ------------- ----------- Balance at December 31, 1998 8,965 $ 90 - $ - $ 39,632 $ (190) $ (24,052) ======== ========= ======= ========= =========== ============= ===========
The accompanying notes are an integral part of these consolidated statements. 45 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------- 1998 1997 1996 --------------- --------------- ------------- OPERATING ACTIVITIES: Net income (loss)....................................................... $ (18,574) $ 1,619 $ (2,830) Extraordinary item-loss on early extinguishment of debt................. 514 - - Adjustments to net income (loss): Depreciation and amortization......................................... 2,253 451 333 Compensation pursuant to stock options................................ 51 144 - Amortization of deferred debt financing costs and debt discounts.......................................................... 947 237 - Changes in operating assets and liabilities: Accounts receivable, net.............................................. (22,315) (11,646) (3,113) Accounts receivable, related party.................................... (307) (299) 241 Accounts payable...................................................... 13,248 8,249 2,515 Accrued expenses...................................................... 745 (45) 1,578 Other................................................................. (2,039) (429) (80) --------------- --------------- ------------- Net cash used in operating activities.............................. (25,477) (1,719) (1,356) --------------- --------------- ------------- INVESTING ACTIVITIES: Acquisitions............................................................ (2,648) - - Purchases of property and equipment..................................... (34,931) (3,881) (520) --------------- --------------- ------------- Net cash used in investing activities.............................. (37,579) (3,881) (520) --------------- --------------- ------------- FINANCING ACTIVITIES: Proceeds from Senior Notes and Warrants Offering........................ 160,000 - - Proceeds from sale of pledged securities................................ 8,261 - - Proceeds from vendor financing.......................................... 8,885 - - Net proceeds from issuance of common stock.............................. 262 34,994 - Investments in pledged securities....................................... (52,417) - - Payments of debt financing costs........................................ (6,222) (366) - Repayments under capital lease obligations.............................. (371) (402) (91) Net borrowings (repayments) under receivables-based credit facility.................................................... - (1,812) 1,242 Borrowings under notes payable to individuals and other................. - - 475 Repayments under notes payable to individuals and other................. - (650) (125) Repayments under notes payable to related parties....................... - (153) (5) Purchase and retirement of nonvoting common stock....................... - (45) - --------------- --------------- ------------- Net cash provided by financing activities.......................... 118,398 31,566 1,496 --------------- --------------- ------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... ................... 55,342 25,966 (380) CASH AND CASH EQUIVALENTS, beginning of year............................ 26,114 148 528 --------------- --------------- ------------- CASH AND CASH EQUIVALENTS, end of year.................................. $ 81,456 $ 26,114 $ 148 =============== =============== ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid........................................................... $ 9,408 $ 591 $ 296 Income taxes paid....................................................... 10 19 SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: Equipment acquired under capital lease.................................. $ 84 $ 378 $ 524 Shares issued in repayment of note payable to individual................ 44 - - Accrued expenses converted to a note.................................... - 44 -
The accompanying notes are an integral part of these consolidated statements. 46 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization Startec Global Communications Corporation (the "Company", formerly Startec, Inc.), is a Maryland corporation founded in 1989 to provide international long-distance telephone services. The Company currently offers U.S.-originated international long-distance service to residential and carrier customers through a flexible network of owned and leased transmission facilities, resale arrangements, and foreign termination arrangements. The Company's marketing targets specific ethnic residential market segments in the United States that are most likely to seek low-cost international long-distance service to specific and identifiable country markets. The Company is headquartered in Bethesda, Maryland. In 1998, the Company's board of directors and stockholders approved a reorganization pursuant to which the Company's corporate structure would be realigned to that of a publicly traded Delaware holding company ("Reorganization"). Pursuant to the reorganization plan, subsequent to year end, all of the Company's assets were transferred into a Delaware subsidiary company ("New Parent"), with a subsequent transfer of those assets to multiple subsidiaries of the New Parent. The Company was then merged with and into the New Parent with the New Parent then assuming the Company's name. The merger did not impact the consolidated financial statements of the Company. In October 1997, the Company completed an Initial Public Offering of its common stock (the "Initial Public Offering"). Together with the exercise of the overallotment option in November 1997, the Initial Public Offering placed 3,277,500 shares of common stock at a price of $12.00 per share, yielding net proceeds (after underwriting discounts, commissions, and other professional fees) to the Company of approximately $35 million. Principles of consolidation The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated. Use of estimates in preparation of financial statements 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. During 1998, the Company recorded a net favorable retroactive PTT rate adjustment in the amount of $953,000 in a manner consistent with its policy of recording credits when received. The rate adjustment relates to traffic sent from April 1997 through December 1998 and is reflected in cost of services in the accompanying consolidated statement of operations. These rate adjustments occur routinely. Revenue recognition Revenues for telecommunication services provided to customers are recognized as services are rendered, net of an allowance for revenue that the Company estimates will ultimately not be realized. Revenues for return traffic received according to the terms of the Company's operating agreements with its foreign partners are recognized as revenue as the return traffic is received and processed. The Company has entered into operating agreements with telecommunications carriers in foreign countries under which international long-distance traffic is both delivered and received. Under these agreements, the foreign carriers are contractually obligated to adhere to the policy of the FCC, whereby traffic from the foreign country is routed to international carriers, such as the Company, in the same proportion as traffic carried into the country. Mutually exchanged traffic between the Company and foreign carriers is settled through a formal settlement policy at agreed upon rates per-minute. The Company records the amount due to the foreign partner as an expense in the period the traffic is terminated. When the return traffic is received in the future period, the Company generally realizes a higher gross margin on the return traffic compared to the lower margin (or sometimes negative margin) on the outbound traffic. Revenue recognized from return traffic was approximately $2.6 million, $1.4 million and $1.1 million, or 2 percent, 2 percent, and 3 percent of net revenues in 1998, 1997, and 1996, respectively. There can be no assurance that traffic will be 47 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED delivered back to the United States or what impact changes in future settlement rates, allocations among carriers or levels of traffic will have on net payments received and revenues recorded by the Company. International operations The consolidated statements of operations include amounts related to non-U.S. subsidiaries. In 1998, the Company recognized net revenues of approximately $23,000 and a net loss of approximately $340,000 attributable to non-U.S. subsidiaries. Cost of services Cost of services represents direct charges from vendors that the Company incurs to deliver service to its customers. These include costs of leasing capacity and rate-per-minute charges from carriers that originate, transmit, and terminate traffic on behalf of the Company. The Company accrues disputed vendor charges until such differences are resolved. (see Note 4). Cash and cash equivalents The Company considers all short-term investments with original maturities of 90 days or less to be cash equivalents. Cash equivalents consist primarily of money market accounts that are available on demand. The carrying amount reported in the accompanying consolidated balance sheets approximates fair value. Pledged Securities and restricted cash In connection with the Senior Notes and Warrants Offering, the Company placed $52 million of net proceeds into marketable securities to fund the first six payments of interest on the Senior Notes which are payable semi-annually in November and May. Subsequent to the November 1998 interest payment, pledged securities totaled $44.2 million. The Company was required to provide a bank guarantee of $180,000 in connection with one of its foreign operating agreements. This guarantee is in the form of a certificate of deposit. The pledged securities and restricted cash are shown as long term assets in the accompanying consolidated balance sheets. The Company has both the positive intent and ability to hold the pledged securities and restricted cash until maturity. Accordingly, these instruments are carried at amortized cost. Other current assets Included in other current assets as of December 31, 1997, is approximately $1.1 million for amounts due from employees related to the exercise of stock options in December 1997. No cash was advanced to these employees. All amounts due from employees for the payment of the exercise price and related payroll taxes were collected in January 1998. During 1998, the Company advanced an aggregate of approximately $1.4 million to certain of its employees and officers. The secured loans bear interest at a rate of 7.87% per year, and are due and payable on December 31, 1999. The loans are included in other current assets in the accompanying consolidated balance sheets. Long-lived assets Long-lived assets and identifiable assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed. Impairment is measured by comparing the carrying value to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual dispositions. The Company considers expected cash flows and estimated future operating results, trends, and other available information in assessing whether the carrying value of the assets is impaired. The Company believes that no such impairment existed as of December 31, 1998 and 1997. The Company's estimates of anticipated gross revenues, the remaining estimated lives of tangible and intangible assets, or both, could be reduced significantly in the future due to changes in technology, regulation, available financing, or competitive pressures. As a result, the carrying amount of long-lived assets could be reduced materially in the future. Property and equipment Property and equipment are stated at historical cost. Depreciation is provided for financial reporting purposes using the straight line method over the following estimated useful lives: 48 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED Property and leasehold improvements..................... 5 years Long-distance communications equipment (including undersea cable)..................................... 7 to 20 years Computer and office equipment........................... 3 to 5 years Long-distance communications equipment includes assets financed under capital lease obligations of approximately $1,540,000 and $1,456,000 as of December 31, 1998 and 1997, respectively. Maintenance and repairs are expensed as incurred. Replacements and improvements are capitalized. Gains on sales of assets are recognized at the time of sale or deferred to the extent required by generally accepted accounting principles. Intangible assets Intangible assets, capitalized in connection with acquisitions made during the fourth quarter of 1998 are reflected within intangibles and other long term assets in the accompanying consolidated balance sheets. At December 31, 1998, intangible assets, net of accumulated amortization, consisted of goodwill, a German telecommunications license and a covenant not to compete of $3.5 million, $1.8 million and $250,000, respectively. Goodwill and covenants not to compete are amortized on a straight-line basis over 30 and 5 years, respectively. The German telecommunications license acquired through the acquisition of Global Communications GmbH of Germany is amortized on a straight-line basis over 30 years. Accumulated amortization at December 31, 1998 was immaterial. Debt discounts and deferred debt financing costs Deferred debt financing costs of $6.2 million, net of amortization of $380,000 incurred primarily in connection with the 1998 Senior Notes and Warrants Offering are reflected within intangible and other long term assets. Debt discounts associated with the Senior Notes and Warrants Offering total $2.1 million, net of amortization of $129,000 are reflected as a reduction of the Senior Notes. Debt discounts and deferred debt financing costs are amortized over the remaining life of the debt using the effective interest method. Concentration of credit risk Financial instruments that potentially subject the Company to a concentration of credit risk are accounts receivable. Residential accounts receivable consist of individually small amounts due from geographically dispersed customers. Carrier accounts receivable represent amounts due from long-distance carriers. The Company's allowance for doubtful accounts is based on current market conditions. The Company's four largest carrier customers represented approximately 32 and 44 percent of gross accounts receivable as of December 31, 1998 and 1997, respectively. Revenues from several customers represented more than 10 percent of net revenues for the periods presented (see Note 10). Including charges in dispute (see Note 4), purchases from the five largest suppliers represented approximately 30 and 47 percent of cost of services for the years ended December 31, 1998 and 1997, respectively. Services purchased from several suppliers represented more than 10 percent of cost of services in the periods presented (see Note 10). One of these suppliers, representing 4and 7 percent of cost of services in the year ended December 31, 1998 and 1997, respectively, is based in a foreign country. Income taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109 requires that deferred income taxes reflect the expected tax consequences on future years of differences between the tax bases of assets and liabilities and their bases for financial reporting purposes. Valuation allowances are established when necessary to reduce deferred tax assets to the expected amount to be realized. Earnings (loss) per common share SFAS No. 128 requires dual presentation of basic and diluted earnings per share on the face of the statements of operations for all periods presented. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Weighted average common shares outstanding 49 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED consist of the following as of December 31, 1998 (in thousands):
1998 1997 1996 ------------ ------------ ------------- Weighted average common shares outstanding - basic...................... 8,945 6,136 5,403 Stock options and warrant equivalents.............................. - 287 - ------------ ------------ ------------- Weighted average common and equivalent shares outstanding - diluted.. 8,945 6,423 5,403 ============ ============ =============
Options and warrants to purchase 1,366,726 and 138,300 shares of common stock, were excluded from the computation of diluted loss per share in 1998 and 1996, respectively, because inclusion of these options would have an anti-dilutive effect on loss per share. Advertising costs In accordance with Statement of Position 93-7, "Reporting on Advertising Costs," costs for advertising are expensed as incurred within the fiscal year. Such costs are included in " Selling and marketing expenses" in the accompanying consolidated statements of operations. Year 2000 The Year 2000 issue arises because many computerized systems use two digits rather than four to identify the year. The effects of the Year 2000 issue may be experienced before, on, or after January 1, 2000, and if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure, which could affect the Company's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 issue affecting the Company, including those related to the efforts of customers, suppliers, vendors or other third parties will be fully resolved. Risk and other important factors The Company is subject to various risks in connection with the operation of its business. These risks include, but are not limited to, dependence on operating agreements with foreign partners, significant foreign and U.S.-based customers and suppliers, availability of transmission facilities, U.S. and foreign regulations, international economic and political instability, dependence on effective billing and information systems, customer attrition, and rapid technological change. Many of the Company's competitors are significantly larger and have substantially greater financial, technical, and marketing resources than the Company; employ larger networks and control transmission lines; offer a broader portfolio of services; have stronger name recognition and loyalty; and have long-standing relationships with the Company's target customers. In addition, many of the Company's competitors enjoy economies of scale that can result in a lower cost structure for transmission and related costs, which could cause significant pricing pressures within the long-distance telecommunications industry. If the Company's competitors were to devote significant additional resources to the provision of international long-distance services to the Company's target customer base, the Company's business, financial condition, and results of operations could be materially adversely affected. The Company has devoted substantial resources to the buildout of its network and the development and expansion of its marketing programs. As a result, the Company experienced operating losses and negative cash flows from operations in 1998. These losses and negative operating cash flows are expected to continue for additional periods in the future. There can be no assurance that the Company's operations will become profitable or will produce positive cash flows. The Company's capital requirements for the continued buildout of its network and growth of its customer base are substantial. The Company intends to fund its operational and capital requirements in 1999 using cash on hand and its available credit facility. However, there can be no assurance that the Company will not need additional external financing sooner than currently anticipated, or that such financing would be available on terms management finds acceptable or at all. In the event that the Company is unable to obtain such additional financing, it will be required to limit or curtail its expansion plans. In the United States, the Federal Communications Commission ("FCC") and relevant state Public Service Commissions have the authority to regulate interstate and intrastate telephone service rates, respectively, ownership of transmission facilities, and the terms and conditions under which the Company's services are provided. Legislation that substantially revised the U.S. 50 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED Communications Act of 1934 was signed into law on February 8, 1996. This legislation has specific guidelines under which the Regional Bell Operating Companies ("RBOCs") can provide long-distance services, which will permit the RBOCs to compete with the Company in providing domestic and international long-distance services. Further, the legislation, among other things, opens local service markets to competition from any entity (including long-distance carriers, cable television companies and utilities). Because the legislation opens the Company's markets to additional competition, particularly from the RBOCs, the Company's ability to compete may be adversely affected. Moreover, certain Federal and other governmental regulations may be amended or modified, and any such amendment or modification could have material adverse effects on the Company's business, results of operations, and financial condition. Recent accounting pronouncements Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires the reporting of comprehensive income (loss) in addition to net income (loss) from operations. Comprehensive income is a more inclusive reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net loss. The adoption of SFAS No. 130 had no impact on the Company's net loss, as reported, and comprehensive loss. In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), was issued which redefines how operating segments are determined and requires disclosures of certain financial descriptive information about a company's operating segments. The January 1, 1998 adoption of SFAS No. 131 currently has had minimal impact on the required disclosures and descriptive information about the Company's operations. The Company operates in a single business segment managed on a regional basis. Currently, operating segments outside the North American region are immaterial. In March 1998, Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), was issued which provides guidance on addressing whether and under what conditions the costs of internal use software should be capitalized. SOP 98-1 is effective for all transactions entered into in fiscal years beginning after December 15, 1998; however, earlier adoption is encouraged. The Company adopted the guidelines of SOP 98-1 on January 1, 1998, pursuant to which the Company capitalized approximately $910,000 for 1998. In April 1998, Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), was issued which requires that entities expense costs of start-up activities as incurred. The Company adopted SOP 98-5 on January 1, 1998 and expensed approximately $166,000 of start-up costs incurred for organizational activities associated with the Company's facilities in the United Kingdom in 1998. 2. ACCOUNTS RECEIVABLE: Accounts receivable consist of the following (in thousands): DECEMBER 31, --------------------------- 1998 1997 ------------ ------------- Residential.......................... $ 20,340 $ 9,560 Carrier.............................. 22,689 9,773 ------------ ------------- 43,029 19,333 Allowance for doubtful accounts...... (2,659) (2,353) ------------ ------------- $ 40,370 $ 16,980 ============ ============= The Company has certain service providers that are also customers. The Company settles amounts receivable and payable from and to certain of these parties on a net basis. 51 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED 3. PROPERTY AND EQUIPMENT: Property and equipment, including equipment under capital leases consist of the following at December 31, 1998 and 1997 (in thousands):
DEPRECIABLE LIVES 1998 1997 ---------------- ------------- ------------ Property and leasehold improvements 5 years $ 1,314 $ 186 Long distance communications equipment 7 to 20 years 29,017 3,305 Company and office equipment 3 to 5 years 4,746 838 ------------- ------------ 35,077 4,329 Less: accumulated depreciation and amortization (3,493) (1,240) ------------- ------------ 31,584 3,089 Construction in progress 11,941 2,095 ------------- ------------ $ 43,525 $ 5,184 ============= ============
Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was $2.3 million , $451,000, and $333,000 respectively. Construction in progress consists primarily of network infrastructure equipment that has not been placed into service; accordingly no depreciation has been recorded. 4. ACCRUED EXPENSES: Accrued expenses consist of the following (in thousands): DECEMBER 31, --------------- 1998 1997 ------ ------ Accrued interest ........................................... $2,496 $ 22 Disputed vendor charges .................................... 774 2,124 Accrued marketing expense .................................. 667 -- Accrued payroll and related taxes........................... 513 1,194 Accrued excise taxes and related charges ................... 1,295 -- Other ...................................................... 1,100 388 ------ ------ $6,845 $3,728 ====== ====== Disputed vendor charges represent an assertion from one of the Company's foreign carriers for minutes processed that are in excess of the Company's records. The Company provided approximately $67,000 in the year ended December 31, 1997 related to disputed minutes for which the Company has not recognized any corresponding revenue. During 1998, the Company paid $1,350,000 of the disputed charges and continues to dispute the remaining balance. If the Company prevails in its dispute, these amounts or portions thereof would be credited to operations in the period of resolution. Conversely, if the Company does not prevail in its dispute, these amounts or portions thereof would presumably be paid in cash. 5. DEBT: Debt consists of the following (in thousands): DECEMBER 31, -------------------- 1998 1997 --------- ------- Senior notes, with a rate of 12% due May 2008 ............ $ 160,000 $ -- NTFC Financing Agreement, with a rate of 8.91% maturing January 2004 ............................... 8,885 -- Note payable to individuals and other..................... 16 44 Capital lease obligations................................. 461 748 --------- ------- 169,362 792 Less: discount on Senior Notes............................ (1,978) -- Less: current portion .................................... (1,894) (331) --------- ------- $ 165,490 $ 461 ========= ======= 52 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED Senior Notes and Warrants Offering In May 1998, the Company issued $160 million of 12% senior unsecured notes ("Senior Notes") with a final maturity of May 2008. Warrants to purchase 200,226 shares of common stock were issued in conjunction with the Senior Notes issuance. The Senior Notes are recorded at a discount of $2.1 million to their face amount to reflect the fair market value attributable to the warrants. The warrants are exercisable subsequent to November 1998 at an exercise price of $24.20 per share. The Company received net proceeds of $155 million, net of offering expenses. Concurrent with the issuance, the Company purchased $52 million in U.S. Government obligations from proceeds of the offering. The U.S. Government obligations are pledged to fund the first six interest payments on the Senior Notes. Interest on the Senior Notes is payable semi-annually in arrears in May and November commencing November 1998. Accrued interest as of December 31, 1998 was $2.5 million. As of December 31, 1998, no Warrants issued in connection with the Senior Notes have been exercised. Under the terms of the Senior Notes, the Company is subject to certain covenants which, among other things, restrict the ability of the Company to incur additional indebtedness, pay dividends or make distributions in respect to capital stock or make certain restricted payments; create liens; or merge or sell all or substantially all of its assets. The Senior Notes are redeemable at the option of the Company, in whole or in part on or after May 15, 2003, at the redemption prices set forth below, plus accrued and unpaid interest and liquidated damages as defined in the indenture, if any, to the date of redemption. REDEMPTION YEAR PRICE --------- ------------------- 2003.......................... 106% 2004.......................... 104% 2005.......................... 102% 2006(and thereafter).......... 100% In addition, at any time prior to May 15, 2001, through proceeds of a public equity offering, the Company may redeem up to 35% of the Senior Notes originally outstanding at a redemption price of 112% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, to the date of redemption. Upon a change of control, the Company will be required to offer to repurchase the outstanding Senior Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase. The Senior Notes are unsecured obligations of the Company and rank pari passu in right of payment with all other existing and future unsecured and unsubordinated obligations of the Company unless expressly noted. NTFC Capital Corp. Financing Agreement In December 1998, the Company entered into a vendor financing facility for up to $35 million with NTFC Capital Corporation, a financing arm of GE Capital ("NTFC Facility"). The facility and may be used to finance switches, associated telecommunications equipment, undersea fiber optic cables, and the expansion of facilities in the Company's targeted marketing areas. Each borrowing under the NTFC Facility bears interest at a fixed rate equal to the average yield to maturity of the five-year Treasury Note plus the Rate Adjustment (as defined in the agreement). Individual borrowings under the NTFC Facility are amortized over 60 months from the date of advance with a final maturity of all outstanding amounts of January 2004. As of December 31, 1998, approximately $8.9 million bearing interest at 8.91% was outstanding under the facility. Principal and interest payments of approximately $184,000 are due monthly in arrears. Under the terms of the NTFC Facility, the Company is subject to certain financial and operational covenants, including but not limited to restrictions on the Company's ability to pay dividends and level of indebtedness. Commercial Loan Agreement In July 1997, the Company entered into a loan agreement ("Loan") with a commercial bank ("Lender"). The Loan provides for maximum borrowings of up to $10 million through December 31, 1997, and the lesser of $15 million or 85 percent of eligible 53 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED accounts receivable, as defined, thereafter until maturity in December 1999. The Loan required a $150,000 commitment fee to be paid at closing, and a quarterly commitment fee of one quarter percent of the unused portion. In December 1998, the Company terminated the Loan. In connection with the termination, the Company recognized an extraordinary loss of $514,000 related to the write-off of deferred financing costs and debt discounts related to the Loan. In connection with the Loan, the Company issued the Lender warrants to purchase 539,800 shares of the Company's common stock, representing 10 percent of the outstanding common stock on the date of issuance. Fifty percent, or 269,900 of the warrants, vested fully on the date of the issuance. Vesting on the remaining warrants was contingent on the occurrence of certain events. In December 1997, as a result of the Company's completed Initial Public Offering of common stock, the remaining warrants were retired. The exercise price of the outstanding warrants is $8.46 per share, and they expire on July 1, 2002. The fair market value of the warrants is approximately $823,000 and is classified as a component of stockholders' equity. As of December 31, 1998, 269,900 warrants from this issuance were outstanding. Debt maturities as of December 31, 1998, excluding capital lease obligations, are as follows (in thousands); 1999............................................ $ 1,475 2000........................................... 1,613 2001........................................... 1,763 2002........................................... 1,927 2003........................................... 2,107 Thereafter..................................... 160,000 ----------- $ 168,885 =========== 6. COMMITMENTS AND CONTINGENCIES: Leases The Company leases office space and equipment under non-cancelable operating leases. Rent expense was approximately $1 million, $313,000, and $135,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The terms of the office lease require the Company to pay a proportionate share of real estate taxes and operating expenses. The Company also leases equipment under capital lease obligations. The future minimum commitments under lease obligations are as follows (in thousands): CAPITAL OPERATING FOR THE YEAR ENDING DECEMBER 31, LEASES LEASES ---------------------------------------- ------------ ------------- 1999................................ $ 434 $ 2,031 2000................................ 60 2,000 2001................................ - 1,802 2002................................ - 1,589 2003................................ - 781 Thereafter.......................... - 1,320 ------------ ------------- 494 $ 9,523 ============= Less - Amounts representing interest.. (33) Less - Current portion................ (402) ------------ Long-term Portion..................... $ 59 ============ Lease with related party The Company has entered into an agreement with an affiliate of a stockholder to lease capacity in certain undersea fiber optic cable. The agreement grants a perpetual right to use the cable and requires ten semiannual payments of $38,330 beginning in June 1996. The Company is required to pay a proportional share of the cost of operating and maintaining the cable. The Company can cancel this agreement without further obligation, except for amounts related to past usage, at any time. 54 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED Litigation Certain claims and suits have been filed or are pending against the Company. In management's opinion, resolution of these matters will not have a material impact on the Company's financial position or results of operations and adequate provision for any potential losses has been made in the accompanying consolidated financial statements 7. STOCKHOLDERS' EQUITY (DEFICIT): Common and preferred stock In 1997, the Board of Directors authorized 100,000 shares of $1.00 par value preferred stock. Concurrent with the approval of the Reorganization, the Board of Directors approved an increase in the authorized shares of common and preferred stock. Subsequent to year end 1998, total common and preferred shares authorized increased to 40,000,000 and 1,000,000, respectively pursuant to the Reorganization. The Board of Directors has the authority to issue these shares and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without further vote or action by the stockholders. In July 1997, the Company exchanged 17,175 shares of its outstanding nonvoting common stock for authorized voting common stock and purchased the remaining 5,351 shares of outstanding nonvoting common stock from a former officer and director of the Company for $45,269. Stock option plans In August 1997, the stockholders of the Company approved the 1997 Performance Incentive Plan (the "Performance Plan"). The Performance Plan provides for the award to eligible employees of the Company and others of stock options, stock appreciation rights, restricted stock, and other stock-based awards, as well as cash-based annual and long-term incentive awards. In 1998, the Board of Directors and stockholders approved an increase in the shares authorized for issuance under the Performance Plan to 18.5 percent of the common shares outstanding. The options expire ten years from the date of grant and vest ratably over five years. The Performance Plan provides that all outstanding options become fully vested in the event of a change in control, as defined. As of December 31, 1998 and 1997, approximately 914,890 and 352,000 options, respectively, were available for grant under the Performance Plan. The Company's Amended and Restated Stock Option Plan, reserves 270,000 shares of voting common stock to be issued to officers and key employees under terms and conditions to be set by the Company's Board of Directors. In conjunction with the Company's January 20, 1997 amendment to the plan, all options were cancelled and certain options were reissued at their original exercise prices and compensation expense was recognized for the excess of the fair value of the common stock over the exercise price of the related options. The Company recognized approximately $131,000 in compensation expense for the year ended December 31, 1997 as the vesting of the options accelerated upon completion of the Initial Public Offering. On December 14, 1998, the Company repriced 581,150 options outstanding, which had exercise prices ranging between $10.00 and $26.75 per share to the then market price of $9.00 per share. This was the Company's first repricing of options and the repricing did not benefit executive officers, affiliates, or major shareholders. A summary of the status of the Company's stock option plans as of December 31, 1998, 1997 and 1996 and changes during the years ending on those dates is presented in the following chart:
1998 1997 1996 ------------------------- -------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE PRICE PER PRICE PER PRICE PER OPTIONS SHARE OPTIONS SHARE OPTIONS SHARE ------------ ----------- -------------- ----------- ------------ ------------ Options outstanding at beginning of year January 1, 531,666 $ 9.96 138,300 $ 0.38 143,200 $ 0.38 Granted 977,900 10.54 668,366 8.14 - - Exercised (125,816) 1.85 (136,500) 1.05 - - Canceled (640,150) 12.81 (138,500) 0.38 (4,900) 0.36 ------------ ----------- -------------- ----------- ------------ ------------ Options outstanding at December 31, 743,600 $ 9.64 531,666 $ 9.96 138,300 $ 0.38 ============ =========== ============== =========== ============ ============ Options exercisable at December 31, 76,530 $ 9.23 133,266 $ 1.85 - $ - ============ =========== ============== =========== ============ ============
55 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------------------- ---------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL PRICE PER NUMBER PRICE PER EXERCISE PRICES OUTSTANDING LIFE SHARE EXERCISABLE SHARE ----------------- -------------- --------------- ------------- -------------- ------------- $1.85 - $1.85 7,450 8.05 $ 1.85 7,450 $ 1.85 $4.75 - $4.75 15,000 9.75 4.75 -- -- $8.00 - $10.00 631,150 8.80 9.08 60,080 9.16 $12.00 - $12.00 7,500 8.63 12.00 1,500 12.00 $14.25 - $16.56 82,500 9.25 15.30 7,500 16.56 ----------------- -------------- --------------- ------------- -------------- ------------- $1.85 - $16.56 743,600 8.86 $ 9.64 76,530 $ 9.23 ================= ============== =============== ============= ============== =============
The Company has elected to account for stock and stock rights in accordance with APB No. 25. SFAS No. 123, "Accounting for Stock-Based Compensation," established an alternative method of expense recognition for stock-based compensation awards to employees based on fair values. The Company has elected not to adopt SFAS No. 123 for expense recognition purposes. Pro forma information regarding net income is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123. The fair value of options granted during the year ended December 31, 1998 and 1997, was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates of 4.56 percent and 6.2 percent; no dividend yield; weighted-average expected lives of the options of five years, and expected volatility of 95 percent and 50 percent, respectively. There were no options granted in 1996. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price characteristics that are significantly different from those of traded options. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock rights. The weighted-average fair value of options granted during 1998 and 1997, was $7.84 per share and $4.32 per share, respectively. For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the estimated service period. If the Company had used the fair value accounting provisions of SFAS No. 123, the pro forma net loss for 1998 and 1996 would have been approximately $19,125,000 and $2,833,000, respectively, or $2.14 and $0.52 per share (basic and diluted), respectively. Pro forma net income for 1997 would have been $1,600,000, or $0.26 per share (basic) and $0.25 per share (diluted). The provisions of SFAS No. 123 are not required to be applied to awards granted prior to January 1, 1995. The impact of applying SFAS No. 123 may not necessarily be indicative of future results. In December 1997, under the Performance Plan, the Company granted to several consultants options to acquire 30,000 shares of the Company's common stock in lieu of payment of certain consulting services to be performed in the future. Pursuant to SFAS No. 123, the Company will recognize compensation expense for the fair value of these options granted to consultants, as calculated using the Black-Scholes option pricing model, using the weighted average assumptions described above. The fair value of these options at issuance was approximately $254,000 and will be recognized ratably over the estimated service period. Stockholder rights plan The Board of Directors has adopted a stockholder rights plan ("Rights" and "Rights Plan"), which is designed to protect the rights of its stockholders and deter coercive or unfair takeover tactics. It is not in response to any acquisition proposal. Preferred stock 56 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED purchase rights have been granted as a dividend at the rate of one Right for each outstanding share of Common Stock held of record as of the close of business on April 3, 1998. Each Right, when exercisable, would entitle the holder thereof to purchase 1/1,000th of a share of Series A Junior Participating Preferred Stock ("Junior Preferred Stock") at a price of $175 per 1/1000th share. The Company's Board of Directors designated 25,000 shares of the authorized Preferred Stock for this purpose. The Rights, which have no voting rights, will expire on March 25, 2008. At the time of adoption of the Rights Plan, the Rights are neither exercisable nor traded separately from the Common Stock. Subject to certain limited exceptions, the Rights will be exercisable only if a person or group, other than an Exempt Person, as defined in the Rights Plan, becomes the beneficial owner of 10% or more of the Common Stock or announces a tender or exchange offer which would result in its ownership of 10% or more of the Common Stock. Ten days after a public announcement that a person has become the beneficial owner of 10% or more of the Common Stock or ten days following the commencement of a tender or exchange offer which would result in a person becoming the beneficial owner of 10% or more of the Common Stock (the earlier of which is called the "Distribution Date"), each holder of a Right, other than the acquiring person, would be entitled to purchase a certain number of shares of Common Stock for each Right at one-half of the then-current market price. If the Company is acquired in a merger, or 50% or more of the Company's assets are sold in one or more related transactions, each Right would entitle the holder thereof to purchase common stock of the acquiring company at one half of the then-market price of such common stock. At any time after a person or group becomes the beneficial owner of 10% or more of the Common Stock, the Board of Directors may exchange one share of Common Stock for each Right, other than Rights held by the acquiring person. Generally, the Board of Directors may redeem the Rights at any time until 10 days following the public announcement that a person or group of persons has acquired beneficial ownership of 10% or more of the outstanding Common Stock. The redemption price is $.001 per Right. Warrant and registration rights The Company agreed to issue to certain underwriters of the Initial Public Offering, warrants to purchase up to 150,000 shares of Common Stock at an exercise price of $13.20 per share. The warrants are exercisable for a period of five years beginning October 1998. The holders of the warrants will have no voting or other stockholder rights unless and until the warrants are exercised. The fair value of these warrants was approximately $870,000 when issued, and is classified in stockholders' equity. As of December 31, 1998, the Company has warrants outstanding of 470,126 in connection with debt issuances and agreements. Warrants issued in connection with the Senior Notes and Warrants Offering have an exercise price of $24.20 and expire May 2008. Warrants issued in connection with the Commercial Loan Agreement have an exercise price of $8.46 and are exercisable for a period of five years beginning July 1997. The holders of the warrants will have no voting or other stockholder rights unless and until the warrants are exercised. Employee benefit plans During 1998, the Company adopted the Startec Employee 401(K) Plan (the "Plan"), a defined contribution plan . Employees are eligible for the Plan after completing at least one year of service and attaining age 20. The Plan allows for employee contributions up to 15% of their compensation. In September 1998, the Company adopted a contribution matching plan pursuant to which the Company, at its discretion, may contribute shares of the Company's Common Stock in an amount up to five percent of employee contributions. These shares will vest ratably over a five year period from the date of employment. 8. INCOME TAXES: The Company has net operating loss carryforwards ("NOLs") for Federal income tax purposes of approximately $25,483,000 and $1,878,000, as of December 31, 1998 and 1997, respectively, which may be applied against future taxable income and expire between 2010 and 2013. The Company utilized a portion of these NOLs to partially offset its taxable income for the year ended December 31, 1997. The use of the NOLs is subject to statutory and regulatory limitations regarding changes in ownership. SFAS No. 109 requires that the tax benefit of NOLs for financial reporting purposes be recorded as an asset to the extent that management assesses the realization of such deferred tax assets is "more likely than not." A valuation reserve is established for any deferred tax assets that are not expected to be realized. As a result of historical and projected operating losses, a valuation allowance equal to the net deferred tax asset was recorded for all periods presented. 57 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED The tax effect of significant temporary differences, which comprise the deferred tax assets and liabilities, are as follows (in thousands): DECEMBER 31, 1998 1997 ------------ ------------ Deferred tax assets: Net operating loss carryforwards......... $ 9,842 $ 725 Allowance for doubtful accounts.......... 1,378 909 Contested liabilities.................... 553 1,024 Cash to accrual adjustments.............. 230 460 Other.................................... 155 119 ------------ ------------ Total deferred tax assets............. 12,158 3,237 ------------ ------------ Deferred tax liabilities: Depreciation............................. 1,227 204 Other.................................... 19 42 ------------ ------------ Total deferred tax liabilities........ 1,246 246 ------------ ------------ Net deferred tax assets.................... 10,912 2,991 Valuation allowance........................ (10,912) (2,991) ------------ ------------ $ - $ - ============ ============ Pursuant to Section 448 of the Internal Revenue Code, the Company was required to change from the cash to the accrual method of accounting. The effect of this change will be amortized over four years for tax purposes. The Company recorded no benefit or provision for income taxes for the years ended December 31, 1998 and 1996. A provision for Federal alternative minimum tax was recorded for the year ended December 31, 1997. The components of income tax expense for the year ended December 31, 1997 are as follows (in thousands): 1997 -------------- Current Provision Federal.................................... $ 171 Federal alternative minimum tax............ 29 State...................................... 23 -------------- 223 -------------- Deferred benefit Federal.................................... (86) State...................................... (12) Benefit of net operating loss carryforwards. (96) -------------- (194) -------------- $ 29 ============== The provision for income taxes for the year ended December 31, 1997 results in an effective rate which differs from the Federal statutory rate as follows: 1997 -------------- Statutory Federal income tax rate................ 35.0% Impact of graduated rate......................... (1.0) State income taxes, net of Federal tax benefit... 4.6 Federal alternative minimum tax.................. 1.8 Benefit of net operating loss carryforwards...... (38.6) ============== Effective rate................................... 1.8% ============== 58 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED 9. RELATED-PARTY TRANSACTIONS: The Company has an agreement with an affiliate of a stockholder of the Company that calls for the purchase and sale of long distance services. Revenues generated from this affiliate amounted to approximately $1.9 million, $1.9 million, and $1.5 million, or 1, 2, and 5 percent of total net revenues for the years ended December 31, 1998, 1997, and 1996, respectively. The Company was in a net accounts receivable position with this affiliate of approximately $684,000 and $377,000 as of December 31, 1998 and 1997, respectively. Services provided by this affiliate and recognized in cost of services amounted to approximately $366,000, $680,000 and $663,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company also has a lease with an affiliate of a stockholder of the Company (see Note 6). 10. BUSINESS SEGMENT DATA AND SIGNIFICANT CUSTOMERS AND SUPPLIERS: The Company classifies its operations into one industry segment, long distance telecommunications services. Substantially all of the Company's revenues for each period presented were derived from calls originated within the United States and terminated outside the United States. Net revenues terminated by geographic area were as follows (in thousands): FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ---- ---- ---- Asia/Pacific Rim................. $ 72,274 $ 42,039 $ 13,824 Middle East/North Africa......... 30,303 21,236 8,276 Sub-Saharan Africa............... 13,020 6,394 1,136 Eastern Europe................... 15,539 7,964 2,650 Western Europe................... 2,725 1,913 1,783 North America.................... 5,661 3,398 3,718 Other............................ 21,647 2,913 828 ------------ ----------- ------------ $ 161,169 $ 85,857 $ 32,215 ============ =========== ============ Significant customers A significant portion of the Company's net revenues is derived from a limited number of customers. During 1998, 1997 and 1996, the Company's five largest carrier customers accounted for approximately 61 percent, 47 percent and 40 percent of net revenues, respectively. One customer accounted for ten percent or more of net revenues in 1998 and 1996 while two customers accounted for ten percent or more of net revenues during 1997. The Company's agreements and arrangements with its carrier customers generally may be terminated on short notice without penalty. The following customers provided 10 percent or more of the Company's total net revenues in the year indicated (in thousands): DECEMBER 31, ------------------------------------------- 1998 1997 1996 ---- ---- ---- MCI/WorldCom, Inc............ $ 38,289 $ 19,886 $ 7,383 Frontier..................... - 12,420 - Significant suppliers 59 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED A significant portion of the Company's cost of services is purchased from a limited number of suppliers. The following suppliers provided 10 percent or more of the Company's total cost of services in the year indicated (in thousands): DECEMBER 31, -------------------------------------- 1998 1997 1996 ---- ---- ---- Pacific Gateway Exchange.......... $ 14,421 $ 8,893 $ - MCI/WorldCom, Inc................. - 9,918 3,972 Videsh Sanchar Nigam Limited ("VSNL") - - 7,525 Cherry Communications............... - - 3,897 The cost of services attributable to VSNL include charges that are in dispute, as discussed in Note 4. VSNL is a government-owned, foreign carrier that has a monopoly on telephone service in India. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of certain financial assets and liabilities are shown below:
DECEMBER 31, 1998 ---------------------------- CARRYING FAIR AMOUNT VALUE ------------- ------------ Financial assets: Pledged short-term marketable securities......... $ 44,156 $ 45,180 Financial liabilities: Senior Notes, excluding debt discount............ 160,000 144,000 Vendor financing................................... 8,885 8,885
Short-term marketable securities and the Senior Notes are valued based on quoted market prices. The fair value of the vendor financing is estimated based on expected future payments discounted at the Company's incremental borrowing rate. The carrying amounts for current assets, restricted cash and current liabilities approximate their fair value due to their short maturity. The fair value of notes payable to individuals and others and notes payable to related parties cannot be reasonably and practicably estimated due to the unique nature of the related underlying transactions and terms. However, given the terms and conditions of these instruments, if these financial instruments were with unrelated parties, interest rates and payment terms could be different than the currently stated rates and terms. 12. ACQUISITIONS: In November 1998, the Company acquired PCI Communications, Inc. ("PCI") for $2.65 million. PCI is a provider of voice and data services located in the Pacific Rim island of Guam. PCI has signatory status on the TPC-5, Guam-Filipinos and China-U.S. cables. The acquisition will allow Startec to access a U.S. based satellite line of sight that extends from Southeast Asia to Central Europe. The purchase price was allocated to the net assets acquired based upon the estimated fair value of such assets, which resulted in an allocation of $1 million to goodwill and $250,000 to a covenant not to compete agreement. Purchase price allocations have been completed on a preliminary basis and are subject to adjustment should new or additional facts about the business become known. In December 1998, the Company acquired Global Communications GmbH of Germany ("Global") for $5.4 million. Global has a Class IV nationwide telecommunications license for Germany, an interconnection agreement with Deutsche Telekom and a Siemens EWSD switch located in Dusseldorf. The purchase price was allocated to the net assets acquired based upon the estimated fair value of 60 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED such assets, which resulted in an allocation of $2.5 million to goodwill. Purchase price allocations have been completed on a preliminary basis and are subject to adjustment should new or additional facts about the business become known. The Company has accounted for all of the referenced acquisitions using the purchase method. Accordingly, the results of operations of the acquired companies are included in the accompanying consolidated statements of operations of the Company, as of the date of their respective acquisition. The Company's summarized, unaudited consolidated pro forma results of operations, assuming the above PCI transaction occurred on January 1, 1997 are as follows (in thousands, except per share amounts):
FOR THE YEAR ENDED DECEMBER 31, ------------------------------ 1998 1997 -------------- ------------- Net Revenues...................................... $ 166,195 $ 93,291 Income (loss) from operations..................... (11,384) 737 Income (loss) before extraordinary item........... (18,655) 480 Net income........................................ (19,169) 480 Basic earnings (loss) per common share: Income (loss) before extraordinary item......... (2.08) 0.08 Net income (loss) per common share.............. (2.14) 0.08 Diluted earnings (loss) per common share: Income (loss) before extraordinary item......... (2.08) 0.07 Net income (loss) per common share.............. (2.14) 0.07
Operations for Global were not significant for 1998 and 1997. 13. QUARTERLY FINANCIAL DATA (UNAUDITED): The following quarterly financial data has been prepared from the financial records of the Company without audit, and reflects all adjustments which, in the opinion of management, were of a normal recurring nature (except as discussed in notes (1) and (2) below) and necessary for a fair presentation of the results of operations for the interim periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
1998 --------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ---------------------------------------------------------- (in thousands, except per common share amounts) Net revenues (1)......................................... $ 29,891 $ 33,461 $ 47,448 $ 50,369 Gross margin (1)......................................... 4,236 4,632 5,496 5,629 Income (loss) from operations............................ 713 (1,166) (3,282) (6,921) Income (loss) before extraordinary item.................. 899 (2,657) (6,015) (10,287) Net income (loss)........................................ 899 (2,657) (6,015) (10,801) Basic earnings (loss) per common share: Income (loss) before extraordinary item................. 0.10 (0.30) (0.67) (1.15) Net income (loss)....................................... 0.10 (0.30) (0.67) (1.21) Weighted average common shares outstanding-basic...................................... 8,909 8,942 8,964 8,965 Diluted earnings (loss) per common share: Income (loss) before extraordinary item.................. 0.10 (0.30) (0.67) (1.15) Net income (loss)........................................ 0.10 (0.30) (0.67) (1.21) Weighted average common and equivalent shares outstanding-diluted.................................... 9,365 8,942 8,964 8,965
61 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
1997 --------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ---------------------------------------------------------- (in thousands, except per common share amounts) Net revenues........................................... $ 12,372 $ 16,464 $ 25,757 $ 31,264 Gross margin (2)....................................... 1,607 1,979 3,089 3,399 Income from operations................................. 256 349 738 754 Net income............................................. 137 214 413 855 Basic earnings per common share: Net income......................................... 0.03 0.04 0.08 0.10 Weighted average common shares outstanding-basic................................ 5,403 5,403 5,403 8,324 Diluted earnings per common share: Net income......................................... 0.03 0.04 0.07 0.10 Weighted average common and equivalent shares outstanding-diluted.............................. 5,474 5,646 5,760 8,709 - --------------------
(1) During the second quarter of 1998, upon receipt of favorable collection data, the Company reduced its allowance for doubtful accounts by approximately $337,000. (2) Vendor disputes and other disputed charges resolved in the fourth quarter of 1997 resulted in net credits as estimated by management of approximately $300,000, recognized as lower cost of services and general and administrative expenses. 14. SUBSEQUENT EVENTS: In February 1999, the Company acquired a 64.6% ownership in Phone Systems and Network Inc. of France ("PSN") for approximately $3.8 million in cash and 425,000 shares of Startec common stock for a total consideration of $7.6 million. PSN is a facilities based provider in France, with switches in Paris and Switzerland. PSN also provides services on a switchless reseller basis in Belgium. Common shares of PSN are traded on the Nouveau Marche exchange in France. In February 1999, the Company acquired a 20% ownership in a Nevada holding company with operations in Europe. The Company was acquired for approximately $1.2 million. Concurrent with the acquisition, Startec received a $2.5 million note payable from the company convertible at the Company's option into common shares equivalent to an additional 28% fully diluted ownership. 62 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information concerning directors and executive officers required by this item is incorporated by reference to the information contained under the captions "Election of Directors", "Meetings and Committees of the Board" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information contained under the caption "Compensation of Directors and Executive Officers" in the Company's Proxy Statement for the Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information contained under the caption "Ownership of the Capital Stock of the Company" in the Company's Proxy Statement for the Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information contained under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement for the Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents are filed as part of this Annual Report on Form 10-K: (a) 1. FINANCIAL STATEMENTS. The financial statements of the Company and the related Report of Independent Public Accountants are filed as Item 8 hereof. (a) 2. FINANCIAL STATEMENT SCHEDULE. The Financial Statement Schedule described below is filed as part of this report. Description: Report of Independent Public Accountants Schedule II - Valuation and Qualifying Accounts (a) 3. EXHIBITS. The Exhibits required to be filed pursuant to Form 10-K are identified in the Exhibit Index. (b) REPORTS ON FORM 8-K On December 15, 1998, the Company filed a Form 8-K with the Securities and Exchange Commission. 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Startec Global Communications Corporation By /s/ Prabhav V. Maniyar ------------------------------------- Senior Vice President, Chief Financial Officer, Secretary and Director (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. STARTEC GLOBAL COMMUNICATIONS CORPORATION
SIGNATURES TITLE DATE ---------- ----- ---- /s/ Ram Mukunda President, Chief Executive Officer, March 30, 1999 --------------- Treasurer and Director (Principal Ram Mukunda Executive Officer) /s/ Prabhav V. Maniyar Senior Vice President, Chief Financial March 30, 1999 - ---------------------- Officer, Secretary and Director Prabhav V. Maniyar (Principal Financial and Accounting Officer) /s/ Vijay Srinivas Director March 30, 1999 - ------------------- Vijay Srinivas /s/ Nazir G. Dossani Director March 30, 1999 - -------------------- Nazir G. Dossani /s/ Richard K. Prins Director March 30, 1999 - ------------------- Richard K. Prins
EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE 2.1**** Agreement and Plan of Reorganization dated June 30, 1998 by and between Startec Global Communications Corporation and Startec Global Holding Corporation 2.2#### Stock Purchase Agreement dated as of November 30, 1998 by and between the Company and Pacific Systems Corporation 2.3 Quota Purchase Agreement by and between Martin Otten and Rolf Otten, on the one part, and the Company, on the other part, effective as of December 31, 1998. 3.1**** Restated Certificate of Incorporation. 3.2**** Bylaws. 4.1* Specimen of Common Stock Certificate. 4.2* Warrant Agreement dated as of July 1, 1997 by and between Startec, Inc. and Signet Bank. 4.3* Form of Underwriters' Warrant Agreement (including Form of Warrant). 4.4* Voting Agreement dated as of July 31, 1997 by and between Ram Mukunda and Vijay and Usha Srinivas. 4.5*** Indenture, dated as of May 21, 1998, between the Company and First Union National Bank. 4.6*** Form of 12% Series A Senior Notes due 2008 4.7*** Registration Rights Agreement, dated as of May 21, 1998, among the Company, Lehman Brothers Inc., Goldman Sachs & Co. and ING Barings (U.S.) Securities, Inc. 4.8*** Warrant Agreement, dated as of May 21, 1998 by and between the Company and First Union National Bank, a Warrant Agent 4.9*** Form of Warrant (included as Exhibit A to Exhibit 4.8) 4.10*** Collateral Pledge and Security Agreement, dated as of May 21, 1998 by and between the Company and First Union National Bank, as Trustee 4.11** Rights Agreement, dated as of March 26, 1998, between the Company and Continental Stock Transfer & Trust Company. 10.1* Secured Revolving Line of Credit Facility Agreement dated as of July 1, 1997 by and between Startec, Inc. and Signet Bank. 10.2* Lease by and between Vaswani Place Limited Partnership and Startec, Inc. dated as of September 1, 1994, as amended. 10.3* Agreement by and between World Communications, Inc. and Startec, Inc. dated as of April 25, 1990. 10.4* Co-Location and Facilities Management Services Agreement by and between Extranet Telecommunications, Inc. and Startec, Inc. dated as of August 28, 1997. 10.5* Employment Agreement dated as of July 1, 1997 by and between Startec, Inc. and Ram Mukunda. 10.6* Employment Agreement dated as of July 1, 1997 by and between Startec, Inc. and Prabhav V. Maniyar. 10.7* Amended and Restated Stock Option Plan. 10.8* 1997 Performance Incentive Plan. 10.9* Subscription Agreement by and among Blue Carol Enterprises, Limited, Startec, Inc. and Ram Mukunda dated as of February 8, 1995. 10.10* Agreement for Management Participation by and among Blue Carol Enterprises, Limited, Startec, Inc. and Ram Makunda dated as of February 8, 1995, as amended as of June 16, 1997. 10.11* Service Agreement by and between Companhia Santomensed De Telecommunicacoes and Startec, Inc. as amended on February 8, 1995. 10.12*+ Lease Agreement between Companhia Protuguesa Radio Marconi, S.A. and Startec, Inc. dated as of June 15, 1996. 10.13*+ Indefeasible Right of Use Agreement between Companhia Portuguesa Radio Marconi, S.A. and Startec, Inc. dated as of January 1, 1996. 10.14*+ International Telecommunication Services Agreement between Videsh Sanchar Nigam Ltd. and Startec, Inc. dated as of November 12, 1992. 10.15*+ Digital Service Agreement with Communications Transmission Group, Inc. dated as of October 25, 1994. 10.16*+ Lease Agreement by and between GPT Finance Corporation and Startec, Inc. dated as of January 10, 1990. 10.17*+ Carrier Services Agreement by and between Frontier Communications Services, Inc. and Startec, Inc. dated as of February 26, 1997. 10.18*+ Carrier Services Agreement by and between MFS International, Inc. and Startec, Inc. dated as of July 3, 1996. 10.19*+ International Carrier Voice Service Agreement by and between MFS International, Inc. and Startec, Inc. dated as of June 6, 1996. 10.20*+ Carrier Services Agreement by and between Cherry Communications, Inc. and Startec, Inc. dated as of June 7, 1995. 10.21*** Agreement by and between Northern Telecom Inc. and the Company, dated as of December 23, 1997 10.22*** Indefeasible Right of Use Agreement by and between Telegloble Cantat-3, Inc. and the Company, dated as of September 15, 1997 (Canus 1 Cable System). 10.23*** Indefeasible Right of Use Agreement by and between Teleglobe Cantat-3, Inc. and the Company, dated as of September 15, 1997 (Cantat 3 Cable System). 10.24# Loan and Security Agreement by and between Prabhav V. Maniyar and the Company, dated June 30, 1998 (as amended and related by agreement dated December 31, 1998. See Exhibit 10.41 below). 10.25# Lease by and between The Vaswani Place Corporation and the Company, dated as of October 27, 1998. 10.26# Indefeasible Right of Use Agreement by and between Cable & Wireless Inc. and the Company, dated June 9, 1998 (Gemini Cable System) 10.27# First Amendment to Lease by and between The Vaswani Place Corporation and the Company, dated May 11, 1998. 10.28# International Facilities License, United Kingdom 10.29## Columbus III Cable System Construction and Maintenance Agreement dated February 11, 1998. 10.30### TAT-14 Cable Network Construction and Maintenance Agreement dated as of September 2, 1998. 10.31### SEA-ME-WE Construction and Maintenance Agreement dated as of January 1, 1997. 10.32### Amendment dated as of July 8, 1998 by and between Cable & Wireless, Inc. and the Company to the Indefeasible Right of Use Agreement, dated as of June 9, 1998 (Gemini Cable System). 10.33### Rack Space Agreement by and between Americatel Corporation and the Company, dated as of July 27, 1998. 10.34### Rack Space Agreement by and between IXC Carrier, Inc. and the Company, dated as of July 6, 1998 (Los Angeles). 10.35### Rack Space Agreement by and between IXC Carrier, Inc. and the Company, dated as of August 19, 1998 (Dallas). 10.36### Co-Location Agreement by and between Espirit Telecom Benelux BV and the Company., dated as of September 21, 1998 10.37### Sublease Agreement by and between Information Systems & Networks, Inc. and the Company dated as of August 11, 1998. 10.38### Master Supply Agreement by and between TTN, Inc. and the Company dated as of September 21, 1998. 10.39 Loan and Security Agreement by and between NTFC Capital Corporation and the Company, dated as of December 31, 1998. 10.40 Loan and Security Agreement by and between Ram Mukunda and the Company, dated as of October 8, 1998. 10.41 Loan and Security Agreement by and between Prabhav V. Maniyar and the Company, dated as of December 31, 1998. 10.42 TPC-5 Cable Network IRU Agreement between Companhia Portuguesa Radio Marconi, SA and the Company, dated December 15, 1998. 10.43 TPC-5 Cable Network Indefeasible Right of Use Agreement between KDD Corporation and the Company dated December 31, 1998. 10.44 TAT-12/13 Cable Network IRU Agreement between Companhia Portuguesa Radio Marconi, SA and the Company, dated December 15, 1998. 10.45 Lease between 36 North East Second Street, L.L.C and the Company executed on November 30, 1998. 10.46 Lease between 36 North East Second Street, L.L.C and the Company executed on October 29, 1998 21.1 Subsidiaries of Company. 23.1 Consent of Arthur Andersen LLP. 27.1 Financial Data Schedule. - ---------- * Incorporated by reference from the Company's Registration Statement on Form S-1 (SEC File No. 333-32753). ** Incorporated by reference from the Company's Current Report on Form 8-K filed on April 8, 1998 *** Incorporated by reference from the Company's Quarterly Report on Form 1 0-Q for the quarter ended June 30, 1998 **** Incorporated by reference from the Company's Registration Statement on Form S-4 (SEC File No. 333-58247) # Incorporated by reference from the Company's Registration Statement on Form S-4 (SEC File No. 333-61779) ## Incorporated by reference from the Company's Registration Statement on Form S-1 (SEC File No. 333-64465) ### Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. #### Incorporated by reference from the Company's Current Report on Form 8-K/A filed on February 12, 1999. + Portions of the Exhibit have been omitted pursuant to a grant of Confidential Treatment by the Securities and Exchange Commission under Rule 406 of the Securities Act of 1933, as amended, and the Freedom of Information Act. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Startec Global Communications Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of Startec Global Communications Corporation and subsidiaries (a Maryland corporation) included in this Form 10-K and have issued our report thereon dated February 23, 1999. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Washington, D.C. February 23, 1999 STARTEC GLOBAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS --------------------------- CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER ENDING DESCRIPTION BALANCE EXPENSES(A) ACCOUNTS(B) DEDUCTIONS(C) BALANCE ---------- ------------- -------------- ---------------- ------------- Reflected as reductions to the related assets: Provisions for uncollectible accounts (deductions from trade accounts receivable) Year ended December 31, 1996. $ 457 $ 783 $ 464 $ (625) $ 1,079 Year ended December 31, 1997. 1,079 57 1,864 (647) 2,353 Year ended December 31, 1998. 2,353 329 827 (850) 2,659
(a) Includes $329,000 of reserves recognized in purchase accounting in 1998. (b) Represents a reduction of residential revenue not expected to be realized. (c) Represents amounts written off as uncollectible. S-1 EX-2.3 2 EXHIBIT 2.3 EXHIBIT 2.3 QUOTA PURCHASE AGREEMENT PREAMBLE WHEREAS; Mr. Martin Otten is the owner of two quotas in the nominal value of DM 850,000.00 and DM 50,000.00 in Global Communications GmbH, Eupener Strasse 57-59, 50933 Cologne, registered with the commercial register of the Lower Court of Cologne under HRB 25429 ("COMPANY") with a registered stated capital amounting to DM 1,000,000. Mr. Rolf Otten is the owner of one quota in the nominal value of DM 100,000.00 in the Company. The aforementioned quotas ("QUOTAS") form 100% of the registered stated capital of the Company. WHEREAS; Sellers desire to sell and Buyers desire to purchase the Quotas of the Company under the terms and conditions set forth herein. Now, THEREFORE; the parties agree as follows: 1. PURCHASE AND SALE Sellers hereby sell assign and transfer to Buyer the Quotas in the Company including the right to undistributed profits and all other rights pertaining to the Quotas, and Buyer purchases and accepts the transfer of said Quotas for the herein below stated purchase price. The assignment and transfer of the Quotas shall be subject to the condition precedent set out in clause 2.1. 2. TRANSFER OF LEGAL TITLE AND LEGAL OWNERSHIP 2.1 The transfer of legal title in the Quotas is conditional upon the payment of the A-Consideration as set out in Clause 3.1 to the escrow account as described in Clause 3.2. 2.2 The Buyer shall be entitled to all profits and losses as of 30 December 1998, 24:00 hrs. ("EFFECTIVE DATE") and all retained profits of prior business years. Risk shall pass to the Buyer as of the Effective Date. As of the Effective Date the Sellers are obliged not to perform or exercise any of their shareholder's rights in the Company without prior consent of the Buyer. Mr. Martin Otten as the registered director of the Company is aware and acknowledges this obligation 2.3 From the Effective Date the Buyer is entitled to review the business documents of the Company. Such documents shall be delivered to the Buyer within three weeks after the Effective Date. 2.4 The risk of loss in respect of the Quotas shall pass to the Buyer as of the Effective Date. 3. CONSIDERATION 3.1 The following two items comprise the purchase price for the Quotas sold hereunder: an amount of DM 9,000,000 (German marks nine million, "A-CONSIDERATION") and an additional amount of DM 350,000 (German marks three hundred fifty thousand, "B-CONSIDERATION"). 3.2 The payment of the A-Consideration shall be made in full to an escrow account provided by the notary Mr. Gerhard Grossmann, Frankfurt/Main pursuant to the escrow agreement attached hereto as ANNEX 3.2. The A-Consideration becomes due as of the December 30, 1998. Default interest in the statutory amounts shall be payable by Buyer if payment of the A-Consideration has not been effected by January 10, 1999. 3.3 It is the understanding of the parties that the A-Consideration is to pay off (1) all outstanding liabilities in the amount of DM 6,103,168.94 (2) all liability reserves (Ruckstellungen) in the amount of DM 187,452 and (3) the outstanding share capital in the amount of DM 665,000, as well as (4) liabilities as referenced to in clause 6.2. The Company hereby requests the payment of the respective outstanding amounts of the share capital. The balance between the A-Consideration and the sum of the aforementioned amounts will be paid for goodwill (DM 2,044,379). 3.4 The A-Consideration will be adjusted downwards in the market value of any liabilities or liability reserves against the Company which have -- in violation of German GAAP -- not been shown in the Company's preliminary balance sheet and profit and loss statements as of 31 December 1998 ("BALANCE SHEET") attached hereto as ANNEX 3.4. Further downside adjustments shall be made with regard to any costs which are shown in the balance sheet but which are not related to the Company's German business. The adjustment of the A-Consideration shall be made by a deduction of the A-Consideration in the amount of the market value of the respective liabilities, liability reserves or costs in accordance with the escrow agreement. 2 3.5 The B-Consideration to be effected to Mr. Martin Otten is subject to the following conditions, it being understood that the external costs incurred in the fulfilment of the conditions shall be borne by the Company or the Buyer: a. the arrangement of an irrevocable offer by STAR-Telecommunications Deutschland GmbH ("STAR") to amend the existing co-location agreement between STAR and the Company which provides for a fixed lease term until 31 December 1999 and an option in favour of the Company to prolong the lease term for one further year as additional fixed terms; b. the co-operation in obtaining an offer by DTAG for the Company for an interconnection agreement (ZusammenschluBvereinbarung) which includes originating services for carrier network operators (Zufuhrungsleistungen fur Verbindungsnetzbetreiber) and no more than 2 PoI; c. the delivery of two ICAs (Interconnect Accesses) [Interconnection Anschlusse] for terminating as well as originating services of DTAG at a PoI in Dusseldorf; d. the making available of a calling card platform billing system for use by the Company, subject to separate agreement; e. submission of a security concept for use by the Company and best efforts to obtain unconditional approval of such concept by the Regulatory Authority for Telecommunication and Post in accordance with Section 87 of the German Telecommunications Act as soon as possible; f. submission of a call monitoring for use by the Company concept and best efforts to obtain unconditional approval of such concepot by the Regulatory Authority for Telecommunication and Post in accordance with Section 88 of the German Telecommunications Act as soon as possible; g. the fulfilment of the conditions (a), (b) and the delivery of one ICA under (c) as well as the submission of the concepts under (e) and (f) within three months after having received clear instructions by the Buyer. The B-Consideration shall amount to DM 200,000 if the conditions as required under (g) will be fulfilled within 6 months including the second ICA foreseen under (c). If those conditions are met within nine months the B-Consideration amounts to DM 100,000. Thereafter no B-Consideration is owed to Mr. Martin Otten. 3 4. REPRESENTATIONS AND WARRANTIES OF THE SELLERS In addition to and not to the exclusion of any warranties implied under law, Sellers represent and warrant in the form of an independent warranty without fault (verschuldensunabhangige Garantie) that the following statements are correct. Unless stated otherwise, hereinafter, the warranties relate to the Effective Date. 4.1 The information contained in the Preamble above is correct. Company is a limited liability company duly organised, validly existing and in good standing under the laws of Germany with a stated capital of DM, 1,000,000.00 and is duly qualified of conduct its present business. 4.2 The Quotas are paid-up in the amount of DM 335,000.00 in cash and are non-assessable. No disclosed or hidden repayments (offene oder verdeckte Ruckzahlungen) have been effected from the assets required in order to maintain the paid-up share capital. There are no agreements, options, warrants or rights outstanding to purchase or otherwise acquire Quotas or any other interests in Company. Sellers are the owner, free and clear of any encumbrances, of all Quotas sold hereunder and by this Agreement and this Agreement shall convey to Buyer full title thereto, free and clear of all liens, encumbrances, or other charges. In particular, the Quotas and/or rights resulting therefrom were neither pledged nor transferred for security purposes, and neither option rights of first refusal thereto exist. There are no outstanding resolutions on distributions of profit or capital. 4.3 All necessary approvals and ratifications required from Sellers in order to consummate this Agreement have been granted. There are no further approvals and ratifications necessary on behalf of Sellers for a valid and binding sale and assignment of Sellers Quotas. The Company hereby declares its consent to the sale and transfer of the Quotas. 4.4 The Company has no Company law relationship of any kind with third parties; in particular, it does not hold any participation or sub-participation in any other company, it has not entered into any affiliation agreements within the meaning of secs. 291, 292 German Stock Corporation Act (Aktiengesetz - "AKTG"), it has not entered into any co-operation agreement and has not 4 issued any letters of comfort in favour of other companies. No third party has any right to or interest in the profit of the Company. 4.5 As between the Company on the one part and the Sellers and undertakings affiliated to the Sellers pursuant to sec. 15 AktG on the other part, there are no contractual relationships of any kind whatsoever. 4.6 Company's financial Balance Sheet is prepared in accordance with the generally accepted accounting principles (Grundsatze ordnungsgemaBer Buchfuhrung), consistently applied, and in accordance with the books and records of the Company and present a true and fair view of the asset position (Vermogenslage), financial position (Finanzlage) and earnings position (Ertragslage) of the Company as of December 31, 1998. 4.7 There has been no material adverse change in the business, properties or financial condition of the Company since the Balance Sheet has been prepared. 4.8 Except as disclosed in ANNEX 4.8, there are no actions, claims, suits, proceedings, or governmental investigations pending, or to the knowledge of the Sellers threatened, or any known basis therefor, against or to the knowledge of the Sellers affecting the Company, except claims and actions as to which the Company is fully covered by insurance. 4.9 Company has good and marketable title to all the assets and property reflected in the Balance Sheet (other than property disposed of in the ordinary course of business after the Balance Sheet date), free and clear of all liens, charges and encumbrances except those which are disclosed in the Balance Sheet and such imperfections of title and encumbrances which do not interfere with the use of the assets or impair the operations of Company, including customary title retentions by suppliers. All lease pursuant to which Company leases real or personal property are valid and enforceable substantially in accordance with their terms. Company is not in default under any such lease. The purchase agreement regarding the purchase of the Siemens EWSD Switch and ancillary voice and data communications equipment is concluded with the Company 5 and Company holds and expectant right (Anwartschaftsrecht) to the Siemens EWSD Switch and all ancillary voice and data communications equipment as documented in the invoices provided to Buyers in written form and as located at the co-location site of Company with STAR TELECOM at Prinzenallee 9, Dusseldorf, and that such Switch and equipment are free of any third party rights. The EWSD Switch is covered by a producer warranty by Siemens until April 30, 1999. 4.10 Company has obtained all consents, licenses and permits to be issued to the Company by a governmental or public entity which is required for its operations as presently conducted; in particular, the Company holds a national class 4 license ("LICENSE") granted by the "Regulierungsbehorde fur Telekommunikation und Post" on August 21, 1998 (license number 98 04 0614 A), The License has not been revoked at the Effective Date and will not be revoked by the Regulatory Authority for Telecommunication and Post due to reasons or events relating to the time period until the Effective Date. 4.11 Company has not received notice of violation of any applicable regulations, ordinance or other law, regulation or requirements relating to its operations or to its properties, and Sellers are not aware of any pending actions, claims and notices of claim. 4.12 Company has performed all obligations required to be performed by it to the date of this agreement, and is not in default in any respect under any contract, agreement lease, license or other documents, which default would have a material adverse effect on the operations of Company. 4.13 Company is not in default of any order, writ, injunction or decree of any court or governmental department. 4.14 Since the Balance Sheet has been prepared, Company has not , (i) sold, assigned or granted rights with respect to any inventions, patents, patent applications, licenses, written know-how, secret processes or trade secrets, (ii) entered into any transactions or series of transactions other that in the ordinary course of business, (iii) made any material change in their 6 accounting or billing policy practices or procedures, (iv) made any distributions of cash or assets to its shareholders, neither by way of dividends nor otherwise, (v) mortgaged, pledged or subjected to lien or encumbrance any of its properties or assets, or (vi) increased the rate of compensation of its key employees. 4.15 The entering into and implementation of this agreement does not violate any obligation or commitment of Company or the Sellers, nor will it affect any existing agreements in particular any lease or loan agreements. 4.16 The Company has submitted all declarations and prepayment notices with regard to income taxes, trade taxes, turnover taxes, wage taxes, and social security charges ("TAXES") concerning the period until December 31, 1998, completely and accurately. Taxes have been paid when due or have been reserved against on the Balance Sheet. The Company, as of the Effective Date, will have prepared and timely filed or may have timely filed requests for extension of filing periods for all required tax returns and as of the Effective Date is not in default in the payment of such due Taxes. 4.17 The only employees of the Company as of 1 January 1999 will be Mr. Fees and Mr. Rauen employed under the conditions disclosed to the Buyer. 4.18 The acquisition of the Quotas by the Buyer does not constitute a transfer of all, or substantially all of the Sellers' assets within the meaning of Section 419 German Civil Code (BGB). 4.19 Pursuant to the letter of intent between the Company and Technology Control Services, Inc. dated May 21, 1998 the Company has no obligation exceeding 100,000 Schweizer Franken. 4.20 All information furnished to the Buyer or to its advisers in connection with the acquisition of the Company is correct. The Sellers have not withheld any material information in this context from the Buyer or its advisers. 5. LEGAL CONSENQUENCES 5.1 If and to the extent to which any of the representations and warranties extended by Sellers under Clause 4 other than Clause 4.16 above are not true, 7 Sellers will put the Company in the same position they would be in had the representations and warranties been true. Sellers are obliged to compensate Buyer in money ("DAMAGES") if Sellers do not put the Company in such position within a reasonable period of time, one month at the longest, or if the restitution of such status should prove to be impossible. The compensation shall be made by deduction of the Damages from the A-Consideration in accordance with the escrow agreement. In the event that the escrow funds are fully released the Damages shall be paid directly by the Sellers to the Buyer. 5.2 To the extent the representations under 4.16 are breached, assessed taxes and/or interest payments (minus interest reimbursements) must be reimbursed by Sellers to the Company, if and to the extent to which such Taxes and interest payments are not covered by Balance Sheet reserves and relate to time periods prior to December 31, 1998. Tax savings realized by the Company for the time period up to December 31, 1998, will be set off against additional taxes to be paid by the Company for periods up to December 31, 1998; the same applies if tax savings or additional tax payments are owed for different fiscal years. Sellers are not liable for additional taxes caused by changes to and changes in the evaluation of Balance Sheet items if the changes are not provided by law. 5.3 Damage claims for breach of representations and warranties may be asserted only if they exxceed an amount of DM 10,000.00 (Freigrenze). 5.4 Any claims by Buyer based on a breach of the representations and warranties set forth under Clause 4 above must be made in writing vis-a-vis Sellers and shall be time-barred 12 (twelve) months after the Effective Date and shall be time-barred if Buyer does not start arbitration proceedings which have been claimed within the 12-months period within an additional period of three months after expiry of the initial 12 months' period. However, if the claim pertains to tax or other public levy liabilities or to liabilities for claims raised by third parties, the claim shall be time-barred six month after the claim has 8 become final and unappealable. Sellers shall not be liable for a breach of representation, warranty or covenant if and to the extent that (i) the amount of the claim is covered by an insurance of the Company or satisfied by a third party not being an affiliate of Buyer (within the meaning of sec. 15 AktG) or (ii) results from a failure of Buyer to mitigate damages pursuant to sec. 254 of the German Civil Code. 5.5 Claims for damages under this Clause 5 are limited in total to 50% of the purshace price. In the event that damages have been caused by gross negligence, the limitation of liability is extended to 100% of the purchase price. Sellers are jointly and severally liable for damages. 5.6 Sellers liability under this section 5 is excluded if and to the extent that the underlying facts have been disclosed to Buyer prior to December 30, 1998 within the meaning of sec. 460 German Civil Code. 6. INDEMNIFICATION 6.1 The Sellers shall jointly and severally indemnify and hold the Buyer harmless against any and all liabilities, penalties or other claims arising from the dispute regarding the Company's name as disclosed in Annex 4.8. 6.2 The Sellers shall jointly and severally indemnify and hold the Buyer harmless against any other obligations of the Company as of December 30, 1998 exceeding DM 10,000, except to the extent that such obligations or their existence have been disclosed to the Buyer, in particular contingent liability in the amount of approximately DM 40,000 claimed by Siemens. 6.3 Sellers acknowledge that certain positions of the invoices provided to Buyer in relation to the Switch and related equipment contain products and services which either relate directly or indirectly to specific envisaged corporate customers of Sellers without being of interest to Buyer or which have not been provided by Siemens or other contractors yet. The parties agree to hold a review within six weeks from the Effective Date in order to determine such positions, it being understood that such positions in sum will be deducted from the consideration in accordance with Clause 3.4 above. 9 Furthermore, Sellers shall jointly and severally indemnify and hold the Buyer harmless against a future claim in the approximate amount of DM 800,000 of Aspect Telecommunications, Ratingen, for delivery of an ordered PBX-facility expected in January 1999. 6.4 Sellers jointly and severally undertake to hold harmless and indemnify Buyer against any and all administrative fees and costs relating to permits, approvals and/or allocations other than the national class 4 license addressed in Clause 4.11 above applied for or granted by the Regulatory Authority for Telecommunication and Post before the Effective Date. 6.5 Except as regards claims under Clause 6.4 above, the Buyer shall immediately inform the Sellers in writing if any third party claims have been asserted or threatened against the Buyer which could result in the Sellers becoming liable under an indemnity under this Clause 6. In such case, the Buyer must within a reasonable period of time make available to the Sellers relevant documents and furnish all relevant information as well as allow the Sellers to inspect the documents and books of the Company to the extent that this is necessary in order to evaluate the justification of the asserted or threatened claims. In respect to such asserted claims, the Buyer shall not be entitled to effect any comprise (Vergleich) or make any acknowledgement (Anerkenntnis) which could result in an obligation on the Sellers part without the Sellers prior written consent. The Buyers must enable the Sellers to effect a third party intervention (Nebenintervention). Any procedural orders (comprise, declaration of settlement (Erledigungserklarung), judicial confession (gerichtliches Gestandnis), acknowledgment)) require the Sellers prior written consent. 6.6 If on the grounds of certain facts the Buyer is entitled to both an indemnity pursuant to Clause 6 and to claims pursuant to Clause 5, then the Buyer may decide at its complete discretion which entitlement it shall assert against the Sellers. 6.7 Any claims by Buyer based on the aforementioned indemnifications must be made in writing vis-a-vis Sellers and shall be time-barred 18 (eighteen) 10 months after the Effective Date and shall be time-barred if Buyer does not start arbitration proceedings which have been claimed within the 18-months period within an additional period of three months after expiry of the initial 18 months' period. 6.8 Clause 5.1 para. 2 shall apply accordingly. 7. MISCELLANEOUS 7.1 It is expressly understood that the Buyer is entitled to use the name of the Company for a period of 9 months commencing on the Effective date. Thereafter the Buyer undertakes to file all necessary documents to the commercial register in order to change the name of the Company and Mr. Martin Otten shall be entitled to use the name of the Company for his own purposes. However, the Buyer retains the right to use the components "Global Communication" inter alia for the future name of the Company. 7.2 Subject to a separate agreement to be concluded between the parties, Buyer commits to provide to Sellers or an entity designated by Sellers, and Sellers commit to exclusively acquire from Buyer, all services which Buyer obtains from Deutsche Telekom AG ("TELEKOM") on the basis of the existing agreements between Company and Telekom or agreements replacing or amending the existing agreements ("AGREEMENTS") at the prices charged by Telekom to Buyer plus Buyers costs and a maximum 15% service fee if and to the extent that Buyer has available service capacity and that Sellers can demonstrate that Sellers intend to offer these services to clients in the insurance and banking business in Germany which are not intended or existing clients of the Buyer; this shall, in particular, apply for freephone services. Buyer will keep Sellers informed about any material changes of the terms of the Agreements. 7.3 The parties will conclude a separate agreement as to the terms under which Mr. Martin Otten may continue to act as Managing Director of Company after December 20, 1998, if so agreed by the parties. 11 8. GENERAL 8.1 Each party agrees to bear the fees and costs of all, consultants, brokers, lawyers and other advisors employed by it in connection with the transaction contemplated by this agreement. 8.2 Transfer taxes, the costs of this notarial deed and other costs, if any, arising in connection with the transfer of the Quotas shall be borne by Buyer. 8.3 All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing by registered air mail, telefax copy and shall be sent to the address set forth below or to such other address as the party in question may have substituted therefor by notice to the other in accordance with this provision: If to Seller: Mr. Martin Otten, Eupener Str 57-59, Koln, Telefax-No.: 0221-94 98 60 30, Tel.: 0221-94 98 60 11 If to Buyer: Startec Global Communications, attn. Mr. Ram Mukunda, 10411 Motor Drive, Bethesda, MD 20817, Maryland, USA (Fax: +1-301-365-8969, Tel: +1-301-767 1447), with a copy to Clifford Chance, attn. Sven-Erik Heun, Oberlindau 54-56, 60323 Frankfurt am Main (Fax: +49-69-97155 555, Tel.: +49-69-97155-0). 8.4 The parties agree that all notices to third parties and all other publicity concerning the transactions contemplated by this agreement shall be agreed between before the initial release. 8.5 This agreement, including the exhibits attached thereto and made a part hereof, contains the entire understanding of the parties hereto with respect to the subject matter contained herein and supersedes all prior arrangements and understandings, whether oral or written. Provisions of this agreement may be amended only by written instrument signed by the parties. 12 8.6 In the event that one or more provisions of this agreement shall be invalid of unenforceable or this agreement is incomplete, the validity and enforceability of the other provisions of this agreement shall not be affected hereby. In such cases the parties hereto agree hereby on such valid and enforceable provision or on provisions completing this agreement which are commensurate with the commercial intent of this agreement. The same applies in the event of an omission. 8.7 This agreement shall be exclusively governed by and constructed in accordance with the laws of Germany under exclusion of the United Nations Convention on the international Sale of Goods. 8.8 All disputes from this agreement including the validity shall be finally settled by arbitration in accordance with the Arbitration Rules of the German Institution of Arbitration e.V. (DIS) without recourse to the ordinary courts of law. The arbitration tribunal may also decide on the validity of this agreement to arbitrate. There shall be one arbitrator. The arbitration procedure shall be held in Frankfurt am Main and shall be carried on in the English language only. All documents must be submitted in the English language, or, where the original is in a different language, with a translation in English, certified by a sworn interpreter. German substantive law (materielles Recht) as provided in Clause 8.7 shall apply. The notary instructed both parties that -- the purchaser of Quotas is liable for unpaid or repaid subscriptions; -- only such party is recognized as the shareholder by a GmbH who has notified the GmbH of the assignment of the Quotas. The Buyer requested the notary to notify the Company of the assignment of Quotas hereunder in accordance with Section 16 GmbHG. The above protocol and the exhibits thereto were read to the parties present in the English language, approved by them and signed by them and the notary in their on hand as follows: 13 EX-10.39 3 EXHIBIT 10.39 EXHIBIT 10.39 LOAN AND SECURITY AGREEMENT This LOAN AND SECURITY AGREEMENT ("Agreement"), is dated as of December 31, 1998 (the "Closing Date"), by and between the following parties: LENDER/SECURED PARTY: NTFC CAPITAL CORPORATION, a Delaware corporation with offices at 501 Corporate Centre Drive, Franklin, Tennessee 37067 ("Lender") BORROWER/DEBTOR: STARTEC GLOBAL COMMUNICATIONS CORPORATION, a Maryland corporation with its principal place of business at 10411 Motor City Drive, Bethesda, Maryland ("Borrower") This Agreement includes the general terms and conditions contained herein and all the exhibits and schedules attached hereto, all of which are incorporated herein. In the event of an express conflict between the general terms and conditions and any exhibit or schedule, the additional terms and conditions stated in the schedule shall control. By executing this Agreement, Lender agrees to make loans to Borrower, and Borrower agrees to borrow from Lender and to provide collateral to secure such loans, all on the terms and conditions set forth herein. IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives: LENDER: BORROWER: - ------- --------- NTFC CAPITAL CORPORATION STARTEC GLOBAL COMMUNICATIONS CORPORATION BY: BY: -------------------------------- ---------------------------------- TITLE: TITLE: ----------------------------- -------------------------------------- DATE: DATE: ----------------------------- --------------------------------------- TABLE OF CONTENTS ----------------- Page ---- ARTICLE 1: DEFINITIONS 1.01. Certain Definitions...................................... 1 1.02. Accounting Principles; Subsidiaries...................... 8 1.03. UCC Terms................................................ 8 1.04. General Construction; Captions........................... 8 1.05. References to Documents and Laws......................... 8 ARTICLE 2: LOANS 2.01. Commitment............................................... 9 2.02. Note and Payment Terms................................... 9 2.03. Procedures for Borrowing..................................10 2.04. Prepayments.............................................. 11 2.05. Computation of Interest.................................. 12 2.06. Payments................................................. 12 2.07. Indemnity................................................ 12 2.08. Use of Proceeds.......................................... 12 2.09. Fees..................................................... 12 2.10. Lender's Expenses........................................ 13 ARTICLE 3: COLLATERAL AND SECURITY AGREEMENT 3.01. Grant of Security Interest............................... 13 3.02. Priority of Security Interests........................... 14 3.03. Further Documentation; Pledge of Instruments............. 14 3.04. Further Identification of Collateral..................... 14 3.05. Remedies................................................. 14 3.06. Standard of Care......................................... 14 3.07. Advances to Protect Collateral........................... 15 3.08. License to Use........................................... 15 3.09. Subsidiary Guarantees.................................... 15 ARTICLE 4: REPRESENTATIONS AND WARRANTIES 4.01. Organization and Qualification........................... 15 4.02. Authority and Authorization.............................. 15 4.03. Execution and Binding Effect............................. 15 4.04. Governmental Authorizations.............................. 16 4.05. Regulatory Authorizations................................ 16 4.06. Material Agreement; Absence of Conflicts................. 16 4.07. No Restrictions.......................................... 16 4.08. Financial Statements..................................... 16 4.09. Financial Accounting Practices........................... 17 4.10. Accurate and Complete Disclosure......................... 17 4.11. No Event of Default; Compliance with Material Agreements............................................... 17 4.12. Litigation............................................... 17 4.13. Rights to Property....................................... 17 4.14. Financial Condition...................................... 17 4.15. Taxes.................................................... 17 4.16. No Material Adverse Change............................... 18 4.17. No Regulatory Event...................................... 18 4.18. Trade Relations.......................................... 18 4.19. No Brokerage Fees........................................ 18 4.20. Margin Stocks; Regulations U and X .......................18 4.21. Intentionally Deleted.................................... 18 4.22. Intentionally Deleted.................................... 18 4.23. Security Interests....................................... 18 4.24. Place of Business........................................ 18 4.25. Location of Collateral................................... 19 4.26. Clear Title To Collateral................................ 19 4.27. Assumed Names............................................ 19 4.28. Intentionally Deleted.................................... 19 4.29. Nortel Purchase Agreement................................ 19 4.30. Subsidiaries of Borrower................................. 19 ARTICLE 5: CONDITIONS OF CLOSING 5.01. Closing Certificates..................................... 19 5.02 Opinions of Counsel...................................... 19 5.03. Closing Documents........................................ 19 ARTICLE 6: CONDITIONS OF LENDING 6.01. Conditions for Initial Advance........................... 20 6.02. Conditions for All Advances.............................. 20 6.03. Affirmation of Representations and Warranties............ 22 6.04. Deadline for Funding Conditions.......................... 22 ARTICLE 7: AFFIRMATIVE COVENANTS 7.01. Reporting and Information Requirements................... 22 7.02 Other Notices............................................ 23 7.03. Inspection Rights........................................ 23 7.04. Preservation of Corporate Existence and Qualification.... 24 7.05. Continuation of Business................................. 24 7.06. Insurance................................................ 24 7.07. Payment of Taxes, Charges, Claims and Current Liabilities.............................................. 25 7.08. Financial Accounting Practices........................... 26 7.09. Compliance with Laws..................................... 26 7.10. Use of Proceeds.......................................... 26 7.11. Government Authorizations; Regulatory Authorizations, Etc...................................................... 26 7.12. Contracts and Franchises................................. 27 7.13. Consents................................................. 27 7.14. Financial Covenants...................................... 27 7.15. Construction and Storage................................. 27 7.16. Upgrade Equipment........................................ 27 ARTICLE 8: NEGATIVE COVENANTS 8.01. Additional Indebtedness.................................. 28 8.02. Restrictions on Liens and Sale of Collateral............. 28 8.03. Intentionally Deleted.................................... 28 8.04. Prohibition of Mergers, Acquisitions, Name, Office or Business Changes......................................... 28 8.05. Limitation on Equity Payments............................ 28 8.06. Limitation on Investments, Advances and Loans............ 28 8.07. Intentionally Deleted.................................... 29 8.08. Intentionally Deleted.................................... 29 8.09. Removal of Collateral.................................... 29 8.10. Assumed Names............................................ 29 ARTICLE 9: EVENTS OF DEFAULT 9.01. Events of Default........................................ 29 9.02. Consequences of an Event of Default...................... 31 9.03. Exercise of Rights....................................... 31 9.04. Rights of Secured Party.................................. 31 9.05. Notices, Etc. Waived..................................... 32 9.06. Additional Remedies...................................... 32 9.07. Application of Proceeds.................................. 33 9.08. Discontinuance of Proceedings............................ 33 9.09. Power of Attorney........................................ 33 9.10. Regulatory Matters....................................... 34 ARTICLE 10: GENERAL CONDITIONS/MISCELLANEOUS 10.01. Modifications and Waivers................................ 34 10.02. Advances Not Implied Waivers............................. 34 10.03. Deviation from Covenants................................. 35 10.04. Holidays................................................. 35 10.05. Records.................................................. 35 10.06. Notices.................................................. 35 10.07. FCC and PUC Approval..................................... 36 10.08. Lender Sole Beneficiary.................................. 36 10.09. Lender's Review of Information........................... 36 10.10. No Joint Venture......................................... 36 10.11. Severability............................................. 36 10.12. Rights Cumulative........................................ 37 10.13. Duration; Survival....................................... 37 10.14. Governing Law............................................ 37 10.15. Counterparts............................................. 37 10.16. Successors and Assigns................................... 37 10.17. Participation............................................ 38 10.18. Time of Essence.......................................... 38 10.19. Disclosures and Confidentiality.......................... 38 10.20. Jurisdiction and Venue................................... 39 10.21. Jury Waiver.............................................. 39 10.22. Limitation on Liability.................................. 40 10.23. Borrower Waivers......................................... 40 10.24. Schedules................................................ 40 10.25. Agreement to Govern...................................... 40 10.26. Entire Agreement......................................... 40 10.27. Construction............................................. 41 LOAN AND SECURITY AGREEMENT --------------------------- THIS LOAN AND SECURITY AGREEMENT ("Agreement") is dated as of the "Closing Date" set forth on Schedule 1 hereto, by and between the entity or entities described on Schedule 1 hereto (collectively, "Borrower") and NTFC CAPITAL CORPORATION, a Delaware corporation ("Lender"), with offices at 501 Corporate Centre Drive, Franklin, Tennessee 37067. B A C K G R O U N D: -------------------- A. Borrower has entered into a certain purchase agreement with Northern Telecom Inc., as described on Schedule 1 hereto, providing for Borrower's purchase of certain telecommunications equipment and the license of associated software, all as described therein, and has requested Lender to extend credit to Borrower to finance such purchase and license, as described on Schedule 1 hereto, and to make credit available for the purchase of additional telecommunications equipment, in each case as described herein. B. Lender is willing to extend such credit to Borrower upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1: DEFINITIONS ---------------------- 1.01. Certain Definitions. Certain terms are defined on Schedule 1 hereto. In addition to other words and terms defined in the preamble hereof or elsewhere in this Agreement, or on the Schedules hereto, the following words and terms shall have the following meanings unless the context otherwise clearly requires: "Advance(s)": any advance or loan of funds made by Lender to Borrower pursuant to this Agreement. "Affiliate": as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person. For purposes of this definition and the definition of "Subsidiary", a Person shall be deemed to control another Person if such first Person possesses, directly or indirectly, the power to direct, or to cause the direction of, the management and policies of such other Person, whether through ownership of voting securities, by contract or otherwise. The "Affiliates" of Borrower shall also include any Person that owns of record or beneficially at least 10% of the outstanding capital stock of Borrower (excluding capital stock issuable upon the exercise of stock options). "Borrowing Certificate": a certificate substantially in the form of Exhibit B hereto. "Borrowing Date": any Business Day on which an Advance is made to Borrower hereunder. "Business Day": a day other than a Saturday, Sunday or other day on which commercial banks in Nashville, Tennessee are authorized or required by law to close. "Calendar Quarter": each three-month period starting on each January 1, April 1, July 1, and October 1, during the term of this Agreement, as appropriately adjusted if Borrower changes its fiscal year in accordance with this Agreement. "Carrier": any interexchange carrier or other provider of telecommunications long distance service, or local exchange company or other provider of local telecommunications service. "Cash": at any time, the cash, cash equivalents or marketable investment grade securities held by Borrower free of any claims or encumbrances. "Cash Flow": during any fiscal period of Borrower, EBITDA, less any Equity Payments pursuant to Section 8.05 hereof or payments on Subordinated Indebtedness made during such period. "Certificate of Financial Condition": a certificate in the form of Exhibit F hereto, executed by Borrower. "Change in Control": any change in the control of, or the actual and then current ability or right to control, a majority of the outstanding shares of voting capital stock of Borrower or in the ability or right to control the election of at least a majority of the board of directors of Borrower. "Closing Date": as defined on Schedule 1 hereto. "Code": the Internal Revenue Code of 1986 and the U. S. Treasury Regulations promulgated thereunder, all as amended from time to time. "Collateral": as defined in Section 3.01 hereof. "Commitment": as defined in Section 2.01 hereof. "Communications Law": any and all of (i) the Communications Act of 1934, as amended and any similar or successor federal statute, and the rules and regulations of the FCC thereunder, (ii) any applicable state law governing the provision of telecommunications services, and the rules and regulations of the PUC, all as the same may be in effect from time to time. "Consent": a consent to a collateral assignment of the Nortel Purchase Agreement, a consent to a collateral assignment of the Vendor Purchase Agreement, a Landlord Consent, and/or a Mortgagee's Consent. "Contingent Obligation": as to any Person, any obligation of such Person guaranteeing, directly or indirectly, any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof. 2 "Debt Service": for any fiscal period of Borrower, the sum of all principal and interest payments that Borrower is required to make during such period on account of all of its Indebtedness including, without limitation, (a) amounts due during such period on account of capitalized leases, (b) the then current portion of any long-term Indebtedness, including any Subordinated Indebtedness, (c) amounts due on short-term Indebtedness, and (d) amounts due under this Agreement and the Note. "Default": any of the conditions or occurrences specified in Section 9.01, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition has been satisfied. "Default Rate": a rate of interest equal to the lesser of (i) three percentage points in excess of the Interest Rate, or (ii) the maximum permissible rate under applicable law in effect at any time. "EBITDA": for any fiscal period, Borrower's actual operating earnings from ongoing operations and before interest, taxes, depreciation and amortization for such fiscal period. "Equipment": as defined in Section 3.01 hereof. "Equity Payment": other than as required in connection with the Units Offering, or as required by the terms of the Units, any distribution of earnings or capital to any stockholders of Borrower, or any redemption of stock or other ownership interests, either directly or indirectly, whether in cash or property or in obligations of Borrower. "Event of Default": any of the events specified in Section 9.01 hereof, provided that any requirement for the giving of notice, the lapse of time, or both, or any other condition, under Section 9.01 or otherwise, has been satisfied. "Exchange Act": means the Securities Exchange Act of 1934, as amended. "FCC": the Federal Communications Commission of the United States of America, and any successor, in whole or in part, to its jurisdiction. "Financing Termination Date": as defined on Schedule 2.02 hereto. "First Borrowing Date": the date of the first Advance by Borrower hereunder. "Fixed Charges": with respect to any fiscal period of Borrower, its Debt Service, plus non-financed capital expenditures. "GAAP": subject to Section 1.02 hereof, generally accepted accounting principles in the United States of America (as such principles may change from time to time) applied on a consistent basis (except for changes in application in which Borrower's independent certified public accountants concur), applied both to classification of items and amounts. "General Intangibles": as defined in Section 3.01 hereof. "Governmental Actions": duly-authorized actions taken by any Governmental Authority. 3 "Governmental Authority": the United States federal government, any state or political subdivision thereof, any city or municipal entity, and any entity exercising executive, legislative, judicial, regulatory, administrative or other quasi-governmental functions. "Indebtedness": as to any Person, at a particular time, (a) indebtedness for borrowed money or for the deferred purchase price of property or services in respect of which such Person is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which such Person otherwise assures a creditor against loss, (b) obligations under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases in respect of which obligations such Person is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person assures a creditor against loss (c) obligations of such Person to purchase or repurchase accounts receivable, chattel paper or other payment rights sold or assigned by such Person, and (d) indebtedness or obligations of such Person under or with respect to letters of credit, notes, bonds or other debt instruments; provided, however, that none of the above-described Indebtedness shall include or be deemed to include the Senior Notes or any securities issued in connection with any refinancing thereof except for the purpose of calculating the ratios specified in Schedule 7.14 hereto. "Initial Payment Date": as defined on Schedule 2.02 hereto. "Interest Rate": as defined on Schedule 2.02 hereto. "Landlord Consent": a consent substantially in the form of Exhibit E hereto or in other form acceptable to Lender, to be executed by the owner/landlord, sublessor and/or licensor (including carriers) of any real property where any of the Equipment is to be located. "Law": any law, constitution, statute, regulation, rule, ordinance, order, injunction, writ, decree or award of any Governmental Authority or court of competent jurisdiction or of any arbitrator (including but not limited to the Code, the UCC, any applicable tax law, product safety law, occupational safety or health law or Communications Law). "Lender's Expenses": as defined in Section 2.10 hereof. "Lien": any mortgage, pledge, hypothecation, lien (statutory or other), judgment lien, security interest, security agreement, charge or other encumbrance, or other security arrangement of any nature whatsoever, including, without limitation, any installment contract, conditional sale or other title retention arrangement, any sale of accounts receivable or chattel paper, and any assignment, deposit arrangement or lease intended as, or having the effect of, security and the filing of any financing statement under the UCC or comparable law of any jurisdiction. "Loan": each of the loans and loan facilities described in Section 2.01 hereof and all Advances pursuant hereto. "Loan Documents": a collective reference to this Agreement, the Note, the Security Documents, and all other documents, instruments, agreements and certificates evidencing or securing any advance hereunder or any obligation for the payment or performance thereof and/or executed and delivered in connection with any of the foregoing. 4 "Mandatory Prepayments": as defined in Section 2.04(b) hereof. "Material Adverse Effect": or "Material Adverse Change": any fact, circumstance or condition that would reasonably be expected to have a material adverse effect on, or material adverse change in, (i) the business, operations or financial condition of Borrower and its Subsidiaries, taken together as a whole, (ii) the ability of Borrower to perform its obligations under this Agreement, the Note, or the other Loan Documents, or (iii) Lender's ability to enforce the rights and remedies granted under this Agreement or the other Loan Documents, in all cases whether attributable to a single circumstance or event or an aggregation of circumstances or events. "Mortgagee's Consent": a consent substantially in the form of Exhibit E-1 hereto, to be executed by any Person holding a lien on real property leased or otherwise provided to Borrower, on which any of the Equipment is located. "Maturity Date": the date defined on Schedule 2.02 hereto, on which all principal due under the Note shall be finally due and payable. "Nortel": Northern Telecom Inc., a Delaware corporation. "Nortel Equipment": the equipment and licensed or sub-licensed software manufactured or supplied by Nortel to Borrower with respect to which Advances hereunder are used directly or indirectly to finance the acquisition cost thereof at any time pursuant to the Nortel Purchase Agreement or any purchase order issued by Borrower to Nortel or otherwise, including installation and construction services provided by Nortel pursuant thereto. "Nortel Purchase Agreement": the Nortel Purchase Agreement identified on Schedule 4.29 hereto, together with any amendments or supplements thereto, and any other purchase agreement between Nortel and Borrower and all purchase orders and invoices issued pursuant thereto, all subject to the approval of Lender. "Note": collectively, one or more promissory notes issued by Borrower to Lender pursuant to this Agreement, and all extensions, renewals, modifications, replacements, amendments, restatements and refinancings thereof. "Obligations": all indebtedness, liabilities and obligations of Borrower to Lender of any class or nature, whether arising under or in connection with this Agreement and/or the other Loan Documents, whether now existing or hereafter incurred, direct or indirect, absolute or contingent, secured or unsecured, matured or unmatured, joint or several, whether for principal, interest, fees, expenses, lease obligations, indemnities or otherwise, including, without limitation, future advances of any sort, all future advances made by Lender for taxes, levies, insurance and/or repairs to or maintenance of the Collateral, the unpaid principal amount of, and accrued interest on, the Note, and any expenses of collection or protection of Lender's rights, including reasonable attorneys' fees. "Organizational Documents": with respect to a corporation, the articles of incorporation and by-laws of such corporation; with respect to a partnership, the certificate of partnership (or limited partnership, as applicable) and partnership agreement, together with the analogous documents for any corporate or 5 partnership general partner; with respect to a limited liability company, the articles of organization and operating agreement of such limited liability company; and in any case, any other document governing the formation and conduct of business by such entity. "Payment Date": as defined on Schedule 2.02 hereto. "Payment Schedule": as defined on Schedule 2.02 hereto. "Permits": all consents, licenses, notices, approvals, authorizations, filings, orders, registrations, and permits required by any Governmental Authority for the construction and operation of the Equipment (excluding Regulatory Authorizations), issued or obtained as and when required in accordance with all Requirements of Law. "Permitted Encumbrances": the Liens permitted under Section 8.02 hereof. "Person": an individual, corporation, limited liability company, partnership, business or other trust, unincorporated association, joint venture, joint-stock company, Governmental Authority or any other entity. "Proceeds": as defined in Section 3.01 hereof. "PUC": the public utilities commission for the state or any other jurisdiction in which Borrower operates its telecommunications business or any portion of the Equipment is located, or any successor agency, and any successor, in whole or in part, to its functions or jurisdictions, and any other Persons specified as such on Schedule 1 hereto. "Purchase Agreement": individually and collectively, the Nortel Purchase Agreement and the Vendor Purchase Agreement. "Regulatory Authorizations": all approvals, authorizations, licenses, filings, notices, registrations, consents, permits, exemptions, registrations, qualifications, designations, declarations, or other actions or undertakings now or hereafter made by, to or in respect of any telecommunications Governmental Authority, including, without limitation, any certificates of public convenience and all grants, approvals, licenses, filings and registrations from or to the FCC or PUC or under any Communications Law necessary in order to enable Borrower to own, construct, maintain and operate the Equipment, and any authorizations specified on Schedule 1 hereto. "Regulatory Event": any of the following events: (i) Lender becomes subject to regulation as a "carrier," a "telephone company," a "common carrier," a "public utility" or otherwise under any applicable law or governmental regulation, federal, state or local, solely as a result of the transactions contemplated by this Agreement and the other Loan Documents, or (ii) Borrower becomes subject to regulation by any Governmental Authority in any way that is materially different from the regulation existing at the Closing Date and that could materially adversely affect Borrower's ability to perform its material obligations under the Loan Documents or Lender's rights thereunder, or (iii) the FCC or PUC issues an order revoking, denying or refusing to renew, or recommending the revocation, denial or non-renewal of, any material Regulatory Authorization. "Required Consents": the Governmental Authority approvals or consents of other Persons required 6 with respect to Borrower's execution, delivery and performance of this Agreement and the other Loan Documents, as described in Section 4.04 hereto. "Requirement of Law": as to any Person, the Organizational Documents of such Person, and any law, treaty, rule or regulation, or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its properties or transactions or to which such Person or any of its property or transactions is subject, including all provisions of all applicable state and federal constitutions, statutes, rules, regulations and orders of Governmental Authorities, all Permits or Regulatory Authorizations issued to Borrower, and all Communications Laws. "Responsible Officer": with respect to a corporation, its President or any Vice President or Treasurer; with respect to a partnership, its general partner (or the President, any Vice President or Treasurer of any corporate general partner, as applicable); with respect to a limited liability company, a member or manager (or the President, any Vice President or Treasurer of any corporate member or manager), or the President or any Vice President of any other Person. "SEC": the United States Securities and Exchange Commission. "Security Documents": this Agreement, the Consents, all financing statements, and any other documents granting, evidencing, or perfecting any security interest or Lien with respect to or securing any of the Obligations. "Senior Notes": means the Borrower's 12% Series A Senior Notes due 2008, issued pursuant to an Indenture (the "Indenture"), dated as of May 21, 1998, between the Borrower and First Union National Bank. "Site(s)": any of the sites where Equipment is or is to be located. "Software" and "Software Licenses": any software now or hereafter owned by, or licensed to, Borrower that is contained in the Equipment supplied by Nortel or any Vendor. "Subsidiary": as to any Person, any corporation or other entity that is an Affiliate of such Person and of which shares of stock or equity interests having ordinary voting power with respect to the election of one or more directors or other managers of such corporation are at the time directly or indirectly owned or controlled by such Person (regardless of any contingency which does or may suspend or dilute the voting rights of such class). "Subordinated Indebtedness": Indebtedness of Borrower for money borrowed for the use of Borrower, payment of which is fully subordinated to the payment of all Obligations of Borrower to Lender upon terms and provisions reasonably acceptable to Lender. "Total Debt": at any time, the total outstanding liabilities of Borrower, including, without limitation, current liabilities, long term Indebtedness, all lease obligations under finance leases, capital leases, all Contingent Obligations, and all the Obligations. "UCC": the Uniform Commercial Code as the same may from time to time be in effect in the State of New York, or the Uniform Commercial Code of another jurisdiction, to the extent it may be required to 7 apply to any item or items of Collateral. "Units": means 160,000 Units, consisting of $160 million in aggregate principal amount of 12% Series A Senior Notes due 2008 and Warrants to Purchase 200,226 shares of common stock of the Borrower offered and sold on or about May 21, 1998. "Units Offering": means the offering of the Units on or about May 21, 1998 by the Borrower. "Vendor" means any manufacturer or supplier of Vendor Equipment or licensor or supplier of Software, in each case other than Nortel. "Vendor Equipment" means any equipment, upgrades, switches and licensed or sub-licensed Software manufactured, or supplied to Borrower, by a Vendor. "Vendor Purchase Agreement": any purchase agreement, together with any amendments or supplements thereto, between a Vendor and Borrower or an assignor of Borrower and all purchase orders and invoices issued pursuant thereto for the sale of Vendor Equipment, all subject to the approval of Lender, not to be unreasonably withheld or delayed. 1.02. Accounting Principles; Subsidiaries. Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters and all financial statements to be delivered pursuant to this Agreement shall be made and prepared in accordance with GAAP (including principles of consolidation where appropriate), consistently applied, and all accounting or financial terms shall have the meanings ascribed to such terms by GAAP. If, at any time, Borrower has any Subsidiaries, all accounting and financial terms herein shall be deemed to include references to consolidated and consolidating principles, and covenants, representations and agreements with respect to Borrower and its properties and activities shall be deemed to refer to Borrower and its consolidated Subsidiaries collectively. 1.03. UCC Terms. Except as otherwise provided or amplified (but not limited) herein, terms used in this Agreement that are defined in the UCC shall have the same meanings herein. 1.04. General Construction; Captions. All definitions and other terms used in this Agreement shall be equally applicable to the singular and plural forms thereof, and all references to any gender shall include all other genders. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, schedule and exhibit references are to this Agreement unless otherwise specified. The captions and table of contents in this Agreement and the other Loan Documents are for convenience only, and in no way limit or amplify the provisions hereof. 1.05. References to Documents and Laws. All defined terms and references in this Agreement or the other Loan Documents with respect to any agreements, notes, instruments, certificates or other documents shall be deemed to refer to such documents and to any amendments, modifications, renewals, extensions, replacements, restatements, substitutions and supplements of and to such documents. All references to statutes and related regulations shall include any amendments thereof and any successor statutes and regulations. ARTICLE 2: LOANS ---------------- 8 2.01. Commitment. Subject to the terms and conditions herein provided, and so long as no Default has occurred and is continuing hereunder, Lender agrees to lend to Borrower from time to time before the Financing Termination Date, an aggregate principal amount not to exceed the amount set forth on Schedule 2.01 hereto as the maximum principal amount (the "Commitment"). All Advances hereunder shall be used solely for the purchase of Nortel Equipment and Vendor Equipment and related services (exclusive of sales tax), and amounts not exceeding the amount (if any) specified on Schedule 2.01 hereto may be used for legal fees, charges, expenses and closing costs and other expenses incurred by Borrower or incurred by Lender and payable by Borrower under Section 2.10 hereof, provided, however, that the Borrower may not use more than thirty percent (30%) of the aggregate principal amount of all Advances made hereunder for purchases of Vendor Equipment and related services, provided, further, that in each case such amount has been approved by Nortel prior to the date of the Advance therefor. 2.02. Note and Payment Terms. (a) Promissory Note. The Loan shall be evidenced by the Note substantially in the form of Exhibit A hereto, with appropriate insertions. The Note shall be executed by Borrower, payable to the order of Lender, and shall evidence the obligation of Borrower to repay all principal amounts advanced under or pursuant to this Agreement, together with interest and all other amounts due thereunder. The Note shall be dated the Closing Date, have a stated maturity that is the Maturity Date, and bear interest at the Interest Rate from the First Borrowing Date until the principal amount and any other amount due under the Note is paid in full (whether on the Maturity Date, by acceleration or otherwise). All schedules attached to the Note shall be deemed a part thereof. Any such schedule may be amended by Lender from time to time to reflect changes in the amounts includable thereon, but the failure to attach any schedule shall not diminish the obligation of Borrower to repay all amounts due hereunder or on the Note. (b) Interest Payments. Interest shall continue to accrue on the principal amount outstanding on the Note at the Interest Rate and shall be payable, in arrears, on each Payment Date, with the principal payments described below. (c) Principal Payments. All principal amounts due with respect to the Note shall be payable in installments in accordance with the Payment Schedule set forth on Schedule 2.02 hereto, commencing on the Initial Payment Date and on each Payment Date thereafter until the Maturity Date. The principal payment amounts shall be recalculated by Lender if any Advances are made hereunder after the Initial Payment Date, based on the aggregate amount of all Advances made at any time. Borrower and Lender understand that this payment schedule is intended to amortize fully the principal amount of the Note and any other principal and interest amounts outstanding will be added to the final payment on the Maturity Date. In any event, the entire outstanding principal amount of the Note and all accrued but unpaid interest and all other outstanding amounts due thereunder shall be paid on the Maturity Date. (d) Late Payments and Default Rate. Notwithstanding the foregoing, if Borrower shall fail to pay, within ten (10) days after the due date thereof, any principal amount or interest or other amount payable under this Agreement or under the Note, Borrower shall pay to Lender, to defray the administrative costs of handling such late payments, an amount equal to interest on the amount unpaid, to the extent permitted under applicable Law, at the Default Rate (instead of the Interest 9 Rate), from the due date until such overdue principal amount or interest is paid in full (both before and after judgment) whether or not any notice of default in the payment thereof has been delivered under Section 9.01 hereof. In addition, but without duplication, upon the occurrence and during the continuance of an Event of Default, all outstanding principal and interest hereunder shall bear interest at the Default Rate (instead of the Interest Rate) until such amounts are paid in full or such Event of Default is waived in writing by Lender. (e) Excess Interest. Notwithstanding any provision of the Note, this Agreement or any other Loan Document to the contrary, it is the intent of Lender and Borrower that Lender or any subsequent holder of the Note shall never be entitled to receive, collect, reserve or apply, as interest, any amount in excess of the maximum rate of interest permitted to be charged by applicable Law, as amended or enacted from time to time. In the event Lender, or any subsequent holder of the Note, ever receives, collects, reserves or applies, as interest, any such excess, such amount which would be excessive interest shall be deemed a partial prepayment of principal due under the Note and treated as such, or, if the principal indebtedness and all other amounts due are paid in full, any remaining excess funds shall immediately be applied to any other outstanding Obligations of Borrower due to Lender, and if none is outstanding, shall be paid to Borrower. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the highest lawful rate, Borrower and Lender shall, to the maximum extent permitted under applicable Law, (a) exclude voluntary prepayments and the effects thereof as it may relate to any fees charged by Lender, and (b) amortize, prorate, allocate, and spread, in equal parts, the total amount of interest throughout the entire term of the Note; provided that if the indebtedness is paid and performed in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence hereof exceeds the maximum lawful rate, Lender or any subsequent holder of the Note shall refund to Borrower the amount of such excess or credit the amount of such excess against the principal portion of the indebtedness, as of the date it was received, and, in such event, Lender shall not be subject to any penalties provided by any laws for contracting for, charging, reserving or receiving interest in excess of the maximum lawful rate. 2.03. Procedures for Borrowing. (a) Timing of Advances. Advances shall not be made more than once per calendar month, and all Advances in any calendar month shall be made on the same Borrowing Date. Each Advance (other than the last Advance) shall be in an aggregate principal amount of not less than $25,000. No amounts may be borrowed hereunder on or after the Financing Termination Date. Lender is hereby authorized to retain from each Advance all amounts of Lender's Expenses accrued and unpaid by Borrower, for which invoices have been sent to Borrower at least five (5) Business Days before such Advance. In any event, all outstanding legal fees, charges and expenses not paid by Borrower prior to any Borrowing Date shall be paid before any Advance is made or concurrently with such Advance. (b) Borrowing Certificates. To request an Advance hereunder, Borrower shall send to Lender, at least five (5) Business Days prior to the requested Borrowing Date, a completed Borrowing Certificate, along with invoices and such other supporting documentation as Lender may reasonably request. Lender is hereby authorized to add to any Borrowing Certificate all amounts payable by Borrower to Lender in respect of legal fees, charges and expenses arising or incurred by Lender, to the extent such fees, charges and expenses have then been incurred or charged and may 10 be paid from proceeds of the Loan. (c) Transmission of Advances. Advances shall be made by wire transfer to the account(s) specified in the applicable Borrowing Certificate, except that (i) proceeds of the Loan may be transmitted, at Lender's option, directly to an Nortel or Vendor account for payment of any unpaid Nortel or Vendor invoices, and (ii) Advances shall be made to Borrower only to the extent that Borrower provides Lender with satisfactory evidence that the amount of such Advance has been paid to Nortel or the Vendor. No further authorization shall be necessary for any such direct disbursements, and each such Advance shall satisfy pro tanto the obligations of Lender under this Agreement. (d) Borrowing Dates. Advances shall be made by Lender on the Borrowing Date specified in the applicable Borrowing Certificate if all conditions for such Advance have been satisfied, or on such later Business Day as all conditions for such Advance shall have been satisfied, as determined by Lender. (e) Advances After Default. At its option, during the continuance of a Default, Lender may, but shall not be obligated to, make Advances to any Person (including without limitation Nortel and any Vendor, suppliers, sub-contractors and materialmen) to whom Lender in good faith determines payment is due with respect to the Equipment, and any Advances so made shall be deemed made as of the Business Day on which the Person to whom payment is made receives the same. No further authorization from Borrower shall be necessary to warrant such direct Advances, and the execution of this Loan Agreement by Borrower shall, and hereby does, constitute an irrevocable authorization and power of attorney to advance proceeds hereunder. All such Advances shall satisfy pro tanto the obligations of Lender hereunder and shall be secured by the Security Documents as fully as if made directly to Borrower. 2.04. Prepayments. (a) Voluntary Prepayments. Borrower may, at its option, at any time and from time to time, prepay the Loan in whole or in part, upon at least ten (10) Business Days prior written notice to Lender specifying the date and amount of prepayment, in a minimum amount of $25,000, plus the premium described below, and all accrued but unpaid interest thereon. Such notice shall be irrevocable and the principal amount specified in such notice shall be due and payable on the date specified together with accrued interest on the amount prepaid. Any such prepayment shall be subject to a prepayment premium equal to a percentage of the amount prepaid as follows: three percent (3%) if the prepayment is made prior to the first anniversary of the Closing Date, two percent (2%) if the prepayment is made more than one (1), but not more two (2) years after the Closing Date, one percent (1%) if the prepayment is made more than two (2) but not more than three (3) years after the Closing Date, and without a premium if the prepayment is made more than three (3) years after the Closing Date. Amounts prepaid may not be reborrowed and shall be applied as provided in Section 2.04(c). Mandatory Prepayments, excess interest payments under Section 2.02(g) or prepayments made from insurance proceeds pursuant to Section 6.03 or with any condemnation proceeds shall not be subject to a prepayment premium. (b) Mandatory Prepayment. Upon Lender's demand, all Obligations arising from Advances for Equipment financed for purchase under the Nortel Purchase Agreement will become 11 due and payable pursuant to the terms of the Note if such Nortel Agreement is terminated prior to the completion and acceptance of such Equipment. Any such Mandatory Prepayments shall not require the payment of any premium or penalty. (c) Application of Prepayments. Any prepayments shall be applied first to interest, then to premium, then to expenses, and then to the installments of principal in reverse chronological order from the Maturity Date. 2.05. Computation of Interest. Interest shall be calculated daily on the basis of a 365-day year for the actual days elapsed in the period during which it accrues. 2.06. Payments. All payments and prepayments (if any) to be made in respect of principal, interest, prepayment premiums or other amounts due from Borrower hereunder or under the Note shall be payable on or before 1:00 p.m., Nashville time, on the Business Day when due, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue. Such payments shall be made to Lender at Lender's office at 501 Corporate Centre Drive, Franklin, Tennessee 37067, or such other location specified in writing by Lender, in immediately available funds, without setoff, recoupment, counterclaims or any other deduction of any nature. 2.07. Indemnity. Borrower hereby indemnifies Lender against any losses, claims, penalties, expenses, actions, suits, obligations, liabilities and Liens (and all costs and expenses, including reasonable attorneys' fees incurred in connection therewith), that Lender has sustained or incurred or may sustain or incur in connection with any of the Collateral, or the enforcement, performance or administration of the Loan Documents, or as a consequence of any Default by Borrower in the performance or observance of any covenant or condition contained in this Agreement or the Loan Documents, including without limitation, the breach of any representation or warranty, any failure of Borrower to pay when due (by acceleration or otherwise) any principal, interest, fee or any other amount due hereunder or under the Note, and any failure of Borrower to comply with all applicable Requirements of Law (collectively, "Claims") except to the extent of any Claims caused solely by Lender's gross negligence or willful misconduct. Borrower's obligations under this Section 2.07 shall be part of the Obligations and shall be secured by the Collateral. Borrower agrees that upon written notice by Lender of the assertion of any Claims, Borrower shall, at Lender's option, either assume full responsibility for, or reimburse Lender for the reasonable costs and expenses of, the defense thereof. Lender shall have no liability for consequential or incidental damages of any nature unless such damages arise as a result of Lender's gross negligence or willful misconduct. The provisions of this Section 2.07 shall survive the termination of this Agreement and payment of the Obligations for a period of two years. 2.08. Use of Proceeds. The proceeds of the Advances hereunder shall be used by Borrower only for the purposes and in the amounts described in Section 2.01 hereof, and no amounts repaid may be reborrowed (except for any voluntary prepayments as permitted pursuant to Section 2.04(a). 2.09. Fees. Borrower shall pay Lender the fees described on Schedule 2.09 hereto in connection with this Agreement. 2.10. Lender's Expenses. Borrower agrees (a) to pay or reimburse Lender for all its reasonable costs, fees, charges and expenses incurred or arising in connection with the negotiation, review, preparation and execution of this Agreement, the Loan Documents, any commitment or proposal letter, or any 12 amendment, supplement, waiver, modification to, or restructuring of this Agreement, the Obligations or the other Loan Documents, including, without limitation, reasonable legal fees and disbursements, expenses, document charges and other charges and expenses of Lender in connection with this Agreement, (b) to pay or reimburse Lender for all its reasonable costs, fees, charges and expenses incurred in connection with the administration of the Loan or the enforcement, protection or preservation of any rights under or in connection with this Agreement or any other Loan Documents, including, without limitation, reasonable legal fees and disbursements, audit fees and charges, and all out-of-pocket expenses, (c) to pay, indemnify, and to hold Lender harmless from, any and all recording and filing fees and taxes and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes (excluding income and franchise taxes and taxes of similar nature), if any, which may be payable or determined to be payable in connection with the execution and delivery or recordation or filing of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement and the other Loan Documents. All of the amounts described in this Section are referred to collectively as the "Lender's Expenses", shall be payable upon Lender's demand, and shall accrue interest at the Interest Rate in effect when such demand is made from five (5) days after the date of demand until paid in full. All Lender's Expenses, and interest thereon, shall be part of the Obligations and shall be secured by the Collateral. The agreements in this Section 2.10 shall survive repayment of the Obligations. All Lender's Expenses that are outstanding on any Borrowing Date shall be paid before or with any Advance relating thereto. If Borrower has not paid to Lender the amount of all Lender's Expenses billed to Borrower at least five (5) Business Days before such Borrowing Date, Lender shall be authorized to retain from any Advance on such Borrowing Date the amount of such Lender's Expenses that remain unpaid. Borrower's obligation to pay Lender's Expenses shall not be limited by any limitation on the amount of the Commitment that may be designated as available for such purposes, and any amounts so designated shall be used to pay Lender's Expenses accrued at the time of any Advance before any of Borrower's legal fees or similar expenses. ARTICLE 3: COLLATERAL AND SECURITY AGREEMENT -------------------------------------------- 3.01. Grant of Security Interest. Borrower (as debtor) hereby assigns to Lender as collateral, and grants to Lender (as secured party) a continuing security interest in and to, all of Borrower's right, title and interest in and to the following kinds and types of property, whether now owned or hereafter acquired or arising, wherever located, together with all substitutions therefor and all accessions, replacements and renewals thereof, and in all proceeds thereof (collectively, the "Collateral"): (a) All Nortel Equipment financed or refinanced with proceeds of an Advance and all Vendor Equipment financed or refinanced with proceeds of an Advance, and in each case any and all additions, substitutions, and replacements to or of any of the foregoing, together with all attachments, components, parts, improvements, upgrades, and accessions installed thereon or affixed thereto (collectively, "Equipment") and Borrower's rights under each Nortel Purchase Agreement and each Vendor Purchase Agreement relating to such Equipment; (b) All general intangibles and intangible property (including all contracts and contract rights) constituting part of, or provided by or through Nortel or any Vendor in connection with, the Equipment which are necessary for the proper operation of the Equipment, including (without limitation) amounts due under licenses, license rights, rights in intellectual property, Software, Software Licenses, computer programming (including 13 source codes, object codes and all other embodiments of computer programming or information), refunds, warranties and indemnification rights directly used in the Equipment, and all amounts owed at any time to Borrower by Lender or Nortel or by a Vendor in connection with a Vendor Purchase Agreement relating to Equipment (collectively, "General Intangibles"); and (c) All proceeds and products of any of the foregoing, including without limitation (i) any and all proceeds of any indemnity, warranty or guaranty payable to Borrower from time to time with respect to any of the Collateral, and (ii) any and all payments (in any form whatsoever) made or due and payable to Borrower from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any Governmental Authority (or any Person acting under color of governmental authority) (collectively, "Proceeds"). 3.02. Priority of Security Interests. The security interests granted by Borrower to Lender are and shall be continuing and indefeasible first-priority security interests in the Collateral, subject to no Liens except for Permitted Encumbrances as defined and permitted under Section 8.02 hereof. 3.03. Further Documentation; Pledge of Instruments. At any time and from time to time, upon the written request of Lender, and at the sole expense of Borrower, Borrower shall promptly execute, deliver and record any documents, instruments, agreements and amendments, and take all such further action, as Lender may reasonably deem necessary or appropriate in obtaining the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing statements or amendments under the UCC. Borrower also hereby authorizes Lender to file any such financing statement or amendment thereto, or with a copy or telecopy of Borrower's signature, to the extent permitted by applicable Law, or to execute any financing statement or amendment thereof on behalf of Borrower as Borrower's attorney-in-fact. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note or other instrument or any certificated securities, such note, instrument or certificate shall be immediately pledged and delivered to Lender hereunder, duly endorsed in a manner satisfactory to Lender. 3.04. Further Identification of Collateral. Borrower shall furnish to Lender from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Lender may reasonably request, all in reasonable detail. 3.05. Remedies. Lender shall have all the rights and remedies of a secured party under the UCC, and shall be entitled to exercise any and all remedies available under Article 9 hereof or otherwise available at law or in equity upon the occurrence of an Event of Default. 3.06. Standard of Care. Lender shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral in its possession if it treats the Collateral in the manner in which it would treat its own property or otherwise takes such action for that purpose as Borrower requests in writing, but Lender's failure to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure of Lender to preserve or protect any rights with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by Borrower, shall be deemed a failure to exercise reasonable care in the custody or preservation of such Collateral. 14 3.07. Advances to Protect Collateral. All expenses of protecting, storing, warehousing, insuring, handling, maintaining and shipping the Collateral (including, without limitation, all rent payable by Borrower to any landlord of any Site), and, any and all taxes shall be borne and paid by Borrower. Lender may (but shall not be obligated to) make advances to preserve, protect or obtain any of the Collateral, including advances to cure, with the prior consent of Borrower, defaults under any lease agreements for Sites or advances to pay taxes, insurance and the like, and all such advances shall become part of the Obligations owing to Lender hereunder and shall be payable to Lender on demand, with interest thereon from the date of such advance until paid at the Default Rate in effect on the date of such advance. 3.08. License to Use. So long as an Event of Default is continuing, Lender is hereby granted a license or other right to use , in connection with the Equipment and without charge, the Software and the Software Licenses pertaining to the Equipment. 3.09. Subsidiary Guarantees. Payment of the Borrower's Obligations shall also be unconditionally guaranteed by any existing Subsidiary of the Borrower, as well as all future Subsidiaries of the Borrower, pursuant to the form of Guaranty Agreement attached as Exhibit G to this Agreement, during such time as, with regard to any single Subsidiary, any such single Subsidiary's assets or revenues (whichever applies first) meet or exceed 10% of the Borrower's consolidated assets or revenues (as applicable) as of the Closing Date, as of the end of each of the Borrower's fiscal years thereafter, or as of the end of the Borrower's fiscal quarter immediately preceding any Borrowing Date, or, with regard to any group of Subsidiaries, the combined combined assets or revenues of any such group of Subsidiaries (whichever applies first) meet or exceed 15% of the Borrower's consolidated assets or revenues (as applicable) as of the Closing Date, as of the end of each of the Borrower's fiscal years thereafter, or as of the end of the Borrower's fiscal quarter immediately preceding any Borrowing Date. ARTICLE 4: REPRESENTATIONS AND WARRANTIES ----------------------------------------- Borrower hereby represents and warrants to Lender as follows: 4.01. Organization and Qualification. Borrower is duly organized, validly existing and in good standing as a corporation under the laws of Maryland. Borrower is duly qualified to do business and in good standing in each jurisdiction in which the failure to receive or retain such qualification would have a Material Adverse Effect. 4.02. Authority and Authorization. Borrower has all requisite corporate right, power and authority to execute and deliver and perform its obligations under this Agreement, to make the borrowings provided for herein, and to execute and deliver and to perform its obligations under the Note. Borrower's execution, delivery and performance of the Loan Documents have been duly and validly authorized by all necessary corporate action on the part of Borrower. 4.03. Execution and Binding Effect. This Agreement, the Note and all other Loan Documents have been or will be duly and validly executed and delivered by Borrower, and constitute or, when executed and delivered will constitute, the legal, valid and binding obligations of Borrower enforceable in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, receivership, moratorium or other Laws affecting creditors' rights generally. 15 4.04. Governmental Authorizations. Except for the consents identified on Schedule 4.04 hereto (the "Required Consents"), no authorization, consent, approval, license, exemption or other action by, and no registration, qualification, designation, declaration or filing with, any Governmental Authority (other than the filing of UCC financing statements and continuation statements) is or will be necessary in connection with execution and delivery of this Agreement, the Note or any other Loan Documents by Borrower, consummation of the transactions herein or therein contemplated, performance of or compliance by Borrower with the terms and conditions hereof or thereof. 4.05. Regulatory Authorizations. The Borrower holds all material authorizations, permits and licenses required by the FCC or the PUC or any Communications Law for the operation of the Equipment, and all such Regulatory Authorizations are in full force and effect, are subject to no further administrative or judicial review and are therefore final. Lender will not, by reason of the execution, delivery and performance (other than the enforcement of remedies) of any of the Loan Documents, be subject to the regulation or control of either the FCC or the PUC. The Regulatory Authorizations will be described on Schedule 4.05 within 30 days after the Closing Date. 4.06. Material Agreements; Absence of Conflicts. The execution and delivery of this Agreement, the Note and the other Loan Documents, the consummation of the transactions herein or therein contemplated and the performance of or compliance with the terms and conditions hereof or thereof by Borrower will not (a) materially violate any applicable Law; (b) conflict with or result in a material breach of or a default under the Organizational Documents of Borrower or any material agreement or instrument to which Borrower is a party or by which Borrower or its properties is bound; or (c) result in the creation or imposition of any Lien upon any property (now owned or hereafter acquired) of Borrower except as otherwise contemplated by this Agreement, except with respect to Permitted Encumbrances or as contemplated by this Agreement and the Security Documents or which would not have a Material Adverse Effect. 4.07. No Restrictions. Borrower is not a party or subject to any contract or agreement which restricts its right or ability to incur Indebtedness, other than as set forth on Schedule 4.07, none of which prohibit Borrower's execution of or compliance with this Agreement. Borrower has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of the Collateral, whether now owned or hereafter acquired, to be subject to a Lien that is not a Permitted Encumbrance. 4.08. Financial Statements. Borrower has furnished to Lender the most recent annual or quarterly financial statements of Borrower, certified by a Responsible Officer of Borrower, including balance sheets and related statements of income and retained earnings and changes in financial position, as described on Schedule 4.08 hereof. Such financial statements (including the notes thereto) present fairly the financial condition of Borrower on a consolidated basis as of the end of each such fiscal period and the results of its operations and the changes in its financial position for the fiscal period then ended, all in conformity with GAAP applied on a basis consistent with that of the preceding fiscal period. Any pro forma financial statements delivered by Borrower to Lender were prepared in good faith. 4.09. Financial Accounting Practices. Borrower has made and kept books, records and accounts which, in reasonable detail, accurately and fairly reflect its respective transactions and dispositions of its assets, and Borrower shall maintain a system of internal accounting controls sufficient to provide reasonable assurances that (a) transactions are executed in accordance with management's general or specific authorization, (b) transactions are recorded as necessary (i) to permit preparation of financial statements in conformity with GAAP and (ii) to maintain accountability for assets, (c) access to assets is permitted only in accordance with management's general or specific authorization and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 16 4.10. Accurate and Complete Disclosure. No representation or warranty made by Borrower under this Agreement and no statement made by Borrower in any financial statement, certificate, report, exhibit or document furnished by Borrower to Lender pursuant to or in connection with this Agreement (including, without limitation, any filings with the SEC, the FCC or the PUC) is or was false or misleading as of the date made in any material respect (including by omission of material information necessary to make such representation, warranty or statement not misleading). To the best of the knowledge of Borrower, there are no existing facts that would reasonably be expected to result in a Material Adverse Effect which has not been set forth in the financial statements referred to in Section 4.08 hereof or otherwise disclosed in writing to Lender prior to the First Borrowing Date. 4.11. No Event of Default; Compliance with Material Agreements. No event has occurred and is continuing and no condition exists which constitutes a Default or an Event of Default after giving effect to the Advance to be made on the First Borrowing Date. As of the date hereof, Borrower is not in violation of any term of its material agreements or instruments to which it is a party or by which it or its properties is bound which would reasonably be expected to result in a Material Adverse Effect. 4.12. Litigation. Except as set forth in Schedule 4.12 or as otherwise disclosed by the Borrower pursuant to the Exchange Act, there is no pending action, suit or (to the best of Borrower's knowledge) threatened proceeding by or before any Governmental Authority against or affecting Borrower or any of its properties, rights or licenses which, if adversely decided, would reasonably be expected to result in a Material Adverse Effect. 4.13. Rights to Property; Intellectual Property. Borrower has good and marketable title, subject only to the Permitted Encumbrances, to the Collateral and to all personal and real property purported to be owned by it as reflected in the most recent balance sheet referred to in Section 4.08 hereof (except as sold or otherwise disposed of in the ordinary course of business as no longer used or useful in the conduct of the business). Borrower owns or possesses the right to use all material patents, trademarks, service marks, trade names, copyrights, know-how, franchises, software and software licenses necessary for the operation of its business. 4.14. Financial Condition. Borrower's financial condition is accurately described in the Certificate of Financial Condition executed by Borrower pursuant hereto. 4.15. Taxes. Borrower's federal tax identification number is set forth on Schedule 1 hereto. All tax returns required to be filed by Borrower have been properly prepared, executed and filed, and all taxes, assessments, fees and other governmental charges upon Borrower or upon any of its respective properties, incomes, sales or franchises which are shown to be due and payable thereon have been paid, other than taxes or assessments the validity or amount of which Borrower is contesting in good faith. The reserves and provisions for taxes on the books of Borrower are adequate for all open years and for its current fiscal period. 17 4.16. No Material Adverse Change. Since the date of the financial statements referenced in Section 4.08, there has been no Material Adverse Change. 4.17. No Regulatory Event. No Regulatory Event has occurred and is continuing. 4.18. Trade Relations. There exists no actual or, to the best of Borrower's knowledge, threatened termination, cancellation or limitation of the business relationship between Borrower and any Carrier, any labor organizations, any material customer or any group thereof whose agreements with Borrower are material to the business of Borrower, or with any material Supplier, and there exists no present condition or state of facts or circumstances which would have a Material Adverse Effect or prevent Borrower from conducting its business after the consummation of the transaction contemplated by this Agreement. 4.19. No Brokerage Fees. Other than as described in this Agreement, no brokerage or other fee, commission or compensation is to be paid by Borrower to any Person in connection with the loans to be made hereunder. Borrower hereby indemnifies Lender against any claims brought against Lender for brokerage fees or commissions of any Person based on a written agreement with Borrower and agrees to pay all reasonable expenses actually incurred by Lender in connection with the defense of any action or proceeding brought to collect any such brokerage fees or commissions. 4.20. Margin Stock; Regulations U and X. Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock. The making of the Advances and the use of the proceeds thereof will not violate Regulations U or X of the Board of Governors of the Federal Reserve System. 4.21. Intentionally Deleted. 4.22. Intentionally Deleted. 4.23. Security Interests. The provisions of Article 3 hereof are effective to create in favor of Lender a legal, valid and enforceable Lien on or security interest in all of the Collateral, and, when the recordings and filings described on Schedule 4.23 hereto have been effected in the public offices listed on said Schedule 4.23, this Agreement and the Security Documents will create a perfected first-priority security interest in all right, title, estate and interest of Borrower in the Collateral, and subject to no other Liens except for Permitted Encumbrances. All action necessary or desirable to protect and perfect such security interest in each item of the Collateral will have been duly taken prior to or on the First Borrowing Date. The recordings and filings shown on said Schedule 4.23 are all the actions necessary or advisable in order to establish, protect and perfect the interest of Lender in the Collateral. 4.24. Place of Business. The chief executive offices of Borrower are identified on Schedule 4.24 hereto. Borrower's principal place of business in the state(s) where the Equipment is located is identified on Schedule 4.24 hereto. Borrower's records concerning the Collateral are kept at one or both of these addresses. 4.25. Location of Collateral. The Collateral is and will be kept at the locations identified on Schedule 4.24 hereto or such other locations as may be permitted under Section 8.12. 18 4.26. Clear Title To Equipment. Borrower is the sole owner of each item of the Equipment, having good and marketable title thereto, free and clear of any and all Liens, claims, or rights of others, except for the security interest granted herein to Lender and the other Permitted Encumbrances. 4.27. Assumed Names. Except as set forth on Schedule 4.27 hereto, Borrower does not conduct business under any assumed names or trade names, and has not, during the five (5) years preceding the date of this Agreement, conducted business under any other names, or any assumed names or trade names. 4.28. Intentionally Deleted. 4.29. Nortel Purchase Agreement. The Nortel Purchase Agreement for Nortel Equipment already acquired has been duly executed and delivered by Borrower, is in full force and effect, and a true, correct and complete copy thereof (including all annexes, attachments and amendments thereto) has been delivered to Lender, and there are no other side letters, waivers or other agreements known to Borrower affecting the terms thereof. 4.30. Subsidiaries of Borrower. A true and correct list of all direct and indirect Subsidiaries of the Borrower, together with the jurisdiction of incorporation of each Subsidiary, appears on Schedule 4.30 to this Agreement. ARTICLE 5: CONDITIONS OF CLOSING -------------------------------- On or before the Closing Date, the following conditions shall have been satisfied: 5.01 Borrower's Certificate. A certificate of Borrower signed by a duly authorized Responsible Officer, certifying as to (i) true copies of Organizational Documents of Borrower in effect on such date; (ii) evidence of all corporate action taken by Borrower relative to this Agreement, the Note and the other Loan Documents; (iii) the names, true signatures and incumbency of the Responsible Officers of Borrower authorized to execute and deliver this Agreement, the Note and the other Loan Documents; (iv) a Certificate of Good Standing (or equivalent certificate) for Borrower duly issued by the Secretary of State of Maryland and each state in which Borrower intends to locate the Equipment; and (v) such other matters as Lender shall request. 5.02 Opinion of Counsel. Lender shall have received dated as of the Closing Date and in form and substance satisfactory to Lender a written opinion of counsel to Borrower, substantially in the Form of Exhibit C hereto. 5.03. Closing Documents. Lender shall have received the following documents, all in form and substance satisfactory to Lender: (a) Agreement. This Agreement, duly executed by Borrower; (b) Note. The Note, duly executed by Borrower; (c) Financing Statements. All UCC-1 financing statements necessary to perfect the Liens granted hereby, each duly executed by Borrower, and duly recorded in all the jurisdictions identified on Schedule 4.24 hereto; 19 (d) Guaranty Agreements. A Guaranty Agreement, duly executed by all of the existing Subsidiaries of the Borrower, in the form attached as Exhibit G to this Agreement. (e) Insurance. Policies and certificates of insurance required by Section 7.06, accompanied by evidence of the payment of the premiums therefor; (f) Financial Statements. The financial statements described in Section 4.08 hereof; (g) Certificate of Financial Condition. A Certificate of Financial Condition, duly executed by a Responsible Officer of Borrower. (h) Pre-Closing Lien Searches. Lien searches from all jurisdictions reasonably determined by Lender to be appropriate, effective as of a date reasonably close to the Closing Date, reflecting no other Liens (other than Permitted Encumbrances) on any of the Collateral. ARTICLE 6: CONDITIONS OF LENDING -------------------------------- 6.01. Conditions for Initial Advance. On or before the First Borrowing Date, the following conditions shall have been met to Lender's satisfaction: (a) Post-Closing Lien Searches. Lender shall have received satisfactory results of Lien searches in all jurisdictions reasonably determined by Lender to be appropriate, reflecting the filing of financing statements in favor of Lender pursuant hereto and no other Liens other than Permitted Encumbrances. (b) Required Consents. Lender shall have received satisfactory evidence of Borrower's obtaining the Required Consents. 6.02. Conditions for All Advances. The obligation of Lender to make any Advance hereunder is subject to Borrower's performance of its obligations hereunder on or before the Borrowing Date of such Advance, and to the satisfaction of the following further conditions on or before the Borrowing Date for any Advance, including the first Advance: (a) Filings, Registrations and Recordings. Any financing statements or other recordings required hereunder shall have been properly filed, registered or recorded in each office in each jurisdiction required in order to create in favor of Lender a perfected first-priority Lien on the Collateral, subject to no other Lien except Permitted Encumbrances; Lender shall have received acknowledgment copies of all such filings, registrations and recordations stamped by the appropriate filing officer; and Lender shall have received results of searches of such filing offices, and satisfactory evidence that any other Liens (other than Permitted Encumbrances) on the Collateral have been duly released, that all necessary filing fees, recording fees, taxes and other expenses related to such filings, registrations and recordings have been paid in full. (b) Borrowing Certificate. Lender shall have received a duly executed Borrowing Certificate in the form of Exhibit B, including a detailed itemization of all costs of goods and services to be paid with the proceeds of the Advance and accompanied by supporting documentation satisfactory to Lender. 20 (c) Reporting Requirements. Borrower shall have provided Lender with all relevant reports and information required under Article 7 hereof. (d) No Regulatory Event. No Regulatory Event (in either Borrower's or Lender's reasonable determination) shall have occurred and be continuing or would exist upon the consummation of transactions to occur on such Borrowing Date. (e) No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing or would exist upon the consummation of transactions to occur on such Borrowing Date. (f) No Material Adverse Change. No Material Adverse Change shall have occurred, or would occur after giving effect to such Advance, since the date of the last financial statements delivered to Lender pursuant to Section 4.08 or 7.01 hereof. (g) Representations and Warranties. The representations and warranties contained in Article 4 hereof shall be true on and as of the date of each such Advance hereunder. (h) Lender's Expenses. All closing costs, and other Lender's Expenses shall have been paid in full (or shall be paid first from such Advance as provided in Section 2.03 hereof). (i) Opinion. Lender shall have received from Borrower such opinion of counsel for Borrower as may be reasonably acceptable to Lender in form and substance with respect to the perfection and priority of the Liens created by the Security Documents in each such jurisdictional location. (j) Details, Proceedings and Documents. All legal details and proceedings in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory to Lender and Lender shall have received all such counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions, in form and substance reasonably satisfactory to Lender, as Lender may from time to time request. (k) Consents. Lender shall have received Consents duly executed by all parties and in form satisfactory to Lender. (l) Fees. Lender shall have received the fee(s) described in Section 2.09 hereof. (m) Purchase Agreement. Lender shall have received a copy of the executed Nortel Purchase Agreement or any Vendor Purchase Agreement with respect to which proceeds of an Advance shall be used to acquire Nortel Equipment or other Vendor Equipment, and Lender shall have reviewed and approved the Equipment to be acquired with proceeds of an Advance. 6.03. Affirmation of Representations and Warranties. Any Borrowing Certificate or other request for any Advance hereunder shall constitute a representation and warranty that (a) the representations and warranties contained in Article 4 hereof are true and correct on and as of the date of such request with the same effect as though made on and as of the date of such request and (b) on the date of such request, no Default or Event of Default has occurred and is continuing or exists or will occur or exist after giving effect to such Advance (for this purpose such Advance being deemed to have been made on the date of such request). Failure of Lender to receive notice from Borrower to the contrary before such Advance is made shall constitute a further representation and warranty by Borrower that (x) the representations and warranties of Borrower contained in the first sentence of this Section 6.03 are true and correct on and as of the date of such Advance with the same effect as though made on and as of the date of such Advance and (y) on the date of the Advance no Default or Event of Default has occurred and is continuing or exists or will occur or exist after giving effect to such Advance. 21 6.04. Deadline for Funding Conditions. Lender shall have no obligation to make any Advances hereunder if all of the conditions set forth in Article 5 and in Sections 6.01 and 6.02 hereof have not been fully satisfied or waived, and the first Advance made hereunder, within the period of twelve (12) calendar months following the Closing Date. ARTICLE 7: AFFIRMATIVE COVENANTS -------------------------------- Borrower hereby agrees that as long as the Commitment remains in effect, the Note remains outstanding or unpaid or any other amount is owing to Lender hereunder or under any of the Loan Documents, Borrower shall keep and perform fully each and all of the following covenants: 7.01. Reporting and Information Requirements. (a) Annual Audit Reports. As soon as practicable within ninety (90) days after the close of each fiscal year of Borrower, but in no event earlier than the date on which the appropriate filing is made with the SEC, Borrower shall furnish or cause to be furnished to Lender audited statements of income, statements of cash flow and retained earnings for such fiscal year and Borrower's balance sheet as of the close of such fiscal year, and notes to each, all in reasonable detail, and beginning with Borrower's second full fiscal year setting forth in comparative form the corresponding figures for the preceding fiscal year, with such statements and balance sheet to be certified by independent certified public accountants selected by Borrower and reasonably satisfactory to Lender. (b) Quarterly Reports. Within forty-five (45) days after the end of each fiscal quarter, Borrower shall furnish to Lender (i) unaudited consolidated statements of income, statements of cash flow and retained earnings for Borrower for such quarter and for the period from the beginning of Borrower's then current fiscal year to the end of such quarter, and an unaudited consolidated balance sheet of Borrower as of the end of the quarter, all in reasonable detail and certified by a Responsible Officer of Borrower as presenting fairly the financial position of Borrower as of the end of such quarter and the results of its operations and the changes in its financial position for such quarter, in conformity with GAAP (except for accompanying notes thereto), subject to year-end audit adjustments; provided, however, that such information shall be furnished only on or after the date on which the appropriate filing is made with the SEC, and (ii) upon Lender's request, an aging of accounts payable and accounts receivable. 22 (c) Compliance Certificates. Within thirty (30) days after the end of each Calendar Quarter, Borrower shall deliver to Lender a certificate dated as of the end of such Calendar Quarter, signed on behalf of Borrower by a Responsible Officer of Borrower (i) stating that, as of the date thereof, no Event of Default has occurred and is continuing or exists, or if an Event of Default has occurred and is continuing or exists, specifying in detail the nature and period of existence thereof and any action with respect thereto taken or contemplated to be taken by Borrower; (ii) stating that such Responsible Officer has reviewed this Agreement and that such certificate is based on an examination made by or under the supervision of the Responsible Officer sufficient to assure that such certificate is accurate; and (iii) calculating and certifying Borrower's compliance with the financial covenants set forth in Section 7.15 hereof. (d) Other Reports and Information. Promptly upon their becoming available to Borrower and otherwise in accordance with applicable Law (including the Exchange Act and the rules and regulations of the SEC), Borrower shall deliver to Lender copies of (i) all regular or special reports or effective registration statements which Borrower shall file with the SEC and (ii) all press releases issued by or concerning Borrower. (e) Further Information. Borrower will promptly furnish to Lender, in accordance with applicable Law, such other information (including any report by independent auditors) in such form as Lender may reasonably request. 7.02 Other Notices. Promptly upon a Responsible Officer of Borrower becoming aware of any of the following, Borrower shall give Lender notice thereof, together with a written statement of a Responsible Officer of Borrower setting forth the details thereof and any action with respect thereto taken or contemplated to be taken by Borrower: (a) a Default or Event of Default; (b) any Material Adverse Change; (c) a material default or breach by Borrower under any other material contractual obligation to which it is a party or by which it or its material properties is bound, if the consequences of such breach or default are material to the business, operations or financial condition of Borrower; (d) any event that Borrower reasonably determines would constitute a Regulatory Event; (e) the commencement, existence or threat of any proceeding by or before any Governmental Authority against Borrower which, if adversely decided, would have a Material Adverse Effect; or (f) any Change in Control or any material change in the management of Borrower. 7.03. Inspection Rights. Borrower shall, upon reasonable notice, permit such Persons as Lender may designate, at Lender's sole expense (unless there is continuing an Event of Default) to visit and inspect the Collateral or any other properties of Borrower, to examine its books and records and discuss its affairs with its officers, employees and independent engineers at such times and as often as Lender may reasonably request. Borrower hereby authorizes such officers, employees, and independent engineers to discuss with Lender the affairs of Borrower in a manner consistent with applicable Law. 23 7.04. Preservation of Corporate Existence and Qualification. Other than as contemplated in connection with the Borrower's pending corporate reorganization (as further described in the Borrower's filings with the SEC pursuant to the Exchange Act), the Borrower shall maintain its existence, good standing and rights in full force and effect in its jurisdiction of organization. Borrower shall qualify to do business and remain qualified and in good standing and shall obtain all necessary authorizations to do business in each jurisdiction in which failure to receive or retain such would have a Material Adverse Effect. 7.05. Continuation of Business. Borrower shall continue to engage solely in the business described on Schedule 1 hereto, and shall acquire and maintain in full force and effect all rights, privileges, franchises and licenses necessary for the operation and maintenance of its business (including, without limitation any license or authorization required by the FCC or any PUC). 7.06. Insurance. (a) With respect to the Equipment, Borrower shall provide and maintain or cause to be maintained at all times insurance in such forms and covering such risks and hazards and in such amounts and with an insurance carrier with a Best rating of "A" or above, licensed to do business in the states where Borrower and the Equipment are located, as may be satisfactory to Lender, as shown on Schedule 7.06 hereto, and otherwise as may be required by the Security Documents. (b) Borrower shall cause (i) all liability insurance policies referred to in Section 7.06(a), above, to name Lender as an additional insured, (ii) all physical damage insurance policies referred to in Section 7.06(a), above, to contain a lender's or mortgagee's loss payable provision reasonably acceptable to Lender with respect to the Collateral, (iii) all insurance policies to provide that no assignment, cancellation, modification, reduction in amount or adverse change in coverage thereof shall be effective until at least thirty (30) days after receipt by Lender of written notice thereof, (iv) all insurance policies to insure the interests of Lender with respect to the Collateral regardless of any breach of or violation by Borrower of any warranties, declarations or conditions contained therein and (v) such action to ensure that Lender shall have no obligation or liability for premiums, commissions, assessments or calls in connection with such insurance. Lender shall be under no obligation to verify the adequacy or existence of any insurance coverage. Borrower shall furnish Lender copies of, or acceptable certificates with respect to, all such policies prior to the Closing Date, and shall provide to Lender, at least thirty days prior to each policy expiration date, evidence of the insurance being maintained by Borrower in compliance with this Section 7.06(b). Certificates for insurance required under subsection (i) above shall be in ACORD Form 27 (attached hereto at Schedule 7.06), and all certificates shall be satisfactory in form and substance to Lender. 24 (c) If the Collateral is partially or totally damaged or destroyed, Borrower shall give prompt notice to Lender, and all insurance proceeds, less the costs of collection thereof, shall be paid to or retained by Lender. Settlements, adjustments or compromises of any claims for loss, damage or destruction to the Collateral shall be made by Borrower and Lender as long as no Event of Default has occurred and is continuing, and otherwise shall be made solely by Lender. Borrower hereby authorizes and directs any affected insurance company to pay such proceeds directly to Lender, and to rely on Lender's statement as to whether an Event of Default has occurred. Borrower shall pay all costs of collection of insurance proceeds payable on account of such damage or destruction. If no Default or Event of Default has occurred and is continuing on the date the Collateral is partially or totally damaged or destroyed, Lender shall make available to Borrower the proceeds of any physical damage insurance actually paid to Lender in respect of such damage or destruction of the Collateral to pay the cost of restoration, and Borrower shall proceed promptly with the work of restoration of the Collateral and shall pursue the work of restoration diligently to completion. If any Default or Event of Default has occurred and is continuing either on the date of such damage or destruction or on the date such insurance proceeds are paid, or if any Default or Event of Default shall occur prior to completion of such work of restoration, then Lender, at its option, may apply such insurance proceeds in payment of any of the Obligations, in such order as Lender may elect in its sole discretion. Any insurance proceeds remaining after completion of work or restoration shall, at Lender's election, be applied in accordance with Section 2.04(c) hereof (but without prepayment premium), or paid over to Borrower. Upon completion of any restoration, Borrower shall deliver to Lender a certificate stating that the restoration has been duly completed and accounting for the use of any insurance proceeds in such restoration. 7.07. Payment of Taxes, Charges, Claims and Current Liabilities. Borrower shall pay or discharge: (a) on or prior to the date on which penalties thereto accrue, all taxes, assessments and other government charges or levies imposed upon it or any of its properties or income; (b) on or prior to the date when due, all lawful and uncontested claims of materialmen, mechanics, carriers, warehousemen, and other like persons which could result in creation of a Lien upon any such property; (c) on or prior to the date when due, all other lawful and uncontested claims which, if unpaid, might result in the creation of a Lien upon any such property (other than Permitted Encumbrances) or which, if unpaid, would give rise to a claim entitled to priority over general creditors of Borrower in a case under Title 11 (Bankruptcy) of the United States Code, as amended, or in any insolvency proceeding or dissolution or winding-up involving Borrower; and (d) all other current liabilities so that none is overdue more than ninety (90) days. Notwithstanding the foregoing, Borrower shall be entitled to contest or appeal the requirements of any Law or Governmental Authority or the payment of any tax, assessment, charge, levy or claim, or any judgment entered against Borrower (collectively, in this Section 7.07, the "requirements"), as long as (i) such requirements are being contested in good faith by appropriate proceedings diligently conducted; (ii) Borrower has given Lender written notice of such requirements and its intent to contest them, with supporting reasons for such contest, before the addition of any interest or penalties that may accrue on such requirements; (iii) Borrower maintains adequate cash reserves and makes other appropriate provisions as may be required by GAAP to provide for any liability arising from such requirements; (iv) the contesting of, or failure to comply with, such requirements does not in any way impair Borrower's ability or authority to operate all or any part of the Collateral or the continuing priority of Lender's security interests in the Collateral; (vi) the contesting of, or failure to comply with, such requirements does not have a Material Adverse Effect; and (vii) any foreclosure, attachment, execution, sale or similar proceeding against Borrower or any of its properties in connection with any such requirements is duly stayed by posting of a bond or security deposit or by other action sufficient under applicable law to stay such foreclosure, attachment, execution, sale or other proceedings. 25 7.08. Financial Accounting Practices. Borrower shall make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of its assets and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (a) transactions are executed in accordance with management's general or specific authorization, (b) transactions are recorded as necessary (i) to permit preparation of financial statements in conformity with GAAP and (ii) to maintain accountability for assets, (c) access to assets is permitted only in accordance with management's general or specific authorization and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 7.09. Compliance with Laws. Borrower shall comply in all material respects with all Laws applicable to Borrower, provided that Borrower shall not be deemed to be in violation of this Section 7.09 as a result of any failure to comply which would not result in any liability or exposure to Lender or any fines, penalties, injunctive relief or other civil or criminal liabilities which, in the aggregate, would have a Material Adverse Effect. 7.10. Use of Proceeds. Borrower shall use the proceeds of Advances hereunder only as set forth in Section 2.01 hereof. 7.11. Government Authorizations; Regulatory Authorizations, Etc. Borrower shall at all times obtain and maintain in force all Regulatory Authorizations and all other authorizations, permits, consents, approvals, licenses, exemptions and other actions by, and all registrations, qualifications, designations, declarations and other filings with, any Governmental Authority necessary in connection with the execution and delivery of this Agreement or the Note, consummation of the transactions herein or therein contemplated, performance of or compliance with the terms and conditions hereof or thereof or to ensure the legality, validity and enforceability hereof or thereof. 7.12. Contracts and Franchises. Borrower shall comply in all material respects with all material agreements or instruments to which it is a party or by which it or any of its material properties (now owned or hereafter acquired) may be subject or bound and shall maintain any and all franchises it may have or hereafter acquire, provided that Borrower shall not be deemed to be in violation of this Section 7.12 as a result of any failure to comply with any agreement if one reasonably would expect such failure not to have a Material Adverse Effect. 7.13. Consents. Borrower shall obtain such Landlord's Consents, Mortgagee's Consents and other third party consents as Lender shall reasonably request after the Closing to protect its Liens and its access to the Collateral. 7.14. Financial Covenants. Borrower shall comply with the financial covenants set forth on Schedule 7.14 hereto. 26 7.15. Construction and Storage. The Collateral shall be installed in material compliance with the Requirements of Law affecting the Collateral except to the extent a failure to so comply would not have a Material Adverse Effect on the construction or operation of the Collateral. All Equipment financed with the proceeds of the Loan shall be safeguarded and stored until installed in appropriate storage facilities owned or leased by Borrower. In the event of any cessation of construction for more than fifteen (15) successive calendar days, Borrower shall make adequate provision, reasonably acceptable to Lender, for the protection of all materials stored on site against deterioration, loss or damage. 7.16. Upgrade Equipment. Borrower shall update the Software used in the Equipment within two releases of the most current batch change supplement release. Borrower shall maintain the Equipment in good working order in accordance with established maintenance procedures such that the Equipment performs to published specifications and shall upgrade its functionality to include batch change supplements releases generally available to customers of Nortel or the applicable Vendor, as the case may be, and batch change supplements upgrades included in the original purchase price of the Purchase Agreement in the form in effect on the date of the Closing Date. ARTICLE 8: NEGATIVE COVENANTS ----------------------------- Borrower hereby agrees that so long as the Commitment hereunder remains in effect or the Note remains outstanding and unpaid or any other amount is owing to Lender hereunder or under any of the Loan Documents, Borrower shall not, directly or indirectly, without the prior written consent of Lender, do or permit to exist any of the following: 8.01. Additional Indebtedness. Create, incur, assume or suffer to exist at any one time any Indebtedness that would cause Borrower not to comply with the ratios set forth in Schedule 7.14 hereto; provided, however, that the Borrower may create, incur, assume or suffer to exist any Indebtedness (or portion thereof) secured by the Borrower's accounts receivable without application of the ratios set forth in Schedule 7.14 hereto and without the Lender's written consent. As long as the Borrower would continue to comply with the ratios set forth in Schedule 7.14 hereto, the Borrower shall have the right to incur (a) Subordinated Indebtedness; (b) unsecured, unsubordinated Indebtedness with the Lender's prior written consent, which consent the Lender shall not withhold unreasonably; or (c) without the Lender's consent, unsecured, unsubordinated Indebtedness with interest only payable prior to the Maturity Date and with covenants, terms and conditions no less favorable from the Lender's perspective as the covenants, terms and conditions contained in the Senior Notes and the Indenture, including (without limitation) conditions prohibiting or restricting Subsidiaries from loaning or distributing cash dividends to Borrower or limiting redemptions prior to maturity. 8.02. Restrictions on Liens and Sale of Collateral. Create or suffer to exist any Lien on the Collateral, or any part thereof, whether superior or subordinate to the Lien of the Security Documents, or assign, convey, sell or otherwise dispose of or encumber its interest in the Collateral, or any part thereof (including, without limitation, execution of any lease), nor permit any such action to be taken, except for the following permitted dispositions and encumbrances (the "Permitted Encumbrances"): (i) the Lien created hereby; (ii) Liens for taxes not yet due, or which are being contested in good faith and by appropriate proceedings in accordance with Section 7.07 hereof; (iii) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are overdue for a period not longer than thirty (30) days or which are being contested in good faith and by appropriate proceedings in accordance with Section 7.07 hereof; (iv) pledges or liens in connection with workers' compensation, unemployment insurance and other social security legislation; (v) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (vi) easements, rights-of-way, restrictions and other similar encumbrances that are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of Borrower; (vii) judgment liens with respect to which execution has been stayed within ten (10) days by appropriate judicial proceedings and the posting of adequate security which may not be any of the Collateral; and (viii) specific liens, if any, identified on Schedule 8.02 hereto. Any of the foregoing Liens shall remain "Permitted Encumbrances" as long as they are being contested by Borrower in compliance with Section 7.07 hereof. 27 8.03. Intentionally Deleted. 8.04. Prohibition of Mergers, Acquisitions, Name, Office or Business Changes, Etc. (a) Enter into or become the subject of any merger, acquisition or consolidation which would result in a Change in Control; liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); or convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or substantially all of Borrower's assets, whether now owned or hereafter acquired. (b) Change its name or corporate structure without giving Lender at least thirty (30) days advance written notice of such change, and ensuring that any steps that Lender may reasonably deem necessary to continue the perfection and priority of Lender's security interests in the Collateral shall have been taken. (c) Change the fiscal year end of Borrower from December 31, except with the prior written consent of Lender, which consent shall not be unreasonably withheld. (d) Amend, restate or otherwise modify, or violate any terms of, its Organizational Documents without the prior written consent of Lender, which consent shall not be unreasonably withheld. (e) Enter into any new business other than the telecommunications business or other similar businesses or make any material change in any of Borrower's business objectives, purposes and operations from those currently undertaken which would have a Material Adverse Effect. 8.05. Limitation on Equity Payments. Make any Equity Payment, except that, as long as no Default or Event of Default is continuing, or would be caused thereby, and if no other provision contained herein will be violated by the disbursement of such Equity Payment, Borrower may make Equity Payments described on Schedule 8.05 hereto. Before making any Equity Payment in accordance with this Section 8.05, Borrower shall deliver to Lender a certificate of a Responsible Officer of Borrower, setting forth in detail the calculation supporting Borrower's compliance with the financial covenants, stating that no Material Adverse Change has occurred since the date of the latest financial statement delivered pursuant to Section 7.01(a), and stating that no Default or Event of Default has occurred and is continuing or will be caused by such Equity Payment. 28 8.06. Limitation on Investments, Advances and Loans. Except in connection with the Borrower's pending corporate organization, without the Lender's prior written consent, organize, create, acquire, capitalize or own any Subsidiaries engaged in any business other than the telecommunications business or similar businesses, or make or commit to make any advance, loan, guarantee of any Indebtedness, extension of credit or capital contribution to, or hold or invest in or purchase or otherwise acquire any stock, bonds, notes, debentures or other securities of, or make any other investment in, any Person not engaged in the telecommunications business or similar businesses. 8.07. Intentionally Deleted. 8.08. Intentionally Deleted. 8.09. Removal of Collateral. Remove or permit the removal of any material part of the Equipment from the locations identified on Schedule 4.24, without giving Lender thirty (30) days prior written notice of such removal and ensuring that any steps Lender may deem necessary to continue the perfection and priority of Lender's security interest in the Collateral shall have been taken. 8.10. Assumed Names. Transact or engage in business under any assumed name, fictitious name, tradestyle or "d/b/a" except those identified on Schedule 4.27. ARTICLE 9: EVENTS OF DEFAULT AND REMEDIES ----------------------------------------- 9.01. Events of Default. An Event of Default shall mean the occurrence or existence of one or more of the following events or conditions (whatever the reason for such Event of Default and whether voluntary, involuntary or effected by operation of Law): (a) Payment Default. If Borrower fails to pay any sum, whether of principal or interest on the Note or any prepayment premiums, or any other amount due hereunder or under the Note within 10 calendar days after such amount becomes due; or (b) False Statement. If any statement, representation or warranty made by Borrower in any Loan Document or made in any financial statement, certificate, report, exhibit or document furnished to Lender pursuant to any Loan Document, proves to have been untrue, incomplete, false or misleading in any material respect as of the time when made (including by omission of material information necessary to make such representation, warranty or statement not misleading) and such untruth, falsity, misleading statement or omission shall not have been corrected or remedied to the satisfaction of Lender within thirty (30) calendar days after the earlier of Borrower's knowledge thereof or receipt of written notice thereof from Lender; or (c) Covenant Defaults. If Borrower defaults in the performance or observance of any covenant or agreement in this Agreement, and such default continues for a period of 30 calendar days after the earlier of Borrower's knowledge thereof or receipt of written notice from Lender thereof, except for violations of Section 7.14, which shall become an Event of Default at the end of 10 days; except for violations of Section 7.07(d), which shall become an Event of Default at the end of the sixty (60) day period stated therein; and except for specific Defaults listed elsewhere in this Section 9.01, as to which no notice or cure period shall apply unless specified; or 29 (d) Failure of Conditions. If Borrower fails to meet any condition of lending under Article 6 hereof, and such condition is not waived by Lender; (e) Undischarged Judgments. If one or more judgments for the payment of money has been entered against Borrower in an amount in excess of $500,000, and such judgment or judgments have remained undischarged and unstayed for a period of thirty (30) calendar days, unless the validity thereof is contested in compliance with Section 7.07 hereof; or (f) Attachments, etc. If a writ or warrant of attachment, garnishment, execution, distraint or similar process has been issued against Borrower or any of its properties which has remained undischarged and unstayed for a period of thirty (30) consecutive days and is not being contested in compliance with Section 7.07 hereof; or (g) Default Under Third Party Agreements. If a default, or event or condition which with notice or lapse of time or both would become a default, occurs that gives the creditor the right to accelerate in respect of any other obligation of Borrower for borrowed money (including lease obligations) in the amount of $500,000 in the aggregate, or under any two or more such other obligations of any amount; or (h) Dissolution; Etc. If Borrower dissolves, has its Organizational Document revoked, winds up or liquidates itself or its business; or (i) Involuntary Bankruptcy or Receivership Proceedings. If a receiver, custodian, liquidator, or trustee of Borrower, or of any of its property is appointed by the order or decree of any court or agency or supervisory authority having jurisdiction; or an order is entered adjudicating Borrower as bankrupt or insolvent; or any of the property of Borrower is sequestered by court order; or a petition is filed against Borrower under any state or federal bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution, liquidation, or receivership law of any jurisdiction, whether now or hereafter in effect; or (j) Voluntary Bankruptcy. If Borrower takes affirmative steps to prepare to file, or files, a petition in voluntary bankruptcy or to seek relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution, or liquidation Law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such Law; or (k) Assignments for Benefit of Creditors, Etc. If Borrower makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee, or liquidator of itself or of all or any part of its properties; or (l) Non-compliance with Governmental Requirements. If Borrower fails to comply with any requirement of any Governmental Authority within thirty (30) calendar days after notice in writing of such requirement shall have been given to Borrower by such Governmental Authority, or such longer period of time permitted Borrower by such Governmental Authority; or (m) Regulatory Authorizations. If any Regulatory Authorization in connection with this Agreement or any other Loan Document or any such Regulatory Authorization now or hereafter necessary or advisable to make this Agreement or the other Loan Documents legal, valid, enforceable and admissible in evidence or to permit Borrower to conduct its business is not obtained or has ceased to be in full force and effect or has been modified or amended or has been held to be illegal or invalid or is revoked or terminated, and is not being contested by Borrower in compliance with Section 7.07 hereof and Lender has reasonably determined in good faith (which determination shall be conclusive) that such event or occurrence may have a Material Adverse Effect or a material adverse effect on Lender's rights under this Agreement or any other Loan Documents; or 30 (n) Damage or Destruction. If the proceeds of any physical damage insurance actually paid in respect of the partial or total damage or destruction of the Collateral are insufficient to cover the cost of the restoration thereof or if Lender determines that such damage or destruction is so extensive that repair or restoration cannot be expected within a time period short enough to prevent a Material Adverse Effect; (o) Consents. If Borrower fails to provide any Consent required hereunder and Lender determines in its reasonable discretion that such failure results in a material impairment of Lender's security for the Loan; or (p) Defaults Under Other Loan Documents. If any default, misrepresentation or breach should occur under any Security Document or other Loan Document and is not cured or waived within the time permitted therein, or any such Loan Documents should cease to be in full force and effect, or any party thereto should assert any unenforceability of, or deny liability on, or admit inability to perform under, any such Loan Document. 9.02. Consequences of an Event of Default. If any Event of Default shall occur and be continuing or shall exist, Lender shall be under no further obligation to make Advances hereunder, any remaining commitment hereunder shall immediately terminate, with no further notice, and Lender may, by notice to Borrower, declare the unpaid principal amount of the Note, interest accrued thereon and all other amounts owing by Borrower hereunder or under the Note to be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue. Such consequences shall occur automatically upon the occurrence of an Event of Default under Section 9.01 (h), (i), (j) or (k), without any notice or demand. Upon the occurrence of an Event of Default, Lender may, in its sole discretion, exercise any and all remedies available to it under this Article 9 or under any of the Loan Documents or under applicable Law without further notice or period of grace or opportunity to cure. 9.03. Exercise of Rights. Subject to any requirements for FCC or other Governmental Authority upon the occurrence of any Event of Default, the rights, powers and privileges provided in this Section and all other remedies available to Lender under this Agreement or by statute or by rule of law may be exercised by Lender at any time from time to time whether or not the Obligations shall be due and payable, and whether or not Lender shall have instituted any foreclosure or other action for the enforcement of this Agreement or the Note. No failure to exercise nor any delay in exercising on the part of Lender, any right, remedy, power or privilege hereunder or under any of the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or future exercise thereof or the exercise of any other right, remedy, power or privilege. 31 9.04. Rights of Secured Party; Possession or Sale of Collateral. Without limiting the generality of the foregoing, Lender shall have all the rights and remedies of a secured party under the UCC, and Lender may, without demand and without advertisement or notice, all of which Borrower waives, at any time or times, sell and deliver any or all Collateral held by or for it at public or private sale, for cash, upon credit or otherwise, at such prices and upon such terms as Lender deems advisable, in its sole discretion, and/or collect, or enforce the collection of, the Collateral. Lender may be the purchaser at any such sale. Upon the occurrence of an Event of Default and upon Lender's request, Borrower shall assemble, at its own expense, any or all Equipment and other Collateral at a convenient place acceptable to Lender and shall pay to Lender or reimburse Lender for, on demand, all costs of collection of all amounts due, and enforcement of all rights hereunder, including reasonable attorneys' fees and legal expenses, and expenses of any repairs to any realty or other property to which any of such Collateral may be affixed. Upon an Event of Default Lender may, to the full extent permitted by applicable law, without notice, advertisement, hearing or process of law of any kind, enter upon any premises where any of the Collateral may be located and take possession of and remove such Collateral. 9.05. Notices, Etc. Waived. Except as expressly provided in this Article 9, Borrower hereby expressly waives, to the full extent permitted by applicable law, presentment, demand, protest, any and all notices of any kind, advertisements, hearing or process of law in connection with the exercise by Lender of any of its rights and remedies upon the occurrence of an Event of Default. If any notification of intended disposition of any of the Collateral is required by law, such notification shall be deemed reasonably and properly given if given in accordance with Section 10.06 hereto at least ten (10) days before such disposition. 9.06. Additional Remedies. Lender's remedies upon the occurrence and during the continuance of an Event of Default shall include, in addition to, and not in lieu of, such remedies as are available at law or in equity or provided for in any of the Loan Documents, the following: (a) Foreclosure; Receivership. Lender shall be entitled to file one or more suits at law or in equity to collect the Obligations and/or to foreclose on Lender's Liens on and security interests created by this Agreement or the Security Documents. Lender may apply or require Borrower to apply for any necessary transfers, assignments, orders, consents or licenses in connection with the operation or abandonment of the Collateral or any part thereof, and Lender shall also be entitled as a matter of right and without notice and without requiring bond (notice and bond being hereby waived), without regard to the solvency or insolvency of Borrower at the time of application and without regard to the value of the Collateral at that time, to have a receiver appointed by a court of competent jurisdiction in order to manage, protect, and preserve the Collateral and to continue the operation of the business of Borrower, and to collect all revenues and profits thereof and apply the same to the payment of all expenses and other charges of such receivership until the sale or other final disposition of the Collateral. Borrower hereby consents to the appointment of such receiver. (b) Right to Cure. If Borrower fails in any material respect to perform or comply with any of its agreements contained herein or in any of the other Loan Documents, Lender may take whatever actions it may deem appropriate to perform or comply or otherwise cause performance or compliance with such agreement, all at the risk, cost and expense of Borrower. (c) Setoff. If the unpaid principal amount of the Note, interest accrued thereon or any other amount owing by Borrower hereunder or under the Note shall have become due and payable (by acceleration or otherwise), Lender shall have the right, in addition to all other rights and remedies available to it, without notice to Borrower, to setoff against and to appropriate and apply to such due and payable amounts any debt owing to, and any other funds held in any manner for the account of, Borrower by Lender. Such right shall exist whether or not Lender shall have given notice or made any demand hereunder or under the Note, whether or not such debt owing to or funds held for the account of Borrower is or are matured or unmatured, and regardless of the existence or adequacy of any Collateral, guaranty or any other security, right or remedy available to Lender. Borrower hereby consents to and confirms the foregoing arrangements and confirms Lender's rights of setoff. 32 9.07. Application of Proceeds. Any proceeds of any of the Collateral received by Lender through sale or disposition of the Collateral or otherwise, may be applied by Lender toward the payment of the Obligations, including expenses in connection with the Collateral (including reasonable fees and legal expenses) in such order of application as Lender may from time to time elect. 9.08. Discontinuance of Proceedings. If Lender should proceed to enforce any right or remedy under this Agreement or any other Loan Document, and then discontinue or abandon such proceeding for any reason, all rights, powers and remedies of Lender hereunder shall continue as if no such proceeding had been taken. 9.09. Power of Attorney. For the purpose of carrying out the provisions and exercising the rights, powers and privileges granted by the Loan Documents, including, without limitation, this Article 9, Borrower hereby irrevocably constitutes and appoints Lender its true and lawful attorney-in-fact to execute, acknowledge and deliver any instruments and do and perform any acts such as are referred to in the Loan Documents during the continuance of any Event of Default, including, without limitation, this Article 9, in the name and on behalf of Borrower, from time to time in Lender's reasonable discretion after the occurrence and during the continuance of an Event of Default, in accordance with the Loan Documents and any statute or rule of law. This power of attorney is a power coupled with an interest and cannot be revoked. Borrower hereby ratifies all that said attorney-in-fact shall lawfully do or cause to be done by virtue and in accordance with the terms hereof. Without limiting the generality of the foregoing, Lender may, during the continuance of an Event of Default, do the following without notice to or assent by Borrower to accomplish the purposes of this Agreement: (a) upon failure of Borrower to timely pay or discharge taxes or Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of this Loan Agreement or any other Loan Document, and pay all or any part of the premiums therefor and the costs thereof; (b) (i) direct any party liable for any payment on any Collateral to make payment of any and all monies due and to become due thereunder directly to Lender or as Lender shall direct; (ii) in the name of Borrower or its own name or otherwise, take possession of and endorse and collect any checks, drafts, notes, acceptances, or other instruments for the payment of monies due under, or otherwise receive payment of and receipt for any and all monies, claims and other amounts due and to become due at any time in respect of or arising out of any Collateral; (iii) sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with the Collateral; (iv) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect all or any of the Collateral and to enforce any other right in respect of any Collateral; (v) defend any suit, action or proceeding brought against Borrower with respect to any Collateral; (vi) settle, compromise or adjust any suit, action or proceeding described above upon commercially reasonable terms under the circumstances and, in connection therewith, give such discharges or releases as Lender may reasonably deem appropriate; and (vii) generally sell, use, operate, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Lender were the absolute owner thereof for all purposes, and, at Lender's option and Borrower's expense, at any time or from time to time after the occurrence and during the continuance of an Event of Default, all other acts and things that Lender reasonably deems necessary to protect, preserve or realize upon the Collateral and Lender's security interest therein, in order to effect the intent of this Agreement and the other Loan Documents all as fully and effectively as Borrower might do. 33 9.10. Regulatory Matters. Notwithstanding any provision to the contrary contained herein, Lender will not exercise any right or remedy under this Agreement that requires prior FCC or PUC approval without first obtaining such approval. If counsel to Lender reasonably determines that the consent of the FCC or PUC is required in connection with any of the actions that may be taken by Lender in the exercise of its rights hereunder or under any of the other Loan Documents, then Borrower, at its sole cost and expense, agrees to use its best efforts to secure such consent and to cooperate with Lender in any action commenced by Lender to secure such consent. Upon the occurrence and during the continuation of an Event of Default, Borrower shall promptly execute and/or cause the execution of all applications, certificates, instruments and other documents and papers that may be required in order to obtain any necessary governmental consent, approval or authorization, and if Borrower fails or refuses to execute such documents, the clerk of the court with jurisdiction may execute such documents on behalf of Borrower. ARTICLE 10: GENERAL CONDITIONS/MISCELLANEOUS -------------------------------------------- The following conditions shall be applicable throughout the term of this Agreement: 10.01. Modifications and Waivers. This Agreement, the other Loan Documents, or any provision thereof may not be changed, waived or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of the change, waiver or termination is sought. No action or course of dealing on the part of Lender, its officers, employees, consultants, or agents, nor any failure or delay by Lender with respect to exercising any right, power, or privilege of Lender under the Note, this Agreement, or any other Loan Document shall operate as a waiver thereof, except as otherwise provided in this Agreement. Any waiver shall be effective only to the extent and for the instance specifically identified in such writing, and shall not be deemed to imply any future waivers or other waivers. No amendment to the Loan Documents shall be effective without written agreement signed by both Borrower and Lender. 10.02. Advances Not Implied Waivers. No waiver of the requirements contained in any Loan Document shall be effective unless in writing duly signed by Lender. No Advance hereunder shall constitute a waiver of any of the conditions of Lender's obligation to make further Advances nor, in the event Borrower is unable to satisfy any such condition, shall any waiver of such condition have the effect of precluding Lender from thereafter declaring such inability to be an Event of Default as herein provided. Any Advance made by Lender and any sums expended by Lender pursuant to the Loan Documents shall be deemed to have been made pursuant to this Agreement, notwithstanding the existence of an uncured Default or Event of Default. No Advance at a time when an Event of Default exists shall constitute a waiver of any right or remedy of Lender existing by reason of such Event of Default, including, without limitation, the right to accelerate the maturity of the Indebtedness evidenced by the Note or to foreclose the Lien on the Collateral or to refuse to make further advances hereunder. 34 10.03. Deviation from Covenants. The procedure to be followed by Borrower to obtain the consent of Lender to any deviation from the covenants contained in this Agreement or any other Loan Document shall be as follows: (a) Borrower shall send a written notice to Lender setting forth (i) the covenant(s) relevant to the matter, (ii) the requested deviation from the covenant(s) involved, and (iii) the reason for the requested deviation from the covenant(s); and (b) Lender, within a reasonable time, will send a written notice to Borrower, permitting or refusing the request, but in no event will any deviation from the covenants of this Agreement or any other Loan Document be effective without the express prior written consent of Lender. Lender's failure to provide such written notice shall be deemed a refusal of such request. 10.04. Holidays. Except as otherwise provided herein, whenever any payment or action to be made or taken hereunder or under the Note shall be stated to be due on a day which is not a Business Day, such payment or action shall be made or taken on the next following Business Day and such extension of time shall be included in computing interest or fees, if any, in connection with such payment or action. 10.05. Records. From time to time, Lender may send Borrower statements of the unpaid principal amount of the Note, the unpaid interest accrued thereon, the Interest Rate or rates applicable to such unpaid principal amount, the duration of such applicability, and the amount remaining available on any Loan, and each statement shall be deemed correct and conclusively binding on Borrower (absent manifest error) unless Borrower notifies Lender of an error in the statement in writing within thirty (30) days of the date of any such statement is provided to Borrower. 10.06. Notices. All notices, requests, demands, directions and other communications (collectively, "notices") required under the provisions of this Agreement or any other Loan Document shall be in writing (including communication by facsimile transmission) unless otherwise expressly permitted hereunder and shall be sent by hand, by registered or certified mail return receipt requested, by overnight courier service maintaining records of receipt, or by facsimile transmission with confirmation in writing mailed first-class, in all cases with charges prepaid, and any such properly given notice shall be effective upon the earlier of receipt or (i) when delivered by hand, or (ii) the third Business Day after being mailed, or (iii) the following Business Day if sent by overnight courier service, or (iv) when sent by facsimile, answer back received. All notices shall be addressed as follows: 35 If to Borrower, to the Notice Address set forth on Schedule 1, with copies, if any, as set forth on Schedule 1. If to Lender: NTFC Capital Corporation 501 Corporate Centre Drive Franklin, Tennessee 37067 Attention: Manager, Credit Telecopy: (615) 771-6626 With a copy to: NTFC Capital Corporation 501 Corporate Centre Drive Franklin, Tennessee 37067 Attention: Legal Department Telecopy: (615) 771-6187 All notices shall be sent to the applicable party at the address stated above or in accordance with the last unrevoked written direction from such party to the other party hereto, given in accordance with the terms hereof. 10.07. FCC and PUC Approval. The exercise of any rights or remedies hereunder or under any other Loan Document by Lender that may require FCC or PUC approval shall be subject to obtaining such approval. Pending the receipt of any PUC or FCC approval, Borrower shall not do anything to delay, hinder, interfere with or obstruct the exercise of Lender's rights or remedies hereunder or the obtaining of such approvals. 10.08. Lender Sole Beneficiary. All conditions of the obligation of Lender to make any Advances hereunder are imposed solely and exclusively for the benefit of Lender and its assigns and no other Person shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that Lender will refuse to make any Advances in the absence of strict compliance with any or all such conditions, and no Person shall under any circumstances be deemed to be a beneficiary of such conditions, any or all of which may be freely waived in whole or in part by Lender at any time if in its sole discretion it deems it advisable to do so. Lender's sole obligation hereunder is to make the Advances if and to the extent required by this Agreement or the Note. 10.09. Lender's Review of Information. Borrower acknowledges and agrees that any review or analysis by Lender of financial information, operating information, marketing data or other information provided to Lender by or on behalf of Borrower at any time is and shall be conducted solely for Lender's benefit and internal use and that Lender is under no duty or obligation to make the results of such review or analysis available to Borrower. Borrower is not relying, and will not rely, on Lender for financial or business advice. 10.10. No Joint Venture. Nothing in any of the Loan Documents or in this Agreement shall be deemed to constitute any kind of partnership, joint venture or fiduciary relationship between Lender and Borrower. 10.11. Severability. The provisions of this Agreement are intended to be severable. If any provision of this Agreement or the other Loan Documents shall be held invalid or unenforceable in whole or in part in any jurisdiction such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability thereof in any other jurisdiction or the remaining provisions hereof or thereof in any jurisdiction. 36 10.12. Rights Cumulative. All rights, powers and remedies herein given to Lender are cumulative and not alternative, and are in addition to all statutes or rules of law. 10.13. Duration; Survival. All representations and warranties of Borrower contained herein or made in connection herewith shall survive the making of and shall not be waived by the execution and delivery of this Agreement and the other Loan Documents, any investigation by Lender, or the making of any Advances hereunder. All covenants and agreements of Borrower contained herein shall continue in full force and effect from and after the date hereof so long as it may borrow hereunder and until payment in full of the Note, interest thereon, all fees and all other Obligations of Borrower. Without limitation, it is understood that all obligations of Borrower to make payments to or indemnify Lender shall survive the payment in full of the Notes and of all other Obligations. 10.14. Governing Law. This Agreement, the Note and each of the other Loan Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York (i.e., notwithstanding any conflict of law principles), except to the extent, if any, set forth on Schedule 2.02 hereto, and except to the extent that the laws of jurisdictions where the Collateral is located may be required to apply to the Collateral. 10.15. Counterparts. This Agreement may be executed in any number of counterparts (by facsimile transmission or otherwise) and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument. 10.16. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of Lender and Borrower and their respective successors and assigns; provided, however, that Borrower may not assign or transfer any of its rights or obligations hereunder or under the other Loan Documents (in whole or in part) without the prior written consent of Lender. Lender may assign, transfer or pledge any of its respective rights or obligations hereunder or under the other Loan Documents without notice to or the prior written consent of Borrower. Upon receipt of written notice from Lender of such assignment, Borrower shall promptly acknowledge receipt thereof in writing. If Borrower is given written notice of any assignment, it shall perform its obligations with respect to this Agreement for the ratable benefit of the applicable assignee(s), and, if so directed, shall pay all amounts due or to become due hereunder directly to the applicable assignee(s) or to any other party designated by such assignee(s). Borrower shall not assert against any such assignee any set-off, defense or counterclaim that Borrower may have against Lender or any person other than such assignee. Borrower shall also execute and deliver to Lender such documentation as any such assignee may reasonably require, including but not limited to amended promissory notes and acknowledgment of or consent to the assignment which may require Borrower to make certain representations or reaffirmations as to some of the basic terms and covenants contained herein. Lender shall not be relieved of its obligations hereunder as a result of any such sale, assignment, transfer, grant or pledge, unless such assignee specifically assumes all or part of Lender's future obligations hereunder in a writing, a copy of which shall be delivered to Borrower, in which event after the date of such assignment, Borrower's obligations to any such assignee shall be proportionately as set forth herein with respect to Lender, and Borrower shall not look to Lender to perform any of such assignee's obligations hereunder which arise after the date thereof. Any assignee shall be entitled to rely on Borrower's agreements as stated herein, as applicable, and shall be considered a third party beneficiary thereof. Except to the extent otherwise required by the context of this Agreement, the word "Lender" where used in this Agreement shall mean and include any holder of any Note originally issued to Lender hereunder, and any such holder of the Note shall be bound by and have the benefits of this Agreement the same as if such holder had been a signatory hereto. 37 10.17. Participation. Lender shall have the right to enter into one or more participation agreements, syndication agreements or similar agreements with one or more participating lenders or other parties approved by Lender on such terms and conditions as Lender shall deem advisable. Borrower shall furnish a sufficient number of copies of reports and certificates to Lender so that Lender and each participating lender shall receive a copy of each such document. 10.18. Time of Essence. Time is of the essence of this Agreement and the Note and the other Loan Documents. 10.19. Disclosures and Confidentiality. (a) Except as required by applicable Law, the Exchange Act, or the rules and regulations of the SEC, Borrower agrees that it will obtain Lender's written consent before using or generating any press release, advertisement, publicity materials or other publication in which the name or logo of Lender or any of its Affiliates is used or may be reasonably inferred, and will not distribute any such materials in the absence of such prior written approval. (b) Except as required by applicable Law, the Exchange Act, or the rules and regulations of the SEC, Borrower agrees that it will not, directly or indirectly, disclose to any third party the terms of this Agreement or the other Loan Documents or prior or future correspondence relating thereto, or the transactions contemplated hereby, or any other information regarding Lender or its Affiliates learned by Borrower during the course of negotiation thereof. The term "third party" shall exclude only Borrower, its Affiliates and their respective attorney(s) and certified public accountant(s). This Section 10.19(b) shall not restrict the disclosure of information if such disclosure is required by law, by order of any court or by the order, rule or regulation of any Governmental Authority, including without limitation any requirements of the SEC, FCC, any PUC, or any state or federal securities commissions (the "Commissions"); provided, however, that, except for disclosures required by the SEC, FCC, PUC or Commissions, Borrower shall provide Lender with advance notice of any such required disclosure of information so that Lender may seek an appropriate protective order and/or waive compliance with this Section. Borrower shall not oppose any action taken by Lender to obtain an appropriate protective order or other reliable assurance that the information will be accorded confidential treatment. The obligations set forth in this Section 10.19(b) shall survive the termination of this Agreement. (c) The disclosure of information by either Lender or Borrower will not be restricted under this Agreement if such information (i) has been or becomes published or is now, or in the future, in the public domain through (A) no fault of the parties, (B) disclosure other than unauthorized disclosure by the party to whom the information is disclosed, or (C) disclosure to third parties by the disclosing party without similar restriction; (ii) is properly (other than proposal letters, commitment letters or other correspondence between Lender and Borrower) within the legitimate possession of the receiving party prior to disclosure hereunder; (iii) subsequent to disclosure hereunder, is lawfully received from a third party having rights therein without restriction of the third party's or receiving party's rights to disseminate the information and without notice of any restriction against its further disclosure; (iv) is disclosed with the written approval of the other party; (v) is or becomes publicly available free of any obligation to keep it confidential. 38 (d) Borrower authorizes Lender to discuss with and furnish to any Affiliate of Lender, to any Governmental Authority with jurisdiction over Lender, to any other Governmental Authority or to any assignee, successor, participant, successor, or prospective assignee, successor or participant, all publicly-disclosed financial statements, audit reports and other information pertaining to Borrower and/or its Subsidiaries whether such information was provided by Borrower or prepared or obtained by Lender or third parties. Neither Lender nor any of its employees, officers, directors or agents make any representation or warranty to any existing or prospective assignee, successor or participant regarding any audit reports or other analyses of Borrower that Lender may distribute, whether such information was provided by Borrower or prepared or obtained by Lender or third parties, nor shall Lender or any of its employees, officers, directors or agents be liable to any Person receiving a copy of such reports or analyses for any inaccuracy or omission contained in such reports or analyses or relating thereto. (e) Every reference in this Agreement to disclosures of Borrower to Lender (except the financial statements), to the extent that such references refer or are intended to refer to disclosures at or prior to the execution of this Agreement, shall be deemed strictly to refer only to written disclosures delivered to Lender concurrently with the execution of this Agreement and referred to specifically in the Loan Documents. The parties intend that such disclosures are to be limited to those presented in an orderly manner at the time of executing this Agreement and are not to be deemed to include expressly or impliedly any disclosures that previously may have been delivered from time to time to Lender, except to the extent that such previous disclosures are again presented to Lender in writing concurrently with the execution of this Agreement. 10.20. Jurisdiction and Venue. BORROWER HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE COURTS LOCATED IN DAVIDSON COUNTY, TENNESSEE, INCLUDING WITHOUT LIMITATION FEDERAL COURTS SITTING IN THE MIDDLE DISTRICT OF TENNESSEE AND THE CHANCERY COURT FOR DAVIDSON COUNTY, TENNESSEE, FOR ANY SUIT BROUGHT OR ACTION COMMENCED IN CONNECTION WITH THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE OBLIGATIONS, AND AGREES NOT TO CONTEST VENUE OR JURISDICTION IN ANY SUCH COURTS. In any such litigation, Borrower waives personal service of any summons, complaint or other process, and agrees that the service thereof may be made by certified or registered mail direct to Borrower at its address set forth in Section 10.06 hereof. Within thirty (30) days after such mailing, Borrower shall appear and answer to such summons, complaint or other process. Should Borrower fail to appear or answer within the said 30-day period, then such party shall be deemed in default and judgment may be entered against Borrower for the amount or other relief as demanded in any summons, complaint or other process so served. In the alternative, in its sole discretion, Lender may effect service upon Borrower in any other form or manner permitted by law. The choice of forum set forth herein shall not be deemed to preclude the enforcement of any judgment obtained in such forum or the taking of any action under this Agreement to enforce the same in any appropriate jurisdiction. 10.21. Jury Waiver. BORROWER AND LENDER HEREBY KNOWINGLY AND WILLINGLY WAIVE THEIR RIGHTS TO DEMAND A JURY TRIAL IN ANY ACTION OR PROCEEDING INVOLVING THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, THE OBLIGATIONS, OR ANY RELATIONSHIP BETWEEN LENDER AND BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 39 10.22. Limitation on Liability. LENDER SHALL HAVE NO LIABILITY UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS FOR SPECIAL, EXEMPLARY, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY SORT IN ANY SUIT BROUGHT OR ACTION COMMENCED IN CONNECTION WITH THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE OBLIGATIONS, AND, EXCEPT TO THE EXTENT PROHIBITED BY LAW, EACH PARTY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH ACTION ANY SPECIAL, EXEMPLARY, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY SORT OTHER THAN ACTUAL DAMAGES. 10.23. Borrower Waivers. To the full extent permitted by law, Borrower hereby waives (i) presentment, demand and protest and notice of presentment, protest, default, non payment, maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, contract rights, documents, instruments, chattel paper and guaranties at any time held by Lender on which Borrower may in any way be liable and hereby ratifies and confirms whatever Lender may do in this regard; (ii) notice prior to taking possession or control of the Collateral or any bond or security which might be required by any court prior to allowing Lender to exercise any of Lender's remedies, including the issuance of an immediate writ of possession, except as expressly required in any of the Loan Documents; (iii) any marshalling of assets, or any right to compel Lender to resort first to any Collateral or other Persons before pursuing Borrower for payment of the Obligations and any defenses based on suretyship or impairment of Collateral; (iv) the benefit of all valuation, appraisement and exemption laws; (v) any right to require Lender to terminate its security interest in the Collateral or in any other property of Borrower until termination of this Agreement and the execution by Borrower and by any person whose loans to Borrower are used in whole or in part to satisfy the Obligations, of an agreement indemnifying Lender from any loss or damage Lender may incur as the result of dishonored or unsatisfied items of any account debtor applied to the Obligations; and (vi) notice of acceptance hereof. Borrower acknowledges that the foregoing waivers are a material inducement to Lender's entering into this Agreement and that Lender is relying upon the foregoing waivers in its future dealings with Borrower. 10.24. Schedules. The Schedules and Exhibits attached to this Agreement are an integral part hereof, and are hereby made a part of this Agreement. 10.25. Agreement to Govern. In case of any conflict between the terms of this Agreement and any of the other Loan Documents, the terms of this Agreement (including all exhibits and schedules hereto) shall govern. 10.26. Entire Agreement. This Agreement, the other Loan Documents and other documents, agreements and certificates executed by the parties contemporaneously herewith or subsequent hereto constitute the entire agreement of the parties and supersede all prior understandings and agreements, written or oral, between the parties hereto relating to the subject matter hereof. Borrower is not entering into this Agreement in reliance on statements or representations made by any Person other than as set forth herein. 40 10.27. Construction. The parties acknowledge that each party and/or its legal counsel have reviewed and made revisions to this Agreement. The rule of construction requiring the resolution of any ambiguities in this Agreement against the drafting party shall not apply to the construction of this Agreement or any schedules or exhibits to this Agreement. [END OF GENERAL TERMS AND CONDITIONS. NEXT PAGE IS SCHEDULE 1.] [SIGNATURES ARE ON COVER PAGE. ] 41 EX-10.40 4 EXHIBIT 10.40 EXHIBIT 10.40 LOAN AND SECURITY AGREEMENT BY AND BETWEEN RAM MUKUNDA ("BORROWER") AND STARTEC GLOBAL COMMUNICATIONS CORPORATION ("LENDER") 8 OCTOBER 1998 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of October 8, 1998 by and between Ram Mukunda ("Borrower"), and Startec Global Communications Corporation, a Maryland corporation ("Lender"). RECITALS A. Whereas, Borrower desires to borrow funds from Lender and Lender is willing to establish such arrangements for and make loans to Borrower, on the terms and conditions set forth below. B. Whereas, the parties desire to define the terms and conditions of their relationship and to reduce their agreements to writing. NOW, THEREFORE, in consideration of the promises and covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: SECTION 1.1. AGREEMENT. "Agreement" means this Loan and Security Agreement, as it may be amended or supplemented from time to time. SECTION 1.2. APPLICABLE INTEREST RATE. "Applicable Interest Rate" means an interest rate of 7.87% per annum. SECTION 1.3. BORROWED MONEY. "Borrowed Money" means any obligation to repay money, any indebtedness evidenced by this Loan and Security Agreement. SECTION 1.4. BORROWER. "Borrower" has the meaning set forth in the Preamble. SECTION 1.5. BUSINESS DAY. "Business Day" means any day on which financial institutions are open for business in the State of Maryland, excluding Saturdays and Sundays. 1 SECTION 1.6. CLOSING DATE. "Closing" and "Closing Date" mean the date on which this Agreement is executed by and between the Borrower and the Lender. SECTION 1.7. LENDER. "Lender" has the meaning set forth in the Preamble. SECTION 1.8. LOAN. "Loan" has the meaning set forth in Section 2.1(a). SECTION 1.9. LOAN DOCUMENTS. "Loan Documents" means and includes this Agreement the final, executed Escrow Agreement and each and every other document now or hereafter delivered in connection therewith, as any of them may be amended, modified, or supplemented from time to time. SECTION 1.10. PERSON. "Person" means an individual, partnership, corporation, trust, joint venture, joint stock company, limited liability company, association, unincorporated organization, Governmental Authority, or any other entity. SECTION 1.11. TERM. "Term" has the meaning set forth in Section 2.3. ARTICLE II LOAN SECTION 2.1. TERMS. (a) Borrower and Lender agree that the aggregate principal amount loaned by Lender to Borrower hereunder (the "Loan") will be Four Hundred Thousand Dollars ($400,000.00). (b) Borrower hereby agrees to repay Lender the principal amount of the Loan pursuant to the terms and conditions set forth herein. Borrower further agrees to pay the Lender interest on the Loan from the date hereof until repaid, at a rate per annum in arrears (on the basis of the actual number of days elapsed over a year of 360 days) equal to the Applicable Interest Rate. SECTION 2.2. PAYMENTS. Principal payable on account of this Loan shall be due and payable by Borrower to Lender immediately upon the earliest of (i) December 31, 1999; or (ii) the termination of this Agreement pursuant to Section 2.3(b) hereof. Interest shall be due and payable at the time that principal amounts are fully paid. Pursuant to Section 2.3(b), the Loan may be prepaid in whole or in part at any time or from time to time without premium or penalty. SECTION 2.3. TERM. 2 (a) This Agreement shall be in effect from the Closing Date until December 31, 1999 ("the Term"), unless terminated as provided in subsection (b) of this Section, and this Agreement may be renewed for one-year periods thereafter upon the mutual written agreement of the parties. (b) Borrower may terminate this Agreement at any time, provided that as of the effective date of such termination, Borrower shall pay to Lender the full amount of any outstanding principal and interest then due and owning on the Loan. SECTION 2.4. SECURITY. Borrower and Lender agree that this Loan shall be secured by, and Lender shall have legal recourse to, all of the Borrower's personal estate, including, but not limited to all now-owned and hereafter acquired real or personal property, deposit accounts, money, insurance proceeds, securities and rights to payment of every kind and description, and all of Borrower's contract rights, and all of Borrower's rights, remedies, interest, security and liens, in any real or personal property. Lender's right of recourse to the security described herein shall be secondary to any pre-existing security interests in such property held by any other Persons. SECTION 2.5. ESTABLISHMENT OF ESCROW SECURITY. As additional security for payments hereunder the Borrower shall place in escrow certain securities of Startec Global Communications Corporation (the "Stock") owned by Borrower, valued at an amount equal to five hundred thousand dollars ($500,000) as determined by a Fair Market Valuation as of the date the Escrow Agreement is executed by and among the parties. For the purpose of this paragraph, a Fair Market Valuation on any given day shall be equal to the closing price reported for the Stock on the National Association of Securities Dealers Automated Quotation System (NASDAQ) two days earlier. The Stock shall be placed in a segregated account to be held by an escrow agent for the purpose of securing payment of the Loan. Following the execution and delivery of this Agreement, the parties shall enter into an Escrow Agreement with an appropriate institution (the "Escrow Agent"), substantially in the form of the Escrow Agreement attached hereto as Exhibit A. Simultaneously with the execution and delivery of the Escrow Agreement, the Borrower shall deliver the Stock to the Escrow Agent. SECTION 2.6. ENTITLEMENT TO ESCROW SECURITY. In the event that Borrower fails to satisfy his obligations hereunder in accordance with the payment terms of Section 2.2 and fails to make interest and principal payments required hereunder by December 31, 1999, Lender shall, in addition to all other legal and equitable remedies, have recourse to the Stock but only in amounts equal to the principal and interest amounts remaining due and unpaid. Within thirty days following the last day of the Term, Lender shall provide Borrower and Escrow Agent with notice ("Notice to Recover") 3 of its intention to recover amounts due and outstanding out of the escrowed Stock. If Borrower fails to satisfy his obligations under Section 2.2 within 15 days of his receipt of Notice to Recover, the Escrow Agent shall release and provide to Lender escrowed Stock equal to the amount due and outstanding from Borrower to Lender. The value of the Stock at the time that Lender shall be entitled to recourse thereto (i.e., in the event borrower fails to satisfy his obligations hereunder), shall be determined by a Fair Market Valuation. For the purpose of this paragraph, a Fair Market Valuation on any given day shall be equal to the closing price reported for the Stock on the National Association of Securities Dealers Automated Quotation System (NASDAQ) two days earlier. SECTION 2.7. RELEASE OF ESCROW SECURITIES TO BORROWER. Upon the earlier of (1) notice jointly provided to the Escrow Agent that the interest and principal amounts due hereunder have been paid; or (2) February 28, 2000, all Stock remaining in escrow shall be released and returned to Borrower. ARTICLE III MISCELLANEOUS SECTION 3.1. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the full and entire understanding and agreement among the parties with regard to their subject matter and supersedes all prior written or oral agreements, understandings, representations and warranties made with respect thereto. No amendment, supplement or modification of this Agreement nor any waiver of any provision thereof shall be made except in writing executed by the party against whom enforcement is sought. SECTION 3.2. NOTICES. Any notice or other communication required or permitted hereunder shall be in writing and personally delivered, mailed by registered or certified mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice hereunder: (a) If to Lender, at: Startec Global Communications Corporation 10411 Motor City Drive Bethesda, MD 20817 Attention: Subhash Pai, Vice President and Controller Telephone: (301) 365-8969 (b) If to Borrower, at: Mr. Ram Mukunda 8906 Durham Drive 4 Potomac, MD 20854 (301) 469-8906 If mailed, notice shall be deemed to be given five (5) days after being sent, if sent by personal delivery or telecopier, notice shall be deemed to be given when delivered, and if sent by prepaid courier, notice shall be deemed to be given on the next Business Day following deposit with the courier. SECTION 3.3. SEVERABILITY. If any term, covenant or condition of this Agreement, or the application of such term, covenant or condition to any party or circumstance shall be found by a court of competent jurisdiction to be, to any extent, invalid or unenforceable, the remainder of this Agreement and the application of such term, covenant, or condition to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition shall be valid and enforced to the fullest extent permitted by law. Upon determination that any such term, covenant or condition is invalid, illegal or unenforceable, the parties hereto shall amend this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner. SECTION 3.4. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute but one instrument. SECTION 3.5. INTERPRETATION. No provision of this Agreement or any other Loan Document shall be interpreted or construed against any party because that party or its legal representative drafted that provision. The titles of the paragraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. Any pronoun used in this Agreement shall be deemed to include singular and plural and masculine, feminine and neuter gender as the case may be. The words "herein," "hereof," and "hereunder" shall be deemed to refer to this entire Agreement, except as the context otherwise requires. SECTION 3.6. THIRD PARTIES. No rights are intended to be created hereunder for the benefit of any third party donee, creditor, or incidental beneficiary of Borrower. Nothing contained in this Agreement shall be construed as a delegation to Lender of Borrower's duty of performance, including, without limitation, Borrower's duties under any account or contract in which Lender has a security interest. SECTION 3.7. CONSTRUCTION. The validity and construction of this Agreement and all matters pertaining hereto shall be determined in accordance with the laws of the State of Maryland. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first written above. 5 LENDER: ATTEST: STARTEC GLOBAL COMMUNICATIONS, CORPORATION By: /s/ Subhash Pai a Maryland corporation --------------------------------- Name: Subhash Pai By: /s/ Prabhav Maniyar Title: Vice President and Controller ------------------------------- Name: Prabhav Maniyar Title: Senior Vice President and C.F.O. BORROWER: ATTEST: RAM MUKUNDA By:/s/ Subhash Pai By: /s/ Ram Mukunda --------------------------------- -------------------------------- Name: Subhash Pai Ram Mukunda Title: Vice President and Controller 6 EX-10.41 5 EXHIBIT 10.41 EXHIBIT 10.41 LOAN AND SECURITY AGREEMENT By and Between PRABHAV V. MANIYAR ("Borrower") STARTEC GLOBAL COMMUNICATIONS CORPORATION ("Lender") December 31, 1998 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of December 31, 1998 by and between Prabhav V. Maniyar ("Borrower"), and Startec Global Communications Corporation, a Maryland corporation ("Lender"). RECITALS A. WHEREAS, Borrower desires to borrow funds from Lender and Lender is willing to establish such arrangements for and make loans to Borrower, on the terms and conditions set forth below. B. WHEREAS, the parties to define the terms and conditions of their relationship and to reduce their agreements to writing. NOW, THEREFORE, in consideration of the promises and convents contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: Section 1.1. Agreement. "Agreement" means this Loan and Security Agreement, as it may be amended or supplemented from time to time. Section 1.2. Applicable Interest Rate. "Applicable Interest Rate" means an interest rate of 7.87% per annum. Section 1.3. Borrowed Money. "Borrowed Money" means any obligation to repay money, any indebtedness evidenced by this Loan and Security Agreement. Section 1.4. Borrower. "Borrower" has the meaning set forth in the Preamble. Section 1.5. Business Day. "Business Day" means any day on which financial institutions are open for business in the State of Maryland, excluding Saturdays and Sundays. Section 1.6. Closing Date. "Closing" and "Closing Date" mean the date on which this Agreement is executed by and between and Borrower and the Lender. Section 1.7. Lender. "Lender" has the meaning set forth in the Preamble. Section 1.8. Loan. "Loan" has the meaning set forth in Section 2.1 (a). Section 1.9. Loan Documents. "Loan Documents" means and includes this Agreement and each and every other document now or hereafter delivered in connection therewith, as any of them may be amended, modified, or supplemented from time to time. Section 1.10. Person. "Person" means an individual, partnership, corporation, trust, joint venture, joint stock company, limited liability company, association, unincorporated organization, Governmental Authority, or any other entity. Section 1.11 Term. "Term" has the meaning set forth in Section 2.3. ARTICLE II LOAN Section 2.1. Terms. (a) Borrower and Lender agree that the aggregate principal amount given by Lender to Borrower hereunder (the "Loan") will be Five Hundred and Fifty Thousand Dollars ($550,000.00). (b) Borrower hereby agrees to repay Lender the principal amount of the Loan pursuant to the terms and conditions set forth herein. Borrower further agrees to pay the Lender interest on the Loan from the date hereof until repaid, at a rate per annum in arrears (on the basis of the actual number of days elapsed over a year of 360 days) equal to the Applicable Interest Rate. Section 2.2. Payments. Principal payable on account of this Loan shall be due and payable by Borrower to Lender December 31, 1999. Interest shall be due and payable on the last Business Day of each calendar quarter and upon the maturity of this Loan. Section 2.3. Term. (a) This Agreement shall be in effect from the Closing Date until June 30, 1999 ("the Term"). Section 2.4. Security (a) Borrower and Lender agree that this Loan and accrued interest thereunder shall be secured by, and Lender shall have full legal recourse to, all of Borrower's personal estate, including, but not limited to all now-owned and hereafter acquired real or personal property, deposit accounts, money, insurance proceeds, securities and rights to payment of every kind and description, and all of Borrower's contract rights, and all of Borrower's rights, remedies, interest, security and liens, in any real or personal property. Lender's right of recourses to the security described herein shall be secondary to any pre-existing security interests in such property held by any other Persons. Borrower and Lender further agree that all accrued interest is non-refundable. ARTICLE III MISCELLANEOUS Section 3.1. Entire Agreement; Amendments. This Agreement constitutes the full and entire understanding and agreement among the parties with regard to their subject matter and supersedes all priors written or oral agreements, understandings, representations and warranties made with respect thereto. No amendment, supplement or modification of this Agreement nor any waiver of any provision thereof shall be made except in writing executed by the party against whom enforcement is sought. Section 3.2. Notices. Any notice or other communication required or permitted hereunder shall be in writing and personally delivered, mailed by registered or certified mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice hereunder: (a) If to Lender, at: Startec Global Communications Corporation 10411 Motor City Drive Bethesda, MD 20817 Attention: Subhash Pai, Vice President and Controller Telephone: (301) 365-8969 (b) If to Borrower , at: Prabhav V. Maniyar 303 Ainstree Court Vienna, VA 22180 Attention: Prabhav V. Maniyar Telephone: (703) 242-6562 If mailed, notice shall be deemed to be given five (5) days after being sent, if sent by personal delivery or telecopier, notice shall be deemed to be given when delivered, and if sent by prepaid courier, notice shall be deemed to be given on the next Business Day following deposit with the courier. Section 3.3. Severability. If any term, covenant or condition of this Agreement, or the application of such term, covenant or condition to any party or circumstance shall be found by a court of competent jurisdiction to be, to any extent, invalid or unenforceable, the remainder of circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition shall be valid and enforced to the fullest extent permitted by law. Upon determination that any such term, convenant or condition is invalid, illegal or unenforceable, the parties hereto shall amend this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner. Section 3.4. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute but one instrument. Section 3.5. Interpretation. No provision of this Agreement or any other Loan Document shall be interpreted or construed against any party because that party or its legal representative drafted that provision. The titles of the paragraphs of this Agreement. Any pronoun used in this Agreement shall be deemed to include singular and plural and masculine, feminine and neuter gender as the case may be. The words "herein," "hereof," and "hereunder" shall be deemed to refer to this entire Agreement, except as the context otherwise requires. Section 3.6. Third Parties. No rights are intended to be created hereunder for the benefit of any third party donee, creditor, or incidental beneficiary of Borrower. Nothing contained in this Agreement shall be construed as a delegation to Lender of Borrower's duty of performance, including, without limitation, Borrower's duties under any account or contract in which Lender has a security interest. Section 3.7. Construction. The validity and construction of this Agreement and all matters pertaining hereto shall be determined in accordance with the laws of the State of Maryland. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first written above. LENDER: ATTEST: STARTEC GLOBAL COMMUNICATIONS CORPORATION A Maryland corporation By: By: ------------------------------------ ------------------------------- Name: Subhash Pai Name: Ram Mukunda Title: Vice President and Controller Title: President and CEO BORROWER: ATTEST: PRABHAV V. MANIYAR By: By: ------------------------------------ ------------------------------- Name: Subhash Pai Name: Prabhav V. Maniyar Title: Vice President and Controller EX-10.42 6 EXHIBIT 10.42 EXHIBIT 10.42 IRU AGREEMENT BETWEEN COMPANHIA PORTUGUESA RADIO MARCONI, SA AND STARTEC GLOBAL COMMUNICATIONS CORPORATION TPC-5 CABLE NETWORK IRU AGREEMENT THIS AGREEMENT, made and entered into this Dec 15 day of December, 1998, between: COMPANHIA PORTUGUESA RADIO MARCONI, S.A., a corporation organized and existing under the laws of Portugal, with the capital stock of PTE 15,600,000,000$00, corporte body 500069131, registered in the Commercial Registry of Lisbon under the number 10844 and having its main office at Av. Alvaro Pais, 2, 1699 Lisboa Codex, Portugal (hereinafter called "MARCONI" which expression shall include its successors and assigns), and STARTEC GLOBAL COMMUNICATIONS CORPORATION, a Maryland corporation having its principal office at 10411 Motor City Drive, Suite 301, Bethesda, MD 20817, U.S.A., (hereinafter called "STARTEC", which expression shall include its successors and assigns). WITNESSETH WHEREAS, an Agreement (hereinafter called "TPC-5 C&MA") was entered into effective 29 October 1992 and amended on 16 May 1995, amended on 31 October 1995, amended on 17 June, 1996 and amended 3 December 1996, to provide, construct, maintain and operate the TPC-5 Cable Network (hereinafter called "TPC-5" or "the Cable Network"), connecting the United States Mainland, on the west, and points in or reached via the United Kingdom and France on the east; and WHEREAS, MARCONI is a Party to the TPC-5 C&MA; and WHEREAS, TPC-5 shall be regarded as consisting of the following Segments: Segment A: a cable station at Coos Bay, Oregon, U.S.A. Segment B: a cable station at San Luis Obispo, California, U.S.A. Segment C: a cable station at Keawaula, Hawaii, U.S.A. Segment D: a cable station at Tumon Bay, Guam. Segment E: a cable station at Miyazaki, Japan. Segment F: a cable station at Ninomiya, Japan. Segments A, B, C, D, E and F shall consist of: 2 (i) an appropriate share of land and buildings at the specified locations for the cable landing and for the cable route including cable rights-of-way and ducts or conduits between the cable station and its respective Cable Landing Point, and an appropriate share of common services and equipment at each of the locations; and (ii) cable station equipment including multiplex equipment down to the primary level, as required, in each of the cable stations associated solely and directly with the TPC-5. Segment G: The whole of the submarine cable provided between and including the Network Interface at the cable station at San Luis Obispo, California, on the U.S. Mainland, and the Network Interface at the cable station at Keawaula, Hawaii, and containing two optical fiber pairs, each such fiber pair capable of operating at 4.8 Gigabits per second (Gbit/s), one of which is the Service Fiber Pair and the other of which is the Restoration Fiber Pair. Segment H: The whole of the submarine cable provided between and including the Network Interface at the cable station at Keawaula, Hawaii, and the Network Interface at the cable station at Tumon Bay, Guam, and containing two optical fiber pairs, each such fiber pair capable of operating at 4.8 Gigabits per second (Gbit/s), one of which is the Service Fiber Pair and the other of which is the Restoration Fiber Pair. Segment I: The whole of the submarine cable provided between and including the Network Interface at the cable station at Tumon Bay, Guam, and the Network Interface at the cable station at Miyazaki, Japan, and containing two optical fiber pairs, each such fiber pair capable of operating at 4.8 Gigabits per second (Gbit/s), one of which is the Service Fiber Pair and the other of which is the Restoration Fiber Pair. Segment J: The whole of the submarine cable provided between and including the Network Interface at the cable station at Miyazaki, Japan, and the Network Interface at the cable station at Coos Bay, Oregon, on the U.S. Mainland, and containing two optical fiber pairs, each such fiber pair capable of operating at 4.8 Gigabits per second (Gbit/s), one of which is the Service Fiber Pair and the other of which is the Restoration Fiber Pair. Segment T1: The whole of the submarine cable provided between and including the Network Interface at the cable station at Coos Bay, Oregon, on the U.S. Mainland, and the Network Interface at the cable station at San Luis Obispo, also on the U.S. Mainland, and containing two optical fiber pairs, each such fiber pair capable of operating at 4.8 Gigabits per second (Gbit/s), one of which is the Service Fiber Pair and the other of which is the Restoration Fiber Pair. Segment T2: The whole of the submarine cable provided between and including the Network Interface at the cable station at Miyazaki, Japan, and the Network Interface at the cable station at Ninomyia, also in Japan, and containing two optical fiber pairs, each such fiber pair capable of operating at 4.8 Gigabits per second (Gbit/s), one of which is the Service Fiber Pair and the other of which is the Restoration Fiber Pair. 3 Segment G, H, I, J, T1 and T2 shall include: (i) all transmission, power feeding and special test equipment specifically associated with, and required to operate and maintain the submersible plant; (ii) the power equipment provided wholly for use with the equipment listed in (i) above; (iii) the transmission cable equipped with appropriate repeaters and joint housings between the cable stations; and (iii) the sea earth cable and electrode system and/or the land earth system, or an appropriate share thereof, associated with the terminal power feeding equipment. In this Agreement, references to any Segment, however expressed, shall be deemed to include, unless the context otherwise requires, additional property incorporated therein by agreement of the Parties. Each Segment shall be regarded as including its related spare and standby units and components, including, but not limited to, submersible repeaters, cable lengths and terminal equipment; and WHEREAS, a MIU is defined in the TPC-5 C&MA as a unit designated as the minimum unit of investment in the Cable Network allowing the use of 2.048 Mbits/s and the additional 420,571.43 bits per second required for multiplexing in each direction. WHEREAS, MARCONI and STARTEC have agreed that a portion of the capacity in the Cable Network currently wholly assigned to MARCONI shall be offered to STARTEC for purchase on an Indefeasible Right of Use basis (hereinafter called "IRU") for the use of STARTEC; and WHEREAS, STARTEC, as an IRU interest holder, will possess an exclusive and irrevocable right to use, but not the right to control the facility; and WHEREAS, it is now desired to define the terms and conditions upon which STARTEC will be granted the IRU in that capacity. NOW, THEREFORE, the Parties hereto, in consideration of the mutual covenants herein expressed, covenant and agree with each other as follows: 1. MARCONI grants to STARTEC, on an IRU basis, for the term of this Agreement, an interest in one (1) Minimum Investment Unit (hereinafter called "MIU") in TPC-5, between Japan and U.S. Mainland. This MIU will be used for supplying communications services between points in or reached via Ninomiya (Japan) and points in or reached via San Luis Obispo (U.S. Mainland). 4 2. For the IRU interest in one MIU granted to STARTEC pursuant to this Agreement, STARTEC shall pay to MARCONI the following: (i) A lump sum amount of two hundred thousand ($200,000) Dollars equal to its share of the capital costs incurred for Segments between Japan and U.S. Mainland, on the date in which this Agreement becomes effective. (ii) A quarterly amount equal to the portion of the costs of operating, maintaining and repairing the Cable Network (as defined in the TPC-5 C&MA) allocable to the MIU granted to STARTEC hereunder on a pro-rata basis. (iii)STARTEC shall pay all bills rendered to it by MARCONI pursuant to this Agreement by the end of the month following the month in which the bills are rendered. All bills will be payable in United States dollars. (iv) Bills not paid by the due date will incur a quarterly compounded financing charge at a rate ten (10) percent per year, effective during the period that the payment is overdue. (v) If STARTEC is unable to make payments when required by this Agreement on the day it is due, or otherwise is in breach of this Agreement, and such default continues for a period of at least one (1) month, MARCONI may notify STARTEC in writing of its intent to terminate this Agreement. Upon receipt of such notification from MARCONI, STARTEC will have thirty (30) calendar days to remedy such breach or make such payment. If at the end of the thirty (30) day period, STARTEC has not paid in full the amounts due hereunder or remedied such breach, MARCONI may proceed to terminate this Agreement by giving STARTEC written notice thereof effective upon the date of mailing or such later date as may be specified in the notice, and MARCONI shall be relieved of any liability to STARTEC arising out of such termination. The rights and obligations of STARTEC under this Agreement shall terminate as of the date of termination, except that the termination shall not relieve STARTEC of its obligation to make full payment of all amounts incurred under this Agreement up to and including the day of termination. 3. In the event that the total number of equivalent MIUs which the Cable Network involved is capable of providing is reduced as a result of physical deterioration, or for other reasons beyond the control of Parties to the TPC-5 C&MA, and if such reduction shall extend to fractions of MIUs, the number of circuits sold to STARTEC hereunder may be reduced in the same proportion as the total number of circuits is reduced. 5 4. Neither Party shall be liable to the other for any loss or damage sustained by reason of any failure in or breakdown of, or of the facilities associated with the Cable Network, or for any interruption of service whatsoever shall be the cause of such failure, breakdown or interruption and however long it shall last. 5. The operation by STARTEC of the IRU interest granted to it hereunder and any equipment associated herewith with the previous written consent of MARCONI shall be such as not to interrupt, interfere with or impair service over any of the facilities comprising the Cable Network, any other circuits of MARCONI or any circuits of MARCONI's associated, affiliated or connecting companies or of other right of user grantees, impair privacy of any communications over such facilities or circuits, cause damage to plant, or create hazards to the employees of any of the aforementioned companies, or of any owner of the aforementioned facilities or circuits or to the publlc. STARTEC shall hold harmless MARCONI and bear the cost of any additional protective apparatus reasonably required to be installed because of the use of facilities by STARTEC, any lessee of STARTEC, or any customer or customers of STARTEC or of any such lessee, and the cost of any possible damage thereto related. A consent granted under this clause may be revoked at anytime by MARCONI if the provisions of the clause are not fulfilled. Such equipment, if used, shall not constitute a part of TPC-5. Similar obligations will be included in any such agreements made with users of TPC-5. 6. The capacity in the Cable Network made available to STARTEC hereunder shall be maintained, or caused to be maintained, in efficient working order in accordance with the TPC-5 C&MA. In this regard, at a time agreeable to MARCONI, the MIU sold to STARTEC hereunder shall be made available to MARCONI to make such tests and adjustments as may be necessary for such circuits to be maintained in efficient working order. 7. In the event of liquidation of the Cable Network, or any part thereof, by sale or other disposition, during the term in which this Agreement is in force, MARCONI shall share with STARTEC the net Proceeds or cost of such sale or disposition, STARTEC's share of such proceeds or cost being proportionate to its contribution to the capital cost of the subject of said liquidation or disposition. 8. No license under patents is granted by MARCONI or shall be implied or arise by estoppel in STARTEC's favour with respect to any apparatus, system or method used by STARTEC in connection with the use of the MIU sold to it hereunder. With respect to claims of patent infringement made by third persons, (i) 6 MARCONI will save STARTEC harmless against claims arising out of the use by STARTEC of such half circuits in accordance with the provision of this Agreement, and (ii) STARTEC will save MARCONI harmless against claims arising out of combining such half circuits or using such half circuits in connection with any apparatus, system or method provided by STARTEC. 9. MARCONI shall keep and maintain for a period of not less than three (3) years such books, records, vouchers and accounts of all its costs with respect to the provision and maintenance of the Cable Network as may be appropriate to support the billing of any such costs to STARTEC and shall at all reasonable times make them available for inspection by STARTEC. 10. The performance of this Agreement by the Parties is contingent upon: (i) The provision and continued operation of the Cable Network; and (ii) the obtaining and continuance of such approvals, consents, governmental authorizations, licenses and permits as may be required or be deemed necessary by the Parties hereto. The Parties shall use their best efforts to obtain and continue such approvals, consents, authorizations, licenses and permits. 11. Unless otherwise stipulated, no transfer of the rights granted under this Agreement or of any right resulting from it by either of the Parties to this Agreement shall be considered valid without the written consent of the other Party to this Agreement, except to a successor or assign or subsidiary of such Party, or corporation controlling, or under the same control as such Party, in which case written notice shall be given in a timely manner by the Party making said transfer. 12. This Agreement and any of the provisions hereof may be altered or added to by any other agreement in writing signed by both Parties by a duly authorized person on behalf of each Party. 13. The relationship between the Parties hereto shall not be that of partners, and nothing contained herein shall be deemed to constitute a partnership between them. 14. This Agreement shall be binding upon, and inure to the benefit of, the Parties, their successors, administrators and permitted assigns. 7 15. This Agreement shall become effective on the date and year first above written and shall continue in effect for the duration of the TPC-5 C&MA. MARCONI shall give STARTEC notice in writing of the termination of the TPC-5 C&MA by not less than three (3) months before such termination. 16. For all purposes, the addresses of the Parties to this Agreement shall be as follows, unless otherwise designated in writing by the respective Parties: Vendor ------ COMPANHIA PORTUGUESA RADIO MARCONI, SA Av. Alvaro Pais, no 2 1699 LISBOA CODEX PORTUGAL Purchaser --------- STARTEC GLOBAL COMMUNICATIONS CORPORATION 10411 Motor City Drive Suite 301, Bethesda MD 20817, U.S.A. 17. All information, except such information in the public domain, exchanged between the Parties under this Agreement or during the negotiations preceding this Agreement and relating either to the existence or terms and conditions of this Agreement or any activities contemplated by this Agreement is confidential to them, their employees, legal advisers and other consultants and may not be disclosed to any third Party, Not withstanding anything to the contrary or contained herein, a Party shall be allowed to disclose confidential information pursuant to judicial or governmental order or if otherwise required to do so by law. 18. a) All disputes arising in connection with the present Agreement shall be finally settled under the rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance of said rules. b) The arbitrator or arbitrators are authorized to act as amiable mediators (ex aequo et bono) in reaching a conclusion as to the rights and obligations of the parties in dispute, under the English Law. 8 c) The arbitration shall take place in London, at a venue to be fixed by arbitrator or arbitrators, and the Language of arbitration shall be the English. 19. This Agreement shall be executed in two counterparts in the English language. Each counterpart, when executed and delivered, shall be an original, and such counterparts shall together (as well as separately) constitute one and the same instrument. IN WITNESS WHEREOF, the Parties hereto have severally subscribed these presents or caused them to be subscribed in their names and behalf by their respective officers thereunto duly authorized. COMPANHIA PORTUGUESA RADIO MARCONI, SA by: Lisbon, 23 November 1998 STARTEC GLOBAL COMMUNICATIONS CORPORATION by: Bethesda, /s/ RY 1998 ------------ 9 EX-10.43 7 EXHIBIT 10.43 EXHIBIT 10.43 TPC-5 CABLE NETWORK INDEFEASIBLE RIGHT OF USE AGREEMENT BETWEEN KDD CORPORATION AND STARTEC GLOBAL COMMUNICATIONS CORPORATION THIS AGREEMENT, made and entered into the last day of December, 1998, by and between KDD Corporation, a corporation organized and existing under the laws of Japan and having its principal office at No.3-2, Nishi-Shinjuku 2-Chorric, Shinjuku-ku, in the city of Tokyo 163-8003, Japan (hereinafter referred to as "KDD" which expression shall include its successors and assigns) and Startec Global Communications Corporation, a corporation organized and existing under the laws of State of Maryland and having its principal office at 10411 Motor City Drive, Bethesda MD 20817, United States of America (hereinafter referred to as "Startec" which expression shall include its successors and assigns) and; WITNESSETH: WHEREAS, pursuant to an agreement entitled "TPC-5 Cable Network Construction and Maintenance Agreement" dated October 29. 1992 and "TPC-5 Cable Network Amendatory Agreement No.1" dated May 16. 199, "TPC-5 Cable Network Amendatory Agreement No.2" dated October 31, 1995, "TPC-5 Cable Network Amendatory Agreement No-3" dated June 17, 1996, "TPC-5 Cable Network Amendatory Agreement No.4" dated December 3, 1996, (hereinafter collectively referred to as the "C&MA" inclusive of any future Amendatory Agreements), KDD and other signatories thereto agreed, on the terms and conditions contained therein, to provide, construct, maintain and operate a submarine cable network linking North America and Japan, known as the "TPC-5 Cable Network" (hereinafter referred to as the "TPC-5 CN"); and WHEREAS, referring the C&MA, hereinafter the Path between the Nodes of Japan - U.S. Mainland shall be referred to as the "JA-US Path", which shall consist of Segment A, Segment B, Segment C, Segment D, Segment E, Segment F, Segment G, Segment H, Segment I, Segment, J, Segment T1 and Segment T2; and WHEREAS, pursuant to the current C&MA, the TPC-5 CN consisting of two fiber pairs, 1 one Service Fiber Pair and one Restoration Fiber Pair, each providing 64 Basic System Modules has a total design capacity of four thousand and thirty-two (4032) Minimum Investment Units (hereinafter referred to as "MIUs"), each of which allows the use of 2.048 Mbits per second and an additional 420,571.43 bits per second required for multiplexing purposes, in each direction; and WHEREAS, pursuant to the C&MA, KDD have been wholly assigned a certain number of MIUs in the number JA-US Path; and WHEREAS, KDD, pursuant to the C&MA as wholly assigned MIUs of a Path Assignment shall be considered as consisting of two half-interests in a MIU assigned to one Party, may make half interests in the said MIUs available to other Parties to the C&MA or telecommunications entities not Parties to the C&MA; and WHEREAS, Startec desires to use KDD's half interests, in a certain number of MIUs assigned to KDD in the JA-US Path; and WHEREAS, KDD and Startec desire to define the terms and conditions under which the said interest in the JA-US Path will be granted to Startec: NOW THEREFORE, KDD and Startec, in consideration of the natural covenants herein cxpressed, covenant and agree with each other as follows: 1. (a) KDD hereby grants to Startec on an indefeasible right of use (hereinafter referred to as "IRU") basis, one (1) half MIU wholly assigned to KDD in the JA-US Path owned by KDD. Actual route assignment for the granted IRU half interest(s) shall be subject to the C&MA. (b) The IRU half interest(s) shall he utilized by Startec in furnishing jointly with KDD communication services between points in the United States and points in Japan. 2. For the IRU half interest(s), Startec shall pay a lump sum amount of twenty million (20,000,000) Japanese Yen. 3. Even if any kind of adjustment in the portion of capital cost (excluding the 2 incremental cost on the relevant cubic stations) incurrcd by KDD is made, as changes occur in the capital cost of the JA-US Path for any reason, including. but not limited to the replacement, addition or removal of property, or change in the capacity of the JA-US Path, no financial adjustment shall be made regarding the lump sum payment described in Clause 2. 4. For the IRU half interest(s), Startec shall also pay the following costs to KDD on the MIU proportionate share of the half intcrest(s) granted to Startec in the KDD's MIU in the JA-US Path at the time of such cost occurrence. (i) the operating and maintenance costs which KDD incurs and receives bills, on JA-US Path and the relevant cable stations, (ii) the costs associated with restoration incurred by KDD, if restoration is required by Startec on the granted half interest(s), in case of restoration not via self-healing function of the TPC-5 CN, including the bills of the terrestrial link charges in Japan, based on the certain terms and conditions established by KDD. 5. Even if any kind of increase or decrease on the design capacity of the TPC-5 CN beyond its initial capacity in the Service Fiber Pair should occur, no adjustment in the capacity of the IRU half interest(s) shall be made hereunder nor shall financial adjustment be made. 6. (a) KDD shall render bills due under this Agreement in Japanese yen. Startec shall make payments of such amounts in Japanese yen to the designated office of KDD within one (1) calendar month after the end of the calendar month in which such bill was rendered. (b) Regarding the operation and maintenance costs described in Clause 4 (i), KDD shall render bills quarterly to Startec. Regarding the costs associated with restoration, KDD shall render bills on cost occurrence. (c) All bills rendered by KDD hereunder may include financial charges computed at a rate equal to the lowest publicly announced prime rate or commercial lending rate, however described; for ninety (90)-day loans in the currency of Japan by the Industrial Bank of Japan, Limited. Tokvo; The Dai - Ichi Kangyo Bank, Limited, Tokyo; and The Bank of Tokyo-Mitsubishi, Limited, Tokyo, on the fifteenth (15th) day of the middle 3 month of the quarter in which the costs were incurred by KDD from such date to the due date of the bills. If the fifteenth (15th) day of the month is not a business day, the interest rate prevailing, on the succeeding business day shall be used. (d) Bills not fully paid when due shall accrue late payment interest on the unpaid portion at the per annum simple interest rate equal to the lowest standard penalty interest rate of the Industrial Bank of Japan, Limited, Tokyo; The Dai - Ichi Kangyo Bank, Limited, Tokyo; and The Bank of Tokyo-Mitsubishi, Limited, Tokyo, applicable on the day following the date payment of the bill was due. In the event that applicable law does not allow the imposition of late payment interest at the rate provided in this sub-clause, interest rate shall be at the highest rate permitted by applicable law. The late payment interest shall accrue on a daily basis from and including the day following the day on which payment is due until payment is received by KDD. 7. KDD shall keep and maintain or caused to be kept and maintained such books, records, vouchers, and accounts as may be appropriate to support its billing under this Agreement as referred in Clause 2, 4 and 6, and shall at all reasonable times make them available for the inspection of Startec, for a period of not less than three (3) years from the date the applicable bill is rendered. 8. The half interest(s) granted to Startec hereunder shall be maintained or caused to be maintained by KDD in efficient working order in accordance with the C&MA. 9. The operation by Startec of the IRU half interest(s) granted to it hereunder and any equipment associated therewith shall be such as not to interfere with or impair service over any of the facilities comprising the TPC-5 CN; nor cause damage to plant; nor create hazards to the employees of any of the owners of the aforementioned facilities or the publc. Startec shall bear the costs of any additional protective apparatus reasonably required to be installed because of the use of such half interest(s) in MIUs by Startec, any lessee of Startec, or any customer or customers of Startec or of any such lessee. 10. Neither KDD nor Startec shall be liable to any other party for any loss or damage sustained by reason of any failure in or breakdown of facilities associated with the TPC-5 CN or any interruption or degradation of service, whatsoever shall be the cause of such failure, breakdown, interruption or degradation and however long it shall last. 11. This Agreement shall become effective on the day and year first above written 4 and shall continue in effect for the duration of the C&MA, subject to the right of either KDD or Startec to terminate this Agreement at the end of the initial period of the C&MA or at any time thereafter upon one (1) year's notice in writing to the other party. KDD shall give Startec prompt notice in writing of termination of the C&MA. 12. (a) This Agreement may be terminated forthwith by KDD and KDD shall reclaim the IRU half interest(s) granted hereunder if: (i) Startec fails to make any payment required by this Agreement on the day it is due or otherwise is in breach of this Agreement and fails to remedy such beach within thirty (30) days (except in case of emergency when KDD may specify in that notice such shorter period as may be reasonable) after receipt of a notice specifying the breach and requiring it to be remedied, or; (ii) Startec shall become insolvent or have a receiver, administrative receiver, or manager, appointed over the whole or any part of its assets or go into liquidation (whether compulsorily or voluntarily) otherwise than for the purpose of amalgamation or reconstruction or make any arrangement with its creditors or have any form of execution or distress levied upon its assets or cease to carry on business. (b) The rights and obligations of Startec under this Agreement shall terminate as of the date of reclamation, except the reclamation shall not relieve Startec of its obligation to make full payment of all amounts incurred under this Agreement up to and including the day of termination. 13. (a) In the event of lquidation of the JA-US Path or any portion thereof, by sale or other disposition, KDD shall share with Startec any net proceeds or costs of such liquidation, sale or disposition received or incurred by KDD. Startec's share of such proceeds or costs shall be proportionate as making the payments of the operation and maintenance costs, as referred in Clause 4. (b) Liquidation of the JA-US Path or any portion thereof, or termination of the CM&A shall not relieve Startec from any liability arising on account of claims made by third parties in respect of the JA-US Path or any part thereof and damages or compensation payable on account of such claims, or obligations which may arise in relation to the JA-US Path, due to any law, order or regulation made by any government 5 or supranational legal authority pursuant to any international convention, treaty or agreement. Startec's share of any such liabilities or costs incurred or benefits accruing in satisfying such obligations shall he proportionate as referred in Sub-Clause 13(a). 14. KDD shall exercise its rights pertaining to the half interest(s) which are the subject of this Agrreement in a manner which will not diminish the IRU half interest(s) grantcd to Startec under this Agreement. 15. (a) KDD and Startec shall treat as confidential and shall not disclose to any third party nor use for any purpose other than the performance of this Agreement any information in this Agreement including, but not limited to, terms, conditions, prices, forms and format with regard to KDD and Startec, excluding; (i) what is allowed to disclose to any third parties with written approval of the other party; (ii) what is generally available to the public other than by reason of a breach of this Agreement; and (iii) what is subsequently acquired by KDD and/or Startec from a third party who is lawfully entitled to disclose. (b) Notwithstanding Sub-Clause 15 (a), KDD and/or Startec may disclose such information to its contractors or sub-contractors or to any of its respective employees or agents only in the case of necessity of such information for the purpose of enabling KDD and/or Startec to perform any of its obligations or to exercise any of its rights under this Agreement. 16. The relationship between KDD and Startec under this Agreement shall not be that of partners and nothing herein contained shall be deemed to constitute a partnership between them. 17. No license under patents is granted by KDD or shall be implied or arise by estoppel in Startec's favor in respect to any apparatus, svstem or method used by Startec in connection with the use of the IRU half interest(s). 18. Startec shall not, without the written consent of KDD, sell, assign, transfer or 6 dispose of its rights or obligations under this Agreement except to a legal successor of Startec. 19. (a) This Agreement contains the entire agreement between KDD and Startec relating to the subject matter of this Agreement and merges all prior discussions, agreements and understandings of written or oral express or implied between them. (b) Any oral attempt to modify and/or add to this Agreement not reduced to writing and signed by KDD and Startec and each successor and permitted assigns shall be totally without effect and will not be binding upon them. 20. For all purposes (e.g. billing and making payments) under this Agreement, the contacts and addresses of KDD and Startec respectively shall be confirmed as set forth in Attachment 1. KDD and Startec shall provide and receive the revised information to the other, whenever necessary, accompanied with this Agreement. 21. (a) All disputes, controversies, claims or differences which may arise between KDD and Startec hereto, out of or in relation to or in connection with this Agreement, KDD and Startec shall make every reasonable effort to resolve such disputes in reference with the C&MA. (b) In the event that such disputes shall not be resolved under the interpretation of the C&MA, this Agreement shall be governed by and construed in accordance with Japanese law. (c) The place of arbitration shall be Tokyo. Japan. 22. This Agreement shall be executed in two (2) counterparts in English, and each such counterpart when so executed and delivered shall be an original, and such counterparts shall together (as well as separately) constitute one and the same instrument. 7 IN WITNESS WHEREOF, KDD and Startec have severally subscribed these presents or caused them to be subscribed in their names and behalf by their respective representatives thereunto duly authorized. KDD CORPORATION By /s/ Y. Shimatani ---------------------------- Yoshiharu Shimatani Director Network Planning Department STARTEC GLOBAL COMMUNICATIONS CORPORATION By /s/ ---------------------------- 8 EX-10.44 8 EXHIBIT 10.44 EXHIBIT 10.44 IRU AGREEMENT BETWEEN COMPANHIA PORTUGUESA RADIO MARCONI, SA AND STARTEC GLOBAL COMMUNICATIONS CORPORATION TAT-12/13 CABLE NETWORK IRU AGREEMENT THIS AGREEMENT, made and entered into this 15 day of December, 1998, between: COMPANHIA PORTUGUESA RADIO MARCONI, S.A., a corporation organized and existing under the laws of Portugal, with the capital stock of PTE 15,600,000,000$00, corporate body 500069131, registered in the Commercial Registry of Lisbon under the number 10844 and having its main office at Av. Alvaro Pais, 2, 1699 Lisboa Codex, Portugal (hereinafter called "MARCONI" which expression shall include its successors and assigns), and STARTEC GLOBAL COMMUNICATIONS CORPORATION, a Maryland corporation having its principal office at 10411 Motor City Drive, Suite 301, Bethesda, MD 20817, U.S.A., (hereinafter called "STARTEC", which expression shall include its successors and assigns). WITNESSETH WHEREAS, an Agreement (hereinafter called "TAT-12/13 C&MA") was entered into effective 16 December 1992 and amended on 28 September 1993, amended on 27 September 1994, amended on 17 October 1995, amended on 12 April 1996, amended on 31 August 1996 and amended 21 April 1997, to provide, construct, maintain and operate the TAT-12/13 Cable Network (hereinafter called "TAT-12/13" or "the Cable Network"), connecting the United States Mainland, on the west, and points in or reached via the United Kingdom and France on the east; and WHEREAS, MARCONI is a Party to the TAT-12/13 C&MA; and WHEREAS, TAT-12/13 shall be regarded as consisting of the following Segments: Segment A: a cable station in Greenhill, Rhode Island, United States. Segment B: a cable station in Lands End, the United Kingdom. Segment C: a cable station in Penmarch, France. Segment D: a cable station in Shirley, New York, United States. Segments E, F, G and H: a submarine cable network linking Segments A, B, C and D. 2 Segments A, B, C and D shall each consist of an appropriate share of land and buildings at the specified locations for the cable landing and for the cable right-of-way and ducts between a cable station and its respective Cable Landing Point, and an appropriate share of common services and equipment (other than services and equipment associated solely with the Cable Network) at each of those locations together with equipment in each of those cable stations solely associated with the TAT-12/13, but which is not part of Segments E, F, G and H. Segments E, F, G and H: The whole of the Submarine cable network provided between and among and including the System Interfaces at the cable stations in the United States, the United Kingdom and France, and shall be comprised of two fiber pairs between each of the cable stations. Unless otherwise agreed by the TAT-12/13 General Committee, each fiber pair in Segments E, F, G and H shall be capable of operating at 4.8 Gigabits per second (Gb/s), and shall consist of 32 Basic System Modules. Segment E, F, G and H shall also include: (i) all transmission, power feeding and special test equipment directly associated with the submersible plant; (ii) the power equipment provided wholly for use with the equipment listed in (i) above; (iii) the transmission cable equipped with appropriate repeaters, and joint housings between the cable stations; and (iv) the sea earth cable and electrode system and/or the land earth system, or an appropriate share thereof, associated with the terminal power feeding equipment, including that of Segment H; and WHEREAS, a MIU is defined in the TAT-12/13 C&MA as a unit designated as the minimum unit of investment in the Cable Network allowing the use of 2,048,000 bits per second and the additional 162,539 bits per second required for multiplexing in each direction. WHEREAS, MARCONI and STARTEC have agreed that a portion of the capacity in the Cable Network currently wholly assigned to MARCONI shall be offered to STARTEC for purchase on an Indefeasible Right of Use basis (hereinafter called "IRU") for the use of STARTEC; and WHEREAS, STARTEC, as an IRU interest holder, will possess an exclusive and irrevocable right to use, but not the right to control the facility; and 3 WHEREAS, it is now desired to define the terms and conditions upon which STARTEC will be granted the IRU in that capacity. NOW, THEREFORE, the Parties hereto, in consideration of the mutual covenants herein expressed, covenant and agree with each other as follows: 1. MARCONI grants to STARTEC, on an IRU basis, for the term of this Agreement, an interest in one (1) Minimum Investment Unit (hereinafter called "MIU"), in Segments between Greenhill (U.S.) and Penmarch (France). 2. For the IRU interest in one MIU granted to STARTEC pursuant to this Agreement, STARTEC shall pay to MARCONI the following: (i) A lump sum amount of one hundred seventy thousand ($170,000) Dollars equal to its share of the capital costs incurred for Segments between Greenhill (U.S.) and Penmarch (France), on the date in which this Agreement becomes effective. (ii) A quarterly amount equal to the portion of the costs of operating, maintaining and repairing the Cable Network allocable to the MIU granted to STARTEC hereunder on a pro-rata basis. (iii)STARTEC shall pay all bills rendered to it by MARCONI pursuant to this Agreement by the end of the month following the month in which the bills are rendered. All bills will be payable in United States dollars. (iv) Bills not paid by the due date will incur a quarterly compounded financing charge at a rate ten (10) percent per year, effective during the period that the payment is overdue. (v) If STARTEC is unable to make payments when required by this Agreement on the day it is due, or otherwise is in breach of this Agreement, and such default continues for a period of at least one (1) month, MARCONI may notify STARTEC in writing of its intent to terminate this Agreement. Upon receipt of such notification from MARCONI, STARTEC will have thirty (30) calendar days to remedy such breach or make such payment. If at the end of the thirty (30) day period, STARTEC has not paid in full the amounts due hereunder or remedied such breach, MARCONI may proceed to terminate this Agreement by giving STARTEC written notice thereof effective upon the date of mailing or such later date as may be specified in the notice, and 4 MARCONI shall be relieved of any liability to STARTEC arising out of such termination. The rights and obligations of STARTEC under this Agreement shall terminate as of the date of termination, except that the termination shall not relieve STARTEC of its obligation to make full payment of all amounts incurred under this Agreement up to and including the day of termination. 3. In the event that the total number of equivalent MIUs which the Cable Network involved is capable of providing is reduced as a result of physical deterioration, or for other reasons beyond the control of Parties to the TAT-12/13 C&MA, and if such reduction shall extend to fractions of MIUs, the number of circuits sold to STARTEC hereunder may be reduced in the same proportion as the total number of circuits is reduced. 4. Neither Party shall be liable to the other for any loss or damage sustained by reason of any failure in or breakdown of, or of the facilities associated with the Cable Network, or for any interruption of service whatsoever shall be the cause of such failure, breakdown or interruption and however long it shall last. 5. The operation by STARTEC of the IRU interest granted to it hereunder and any equipment associated herewith with the previous written consent of MARCONI shall be such as not to interrupt, interfere with or impair service over any of the facilities comprising the Cable Network, any other circuits of MARCONI or any circuits of MARCONI's associated, affiliated or connecting companies or of other right of user grantees, impair privacy of any communications over such facilities or circuits, cause damage to plant, or create hazards to the employees of any of the aforementioned companies, or of any owner of the aforementioned facilities or circuits or to the publlc. STARTEC shall hold harmless MARCONI and bear the cost of any additional protective apparatus reasonably required to be installed because of the use of facilities by STARTEC, any lessee of STARTEC, or any customer or customers of STARTEC or of any such lessee, and the cost of any possible damage thereto related. A consent granted under this clause may be revoked at anytime by MARCONI if the provisions of the clause are not fulfilled. Such equipment, if used, shall not constitute a part of TAT-12/13. Similar obligations will be included in any such agreements made with users of TAT-12/13. 5 6. The capacity in the Cable Network made available to STARTEC hereunder shall be maintained, or caused to be maintained, in efficient working order in accordance with the TAT-12/13 C&MA. In this regard, at a time agreeable to MARCONI, the MIU sold to STARTEC hereunder shall be made available to MARCONI to make such tests and adjustments as may be necessary for such circuits to be maintained in efficient working order. 7. In the event of liquidation of the Cable Network, or any part thereof, by sale or other disposition, during the term in which this Agreement is in force, MARCONI shall share with STARTEC the net Proceeds or cost of such sale or disposition, STARTEC's share of such proceeds or cost being proportionate to its contribution to the capital cost of the subject of said liquidation or disposition. 8. No license under patents is granted by MARCONI or shall be implied or arise by estoppel in STARTEC's favour with respect to any apparatus, system or method used by STARTEC in connection with the use of the MIU sold to it hereunder. With respect to claims of patent infringement made by third persons, (i) MARCONI will save STARTEC harmless against claims arising out of the use by STARTEC of such half circuits in accordance with the provision of this Agreement, and (ii) STARTEC will save MARCONI harmless against claims arising out of combining such half circuits or using such half circuits in connection with any apparatus, system or method provided by STARTEC. 9. MARCONI shall keep and maintain for a period of not less than three (3) years such books, records, vouchers and accounts of all its costs with respect to the provision and maintenance of the Cable Network as may be appropriate to support the billing of any such costs to STARTEC and shall at all reasonable times make them available for inspection by STARTEC. 10. The performance of this Agreement by the Parties is contingent upon: (i) The provision and continued operation of the Cable Network; and (ii) the obtaining and continuance of such approvals, consents, governmental authorizations, licenses and permits as may be required or be deemed necessary by the Parties hereto. The Parties shall use their best efforts to 6 obtain and continue such approvals, consents, authorizations, licenses and permits. 11. Unless otherwise stipulated, no transfer of the rights granted under this Agreement or of any right resulting from it by either of the Parties to this Agreement shall be considered valid without the written consent of the other Party to this Agreement, except to a successor or assign or subsidiary of such Party, or corporation controlling, or under the same control as such Party, in which case written notice shall be given in a timely manner by the Party making said transfer. 12. This Agreement and any of the provisions hereof may be altered or added to by any other agreement in writing signed by both Parties by a duly authorized person on behalf of each Party. 13. The relationship between the Parties hereto shall not be that of partners, and nothing contained herein shall be deemed to constitute a partnership between them. 14. This Agreement shall be binding upon, and inure to the benefit of, the Parties, their successors, administrators and permitted assigns. 15. This Agreement shall become effective on the date and year first above written and shall continue in effect for the duration of the TAT-12/13 C&MA. MARCONI shall give STARTEC notice in writing of the termination of the TAT-12/13 C&MA by not less than three (3) months before such termination. 16. For all purposes, the addresses of the Par-ties to this Agreement shall be as follows, unless otherwise designated in writing by the respective Parties: Vendor ------ COMPANHIA PORTUGUESA RADIO MARCONI, SA Av. Alvaro Pais, no 2 1699 LISBOA CODEX PORTUGAL 7 Purchaser --------- STARTEC GLOBAL COMMUNICATIONS CORPORATION 10411 Motor City Drive Suite 301, Bethesda MD 20817, U.S.A. 17. All information, except such information in the public domain, exchanged between the Parties under this Agreement or during the negotiations preceding this Agreement and relating either to the existence or terms and conditions of this Agreement or any activities contemplated by this Agreement is confidential to them, their employees, legal advisers and other consultants and may not be disclosed to any third Party. Notwithstanding anything to the contrary or contained herein, a Party shall be allowed to disclose confidential information pursuant to judicial or governmental order or if otherwise required to do so by law. 18. a) All disputes arising in connection with the present Agreement shall be finally settled under the rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance of said rules. b) The arbitrator or arbitrators are authorized to act as amiable mediators (ex aequo et bono) in reaching a conclusion as to the rights and obligations of the parties in dispute, under the English Law. c) The arbitration shall take place in London, at a venue to be fixed by arbitrator or arbitrators, and the Language of arbitration shall be the English. 19. This Agreement shall be executed in two counterparts in the English language. Each counterpart, when executed and delivered, shall be an original, and such counterparts shall together (as well as separately) constitute one and the same instrument. IN WITNESS WHEREOF, the Parties hereto have severally subscribed these presents or caused them to be subscribed in their names and behalf by their respective officers thereunto duly authorized. 8 COMPANHIA PORTUGUESA RADIO MARCONI, SA By: Lisbon, 23 November 1998 (SEAL) (SEAL) (SEAL) (SEAL) STARTEC GLOBAL COMMUNICATIONS CORPORATION By: Bethesda, /s/ RY 1998 9 EX-10.45 9 EXHIBIT 10.45 EXHIBIT 10.45 LEASE 36 NORTH EAST SECOND STREET, L.L.C. LANDLORD STARTEC GLOBAL COMMUNICATIONS CORPORATION TENANT TABLE OF CONTENTS
ARTICLE PAGE 1. USE, RESTRICTIONS ON USE AND COMPLIANCE WITH LAWS .......... 1 2. TERM ....................................................... 2 3. RENT ....................................................... 3 4. RENT ADJUSTMENTS ........................................... 3 5. SECURITY DEPOSIT ........................................... 5 6. ALTERATIONS ................................................ 5 7. REPAIR ..................................................... 6 8. LIENS ...................................................... 7 9. ASSIGNMENT AND SUBLETTING .................................. 7 10. INDEMNIFICATION ........................................... 8 11. INSURANCE ................................................. 9 12. WAIVER OF SUBROGATION ..................................... 9 13. SERVICES AND UTILITIES .................................... 9 14. HOLDING OVER .............................................. 10 15. SUBORDINATION ............................................. 10 16. RULES AND REGULATIONS ..................................... 10 17. REENTRY BY LANDLORD ....................................... 10 18. DEFAULT ................................................... 11 19. REMEDIES .................................................. 11 20. TENANT'S BANKRUPTCY FOR INSOLVENCY ........................ 13 21. QUIET ENJOYMENT ........................................... 13 22. DAMAGE BY FIRE, ETC. ...................................... 14 23. EMINENT DOMAIN ............................................ 14 24. SALE BY LANDLORD .......................................... 15 25. ESTOPPEL CERTIFICATES ..................................... 15 26. SURRENDER OF PREMISES ..................................... 15 27. NOTICES ................................................... 15 28. TAXES PAYABLE BY TENANT ................................... 15 29. DEFINED TERMS AND HEADINGS ................................ 16 30. TENANT'S AUTHORITY ........................................ 16
31. COMMISSIONS ............................................... 16 32. TIME AND APPLICABLE LAW ................................... 16 33. SUCCESSORS AND ASSIGNS .................................... 16 34. ENTIRE AGREEMENT .......................................... 16 35. EXAMINATION NOT OPTION .................................... 16 36. RECORDATION ............................................... 16 37. LIMITATION OF LANDLORD'S LIABILITY ........................ 17 38. MISCELLANEOUS ............................................. 17
EXHIBIT A -- PREMISES EXHIBIT B -- INITIAL ALTERATIONS EXHIBIT C -- RULES AND REGULATIONS EXHIBIT D -- LIST OF APPROVED CONTRACTORS EXHIBIT E -- LOCATION OF DESIGNATED AREAS LEASE By this Lease Landlord leases to Tenant and Tenant leases from Landlord the Premises in the Building as set forth and described on the Reference Page. The Reference Page, including all terms defined thereon, is incorporated as part of this Lease. 1. USE, RESTRICTIONS ON USE AND COMPLIANCE WITH LAWS. 1.1 The Premises are to be used solely for the operation, installation, maintenance, repair and replacement of telecommunications equipment and its related facilities and for general office use. Tenant shall not do or permit anything to be done in or about the Premises or the Building which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure, annoy, or disturb them or allow the Premises to be used for any improper or unlawful or objectionable purpose. Tenant shall not do, permit or suffer in, on, or about the Premises the sale of any alcoholic liquor without the written consent of Landlord first obtained, or the commission of any waste. Tenants shall comply with all government laws, ordinances and regulations applicable to the use of the Premises and its occupancy and shall promptly comply with all governmental orders and directions for the correction, prevention and abatement of any violations in or upon, or in connection with, the Premises, related to Tenant's use of the Premises, all at Tenant's sole expense. Tenant shall not do or permit anything to be done on or about the Premises or the Building or bring or keep anything into the Premises which will in any way increase the rate of, invalidate or prevent the procuring of any insurance protecting against loss or damage to the Building or any of its contents by fire or other casualty or against liability for damage to property or injury to persons in or about the Building or any part thereof, provided, however, that Landlord represents and warrants that Tenant's intended use as a telecommunications center as provided for in this Lease shall not cause any increase in the rate of, invalidate or prevent the procuring of any such protections. Landlord acknowledges and agrees that Tenant may enter into agreements with its customers and/or end users ("Collocation Agreements") providing for physical location of telecommunication equipment and facilities within the Premises, maintained and serviced by Tenant and placed in the Premises and Tenant's sole cost, expenses and risk, provided that such Collocation Agreements shall be subordinate to the Lease and to any mortgages, deeds of trust, or land sale contracts now or in the future, against the Building. Tenant may enter into Collocation Agreements with third parties, for the use of the Premises at the sole discretion of Tenant, and any provision of the subletting and assignment provisions of this Lease to the contrary notwithstanding, such Collocation Agreements shall not be construed as an assignment or sublet. 1.2 Tenant shall not, and shall not direct, suffer or permit any of its agents, contractors, employees, licensees or invitees to at any time handle, use, manufacture, store or dispose of in or about the Premises or the Building any (collectively "Hazardous Materials") flammables, explosives, radioactive materials, hazardous wastes or materials, toxic wastes or materials, or other similar substances, petroleum products or derivatives or any substance subject to regulation by or under any Environmental Laws, except if handled, used, stored and disposed of in accordance with applicable Environmental Laws. Tenants shall protect, defend, indemnify and hold each and all of the Landlord Entities (as defined in Article 29) harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of any actual or asserted failure of Tenant to fully comply with all applicable Environmental Laws, or the presence, handling, use or disposition in or from the Premises of any Hazardous Materials (even though permissible under all applicable Environmental Laws or the provisions of this Lease), or by reason of any actual or asserted failure of Tenant to keep, observe, or perform any provision of this Section 1.2. Tenant's use of batteries, generator and fuel tank are acceptable, provided such items comply with all applicable Environmental Laws and provided further Tenant removes all such items on or prior to the termination or expiration of this Lease. Tenant agrees to indemnify Landlord from and against any loss, cost, damage, lawsuit, claim or liability arising from the presence of these items in the Premises, except if caused by Landlord's negligence or willful misconduct. Landlord represents that prior to November 4, 1998, any known friable asbestos shall be removed from the Premises, ground floor and all risers of the Building and all known non-friable asbestos in such locations shall be removed or encapsulated, all at Landlord's cost by a party licensed to remove asbestos. No other Hazardous Materials are known by Landlord to exist in the Building. Landlord shall, prior to the Commencement Date, deliver to Tenant a Certificate of Environmental Compliance, if available, or other similar document. Landlord shall comply with and shall cause the Building to be in compliance with all applicable Laws (as hereinafter defined) as of the date of this Lease. Subject to the preceding sentence, Tenant shall comply with all applicable Laws with respect to its use and occupancy of the Premises and in its construction of Tenant's Improvements; provided, however, Tenant shall only be responsible for making improvements to the Premises (capital or otherwise) required by applicable Laws if the necessity arises from Tenant's use of the Premises. As used herein, "Laws" shall mean all federal, state, county and local governmental laws, statutes, codes, ordinances, rules, regulations, decrees, orders and other such requirements now or hereafter imposed, including but not limited to, the ADA and any and all Environmental Law. As used herein, "ADA" means the Americans With Disabilities Act of 1990 (42 U.S.C. '1201 et seq.) and the regulations and guidelines promulgated or published thereunder, as any of the foregoing may from time to time be amended. As used herein, "Environmental Law" means all legal requirements relating to (a) the protection of the environment, the safety and health of persons (including employees) or the public welfare from actual or potential exposure (or effects of exposure) to any actual or potential release, discharge, disposal or omission (whether past or present) of any Hazardous Materials (as hereinafter defined) or (b) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any Hazardous Materials, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. '9601 et seq., the Solid Waste Disposal Act, as amended by the Resource Conversation and Recovery Act of 1976, as amended by the Solid and Hazardous Waste Amendments of 1984, 42 U.S.C. '6901 et seq., the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C. '1251 et seq., the Toxic Substances Control Act of 1976, 15 U.S.C. '2601 et seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. '1101 et seq., the Clean Air Act of 1966, as amended, 42 U.S.C. '7401 et seq., the National Environmental Policy Act of 1975, 42 U.S.C. '4321, the Rivers and Harbors Act of 1899, 33 U.S.C. '401 et seq., the Endangered Species Act of 1973, as amended, 16 U.S.C. '1531 et seq., the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. '651 et seq., and the Safe Drinking Water Act of 1974, as amended, 42 U.S.C. '300(f) et seq., and all rules, regulations and guidance promulgated or published thereunder, as any of the foregoing may from time to time be amended. 2.1. TERM. 2.1 The Term of this Lease shall begin on the date ("Commencement Date") which shall be February 1, 1999, provided the Commencement Date shall be extended one (1) day for each day after November 4, 1998 that Landlord's Work is not substantially completed unless delayed because of Tenant's act or omission. Landlord shall tender possession of the Premises on the Commencement Date with all the work, if any, to be performed by Landlord pursuant to Exhibit B to this Lease ("Landlord's Work") substantially completed. Unless Tenant advises Landlord in writing to the contrary within ten (10) days of the Commencement Date, it shall be assumed that Landlord's Work is substantially complete upon delivery of the Premises to Tenant. Tenant may commence any work to be performed by Tenant while Landlord is performing Landlord's work, provided Tenant does not cause any delay in Landlord's work and Tenant indemnifies Landlord from and against any loss, cost, claim, lawsuit, damage or liability incurred by Landlord as a result of Tenant's entry onto the Premises prior to the Commencement Date, or the entry of Tenant's agents, employees or contractors. On or before the date that Landlord substantially completes Landlord's Work and deliver possession of the Premises to Tenant, Landlord shall provide Tenant with temporary power to enable Tenant to complete its tenant finish in the Premises. Prior to performing any actual construction work in the Premises, Tenant must procure any necessary building permits. Landlord and Tenant shall execute a memorandum setting forth the actual Commencement Date and Termination Date. Subject to delays caused by Tenant, or its agents or employees, in the event that Landlord is unable to deliver the Premises with Landlord's Work substantially completed before November 4, 1998, the Commencement Date specified above shall be extended as provided in the first sentence of this Section 2.1. After twenty-one (21) days of delay, Tenant shall have the right to terminate the lease upon written notice to Landlord within ten (10) days of the accrual of such right and Landlord shall reimburse Tenant for any third-party architectural/engineering fees and legal expenses, up to a maximum of $50,000.00, incurred by Tenant after September 15, 1998 through the termination date. 2.2 Landlord shall permit Tenant to occupy the Premises prior to the Commencement Date to complete Tenant Improvements. Such occupancy shall be subject to all the provisions of this Lease. Said early possession shall not advance the Commencement Date or Termination Date. 2.3 Landlord grants Tenant the right and option to extend the Term for the option periods indicated in the Renewal Option Section of the Reference Pages (each a "Renewal Term"). Tenant shall notify Landlord in writing of its election to extend this Lease for each Renewal Term not less than nine (9) months nor more than twelve (12) months prior to the expiration date of the then existing Term. Tenant's failure to timely exercise any option hereunder shall cause the automatic extinguishment thereof, time being of the essence. Each Renewal Term shall be upon all of the terms, covenants, and conditions of this Lease except that the Annual Rent payable during the Renewal Term shall be ninety five percent (95%) of the then current fair market rental ("Market Rate") for comparable space in the Building and in other telecommunication buildings in the downtown Miami, Florida area at the time of the exercise of the renewal option. Landlord shall advise Tenant of the fair market rental within fifteen (15) days after receipt of written request therefor. Thereafter, Landlord and Tenant shall agree as to fair market value. Said request shall be made no earlier than thirty (30) days prior to the first date on which Tenant may exercise its option under this paragraph. Notwithstanding the above, Tenant shall have no right to extend or renew this Lease if (i) it is in default beyond the curative period at the time of giving its notice of renewal; (ii) Tenant is in default and beyond any applicable cure period as of the first day of the extended Term which was the subject of such notice; or (iii) neither Tenant nor any of Tenant's Permitted Assignees is not occupying the Premises. 2.4 Within thirty (30) days after Landlord's receipt of Tenant's renewal notice, Landlord shall provide to Tenant its determination of the Market Rate ("Landlord's Determination"). Within fifteen (15) days of Tenant's receipt of Landlord's Determination, Tenant shall either accept Landlord's Determination or propose a different Market Rate to Landlord. If Landlord and Tenant are unable to agree upon a Market Rate within thirty (30) days after Tenant's receipt of Landlord's Determination, then Landlord and Tenant shall, within fifteen (15) days of Tenant's receipt of Landlord's Determination, each simultaneously submit to the other in writing its good faith estimate of the Market Rate. 2 If the higher of said estimates is not more than one hundred and five percent (105%) of the lower of such estimates, the Market Rate in question shall be deemed to be the average of the submitted rates. If otherwise, within fifteen (15) days thereafter, Tenant may either terminate this Lease effective as of the Expiration Date or establish the rate by an arbitration to be held in Miami, Florida in accordance with the Real Estate Valuation Arbitration Rules of the American Arbitration Association, except that the arbitration shall be conducted by a single arbitrator, selected jointly by Landlord and Tenant, and shall be on the basis that the arbitrator shall pick one of the two rates submitted, being the rate which is closer to the Market Rate as determined by the arbitrator. The parties agree to be bound by the decision of the Arbitrator, which shall be final in this and non-appealable, and shall share equally the costs of arbitration, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. During each of the Renewal Terms (if applicable), Tenant shall pay Direct Expenses and Taxes in accordance with the provision of Paragraph 4. 3. RENT. 3.1 Commencing on the Rent Commencement Date, Tenant agrees to pay to Landlord the Annual Rent in effect from time to time by paying the Monthly Installment of Rent then in effect on or before the first day of each full calendar month during the Term. The Monthly Installment of Rent in effect at any time shall be one-twelfth of the Annual Rent in effect at such time. Rent for any period during the Term which is less than a full month shall be a prorated portion of the Monthly Installment of Rent based upon a thirty (30) day month. Said rent shall be paid to Landlord, without deduction or offset and without notice or demand, at the Landlord's address, as set forth on the Reference Page, or to such other person or at such other place as Landlord may from time to time designate in writing. Notwithstanding the above and subject to Section 2.1 above, Tenant's rent commencement date shall begin sixty (60) days after the Commencement Date ("Rent Commencement Date"). Landlord and Tenant shall execute an amendment to the Lease setting forth the final Rent Commencement Date. Commencing on the first anniversary of the Rent Commencement Date and on each anniversary thereafter, including during any Renewal Term, the Annual Rent shall increase Fifty Cents ($0.50) per rentable square foot. 3.2 Tenant recognizes that the late payment of any rent or other sum due under this Lease will result in administrative expense to Landlord, the extent of which additional expense is extremely difficult and economically impractical to ascertain. Tenant therefore agrees that if rent or any other sum is not paid by the tenth (10th) day of each month, a late charge shall be imposed in an amount equal to a sum equal to five percent (5%) of the unpaid rent or other payment. The amount of the late charge to be paid by Tenant shall be reassessed and added to Tenant's obligation for each successive monthly period until paid. The provisions of this Section 3.2 in no way relieve Tenant of the obligation to pay rent or other payments on or before the date on which they are due, nor do the terms of this Section 3.2 in any way affect Landlord's remedies pursuant to Article 19 of this Lease in the event said rent or other payment is unpaid after date due. 4. RENT ADJUSTMENTS. 4.1 For the purpose of this Article 4, the following terms are defined as follows: 4.1.1 LEASE YEAR: Each calendar year falling partly or wholly within the Term. 4.1.2 DIRECT EXPENSES : All direct costs of operation, maintenance, repair and management of the Building (including the amount of any credits which Landlord may grant to particular tenants of the Building in lieu of providing any standard services or paying any standard costs described in this Section 4.1.2 for similar tenants), as determined in accordance with generally accepted accounting principles, including the following costs by way of illustration, but not limitation: water and sewer charges; insurance charges of or relating to all insurance policies and endorsements deemed by Landlord to be reasonably necessary or desirable and relating in any manner to the protection, preservation, or operation of the Building or any part thereof; utility costs, including, but not limited to, the cost of heat, light, electricity, power, steam, gas, and waste disposal; the cost of janitorial services; the cost of security and alarm services; window cleaning costs; labor costs; costs and expenses of managing the Building including management fees (not to exceed normal and customary management fees for similar buildings); air conditioning maintenance costs; elevator maintenance fees and supplies; material costs; the cost of maintenance, repair and service agreements; purchase costs of equipment other than capital items; tool costs; licenses, permits and inspection fees; wages and salaries of on-site Building personnel; employee benefits and payroll taxes; accounting and legal fees (except legal fees in connection with specific tenant leases); any sales, use or service taxes incurred in connection therewith. Notwithstanding the above, Direct Expenses shall not include: (a) commissions payable to any real estate broker(s) for the leasing of space in the Building; (b) the cost of any work done by Landlord for and at the expense of any particular tenant(s) in the Building which do not benefit Tenant; 3 (c) interest or penalties for overdue payments of Taxes; (d) the cost to Landlord of repairs made, or other work done, by Landlord as a result of fire, windstorm or other insurable casualty to the extent for which Landlord has received insurance proceeds, or by the exercise of eminent domain, provided, however, that this exclusion for eminent domain is limited to the amount of the condemnation award received by landlord in compensation for such repairs or other work; (e) attorney's fees and court costs and other such expenses incurred by Landlord in connection with the negotiation of disputes with existing or prospective tenants of the Building; (f) the costs to landlord of renovating, decorating, painting or redecorating interior space for the actual premises of tenants of the Building; (g) amounts for which reimbursement has been made to Landlord by tenants of the Building for "extra hours" services rendered to them by Landlord for which Tenant does not benefit; (h) interest on debt or amortization payments on any mortgages and/or rental under any ground or underlying leases covering Landlord's Property; (i) compensation paid by Landlord to persons engaged in commercial concessions operated by Landlord (and not by a third party) on Landlord's Property (e.g., a newspaper stand or shoeshine service or valet parking); (j) expenses paid by Landlord for the advertising and promotion of rental space in the Building; (k) fines, penalties or other costs incurred by Landlord due to its violation of any governmental laws; (l) costs incurred by Landlord for the purchase of sculptures, paintings or other objects of art for Landlord's Property, if any; (m) depreciation expense on the Building; (n) the overtime hours charges for electricity used and paid for by other tenants; (o) salaries, wages and benefits of Landlord's employees above the level of "Building Manager". 4.1.3 TAXES: Real estate taxes and any other taxes, charges and assessments which are levied with respect to the Building or the land appurtenant to the Building, or with respect to any improvements, fixtures and equipment or other property of Landlord, real or personal, located in the Building and used in connection with the operation of the Building and said land, any payments to any ground lessor in reimbursement of tax payments made by such lessor; and all fees, expenses and costs incurred by Landlord in investigating, protesting, contesting or in any way seeking to reduce or avoid increase in any assessments, levies or the tax rate pertaining to any Taxes to be paid by Landlord in any Lease Year. Taxes shall not include any corporate franchise, or estate, inheritance or federal or state income tax, or tax imposed upon any transfer by Landlord of its interest in this Lease or the Building. In the event that during the Base year, as hereafter defined, the Building is not fully rented and occupied Landlord shall make an appropriate adjustment in Taxes for such year for the purpose of avoiding distortion of the amount of such Taxes, and the adjustment so determined shall be deemed to have been Taxes for such year. Base Year, as used in this Lease shall mean the calendar year 1999 for the original Term; the calendar year 2009 for the first Renewal Option; and the calendar year 2014 for the second Renewal Option. 4.2 Tenant shall pay as additional rent for each calendar year Tenant's Proportionate Share of any increase in Direct Expenses and Taxes incurred for such calendar year, above the amount of such Direct Expenses and Taxes for the Base Year. Notwithstanding anything herein to the contrary, Tenant's Proportionate Share of Direct Expenses (excluding common area utilities and insurance) for any calendar year after the Base Year shall not exceed 105% of Tenant's Proportionate Share of Direct Expenses (excluding common area utilities and insurance) for the immediately preceding calendar year ("CAM Cap"); provided, however, if the Tenant's Proportionate Share of Direct Expenses (excluding common area utilities and insurance) in any calendar year as calculated as if there were no CAM Cap ("Uncapped CAM Costs") is greater than Tenant's Proportionate Share of Direct Expenses (excluding common are utilities and insurance) as calculated pursuant to the CAM Cap ("Capped CAM Costs"), the difference between the Uncapped CAM Costs and the Capped CAM Costs may be accumulated and applied toward Tenant's Proportionate Share of Direct Expenses (excluding utilities and insurance) in any future calendar year in which Tenant;'s Uncapped CAM Costs are less than the Capped CAM Costs. However, Tenant's Proportionate Share of Direct Expenses 4 4.3 The annual determination of Direct Expenses shall be made by Landlord and if certified by a nationally recognized firm of public accountants selected by Landlord. In the event that during the Base Year, the Building is not fully rented and occupied Landlord shall make any appropriate adjustment in occupancy related Direct Expenses to be attributed to Tenant by such year for the purpose of avoiding distortion of the amount of such Direct Expenses to be attributed to Tenant by reason of variation in total occupancy of the Building, by employing sound accounting and management principals to determine Direct Expenses that would have been paid or incurred by Landlord had the Building been fully rented and occupied, and the amount so determined shall be deemed to have been Direct Expenses for such calendar year. 4.4 Prior to the actual determination thereof for a Lease Year, Landlord may once a year estimate Tenant's liability for Direct Expenses and/or Taxes under Section 4.2 and Article 28 for the Lease Year or portion thereof. Landlord will give Tenant written notification of the amount of such estimate and Tenant agrees that it will pay, by increase of its Monthly Installments of Rent due in such Lease Year, additional rent in the amount of such estimate. Any such increased rate of Monthly Installments of Rent pursuant to this Section 4.4 shall remain in effect until further written notification to Tenant pursuant hereto. 4.5 When the above mentioned actual determination of Tenant's liability for Direct Expenses and/or Taxes is made for any Lease Year and when Tenant is so notified in writing, then: 4.5.1 If the total additional rent Tenant actually paid pursuant to Section 4.4 on account of Direct Expenses and/or Taxes for the Lease Year is less than Tenant's liability for Direct Expenses and/or Taxes, then Tenant shall pay such deficiency to Landlord as additional rent in one lump sum within (30) days of receipt of Landlord's bill therefor; and 4.5.2 If the total additional rent Tenant actually paid pursuant to Section 4.4 on account of Direct Expenses and/ or Taxes for the Lease Year is more than Tenant's liability for Direct Expenses and/or Taxes, then Landlord shall credit the difference against the then next due payments of Rent and Direct Expenses and Taxes, if the Term has ended, shall be paid to Tenant within thirty (30) days after the date Landlord makes any such determination. 4.6 If Commencement Date is other than January 1 or if the Termination Date is other than December 31, Tenant's liability for Direct Expenses and Taxes for the Lease Year in which said Date occurs shall be prorated based upon a three hundred sixty-five (365) day year. 5. SECURITY DEPOSIT. Intentionally Omitted. 6. ALTERATIONS. 6.1 Except for those, if any, specifically provided for in Exhibit B to this Lease, Tenant shall not make or suffer to be made any alterations, additions, or improvements, including, the attachment of any fixtures or equipment in, on, or to the Premises or any part thereof or the making of any improvements as required by Article 7 ("Alterations"), without the prior written consent of Landlord. When applying for such consent, Tenant shall, if requested by landlord furnish complete plans and specifications for such alterations, additions and improvements, if applicable. 6.2 In the event Landlord consents to the making of any such alteration, addition or improvement by Tenant, the same shall be made by a licensed, bonded and insured contractor approved by Landlord, such approval not to be unreasonably withheld, conditioned or delayed, at Tenant's sole cost and expense. If Tenant shall employ any contractor other than Landlord's pre-approved contractor, and such other contractor or any subcontractor of such other contractor shall employ labor and/or suppliers, then Tenant shall be responsible for and hold Landlord harmless from any and all delays, damages and extra costs suffered by Landlord as a result of any dispute with any labor concerning the wage, hours, terms or conditions of the employment of any such labor. 6.3 All alterations, additions, and improvements proposed by Tenant shall be constructed in accordance with all government laws, ordinances, rules and regulations and Tenant shall, prior to construction, provide the additional insurance required under Article 11 in such case, and also all such assurances to Landlord, including but not limited to, waivers of lien, as Landlord shall require to assure payment of the costs thereof and to protect Landlord and the Building and appurtenant land against any loss from any mechanic's, materialmen's or other liens. Tenant shall pay in addition to any sums due pursuant to Article 4, any increase in real estate taxes attributable to any such alteration, addition or improvement for so long, during the Term, as such increase is ascertainable; at Landlord's election said sums shall be paid in the same way as sums due under Article 4. 5 6.4 All alterations, additions, and improvements, in, on , or to the Premises or in, on or to the Building made or installed by Tenant, including carpeting, shall be and remain the property of Tenant during the Term but, excepting furniture, furnishings, telecommunication switch equipment, batteries, generators, condensers, dry coolers, conduits, cabling, pull boxes, and other telecommunication related facilities, movable partitions of less than full height from floor to ceiling and other trade fixtures, all of which shall be removed from the Premises and the Building at Tenant's expense if required to be removed by Landlord in a written document delivered to Tenant at the time Landlord approves Tenant's plans and specifications and the Premises restored to its original condition, and any remaining improvements, shall become a part of the realty and belong to Landlord without compensation to Tenant upon the expiration or sooner termination of the Term, at which time title shall pass to Landlord under this Lease as by a bill of sale, unless Landlord elects otherwise. Upon such election by Landlord, Tenant shall upon demand by Landlord, at Tenant's sole cost and expense, forthwith and with all due diligence remove any such alterations, additions or improvements, including any which are designated by Landlord to be removed, and Tenant shall forthwith and with all due diligence, at its sole costs and expense, repair and restore the Premises and the Building to their original condition, reasonable wear and tear and damage by fire or other casualty excepted. 7. REPAIR. 7.1 Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises or the Building, except as specified in Exhibit B if attached to this Lease and except that Landlord shall repair and maintain the structural portions of the Building, including the roof and the basic plumbing, common area air conditioning, heating and electrical systems installed or furnished by Landlord and all common areas of the Building in working order and condition. By taking possession of the Premises, Tenant accepts them as being in good order condition and repair and in the condition in which Landlord is obligated to deliver them subject to the items set forth on the punchlist prepared in accordance with Section 2.1. It is hereby understood and agreed that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant, expect as specifically set forth in this Lease. 7.2 Tenant shall at its own cost and expense keep and maintain all parts of the Premises and improvements therein in good condition, promptly making all necessary repairs and replacements, whether ordinary or extraordinary, with materials and workmanship of the same character, kind and quality as the original (including, but not limited to, repair and replacement of all fixtures installed by Tenant, windows, glass and plate glass, doors, any special office entries, interior walls and finish work, floors and floor coverings, heating and air conditioning systems serving the Premises, electrical systems and fixtures and sprinkler systems), if applicable. Tenant as part of its obligations hereunder shall keep the Premises in a clean and sanitary condition. Tenant will, as far as possible keep all such parts of the Premises from deterioration due to ordinary wear and from falling temporarily out of repair, and upon termination of this Lease in any way Tenant will deliver the Premises to Landlord in good condition and repair, loss by fire or other casualty excepted and ordinary wear and tear excepted. Tenant shall, at its own cost and expense, repair any damage to the Premises or the Building resulting from and/or caused in whole or in part by Tenant, its agents, employees, invitees, or any other person entering upon the Premises as a result of Tenant's business activities or caused by Tenant's default hereunder. 7.3 Landlord shall not be liable for any failure to make any repairs or to perform any maintenance unless such failure shall persist for an unreasonable time which shall be determined in Landlord's reasonable discretion after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. 7.4 Except as provided in Articles 22, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or to fixtures, appurtenances and equipment in the Building unless due to Landlord's negligence or willful misconduct, in which event, after three (3) days, Tenant shall receive one (1) day of Rent abatement for each day Tenant is unable to operate in the Premises until Tenant can again operate in the Premises. Except to the extent, if any, prohibited by law, Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect. 7.5 Tenant shall, at its own cost and expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor and/or an employee certified by manufacturer, selected by Tenant and approved by Landlord for servicing all heating and air conditioning systems and batteries, generators and fuel tanks serving the Premises (and a copy thereof shall be furnished to Landlord). The service contract must include all services suggested by the equipment manufacturer in the operation/maintenance manual and must become effective within thirty (30) days after the Commencement Date. 7.6 In recognition of Tenant's use, Landlord shall use good-faith efforts to provide Tenant (except in the case of emergency, in which event Landlord shall use reasonable efforts, but shall not be required, to provide Tenant with prior notice) not less than twenty four (24) hours prior written notice of Landlord's intent to enter the Premises provided such entry shall not disrupt Tenant's service to its clients, and not less than forty eight (48) hours prior written notice of Landlord's intention to enter the Premises to effect planned repairs (including, but not limited to electrical, mechanical or plumbing work) if such work will materially disrupt and/or interfere with the business of Tenant within the Premises or Building in a manner which will, in Landlord's reasonable opinion, affect Tenant's use. In such circumstances Tenant 6 and Landlord will cooperate to determine an appropriate time. Further, in emergency situations Landlord shall use reasonable care and precaution in order to minimize the disruptions in Tenant's business. 8. LIENS. Tenant shall keep the Premises, the Building and appurtenant land and Tenant's leasehold interest in the Premises free from any liens arising out of any services, work or materials performed, furnished, or contracted for by Tenant, or obligations incurred by Tenant. Notice is hereby given that Landlord shall not be liable for any work performed or to be performed on the Premises, or for any materials furnished or to be furnished at or to the Premises, or any building or improvements thereon, for Tenant or any subtenant, and that no mechanic's or other lien for such work or materials shall attach to the interest of Landlord. This Lease specifically prohibits the subjecting of the Premises, or any part of it, to any liens for improvements Tenant makes or causes to be made or for which Tenant is directly or indirectly responsible for payment. Pursuant to Section 713.10, Florida Statutes, all persons dealing with Tenant are hereby given notice of this provision, and Tenant hereby covenants and agrees to provide all persons dealing with Tenant with a copy of this Section 8. If, in connection with any work being performed by Tenant or any subtenant or in connection with any materials being furnished to Tenant or any subtenant, any mechanic's lien or other lien or charge shall be filed or made against the Premises or any building or improvements thereon or any part thereof, or if any such lien or charge shall be filed or made against Landlord as owner, then Tenant, at Tenant's cost and expense, within thirty (30) days after such lien or charge shall have been filed or made (but in any event prior to foreclosure), shall cause the same to be cancelled and discharged of record by payment thereof or filing a bond or otherwise, and shall also defend any action, suit or proceeding which may be brought for the enforcement of such lien or charge, and shall pay any damages, costs and expenses, including attorneys' fees, suffered or incurred therein by Landlord, and shall satisfy and discharge any judgment entered therein within thirty (30) days from the entering of such judgment by payment thereof or filing of a bond, or otherwise. In the event of the failure of Tenant to discharge within the above-mentioned thirty (30)-day period, any lien, charge or judgment herein required to be paid or discharged by Tenant, Landlord may pay such items or discharge such liability by payment or bond or both, and Tenant will repay to Landlord, upon demand, any and all amounts paid by Landlord therefor, or by reason of any liability on any such bond, and also any and all incidental expenses, including attorneys' fees and costs, incurred by Landlord in connection therewith. 9. ASSIGNMENT AND SUBLETTING. 9.1 Tenant shall not have the right to assign or pledge this Lease or to sublet the whole or any part of the Premises whether voluntarily or by operation of law, or permit the use or occupancy of the Premises by anyone other than Tenant, and shall not make, suffer or permit such assignment, subleasing or occupancy without the prior written consent of Landlord not to be unreasonably withheld or delayed and said restrictions shall be binding upon any and all assignees of the Lease and subtenants of the Premises. In the event Tenant desires to sublet, or permit such occupancy of, the Premises, or any portion thereof, or assign this Lease, Tenant shall give written notice thereof to Landlord at least thirty (30) days prior to the proposed commencement date of such subletting or assignment, which notice shall set forth the name of the proposed subtenant or assignee, the relevant terms of any sublease or assignment and copies of financial reports and other relevant financial reports and other relevant financial information of the proposed subtenant or assignee. 9.2 Notwithstanding any assignment or subletting, permitted or otherwise, Tenant shall at all times remain directly, primarily and fully responsible and liable for the payment of the rent specified in this Lease and for compliance with all of its other obligations under the terms, provisions and covenants of this Lease. Upon the occurrence of an Event of Default, if the Premises or any part of them are then assigned or sublet, Landlord, in addition to any other remedies provided in this Lease or provided by law, may, at its option, collect directly from such assignee or subtenant all rents due and becoming due to Tenant under such assignment or sublease and apply such rent against any sums due to Landlord from Tenant under this Lease, and no such collection shall be construed to constitute a novation or release of Tenant from the further performance of Tenant's obligations under this Lease. 9.3 In the event that Tenant sells, sublets, assigns or transfers this Lease, Tenant shall pay to Landlord as additional rent an amount equal to fifty percent (50%) of any Increased Rent (as defined below) when and as such Increased Rent is received by tenant. As used in this Section, "Increased Rent" shall mean the excess of (i) all rent and other consideration which Tenant is entitled to receive by reason of any sale, sublease, assignment or other transfer of this Lease, over (ii) the rent otherwise payable by Tenant under this Lease at such time. For purposes of the foregoing, any consideration received by Tenant in form other than cash shall be valued at its fair market value as determined by Landlord in good faith. 9.4 Notwithstanding any other provision hereof, Tenant shall have no right to make any assignment of this Lease or sublease of any portion of the Premises if at the time of either Tenant's notice of the proposed assignment or sublease or the proposed commencement date thereof, there shall exist any Event of Default of Tenant or matter which will become a default of Tenant with passage of time unless cured, or if the proposed assignee or sublessee is an entity: (a) with which Landlord is already in negotiation as evidenced by the issuance of a written proposal; (b) is already an occupant of the Building; (c) is a governmental agency; (d) is incompatible with the character or occupancy of the Building; or (e) would subject the Premises to a use which would: (i) violate any exclusive right granted to another 7 tenant of the Building; (ii) require any addition to or modification of the Premises or the Building in order to comply with building code or other governmental requirements; or, (iii) involve a violation of Section 1.2. 9.5 The assignment or other transfer of Tenant's interest under this Lease or the sublease of the Premises to an affiliate, subsidiary or successor of Tenant shall not be deemed an assignment or subletting of the Premises as to which Tenant must obtain Landlord's consent (however, Tenant must provide thirty (30) days prior written notice to Landlord). The terms affiliate and subsidiary and successor shall have the following meaning: (a) any corporation which directly or indirectly controls or is controlled by or is under common control with Tenant. (b) any subsidiary, meaning any corporation not less than 50% of whose outstanding stock shall, at the time, be owned directly or indirectly by Tenant. (c) any successor, meaning: (i) A corporation into which or with which Tenant, its corporate successors or assigns, is merged or consolidated in accordance with applicable, statutory provisions for merger or consolidation of corporations, but only if, by operation of law or by effective provisions contained in the instruments of merger or consolidation, the liabilities of the corporations participating in such merger or consolidation are assumed by the corporation surviving such merger or created by such consolidation; or, (ii) Any corporation acquiring this Lease and the Premises hereby demised and a substantial portion of the property and assets of Tenant, its corporate successors or assigns; or (iii) Any corporation or successor corporation becoming such by either of the methods described in Subsections (a) or (b) above, but only if, on the completion of such merger, consolidation, acquisition, or assumption, the successor has a net worth in excess of Tenant's immediately prior to such merger, consolidation, acquisition or assumption. Acquisition by Tenant, its corporate successors or assigns, of a substantial portion of the assets, together with the assumption of all or substantially all the obligations and liabilities of any corporation, shall be deemed a merger of such corporation into Tenant for purposes of this Section. 10. INDEMNIFICATION. None of the Landlord Entities shall be liable and Tenant hereby waives all claims against them for any damage to any property or any injury to any person in or about the Premises or the Building by or from any cause whatsoever (including without limiting the foregoing, rain or water leakage of any character from the roof, windows, walls, basement, pipes, plumbing works or appliances, the Building not being in good condition or repair, gas, fire, oil, electricity or theft), except to the extent caused by or arising from the negligence or willful misconduct of Landlord or its agents, employees or contractors. Tenant shall protect, indemnify and hold the Landlord Entities harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of (a) any damage to any property (including but not limited to property of any Landlord Entity) or any injury (including but not limited to death) to any person occurring in, on or about the Premises or the Building to the extent that such injury or damage shall be caused by or arise from any act or omission of Tenant, its agents, servants, employees, invitees, or visitors; (b) the conduct or management of any work or thing whatsoever done by the Tenant in or about the Premises; or (c) Tenant's failure to comply with any and all governmental laws, ordinances and regulations applicable to the condition or use of the Premises or its occupancy which are Tenant's responsibility under the Lease. The provisions of this Article shall survive the termination of this Lease with respect to any claims or liability accruing prior to such termination. Tenant shall not be liable and Landlord hereby waives all claims against Tenant for any damage to any property or any injury to any person in or about the Premises or the Building by or from any cause whatsoever (including without limiting the foregoing, rain or water leakage of any character from the roof, windows, walls, basement, pipes, plumbing works or appliances, the Building not being in good condition or repair, gas, fire, oil, electricity or theft), except to the extent caused by or arising from the negligence or willful misconduct of Tenant or its agents, employees or contractors. Landlord shall protect, indemnify and hold Tenant harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of (a) any damage to any property or any injury (including but not limited to death) to any person occurring in, on or about the Premises or the Building to the extent that such injury or damage shall be caused by or arise from any act or omission of Landlord, its agents, servants, employees, invitees, or visitors; or (b) the conduct or management of any work or thing whatsoever done by the Landlord in or about the Premises. The provisions of this Article shall survive the termination of this Lease with respect to any claims or liability accruing prior to such termination. 8 11.0 INSURANCE. 11.1 Tenant shall keep in force throughout the Term: (a) a Commercial General Liability insurance policy or policies to protect the Landlord Entities against any liability to the public or to any invitee of Tenant or a Landlord Entity incidental to the use of or resulting from any accident occurring in or upon the Premises with a limit of not less than $2,000,000.00 per occurrence and not less than $4,000,000.00 in the annual aggregate (part of which may come from an umbrella insurance policy), or such larger amount as Landlord may prudently require from time to time, covering bodily injury and property damage liability and $1,000,000 products/completed operations aggregate; (b) Business Auto Liability covering owned, non-owned and hired vehicles with a limit of not less than $1,000,000 per accident; (c) insurance protecting against liability under Worker's Compensation Laws with Limits at lease as required by statute; (d) Employers Liability with limits of $500,000 each accident, $500,000 disease policy limit, $500,000 disease--each employee; (e) All Risk or Special Form coverage protecting Tenant against loss of or damage to Tenant's alterations, additions, improvements, carpeting, floor coverings, paneling, decorations, fixtures, inventory and other business personal property situated in or about the Premises to the full replacement value of the property so insured; and, (f) Business Interruption Insurance with limit of liability representing loss of at least approximately six months of rent. 11.2 Each of the aforesaid policies shall (a) be provided at Tenant's expense; (b) name the Landlord Entities and building management company, if any, as additional insureds as their interests may appear; (c) be issued by an insurance company with a minimum Best's rating of "A:VII" during the Term; and (d) provide that said insurance shall not be canceled unless thirty (30) days prior written notice (ten days for non-payment of premium) shall have been given to the Landlord; and said policy or policies or certificates thereof shall be delivered to the Landlord by Tenant upon the Commencement Date and at least thirty (30) days prior to each renewal of said insurance. 11.3 Whenever Tenant shall undertake any Alterations in, to or about the Premises ("Work") the aforesaid insurance protection must extend to and include injuries to persons and damage to property arising in connection with such Work, without limitation including liability under any applicable structural work act, and such other insurance as Landlord shall require; and the policies of or certificates evidencing such insurance must be delivered to Landlord prior to the commencement of any such Work. 12.0 WAIVER OF SUBROGATION. So long as their respective insurers so permit, Tenant and Landlord hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage, All Risks or other insurance now or hereafter existing for the benefit of the respective party but only to the extent of the net insurance proceeds payable under such policies. Each party shall obtain any special endorsements required by their insurer to evidence compliance with the aforementioned waiver. 13.0 SERVICES AND UTILITIES. 13.1 Subject to the other provisions of this Lease, Landlord agrees to furnish to the common areas of the Building, the following services and utilities subject to the rules and regulations of the Building prescribed from time to time: (a) water suitable for normal office use of the Premises; (b) heat and air conditioning required in Landlord's judgment for the use and occupation of the common areas of the Building; (c) cleaning and janitorial service for common areas; (d) elevator service by nonattended automatic elevators; (e) such window washing as may from time to time in Landlord's judgment by reasonably required; and, (f) provisions to bring electricity to the floor of the Premises an amount equal to no less than 800 amps @ 480V on or before the Commencement Date with ultimate requirement of 1,250 amps @ 480V on or before one hundred eighty (180) days after the Rent Commencement Date. To the extent that Tenant is not billled directly by a public utility, Tenant shall pay, upon demand, as additional rent, for all electricity used by Tenant in the Premises, including the usage of any temporary power supplied to Tenant prior to the Commencement Date. The charge shall be at the pro rata rates charged for such services by the local public utility. Landlord shall not be liable for, and Tenant shall not be entitled to, any abatement or reduction of rental by reason of Landlord's failure to furnish any of the foregoing, unless such failure shall persist for an unreasonable time after written notice of such failure is given to Landlord by Tenant and provided further that Landlord shall not be liable when such failure is caused by accident, breakage, repairs, labor disputes of any character, energy usage restrictions or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. If the disruption of services is due to Landlord's negligence or willful misconduct and, as a result thereof, Tenant is unable to operate in the Premises more than five (5) days, then Tenant shall receive an abatement of Rent after the fifth (5th) day until Tenant is again able to operate in the Premises. Landlord shall use reasonable efforts to remedy any interruption in the furnishing of services and utilities. Landlord shall not (except in the event of an emergency or a force majeure event) exercise any right of Landlord to reduce, interrupt or cease service of the heating, air conditioning, ventilation, elevator, plumbing, electrical systems, telephone systems and/or utilities services of the Premises, the Building or the Property, without advising Tenant in advance of Landlord's requirements so that Landlord and Tenant may arrange procedures for accomplishing Landlord's goals and minimize the interruption to Tenant's use, possession and occupancy of the Premises for the purpose of conducting its business on a continuing basis. 9 13.2 Should Tenant require any additional work or service, as described above and in Paragraph 38, Landlord may, on terms to be agreed, upon reasonable advance notice by Tenant, furnish such additional service and Tenant agrees to pay Landlord such charges as may be agreed upon, including any tax imposed thereon, but in no event at a charge less than Landlord's actual cost for such additional service and, where appropriate, a reasonable allowance for depreciation of any systems being used to provide such service. 13.3 If Tenant shall require water or electric current in excess of that required to be furnished or supplied for use in the Premises as set forth in the Lease, Landlord may cause a water meter or electric current meter to be installed so as to measure the amount of such excess water and electric current. The cost of any such meters and any additional installations or expense required or incurred as a result of the increased capacity shall be paid for by Tenant. Tenant agrees to pay as additional rent to Landlord promptly upon demand therefor, the cost of all such excess water and electric current consumed (as shown by said meters, if any, or, if none, as reasonably estimated by Landlord) at the rates charged for such services by the local public utility or agency, as the case may be, furnishing the same, plus any additional expense incurred in keeping account of the water and electric current so consumed. 14.0 HOLDING OVER. Tenant shall pay Landlord for each day Tenant retains possession of the Premises or part of them after termination of this Lease by lapse of time or otherwise at the rate ("Holdover Rate") which shall be (a) 150% of the amount of the Annual Rent for the last period prior to the date of such termination plus (b) 150% of all Rent Adjustments under Article 4. If Landlord gives notice to Tenant of Landlord's election to that effect, such holding over shall constitute renewal of this Lease for a period from month to month. In any event, no provision of this Article 14 shall be deemed to waive Landlord's right of reentry or any other right under this Lease or at law. 15. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be subject and subordinate at all times to ground or underlying leases and to the lien of any mortgages or deeds of trust now or hereafter placed on, against or affecting the Building, Landlord's interest or estate in the Building, or any ground or underlying lease; provided, however, that f the lessor, mortgagee, trustee, or holder of any such mortgage or deed of trust elects to have Tenant's interest in this Lease be superior to any such instrument, then, by notice to Tenant, this Lease shall be deemed superior, whether this Lease was executed before or after said instrument. Notwithstanding the foregoing, Tenant covenants and agrees to execute and deliver upon demand such further instruments evidencing such subordination or superiority of this Lease as may be required by Landlord. As a condition precedent to the effectiveness of any such subordination of this Lease to any future ground or underlying lease or the lien of any future mortgages, deeds of trust, or like encumbrances. Landlord shall provide to tenant within thirty (30) days of the recording of the lien, a commercially reasonable non-disturbance and attornment agreement in favor of Tenant executed by such future ground lessor, master lessor, mortgagee or deed of trust beneficiary, as the case may be, which shall provide that Tenant's quiet possession of the premises shall not be disturbed on account of such subordination to such future lease or lien so long as Tenant is not in default following the expiration of any applicable cure period under any provisions of this Lease. In addition, within thirty (30) days of execution of this Lease, Landlord shall provide to Tenant a commercially reasonable non-disturbance and attornment agreement in favor of Tenant executed by any existing ground lessor, master lessor, mortgagee or deed of trust beneficiary, as the case may be, which shall provide that Tenant's quiet possession of the Premises shall not be disturbed on account of such subordination to such existing lease or lien so long as Tenant is not in default following the expiration of any applicable cure period under any provisions of this Lease. 16.0 RULES AND REGULATIONS Tenant shall faithfully observe and comply with all the rules and regulations as set forth in Exhibit C to this Lease and all reasonable modifications of and additions to them from time to time put into effect by Landlord. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Building of any such rules and regulations. 17.0 REENTRY BY LANDLORD. 17.1 Landlord reserves and shall at all times have the right upon reasonable notice to re-enter the Premises to inspect the same, to supply janitorial service and any other service to be provided by Landlord to Tenant under this Lease, to show said Premises to prospective purchasers, mortgagees or tenants, and to alter, improve or repair the Premises and any portion of the Building, without abatement of rent, and may for that purpose erect, use and maintain scaffolding, pipes, conduits and other necessary structures and open any wall, ceiling or floor in and through the Building and Premises where reasonably required by the character of the work to be performed, provided entrance to the Premises shall not be blocked thereby, and further provided that the business of Tenant shall not be interfered with unreasonably. 17.2 Landlord shall have the right at any time to change the arrangement and/or location of entrances, or passageways, doors and doorways, and corridors, windows, elevators, stairs, toilets or other public parts of the Building and to change the name, number or designation by which the Building is commonly known. In the event that Landlord damages any portion of any wall or wall covering, ceiling, or floor or floor covering within the Premises, Landlord shall repair or replace the damaged portion to match the original as nearly as commercially reasonable but shall not be required to repair or replace more than the portion actually damaged. 10 17.3 For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in the Premises, excluding Tenant's vaults and safes or special security areas (designated in advance), except as required by law, and Landlord shall have the right to use any and all means which landlord may deem proper to open said doors in an emergency to obtain entry to any portion of the Premises. As to any portion to which access cannot be had by means of a key or keys in Landlord's possession, Landlord is authorized to gain access by such means as Landlord shall elect and the cost of repairing any damage occurring in doing so shall be borne by Tenant and paid to Landlord as additional rent upon demand. 18.0 DEFAULT. 18.1 Except as otherwise provided in Article 20, the following events shall be deemed to be Events of Default under this Lease: 18.1.1 Tenant shall fail to pay within ten (10) days any sum of money becoming due to be paid to Landlord under this Lease, whether such sum be any installment of the rent reserved by this Lease, any other amount treated as additional rent under this Lease, or any other payment or reimbursement to Landlord required by this Lease, whether or not treated as additional rent under this Lease, and such failure shall continue for a period of five days after written notice that such payment was not made when due, but if any such notice shall be given, for the twelve month period commencing with the date of such notice, the failure to pay within five days after due any additional sum of money becoming due to be paid to Landlord under this Lease during such period shall be an Event of Default, without notice. 18.1.2 Tenant shall fail to comply with any term, provision or covenant of this Lease which is not provided for in another Section of this Article and shall not cure such failure within twenty (20) days (forthwith, if the failure involves a hazardous condition) after written notice of such failure to Tenant. 18.1.3 Tenant shall fail to vacate the Premises immediately upon termination of this Lease, by lapse of time or otherwise, or upon termination of Tenant's right to possession only. 18.1.4 Tenant shall become insolvent, admit in writing its inability to pay its debts generally as they become due, file a petition in bankruptcy or a petition to take advantage of any insolvency statute, make an assignment for the benefit of creditors, make a transfer in fraud of creditors, apply for or consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, or file a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws, as now in effect or hereafter amended, or any other applicable law or statute of the United States or any state thereof. 18.1.5 A court of competent jurisdiction shall enter an order, judgment or decree adjudicating Tenant bankrupt, or appointing a receiver of Tenant, or of the whole or any substantial part of its property, without the consent of Tenant, or approving a petition filed against Tenant seeking reorganization or arrangement of Tenant under the bankruptcy laws of the United States, as now in effect or hereafter amended, or any state thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within thirty (30) days from the date of entry thereof. 19.0 REMEDIES. 19.1 Except as otherwise provided in Article 20, upon the occurrence of any of the Events of Default described or referred to in Article 18, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever, concurrently or consecutively and not alternatively: 19.1.1 Landlord may, at its election, terminate this Lease or terminate Tenant's right to possession only, without terminating the Lease. 19.1.2 Upon any termination of this Lease, whether by lapse of time or otherwise, or upon any termination of Tenant's right to possession without termination of the Lease, Tenant shall surrender possession and vacate the Premises immediately, and deliver possession thereof to Landlord, and Tenant hereby grants to Landlord full and free license to enter into and upon the Premises in such event and to repossess Landlord of the Premises as of Landlord's former estate and to expel or remove Tenant and any others who may be occupying or be within the Premises and to remove Tenant's signs and other evidence of tenancy and all other property of Tenant therefrom without being deemed in any manner guilty of trespass, eviction or forcible entry or detainer, and without incurring any liability for any damage resulting therefrom, Tenant waiving any right to claim damages for such re-entry and expulsion, and without relinquishing Landlord's right to rent or any other right given to Landlord under this Lease or by operation of law. 19.1.3 Upon any termination of this Lease, whether by lapse of time or otherwise, Landlord shall be entitled to recover as damages, all rent, including any amounts treated as additional rent under this Lease, and other sums due and payable by Tenant on the date of termination, plus as liquidated damages and not as a penalty, an amount equal to the sum of: (a) an amount equal to the then present value of the rent reserved in this Lease for the residue of the 11 stated Term of this Lease including any amounts treated as additional rent under this Lease and all other sums provided in this Lease to be paid by Tenant, minus the fair rental value of the Premises for such residue; (b) the value of the time and expense necessary to obtain a replacement tenant or tenants, and the estimated expenses described in Section 19.1.4 relating to recovery of the Premises, preparation for reletting and for reletting itself; and (c) the cost of performing any other covenants which would have otherwise been performed by Tenant. 19.1.4 Upon any termination of Tenant's right to possession only without termination of the Lease: 19.1.4.1 Neither such termination of Tenant's right to possession nor Landlord's taking and holding possession thereof as provided in Section 19.1.2 shall terminate the Lease or release Tenant, in whole or in part, from any obligation, including Tenant's obligation to pay the rent, including any amounts treated as additional rent, under this Lease for the full Term, and if Landlord so elects Tenant shall pay forthwith to Landlord the sum equal to the entire amount of the rent, including any amounts treated as additional rent under this Lease, for the remainder of the Term plus any other sums provided in this Lease to be paid by Tenant for the remainder of the Term. 19.1.4.2 Landlord may, but need not, relet the Premises or any part thereof for such rent and upon such terms as Landlord, in its sole discretion, shall determine (including the right to relet the premises for a greater or lesser term than that remaining under this Lease, the right to relet the Premises as a part of a larger area, and the right to change the character or use made of the Premises). In connection with or in preparation for any reletting, Landlord may, but shall not be required to, make repairs, alterations and additions in or to the Premises and redecorate the same to the extent Landlord deems necessary or desirable, and Tenant shall, upon demand, pay the cost thereof, together with Landlord's expenses of reletting, including, without limitation, any commission incurred by Landlord. If Landlord decides to relet the Premises or a duty to relet is imposed upon Landlord by law, Landlord and Tenant agree that nevertheless Landlord shall at most be required to use only the same efforts Landlord then uses to lease premises in the Building generally and that in any case that Landlord shall not be required to give any preference or priority to the showing or leasing of the Premises over any other space that Landlord may be leasing or have available and may place a suitable prospective tenant in any such other space regardless of when such other space becomes available. Landlord shall not be required to observe any instruction given by Tenant about any reletting or accept any tenant offered by Tenant unless such offered tenant has a creditworthiness acceptable to Landlord and leases the entire Premises upon terms and conditions including a rate of rent (after giving effect to all expenditures by Landlord for tenant improvements, broker's commissions and other leasing costs) all no less favorable to Landlord than as called for in this Lease, nor shall Landlord be required to make or permit any assignment or sublease for more than the current term or which Landlord would not be required to permit under the provisions of Article 9. 19.1.4.3 Until such time as Landlord shall elect to terminate the Lease and shall thereupon be entitled to recover the amounts specified in such case in Section 19.1.3, Tenant shall pay to Landlord upon demand the full amount of all rent, including any amounts as additional rent under this Lease and other sums reserved in this Lease for the remaining Term, together with the costs of repairs, alterations, additions, redecorating and Landlord's expenses of reletting and the collection of the rent accruing therefrom (including attorney's fees and broker's commissions), as the same shall then be due or become due from time to time, less only such consideration as Landlord may have received from any reletting of the Premises; and Tenant agrees that Landlord may file suits from time to time to recover any sums falling due under this Article 19 as they become due. Any proceeds of reletting by Landlord in excess of the amount then owed by Tenant to Landlord from time to time shall be credited against Tenant's future obligations under this Lease but shall not otherwise be refunded to tenant or inure to Tenant's benefit. 19.2 Landlord may, at Landlord's option, enter into and upon the Premises if Landlord determines in its sole discretion that Tenant is not acting within a commercially reasonable time to maintain, repair or replace anything for which Tenant is not acting within a commercially reasonable time to maintain, repair or replace anything for which Tenant is responsible under this Lease and correct the same, without being deemed in any manner guilty of trespass, eviction or forcible entry and detainer and without incurring any liability for any damage or interruption of Tenant's business resulting therefrom. If Tenant shall have vacated the Premises, Landlord may at Landlord's option re-enter the Premises at any time and make any and all such changes, alterations, revisions, additions and tenant and other improvements in or about the Premises as Landlord shall elect, all without any abatement of any of the rent otherwise to be paid by Tenant under this Lease. 19.3 If, on account of any breach or default by Tenant in Tenant's obligations under the terms and conditions of this Lease, it shall become necessary or appropriate for Landlord to employ or consult with an attorney concerning or to enforce or defend any of Landlord's rights or remedies arising under this Lease, Tenant agrees to pay all Landlord's attorney's fees and costs so incurred. Tenant expressly waives any right: (a) trial by jury; and (b) service of any notice required by any present or future law or ordinance applicable to landlords or tenants but not required by the terms of this Lease. 19.4 Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies provided in this Lease or any other remedies provided by law or equity (all such remedies being cumulative), nor shall pursuit of any remedy provided in this Lease constitute a forfeiture or waiver of any rent due to Landlord under this Lease or 12 of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants contained in this Lease. 19.5 No act or thing done by Landlord or its agents during the Term shall be deemed a termination of this Lease or any acceptance of the surrender of the Premises, and except as expressly provided for in this Lease, no agreement to terminate this Lease or accept a surrender of said Premises shall be valid, unless in writing signed by Landlord. No waiver by Landlord or Tenant of any violation or breach of any of the terms, provisions and covenants contained in this Lease shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions and covenants contained in this Lease. Landlord's acceptance of the payment of rental or other payments after the occurrent of an Event of Default shall not be construed as a waiver of such Default, unless Landlord so notifies Tenant in writing. Forbearance by Landlord in enforcing one or more of the remedies provided in this Lease upon an Event of Default shall not be deemed or construed to constitute a waiver of such Default or of Landlord's right to enforce any such remedies with respect to such Default or any subsequent Default. 19.6 Any and all property which may be removed from the Premises by Landlord pursuant to the authority of this Lease or of law, to which Tenant is or may be entitled, may be handled, removed and/or stored, as the case may be, by or at the direction of Landlord but at the risk, cost and expense of Tenant, and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all expenses incurred in such removal and all storage charges against such property so long as the same shall be in Landlord's possession or under Landlord's control. Any such property of Tenant not retaken by Tenant from storage within thirty (30) days after removal from the Premises shall, at Landlord's option, be deemed conveyed by Tenant to Landlord under this Lease as by a bill of sale without further payment or credit by Landlord to Tenant. 20.0 TENANT'S BANKRUPTCY OR INSOLVENCY. 20.1 If at any time and for so long as Tenant shall be subjected to the provisions of the United States Bankruptcy Code or other law of the United States or any state thereof for the protection of debtors as in effect at such time (each a "Debtor's Law"): 20.1.1 Tenant, Tenant as debtor-in-possession, and any trustee or receiver of Tenant's assets (each a "Tenant's Representative") shall have no greater right to assume or assign this Lease or any interest in this Lease, or to sublease any of the Premises than accorded to Tenant in Article 9, except to the extent Landlord shall be required to permit such assumption, assignment or sublease by the provisions of such Debtor's Law. Without limitation of the generality of the foregoing, any right of any Tenant's Representative to assume or assign this Lease or to sublease any of the Premises shall be subject to the conditions that: 20.1.1.1 Such Debtor's Law shall provide to Tenant's Representative a right of assumption of this Lease which Tenant's Representative shall have timely exercised and Tenant's Representative shall have fully cured any default of Tenant under this Lease. 20.1.1.2 Tenant's Representative or the proposed assignee, as the case shall be, shall have deposited with Landlord as security for the timely payment of rent an amount equal to the larger of: (a) three months' rent and other monetary charges accruing under this Lease; and (b) any sum specified in Article 5; and shall have provided Landlord with adequate other assurance of the future performance of the obligations of the Tenant under this Lease. Without limitation, such assurances shall include, at least, in the case of assumption of this Lease, demonstration to the satisfaction of the Landlord that Tenant's Representative has and will continue to have sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that Tenant's Representative will have sufficient funds to fulfill the obligations of Tenant under this Lease; and, in the case of assignment, submission of current financial statements of the proposed assignee, audited by an independent certified public accountant reasonably acceptable to Landlord and showing a net worth and working capital in amounts determined by Landlord to be sufficient to assure the future performance by such assignee of all of the Tenant's obligations under this Lease. 20.1.1.3 The assumption or any contemplated assignment of this Lease or subleasing any part of the Premises, as shall be the case, will not breach any provision in any other lease, mortgage, financing agreement or other agreement by which Landlord is bound. 20.1.1.4 Landlord shall have, or would have had absent the Debtor's Law, no right under Article 9 to refuse consent to the proposed assignment or sublease by reason of the identity or nature of the proposed assignee or sublessee or the proposed use of the Premises concerned. 21.0 QUIET ENJOYMENT. Landlord represents and warrants that it has full right and authority to enter into this Lease and that Tenant, while paying the rental and performing its other covenants and agreements contained in this Lease, shall peaceably and quietly have, hold and enjoy the Premises for the Term without hindrance or molestation 13 from Landlord subject to the terms and provisions of this Lease. Landlord shall not be liable for any interference or disturbance by other tenants or third persons, unless resulting from Landlord's negligence or wrongful misconduct. 22.0 DAMAGE BY FIRE, ETC. 22.1 In the event the Premises or the Building are damaged by fire or other cause and in Landlord's reasonable estimation such damage can be materially restored within one hundred twenty (120) days of the casualty, Landlord shall forthwith repair the same and this Lease shall remain in full force and effect, except that Tenant shall be entitled to a proportionate abatement in rent from the date of such damage. Such abatement of rent shall be made pro rata in accordance with the extent to which the damage and the making of such repairs shall interfere with the use and occupancy by Tenant of the Premises from time to time. Within sixty (60) days from the date of such damage, Landlord shall notify Tenant, in writing, of Landlords's reasonable estimation of the length of time within which material restoration can be made, and Landlord's determination shall be binding on Tenant. For purposes of this Lease, the Building or Premises shall be deemed "materially restored" if they are in such condition as would allow Tenant to use the Premises for the purpose for which it was being used immediately before such damage. 22.2 If such repairs cannot, in Landlord's architects or engineers reasonable estimation, be made within one hundred twenty (120) days from the date of the casualty, Landlord and Tenant shall each have the option of giving the other, at any time within sixty (60) days after such damage, notice terminating this Lease as of the date of such damage. In the event of the giving of such notice, this Lease shall expire and all interest of the Tenant in the Premises shall terminate as of the date of such damage as if such date had been originally fixed in this Lease for the expiration of the Term. In the event that neither Landlord nor Tenant exercises its option to terminate this Lease, then Landlord shall repair or restore such damage, this Lease continuing in full force and effect, and the rent and additional payments due hereunder shall be proportionately abated as provided in Section 22.1. 22.3 Landlord shall not be required to repair or replace any damage or loss by or from fire or other cause to any paneling, decorations, partitions, additions, railings, ceilings, floor coverings, office fixtures or any other property or improvements installed on the Premises or belonging to Tenant. Any insurance which may be carried by Landlord or Tenant against loss or damage to the Building or Premises shall be for the sole benefit of the party carrying such insurance and under its sole control. 22.4 In the event that Landlord does not commence such repairs and material restoration within forty five (45) days after the date estimated by Landlord therefor as extended by this Section 22.4, and, diligently complete within forty five (45) days of such estimation, Tenant may at its option and as its sole remedy terminate this Lease by delivering written notice to Landlord, within fifteen (15) days after the expiration of said period of time, whereupon the Lease shall end on the date of such notice or such later date fixed in such notice as if the date of such notice was the date originally fixed in this Lease for the expiration of the Term; provided, however, that if construction is delayed because of changes, deletions or additions in construction requested by Tenant, strikes, lockouts, casualties, Acts of God, war, material or labor shortages, government regulation or control or other causes beyond the reasonable control of Landlord, the period for restoration, repair or rebuilding shall be extended for the amount of time Landlord is so delayed. 22.5 Notwithstanding anything to the contrary contained in this Article: (a) Landlord shall not have any obligation whatsoever to repair, reconstruct, or restore the Premises when the damages resulting from any casualty covered by the provisions of this Article 22 occur during the last twelve (12) months of the Term or any extension thereof, but if Landlord determines not to repair such damages Landlord shall notify Tenant and if such damages shall render any material portion of the Premises untenantable Tenant shall have the right to terminate this Lease by notice to Landlord within fifteen (15) days after receipt of Landlord's notice; and (b) in the event the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises or Building requires that any insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is made by any such holder, whereupon this Lease shall end on the date of such damage as if the date of such damage were the date originally fixed in this Lease for the expiration of the Term. 22.6 In the event of any damage or destruction to the Building or Premises by any peril covered by the provisions of this Article 22, it shall be Tenant's responsibility to properly secure the Premises and upon notice from Landlord to remove forthwith, at its sole cost and expense, such portion or all of the property belonging to Tenant or its licensees from such portion or all of the Building or Premises as Landlord shall request. 23.0 EMINENT DOMAIN. If all or any substantial part of the Premises shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain, or conveyance in lieu of such appropriation, either party to this Lease shall have the right, at its option, of giving the other, at any time within thirty (30) days after such taking, notice terminating this Lease, except that Tenant may only terminate this Lease by reason of taking or appropriation, if such taking or appropriation shall be so substantial as to materially interfere with Tenant's use and occupancy of the Premises. If neither party to this Lease shall so elect to terminate this Lease, the rental thereafter to be paid shall be adjusted on a fair and equitable basis under the circumstances. In addition to the rights of Landlord 14 above, if any substantial part of the Building shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, and regardless of whether the Premises or any part thereof are so taken or appropriated, Landlord shall have the right, at its sole option, to terminate this Lease. Landlord shall be entitled to any and all income, rent, award, or any interest whatsoever in or upon any such sum, which may be paid or made in connection with any such public or quasi-public use or purpose, and Tenant hereby assigns to Landlord any interest it may have in or claim to all or any part of such sums, other than any separate award which may be made with respect to Tenant's trade fixtures and moving expenses and which does not reduce Landlord's award; Tenant shall make no claim for the value of any unexpired Term. 24.0 SALE BY LANDLORD. In event of a sale or conveyance by Landlord of the Building, the same shall operate to release Landlord from any future liability upon any of the covenants or conditions, expressed or implied, contained in this Lease, and in such event Tenant agrees to look solely to the successor in interest of Landlord in and to this Lease. Except as set forth in this Article 24, this Lease shall not be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee. If any security has been given by Tenant to secure the faithful performance of any of the covenants of this Lease. Landlord shall transfer or deliver said security, as such, to Landlord's successor in interest and thereupon Landlord shall be discharged from any further liability with regard to said security. 25.0 ESTOPPEL CERTIFICATES. Within ten (10) days following any written request which Landlord may make from time to time, in connection with the sale, financing or refinancing of the Building, Tenant shall execute and deliver to Landlord or its mortgagee or prospective mortgagee a sworn statement certifying: (a) the date of commencement of this Lease; (b) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications to this Lease, that this lease is in full force and effect, as modified, and stating the date and nature of such modifications); (c) the date to which the rent and other sums payable under this Lease have been paid; (d) the fact that there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant's statement; and (e) such other matters as may be requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Article 25 may be relied upon by any mortgagee, beneficiary or purchaser and Tenant shall be liable for all loss, cost or expense resulting from the failure of any sale or funding of any loan caused by any material misstatement contained in such estoppel certificate. 26.0 SURRENDER OF PREMISES. 26.1 Landlord shall, at least thirty (30) days before the last day of the Term, arrange to meet Tenant for a joint inspection of the Premises. 26.2 At the end of the Term or any renewal of the Term or other sooner termination of this Lease, Tenant will peaceably deliver up to Landlord possession of the Premises, together with all improvements or additions upon or belonging to the same, by whomsoever made, whether in the Premises or in, on or to the Building, in the same conditions received or first installed, broom clean and free of all debris, excepting only ordinary wear and tear and damage by fire or other casualty. Tenant may, and at Landlord's request shall, at Tenant's sole cost, remove upon termination of this Lease, any and all furniture, furnishings, movable partitions of less than full height from floor to ceiling, trade fixtures and other property installed by Tenant, including, but not limited to, raised flooring, conduits, cabling, condensers, dry coolers, generators, pull boxes, junction boxes, supplemental HVAC units, electrical equipment, fire suppression systems, etc., title to which shall not be in or pass automatically to Landlord upon such termination, repairing all damage caused by such removal. Property not so removed shall, unless requested to be removed, be deemed abandoned by the Tenant and title to the same shall thereupon pass to Landlord under this Lease as by a bill of sale. All other alterations, additions and improvements in, on or to the Premises shall be dealt with and disposed of as provided in Article 6 hereof. 26.3 All obligations of Landlord and Tenant under this Lease not fully performed as of the expiration or earlier termination of the Term shall survive the expiration or earlier termination of the Term. 27.0 NOTICES. Any notice or document required or permitted to be delivered under this Lease shall be addressed to the intended recipient, shall be transmitted personally, by fully prepaid registered or certified United States Mail return receipt requested by facsimile transmission, or by reputable independent contract delivery service furnishing a written record of attempted or actual delivery, and shall be deemed to be delivered when tendered for delivery to the addressee at its address set forth on the Reference Page, or at such other address as it has then last specified by written notice delivered in accordance with this Article 27, or if to Tenant at either its aforesaid address or its last known registered office or home of a general partner or individual owner, whether or not actually accepted or received by the addressee. 28.0 TAXES PAYABLE BY TENANT. In addition to rent and other charges to be paid by Tenant under this Lease, Tenant shall reimburse to Landlord, upon demand, any and all taxes payable by landlord (other than net income taxes) whether or not now customary or within the contemplation of the parties to this Lease: (a) upon, allocable to, or measured by or on the gross or net rent payable under this Lease, including without limitation any rental tax or excise tax levied by the State, any political subdivision thereof, or the Federal Government with respect to the receipt of such 15 rent; (b) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of the Premises or any portion thereof, including any sales, use or service tax imposed as a result thereof; (c) upon or measured by the Tenant's gross receipts or payroll or the value of Tenant's equipment, furniture, fixtures and other personal property of Tenant or leasehold improvements, alterations or additions located in the Premises; or (d) upon this transaction or any document to which Tenant is a party creating or transferring any interest of Tenant in this Lease or the Premises. In addition to the foregoing, Tenant agrees to pay, before delinquency, any and all taxes levied or assessed against Tenant and which become payable during the term hereof upon Tenant's equipment, furniture, fixtures and other personal property of Tenant located in the Premises. 29.0 DEFINED TERMS AND HEADINGS. The Article headings shown in this Lease are for convenience of reference and shall in no way define, increase, limit or describe the scope or intent of any provision of this Lease. Any indemnification or insurance of Landlord shall apply to and inure to the benefit of all the following "Landlord Entities", being Landlord, and the trustees, boards of directors, officers, general partners, beneficiaries, stockholders, employees and agents of each of them. In any case where this Lease is signed by more than one person, the obligations under this Lease shall be joint and several. The terms "Tenant" and "Landlord" or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations, and their and each of their respective successors, executors, administrators and permitted assigns, according to the context hereof. The term "rentable area" shall mean the rentable area of the Premises or the Building as calculated by the Landlord on the basis of the plans and specifications of the Building including a proportionate share of any common areas. Tenant hereby accepts and agrees to be bound by the figures for the rentable space footage of the Premises and Tenant's Proportionate Share shown on the Reference Page. 30.0 TENANT'S AUTHORITY. If Tenant signs as a corporation each of the persons executing this Lease on behalf of Tenant represents and warrants that Tenant has been and is qualified to do business in the state in which the Building is located, that the corporation has full right and authority to enter into this Lease, and that all persons signing on behalf of the corporation were authorized to do so by appropriate corporate actions. If Tenant signs as a partnership, trust or other legal entity, each of the persons executing this Lease on behalf of Tenant represents and warrants that Tenant has complied with all applicable laws, rules and governmental regulations relative to its right to do business in the state and that such entity on behalf of the Tenant was authorized to do so by any and all appropriate partnership, trust or other actions. Tenant agrees to furnish promptly upon request a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of Tenant to enter into this Lease. 31.0 COMMISSIONS. Each of the parties represents and warrants to the other that it has not dealt with any broker or finder in connection with this Lease, except as described on the Reference Page. Tenant represents and warrants that it has not dealt with a real estate broker, agent or finder in connection with this Lease with the exception of the broker named in the Reference Pages to this Lease whose commission Landlord agrees to pay. Landlord shall not pay a commission or fee due any other brokers, agents or finders as a result of this Lease. Tenant and Landlord agree to indemnify, defend and hold harmless the other party hereto against and from all liabilities claims and damages arising from any claim by any broker (other than said named broker), finder or agent claiming to have dealt with Tenant in connection with this Lease. 32.0 TIME AND APPLICABLE LAW. Time is of the essence of this Lease and all of its provisions. This Lease shall in all respects be governed by the laws of the state in which the Building is located. 33.0 SUCCESSORS AND ASSIGNS. Subject to the provisions of Article 9, the terms, covenants and conditions contained in this Lease shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators and assigns of the parties to this Lease. 34.0 ENTIRE AGREEMENT. This Lease, together with its exhibits, contains all agreements of the parties to this Lease and supersedes any previous negotiations. There have been no representations made by the Landlord or understandings made between the parties other than those set forth in this Lease and its exhibits. This Lease may not be modified except by a written instrument duly executed by the parties to this Lease. 35.0 EXAMINATION NOT OPTION. Submission of this Lease shall not be deemed to be a reservation of the Premises. Neither Tenant nor Landlord shall be bound by this Lease until each has received a copy of this Lease duly executed by Tenant and has delivered to Tenant a copy of this Lease duly executed by Landlord, and until such delivery Landlord reserves the right to exhibit and lease the Premises to other prospective tenants. Notwithstanding anything to the contrary, Landlord may withhold delivery of possession of the Premises from Tenant until such time as Tenant has paid to landlord any security deposit required by Article 5, the first month's rent as set forth in Article 3 and any sum owed pursuant to this Lease. 36.0 RECORDATION. Tenant may not record or register this lease or a short form memorandum of this Lease without the prior written consent of Landlord. 16 37.0 LIMITATION OF LANDLORD'S LIABILITY. Redress for any claim against Landlord under this Lease shall be limited to and enforceable only against and to the extent of Landlord's interest in the Building. The obligations of Landlord under this Lease are not intended to and shall not be personally binding on, nor shall any resort be had to the private properties of, any of its members, or its or their trustees or board of directors and officers, as the case may be, its manager, the general partners thereof, or any beneficiaries, stockholders employees, or agents of Landlord, the manager or the members. 38.0 MISCELLANEOUS. 38.1 Subject to compliance with all applicable governmental codes, regulations and ordinances, including approval of Tenant's plans, Landlord hereby grants Tenant the right to install up to a 500KW diesel fuel emergency generator in a location deemed feasible by Landlord and Tenant, including an associated 500 gallon diesel fuel-tank as necessary to support the generator on the ground floor or roof of the Building. Subject to Landlord's approval of Tenant's detailed plans as to method of installation and location, Landlord shall permit Tenant, at its sole cost and expense, to install, use, operate and maintain electrical and telecommunications conduits, condenser and fuel piping, in the riser or other locations in, on or to the Building (as noted in Exhibit E attached hereto (the "Designated Areas"), as necessary to connect to Tenants': (a) emergency generator and fuel to each other and to the Premises; (b) generator transfer switch for portable "roll-up" generator; (c) telecommunication service providers, CLEC's, IXC's, and ILEC, etc.; (d) Telco and Hogan grounds and; (e) GPS antenna on the roof. Tenant shall have the ability to test its generator on a reasonable basis as recommended by the manufacturer. In addition, Landlord may install a diesel fuel tank and/or emergency generator and/or fuel pump (the "Emergency Facilities") to service multiple Tenants of the Building. Should Tenant request to utilize Landlord's Emergency Facilities, Tenant shall pay its proportionate share of the installation, maintenance, repair and operation of the Emergency Facilities, in which case Landlord and Tenant shall enter into a separate agreement which governs its use, rules and regulations. Landlord will permit Tenant to install, use, operate and maintain condensing units or dry coolers (sized to meet Tenant's air conditioning requirements for operation of its system in a designated area of the roof). In addition, Tenant shall have the right to tie into the Building's existing ground field or, if the existing grid does not meet Tenant's requirements, to install its own ground system. Nothing permitted in this paragraph shall permit Tenant to interfere with other occupants' use of similar facilities in their designated locations. Tenant's preapproved vertical riser locations are designated on Exhibit E. 38.2 Subject to compliance with all applicable governmental codes, regulations and ordinances, including approval of Tenant's plans, Tenant shall have the right to construct a dry pipe, pre-action system for the Premises, including the right to relocate or encase any water mains or other water pipes (whether or not related to fire safety) running through the Premises, at Tenant's sole cost and expense and subject to Landlord's approval, not to be unreasonably withheld. Landlord agrees that Tenant, at its sole expense, shall install a fire protection system which is approved by Landlord, such approval not to be unreasonably withheld. Tenant shall also have the right to install a FM 200 fire suppression system in the Premises. Tenant shall not penetrate the floor or ceiling on any floor of the Building with any water or liquid piping, supply or drains, or install any pull boxes or junction boxes, without the Landlord's expressed written approval of Tenant's detailed plans. 38.3 Tenant shall be permitted to erect and operate, at its sole cost and expense, and if Tenant does so erect, Tenant shall be required to maintain, operate, repair and replace, at its sole cost and expense, one (1) GPS antenna on the roof of the Building and to run necessary conduit and cabling from the antenna to the Premises, provided that Tenant installs said antennae at locations and in a manner reasonably approved by Landlord, and provided further Tenant installs any screening device requested by Landlord to insure the antenna cannot be viewed by the public. Tenant shall have access to roof at all times, subject to Section 38.4, to install, maintain, operate and repair the antenna and to the risers, floor space and ceiling space to run the necessary cabling and conduit. Any antenna shall be installed in a good and workmanlike manner and in compliance with all applicable laws and plans approved by Landlord. Tenant shall indemnify and hold Landlord harmless from and against any loss, cost, damage, claim or liability, including loss or diminution of any roof warranties, that Landlord may suffer as a result of Tenant's actions pursuant to this section. Landlord's approval shall not be deemed to give Tenant the exclusive right to use the roof and shall not preclude Landlord from granting similar rights to others. The rights of other tenants or licensees shall be exercised without causing unreasonable interference with the antennae and associated activities being carried on by Tenant. Similarly, the rights of Tenant shall be exercised without causing interference with antennae and associated activities being carried on by other tenants or licensees. Tenant shall not change, substitute or materially alter the antennae or related equipment agreed to herein without the prior written consent of Landlord. 38.4 Landlord hereby grants Tenant access to the Premises, the roof, the tunnel and the risers housing Tenant's wiring, conduit and cabling twenty four (24) hours per day, three hundred sixty-five (365) days per year. However, if access is needed to areas not otherwise available to Tenant during normal business hours, Tenant must notify Landlord and Landlord will provide escorted access, at Tenant's expense (if Landlord incurs any actual expenses). In addition, Landlord shall give Tenant reasonable access to prearranged and demised vertical risers exclusively allocated to such purposes to enable Tenant to provide Tenant's telecommunications services and to interconnect to tenants and other occupants of the Building in Designated Areas as shown on Exhibit E. Tenant may install in the aforementioned risers, conduit and other such cabling as set forth in Section 38.6(b) for its services within the Building. Tenant shall have the 17 right to permit its customers to collocate telecommunications equipment in the Premises that are serviced and maintained by Tenant. 38.5 Tenant may use Landlord's approved contractors in connection with Tenant's Improvements and may competitively bid to tenant finish contractors acceptable to Landlord and to select and/or approve the successful contractor. In the event of a renovation, Tenant shall have the right to use any of the approved contractors and competitively bid the renovations in the same manner. Landlord shall not charge any supervision or management fee, however, Tenant shall be responsible for and reimburse Landlord for any actual and reasonable out of pocket expenses relating to the approval, or review of Tenant's plans. 38.6 Landlord shall make the following available for Tenant's installation or use which, if Tenant accepts, shall be installed, performed or used at Tenant's sole cost and expense: (a) 480/277 volt three-phase, 4 wire electrical service at the bus duct to the floor of the Building in which the Premises is located, at Landlord's costs (however Tenant shall pay all costs associated with its connection to the electrical service, the disconnect switch, meter, and associated utility costs. Pursuant to Paragraph 9 of Exhibit B, the cost to provide 1250 amp service shall be borne by Landlord. Tenant shall, prior to Landlord providing any electricity for Tenant's use at the Premises (as described in subparagraph 13.1(f) above), and installing the disconnect switch, supply Landlord with its certified electrical load calculations and Landlord shall arrange for the installation of a multimeter (in the case of a multi-tenant floor) for the recording of electrical usage, and Tenant agrees to reimburse Landlord for Tenant's proportionate share of the cost of said multimeter and disconnect switch if purchased and installed by Landlord or Landlord's contractor. Notwithstanding the above, should Tenant, during the term of the Lease, require additional electrical service over and above its initial electrical load calculations, Landlord shall cooperate and coordinate with Tenant to provide the increased requirements, all in the same manner as described above for Tenant's initial requirements. (b) Riser capacity, shown on Exhibit E, to enable Tenant to interconnect with other occupants of the building without any additional cost or fees from Tenant to Landlord. This does not imply that Landlord is providing any conduit, cabling or other facilities for Tenant's interconnection purposes. All of Tenant's conduits and cabling shall be clearly labeled and tagged with Tenant's name and an emergency contact phone number at each floor and at a maximum of twenty feet apart. Tenant shall not allow any cabling or loose wiring to exist in the Building, outside the Premises, except as otherwise permitted in this Lease to be field verified and approved by Landlord, such approval not to be unreasonably withheld. Landlord may also install dedicated pull boxes (one or more for each tenant) for Tenant's conduits at the floor of the Premises and at the basement level for the purposes of coordinating and segregating the telecommunications conduits within the Building. Tenant shall pay Landlord's actual costs for the pull boxes. (c) Ability to ventilate supplemental HVAC through louvers to the exterior of the south side of the Building and Landlord shall provide Tenant with Tenant's Proportionate Share of available space in the common areas of the roof of the Building for Tenant's condenser/dry coolers and generator on the roof of the Building. (d) Location for A/C grounding for Tenant's main distribution cabinets and transformers. The ground will be chosen and installed by Tenant in a grounding area selected by Landlord and feasible for Tenant's use in accordance with Bellcore standards. (e) Existing slab to underside of concrete deck above has been measured at a minimum 13'-0" clearance. (f) 5000# capacity freight elevator approximately 10'0"w x 6'0" interior. (g) Loading dock. (h) Permission for Tenant to have diverse dual entrances into the Premises for fiber optic cable service. Landlord will permit the use and/or installation of all conduits reasonably necessary to connect the fiber optic cable service to the Premises, provided within the permissible area shown on Exhibit E. Landlord shall not limit Tenant in its choice of which telecommunication carrier to utilize. (i) Permission for Tenant to install and maintain on the roof of the Building (in a location and manner reasonably approved by Landlord) protection against damage by lightning to Tenant's telecommunications equipment. 38.7 Landlord's and Tenant's work shall each be performed in compliance with the ADA. 18 38.8 Landlord shall provide within the passenger and freight elevators accommodations to separately lock-out Tenant's floor subject to Landlord's security and aesthetic requirements. Landlord shall provide a guard twenty-four (24) hours a day, and a security system for the Building operated seven (7) days per week 24 hours a day. Tenant shall have the right to install its own security system in the Premises. Building shall be fully sprinkled, to the extent required by applicable law. 38.9 Prior to the commencement of Tenant's initial alterations to the Premises and the Building (collectively, the "Initial Alterations"), Tenant shall deliver the plans and specifications to Landlord for its written approval, which approval shall not be unreasonably withheld or delayed. Tenant's plans and specifications for Tenant's Initial Alterations must comply with all applicable laws, introduce no hazardous materials into the Building (other than batteries and diesel fuel to be stored in the tank and generator permitted hereunder), impose on Landlord no additional ADA compliance requirements within the Building or the Premises, and be reasonable and compatible with the systems and structure of the Building. Tenant shall deliver to Landlord a report from a structural engineer that all of Tenant's Initial Alterations comply with building structural capacities, applicable laws and codes. Landlord shall respond to Tenant's request for approval of Tenant's plans and specifications within ten (10) business days after receipt thereof. In the event Landlord shall not approve the plans and specifications, Landlord shall notify Tenant of its objections thereto. Landlord and Tenant shall thereafter work cooperatively and in good faith to reach agreement upon mutually acceptable plans and specifications. Tenant shall pay all Landlord's reasonable third party engineering and out of pocket expenses relating to the review of Tenant's plan and specifications related to the Initial Alterations. Tenant at its sole cost and expense shall obtain any permits, license, variances, or other approvals required with respect to the installation or operation of the improvement, equipment, cabling or wiring to be installed by Tenant or to be alterations to be performed by Tenant. Tenant shall deliver true and complete copies thereof to Landlord prior to permit application and commencing any improvement or alteration. Tenant, its contractors and/or agents shall not tie into, disrupt, disengage, terminate, or violate any building systems, fire protection, fire alarm, security, HVAC, electrical, etc., unless coordinated, scheduled in advanced and approved with the Buildings' engineer, manager and contractor to assure integrity with the system and continued applicability of the Buildings' warranties and guaranties. Any violation of the above is subject to default under this Lease. 38.10 Provided no Event of Default hereunder has occurred and is continuing, Tenant shall have continuing rights of first offer to lease the balance of the 3rd floor, in the Building which is contiguous to the Premises and which may become available on and after the date of this Lease. At such time that Landlord has knowledge that such space ("Offered Space") is or will become available, Landlord will give Tenant notice (the "Offering Notice") of the terms and conditions Landlord would be willing to accept with respect to the Offered Space (including, without limitation, the proposed rent, additional rent, scope of Landlord's proposed tenant improvements, location and floor area), and Tenant shall have five (5) business days within which to respond to Landlord's offer. In the event Tenant elects to accept Landlords' offer, then Tenant shall notify Landlord of such election by giving notice to Landlord during such five (5) days period and Landlord and Tenant shall thereupon enter into an amendment to this Lease for the leasing of the Offered Space, which amendment shall contain (i) the terms and conditions set forth in the Offering Notice, (ii) provide that the term thereunder shall expire or sooner terminate contemporaneously with the expiration or sooner termination of the Term hereof, and (iii) contain such other terms and provisions as either Landlord or Tenant may reasonably require in order to effectuate the incorporation of the Offered Space into the Premises and to otherwise effectuate the intent of this Section 38.10. Should Tenant decline Landlord's offer or fail to respond thereto, then, and in such event, Tenant shall have been deemed to have waived any prospective rights of first offer to the Offered Space and Landlord may lease the Offered Space to any other party on the same terms and conditions set forth in the Offering Notice. 38.11 Thirty (30) days after fulfillment of the requirements set forth below, Landlord agrees to pay to Tenant $240,000.00 ($20.00/sf) as and for Landlord's contribution to Tenant's Work ("Construction Allowance"). A) Completion of Tenant's work in accordance with approved plans and specifications in a manner reasonably satisfactory to Landlord's Architect. B) Presentation to Landlord of the following: i) General Contractor's executed and notarized final waiver of Lien/affidavit form listing all subcontractors and material suppliers and the amounts they were paid for work and materials supplied for the Premises which equal or exceed the Construction Allowance; ii) Executed and notarized final Waiver of Lien/Affidavit form from HVAC, plumbing, electrical, drywall/carpentry subcontractors and material suppliers; iii) Waivers/Affidavits must be satisfactory to Landlord. C) Presentation to Landlord of a Certificate of Occupancy. D) Tenant shall have paid to Landlord the first monthly installment of Annual Rent. E) Tenant shall have not been in default under the terms and conditions of this Lease. 19 38.12 Tenant shall have the right to display its signage at the entrance to its Premises. In addition, Landlord shall provide and pay for all standard building directory ground floor lobby signage for Tenant. 38.13 Landlord and Tenant acknowledge that Landlord has not yet acquired title to the Building and therefore this lease and all obligations and Tenant herein are conditioned upon Landlord's acquisition of such title no later than November 1, 1998. 38.14 Tenant acknowledges there is no on-site parking, and Landlord shall arrange for four (4) parking spaces off-site for Tenant at Tenant's sole cost and expense, within a one (1) block radius of the Premises. 38.15 As required by Section 404.56(6), Florida Statutes, the following notification is made regarding radon gas: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit. LANDLORD: TENANT: 36 North East Second Street, L.L.C. Startec Global Communications Corporation
By: ----------------------------- By: /s/ By: /s/ ------------------------------ ------------------------------- Title: Manager Title: Prabhav V. Muniyar --------------------------- Secretary, Sr. VP & CFO Dated: 10/29/98 , 19 Dated: 10/28/98 ,19 ----------------- ----- --------------- --------- Witnesses: Witnesses: /s/ /s/ - --------------------------------- ----------------------------------- - --------------------------------- -----------------------------------
EX-10.46 10 EXHIBIT 10.46 EXHIBIT 10.46 LEASE 36 NORTH EAST SECOND STREET, L.L.C. LANDLORD STARTEC GLOBAL COMMUNICATIONS CORPORATION TENANT TABLE OF CONTENTS
ARTICLE PAGE 1. USE, RESTRICTIONS ON USE AND COMPLIANCE WITH LAWS .......... 1 2. TERM ....................................................... 2 3. RENT ....................................................... 3 4. RENT ADJUSTMENTS ........................................... 3 5. SECURITY DEPOSIT ........................................... 5 6. ALTERATIONS ................................................ 5 7. REPAIR ..................................................... 6 8. LIENS ...................................................... 7 9. ASSIGNMENT AND SUBLETTING .................................. 7 10. INDEMNIFICATION ........................................... 8 11. INSURANCE ................................................. 9 12. WAIVER OF SUBROGATION ..................................... 9 13. SERVICES AND UTILITIES .................................... 9 14. HOLDING OVER .............................................. 10 15. SUBORDINATION ............................................. 10 16. RULES AND REGULATIONS ..................................... 10 17. REENTRY BY LANDLORD ....................................... 10 18. DEFAULT ................................................... 11 19. REMEDIES .................................................. 11 20. TENANT'S BANKRUPTCY FOR INSOLVENCY ........................ 13 21. QUIET ENJOYMENT ........................................... 13 22. DAMAGE BY FIRE, ETC. ...................................... 14 23. EMINENT DOMAIN ............................................ 14 24. SALE BY LANDLORD .......................................... 15 25. ESTOPPEL CERTIFICATES ..................................... 15 26. SURRENDER OF PREMISES ..................................... 15 27. NOTICES ................................................... 15 28. TAXES PAYABLE BY TENANT ................................... 15 29. DEFINED TERMS AND HEADINGS ................................ 16 30. TENANT'S AUTHORITY ........................................ 16
ARTICLE PAGE 31. COMMISSIONS ............................................... 16 32. TIME AND APPLICABLE LAW ................................... 16 33. SUCCESSORS AND ASSIGNS .................................... 16 34. ENTIRE AGREEMENT .......................................... 16 35. EXAMINATION NOT OPTION .................................... 16 36. RECORDATION ............................................... 16 37. LIMITATION OF LANDLORD'S LIABILITY ........................ 17 38. MISCELLANEOUS ............................................. 17
EXHIBIT A -- PREMISES EXHIBIT B -- INITIAL ALTERATIONS EXHIBIT C -- RULES AND REGULATIONS EXHIBIT D -- LIST OF APPROVED CONTRACTORS EXHIBIT E -- LOCATION OF DESIGNATED AREAS LEASE By this Lease Landlord leases to Tenant and Tenant leases from Landlord the Premises in the Building as set forth and described on the Reference Page. The Reference Page, including all terms defined thereon, is incorporated as part of this Lease. 1. USE, RESTRICTIONS ON USE AND COMPLIANCE WITH LAWS. 1.1 The Premises are to be used solely for the operation, installation, maintenance, repair and replacement of telecommunications equipment and its related facilities and for general office use. Tenant shall not do or permit anything to be done in or about the Premises or the Building which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure, annoy, or disturb them or allow the Premises to be used for any improper or unlawful or objectionable purpose. Tenant shall not do, permit or suffer in, on, or about the Premises the sale of any alcoholic liquor without the written consent of Landlord first obtained, or the commission of any waste. Tenants shall comply with all government laws, ordinances and regulations applicable to the use of the Premises and its occupancy and shall promptly comply with all governmental orders and directions for the correction, prevention and abatement of any violations in or upon, or in connection with, the Premises, related to Tenant's use of the Premises, all at Tenant's sole expense. Tenant shall not do or permit anything to be done on or about the Premises or the Building or bring or keep anything into the Premises which will in any way increase the rate of, invalidate or prevent the procuring of any insurance protecting against loss or damage to the Building or any of its contents by fire or other casualty or against liability for damage to property or injury to persons in or about the Building or any part thereof, provided, however, that Landlord represents and warrants that Tenant's intended use as a telecommunications center as provided for in this Lease shall not cause any increase in the rate or, invalidate or prevent the procuring of any such protections. Landlord acknowledges and agrees that Tenant may enter into agreements with its customers and/or end users ("Collocation Agreements") providing for physical location of telecommunication equipment and facilities within the Premises, maintained and serviced by Tenant and placed in the Premises and Tenant's sole cost, expenses and risk, provided that such Collocation Agreements shall be subordinate to the Lease and to any mortgages, deeds of trust, or land sale contracts now or in the future, against the Building. Tenant may enter into Collocation Agreements with third parties, for the use of the Premises at the sole discretion of Tenant, and any provision of the subletting and assignment provisions of this Lease to the contrary notwithstanding, such Collocation Agreements shall not be construed as an assignment or sublet. 1.2 Tenant shall not, and shall not direct, suffer or permit any of its agents, contractors, employees, licensees or invitees to at any time handle, use, manufacture, store or dispose of in or about the Premises or the Building any (collectively "Hazardous Materials") flammables, explosives, radioactive materials, hazardous wastes or materials, toxic wastes or materials, or other similar substances, petroleum products or derivatives or any substance subject to regulation by or under any Environmental Laws, except if handled, used, stored and disposed of in accordance with applicable Environmental Laws. Tenants shall protect, defend, indemnify and hold each and all of the Landlord Entities (as defined in Article 29) harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of any actual or asserted failure of Tenant to fully comply with all applicable Environmental Laws, or the presence, handling, use or disposition in or from the Premises of any Hazardous Materials (even though permissible under all applicable Environmental Laws or the provisions of this Lease), or by reason of any actual or asserted failure of Tenant to keep, observe, or perform any provision of this Section 1.2. Tenant's use of batteries, generator and fuel tank are acceptable, provided such items comply with all applicable Environmental Laws and provided further Tenant removes all such items on or prior to the termination or expiration of this Lease. Tenant agrees to indemnify Landlord from and against any loss, cost, damage, lawsuit, claim or liability arising from the presence of these items in the Premises, except if caused by Landlord's negligence or willful misconduct. Landlord represents that prior to November 4, 1998, any known friable asbestos shall be removed from the Premises, ground floor and all risers of the Building and all known non-friable asbestos in such locations shall be removed or encapsulated, all at Landlord's cost by a party licensed to remove asbestos. No other Hazardous Materials are known by Landlord to exist in the Building. Landlord shall, prior to the Commencement Date, deliver to Tenant a Certificate of Environmental Compliance, if available, or other similar document. Landlord shall comply with and shall cause the Building to be in compliance with all applicable Laws (as hereinafter defined) as of the date of this Lease. Subject to the preceding sentence, Tenant shall comply with all applicable Laws with respect to its use and occupancy of the Premises and in its construction of Tenant's Improvements; provided, however, Tenant shall only be responsible for making improvements to the Premises (capital or otherwise) required by applicable Laws if the necessity arises from Tenant's use of the Premises. As used herein, "Laws" shall mean all federal, state, county and local governmental laws, statutes, codes, ordinances, rules, regulations, decrees, orders and other such requirements now or hereafter imposed, including but not limited to, the ADA and any and all Environmental Law. As used herein, "ADA" means the Americans With Disabilities Act of 1990 (42 U.S.C. '1201 et seq.) and the regulations and guidelines promulgated or published thereunder, as any of the foregoing may from time to time be amended. As used herein, "Environmental Law" means all legal requirements relating to (a) the protection 1 of the environment, the safety and health of persons (including employees) or the public welfare from actual or potential exposure (or effects of exposure) to any actual or potential release, discharge, disposal or omission (whether past or present) of any Hazardous Materials (as hereinafter defined) or (b) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of any Hazardous Materials, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. '9601 et seq., the Solid Waste Disposal Act, as amended by the Resource Conversation and Recovery Act of 1976, as amended by the Solid and Hazardous Waste Amendments of 1984, 42 U.S.C. '6901 et seq., the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, 33 U.S.C. '1251 et seq., the Toxic Substances Control Act of 1976, 15 U.S.C. '2601 et seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. '1101 et seq., the Clean Air Act of 1966, as amended, 42 U.S.C. '7401 et seq., the National Environmental Policy Act of 1975, 42 U.S.C. '4321, the Rivers and Harbors Act of 1899, 33 U.S.C. '401 et seq., the Endangered Species Act of 1973, as amended, 16 U.S.C. '1531 et seq., the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. '651 et seq., and the Safe Drinking Water Act of 1974, as amended, 42 U.S.C. '300(f) et seq., and all rules, regulations and guidance promulgated or published thereunder, as any of the foregoing may from time to time be amended. 2. TERM. 2.1 The Term of this Lease shall begin on the date ("Commencement Date") which shall be February 1, 1999, provided the Commencement Date shall be extended one (1) day for each day after November 4, 1998 that Landlord's Work is not substantially completed unless delayed because of Tenant's act or omission. Landlord shall tender possession of the Premises on the Commencement Date with all the work, if any, to be performed by Landlord pursuant to Exhibit B to this Lease ("Landlord's Work") substantially completed. Unless Tenant advises Landlord in writing to the contrary within ten (10) days of the Commencement Date, it shall be assumed that Landlord's Work is substantially complete upon delivery of the Premises to Tenant. Tenant may commence any work to be performed by Tenant while Landlord is performing Landlord's work, provided Tenant does not cause any delay in Landlord's work and Tenant indemnifies Landlord from and against any loss, cost, claim, lawsuit, damage or liability incurred by Landlord as a result of Tenant's entry onto the Premises prior to the Commencement Date, or the entry of Tenant's agents, employees or contractors. On or before the date that Landlord substantially completes Landlord's Work and deliver possession of the Premises to Tenant, Landlord shall provide Tenant with temporary power to enable Tenant to complete its tenant finish in the Premises. Prior to performing any actual construction work in the Premises, Tenant must procure any necessary building permits. Landlord and Tenant shall execute a memorandum setting forth the actual Commencement Date and Termination Date. Subject to delays caused by Tenant, or its agents or employees, in the event that Landlord is unable to deliver the Premises with Landlord's Work substantially completed before November 4, 1998, the Commencement Date specified above shall be extended as provided in the first sentence of this Section 2.1. After twenty-one (21) days of delay, Tenant shall have the right to terminate the lease upon written notice to Landlord within ten (10) days of the accrual of such right and Landlord shall reimburse Tenant for any third-party architectural/engineering fees and legal expenses, up to a maximum of $50,000.00, incurred by Tenant after September 15, 1998 through the termination date. 2.2 Landlord shall permit Tenant to occupy the Premises prior to the Commencement Date to complete Tenant Improvements. Such occupancy shall be subject to all the provisions of this Lease. Said early possession shall not advance the Commencement Date or Termination Date. 2.3 Landlord grants Tenant the right and option to extend the Term for the option periods indicated in the Renewal Option Section of the Reference Pages (each a "Renewal Term"). Tenant shall notify Landlord in writing of its election to extend this Lease for each Renewal Term not less than nine (9) months nor more than twelve (12) months prior to the expiration date of the then existing Term. Tenant's failure to timely exercise any option hereunder shall cause the automatic extinguishment thereof, time being of the essence. Each Renewal Term shall be upon all of the terms, covenants, and conditions of this Lease except that the Annual Rent payable during the Renewal Term shall be ninety five percent (95%) of the then current fair market rental ("Market Rate") for comparable space in the Building and in other telecommunication buildings in the downtown Miami, Florida area at the time of the exercise of the renewal option. Landlord shall advise Tenant of the fair market rental within fifteen (15) days after receipt of written request therefor. Thereafter, Landlord and Tenant shall agree as to fair market value. Said request shall be made no earlier than thirty (30) days prior to the first date on which Tenant may exercise its option under this paragraph. Notwithstanding the above, Tenant shall have no right to extend or renew this Lease if (i) it is in default beyond the curative period at the time of giving its notice of renewal; (ii) Tenant is in default and beyond any applicable cure period as of the first day of the extended Term which was the subject of such notice; or (iii) neither Tenant nor any of Tenant's Permitted Assignees is not occupying the Premises. 2.4 Within thirty (30) days after Landlord's receipt of Tenant's renewal notice, Landlord shall provide to Tenant its determination of the Market Rate ("Landlord's Determination"). Within fifteen (15) days of Tenant's receipt of Landlord's Determination, Tenant shall either accept Landlord's Determination or propose a different Market Rate to Landlord. If Landlord and Tenant are unable to agree upon a Market Rate within thirty (30) days after Tenant's receipt of Landlord's Determination, then Landlord and Tenant shall, within fifteen (15) days of Tenant's receipt of Landlord's Determination, each simultaneously submit to the other in writing its good faith estimate of the Market Rate. 2 If the higher of said estimates is not more than one hundred and five percent (105%) of the lower of such estimates, the Market Rate in question shall be deemed to be the average of the submitted rates. If otherwise, within fifteen (15) days thereafter, Tenant may either terminate this Lease effective as of the Expiration Date or establish the rate by an arbitration to be held in Miami, Florida in accordance with the Real Estate Valuation Arbitration Rules of the American Arbitration Association, except that the arbitration shall be conducted by a single arbitrator, selected jointly by Landlord and Tenant, and shall be on the basis that the arbitrator shall pick one of the two rates submitted, being the rate which is closer to the Market Rate as determined by the arbitrator. The parties agree to be bound by the decision of the Arbitrator, which shall be final in this and non-appealable, and shall share equally the costs of arbitration, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. During each of the Renewal Terms (if applicable), Tenant shall pay Direct Expenses and Taxes in accordance with the provision of Paragraph 4. 3. RENT. 3.1 Commencing on the Rent Commencement Date, Tenant agrees to pay to Landlord the Annual Rent in effect from time to time by paying the Monthly Installment of Rent then in effect on or before the first day of each full calendar month during the Term. The Monthly Installment of Rent in effect at any time shall be one-twelfth of the Annual Rent in effect at such time. Rent for any period during the Term which is less than a full month shall be a prorated portion of the Monthly Installment of Rent based upon a thirty (30) day month. Said rent shall be paid to Landlord, without deduction or offset and without notice or demand, at the Landlord's address, as set forth on the Reference Page, or to such other person or at such other place as Landlord may from time to time designate in writing. Notwithstanding the above and subject to Section 2.1 above, Tenant's rent commencement date shall begin sixty (60) days after the Commencement Date ("Rent Commencement Date"). Landlord and Tenant shall execute an amendment to the Lease setting forth the final Rent Commencement Date. Commencing on the first anniversary of the Rent Commencement Date and on each anniversary thereafter, including during any Renewal Term, the Annual Rent shall increase Fifty Cents ($0.50) per rentable square foot. 3.2 Tenant recognizes that the late payment of any rent or other sum due under this Lease will result in administrative expense to Landlord, the extent of which additional expense is extremely difficult and economically impractical to ascertain. Tenant therefore agrees that if rent or any other sum is not paid by the tenth (10th) day of each month, a late charge shall be imposed in an amount equal to a sum equal to five percent (5%) of the unpaid rent or other payment. The amount of the late charge to be paid by Tenant shall be reassessed and added to Tenant's obligation for each successive monthly period until paid. The provisions of this Section 3.2 in no way relieve Tenant of the obligation to pay rent or other payments on or before the date on which they are due, nor do the terms of this Section 3.2 in any way affect Landlord's remedies pursuant to Article 19 of this Lease in the event said rent or other payment is unpaid after date due. 4. RENT ADJUSTMENTS. 4.1 For the purpose of this Article 4, the following terms are defined as follows: 4.1.1 LEASE YEAR: Each calendar year falling partly or wholly within the Term. 4.1.2 DIRECT EXPENSES : All direct costs of operation, maintenance, repair and management of the Building (including the amount of any credits which Landlord may grant to particular tenants of the Building in lieu of providing any standard services or paying any standard costs described in this Section 4.1.2 for similar tenants), as determined in accordance with generally accepted accounting principles, including the following costs by way of illustration, but not limitation: water and sewer charges; insurance charges of or relating to all insurance policies and endorsements deemed by Landlord to be reasonably necessary or desirable and relating in any manner to the protection, preservation, or operation of the Building or any part thereof; utility costs, including, but not limited to, the cost of heat, light, electricity, power, steam, gas, and waste disposal; the cost of janitorial services; the cost of security and alarm services; window cleaning costs; labor costs; costs and expenses of managing the Building including management fees (not to exceed normal and customary management fees for similar buildings); air conditioning maintenance costs; elevator maintenance fees and supplies; material costs; the cost of maintenance, repair and service agreements; purchase costs of equipment other than capital items; tool costs; licenses, permits and inspection fees; wages and salaries of on-site Building personnel; employee benefits and payroll taxes; accounting and legal fees (except legal fees in connection with specific tenant leases); any sales, use or service taxes incurred in connection therewith. Notwithstanding the above, Direct Expenses shall not include: (a) commission payable to any real estate broker(s) for the leasing of space in the Building; (b) the cost of any work done by Landlord for and at the expense of any particular tenant(s) in the Building which do not benefit Tenant; 3 (c) interest or penalties for overdue payments of Taxes; (d) the cost to Landlord of repairs made, or other work done, by Landlord as a result of fire, windstorm or other insurable casualty to the extent for which Landlord has received insurance proceeds, or by the exercise of eminent domain, provided, however, that this exclusion for eminent domain is limited to the amount of the condemnation award received by Landlord in compensation for such repairs or other work; (e) attorney's fees and court costs and other such expenses incurred by Landlord in connection with the negotiation of disputes with existing or prospective tenants of the Building; (f) the costs to Landlord of renovating, decorating, painting or redecorating interior space for the actual premises of tenants of the Building; (g) amounts for which reimbursement has been made to Landlord by tenants of the Building for "extra hours" services rendered to them by Landlord for which Tenant does not benefit; (h) interest on debt or amortization payments on any mortgages and/or rental under any ground or underlying leases covering Landlord's Property; (i) compensation paid by Landlord to persons engaged in commercial concessions operated by Landlord (and not by a third party) on Landlord's Property (e.g., a newspaper stand or shoeshine service or valet parking); (j) expenses paid by Landlord for the advertising and promotion of rental space in the Building; (k) fines, penalties or other costs incurred by Landlord due to its violation of any governmental laws; (l) costs incurred by Landlord for the purchase of sculptures, paintings or other objects of art for Landlord's Property, if any; (m) depreciation expense on the Building; (n) the overtime hours charges for electricity used and paid for by other tenants; (o) salaries, wages and benefits of Landlord's employees above the level of "Building Manager". 4.1.3 TAXES: Real estate taxes and any other taxes, charges and assessments which are levied with respect to the Building or the land appurtenant to the Building, or with respect to any improvements, fixtures and equipment or other property of Landlord, real or personal, located in the Building and used in connection with the operation of the Building and said land, any payments to any ground lessor in reimbursement of tax payments made by such lessor; and all fees, expenses and costs incurred by Landlord in investigating, protesting, contesting or in any way seeking to reduce or avoid increase in any assessments, levies or the tax rate pertaining to any Taxes to be paid by Landlord in any Lease Year. Taxes shall not include any corporate franchise, or estate, inheritance or federal or state income tax, or tax imposed upon any transfer by Landlord of its interest in this Lease or the Building. In the event that during the Base Year, as hereafter defined, the Building is not fully rented and occupied Landlord shall make an appropriate adjustment in Taxes for such year for the purpose of avoiding distortion of the amount of such Taxes, and the adjustment so determined shall be deemed to have been Taxes for such year. Base Year, as used in this Lease shall mean the calendar year 1999 for the original Term; the calendar year 2009 for the first Renewal Option; and the calendar year 2014 for the second Renewal Option. 4.2 Tenant shall pay as additional rent for each calendar year Tenant's Proportionate Share of any increase in Direct Expenses and Taxes incurred for such calendar year, above the amount of such Direct Expenses and Taxes for the Base Year. Notwithstanding anything herein to the contrary, Tenant's Proportionate Share of Direct Expenses (excluding common area utilities and insurance) for any calendar year after the Base Year shall not exceed 105% of Tenant's Proportionate Share of Direct Expenses (excluding common area utilities and insurance) for the immediately preceding calendar year ("CAM Cap"); provided, however, if the Tenant's Proportionate Share of Direct Expenses (excluding common area utilities and insurance) in any calendar year as calculated as if there were no CAM Cap ("Uncapped CAM Costs") is greater than Tenant's Proportionate Share of Direct Expenses (excluding common area utilities and insurance) as calculated pursuant to the CAM Cap ("Capped CAM Costs"), the difference between the Uncapped CAM Costs and the Capped CAM Costs may be accumulated and applied toward Tenant's Proportionate Share of Direct Expenses (excluding utilities and insurance) in any future calendar year in which Tenant's Uncapped CAM Costs are less than the Capped CAM Costs. However, Tenant's Proportionate Share of Direct Expenses 4 (excluding utilities and insurance) in any given calendar year shall not exceed the Capped CAM Costs for the given calendar year. 4.3 The annual determination of Direct Expenses shall be made by Landlord and if certified by a nationally recognized firm of public accountants selected by Landlord. In the event that during the Base Year, the Building is not fully rented and occupied Landlord shall make any appropriate adjustment in occupancy related Direct Expense for such year for the purpose of avoiding distortion of the amount of such Direct Expenses to be attributed to Tenant by reason of variation in total occupancy of the Building, by employing sound accounting and management principals to determine Direct Expenses that would have been paid or incurred by Landlord had the Building been fully rented and occupied, and the amount so determined shall be deemed to have been Direct Expenses for such calendar year. 4.4 Prior to the actual determination thereof for a Lease Year, Landlord may once a year estimate Tenant's liability for Direct Expenses and/or Taxes under Section 4.2 and Article 28 for the Lease Year or portion thereof. Landlord will give Tenant written notification of the amount of such estimate and Tenant agrees that it will pay, by increase of its Monthly Installments of Rent due in such Lease Year, additional rent in the amount of such estimate. Any such increased rate of Monthly Installments of Rent pursuant to this Section 4.4 shall remain in effect until further written notification to Tenant pursuant hereto. 4.5 When the above mentioned actual determination of Tenant's liability for Direct Expenses and/or Taxes is made for any Lease Year and when Tenant is so notified in writing, then: 4.5.1 If the total additional rent Tenant actually paid pursuant to Section 4.4 on account of Direct Expenses and/or Taxes for the Lease Year is less than Tenant's liability for Direct Expenses and/or Taxes, then Tenant shall pay such deficiency to Landlord as additional rent in one lump sum within (30) days of receipt of Landlord's bill therefor; and 4.5.2 If the total additional rent Tenant actually paid pursuant to Section 4.4 on account of Direct Expenses and/or Taxes for the Lease Year is more than Tenant's liability for Direct Expenses and/or Taxes, then Landlord shall credit the difference against the then next due payments of Rent and Direct Expenses and Taxes, if the Term has ended, shall be paid to Tenant within thirty (30) days after the date Landlord makes any such determination. 4.6 If the Commencement Date is other than January 1 or if the Termination Date is other than December 31, Tenant's liability for Direct Expenses and Taxes for the Lease Year in which said Date occurs shall be prorated based upon a three hundred sixty-five (365) day year. 4.7 In the event any dispute arises between Landlord and Tenant, as to Direct Expenses, Tenant shall have the right, upon reasonable notice, to inspect Landlord's records concerning the Direct Expenses of the Building. If, after such inspection, Tenant continues to dispute Direct Expenses, Tenant shall be entitled to retain an independent accountant or accountancy frim that has a specialty in auditing operting expenses to conduct an audit. If Tenant's audit reveals that Landlord has overchanged Tenant, after Landlord has been afforded an opportunity to explain any contrary position on the matter to Tenant's accounting frim (with any disputes being resolved in good faith by the parties), then Tenant shall receive a credit against the next month's Rent in the amount of such overcharge. If the audit reveals that Tenant was undercharged, then within five (5) days after the results of such audit are made available to Tenant, Tenant shall reimburse Landlord for the amount of such undercharge. Tenant shall pay the cost of any audits requested by Tenant, unless any audit reveals that Landlord's determination of the Direct Expenses was in error by more than five percent (5%), in which case, Landlord shall pay the cost of such audit. Except in the event of fraud by Landlord, failure on the part of tenant to object to the Direct Expense Statement within one (1) year after its receipt thereof shall be conclusively deemed Tenant's approval of such Direct Expense Statement. All inspections shall be made at Landlord's offices, during normal business hours, with at least ten (10) days prior written notice. 5. SECURITY DEPOSIT. Intentionally Omitted. 6. ALTERATIONS. 6.1 Except for those, if any, specifically provided for in Exhibit B to this Lease, Tenant shall not make or suffer to be made any alterations, additions, or improvements, including, the attachment of any fixtures or equipment in, on, or to the Premises or any part thereof or the making of any improvements as required by Article 7 ("Alterations"), without the prior written consent of Landlord. When applying for such consent, Tenant shall, if requested by landlord, furnish complete plans and specifications for such alterations, additions and improvements, if applicable. Landlord's consent shall not be unreasonably withheld, conditioned or delayed for nonstructural Alterations which are not visible from the exterior of the Premises. 5 6.2 In the event Landlord consents to the making of any such alteration, addition or improvement by Tenant, the same shall be made by a licensed, bonded and insured contractor approved by Landlord, such approval not be unreasonably withheld, conditioned or delayed, at Tenant's sole cost and expense. If Tenant shall employ any contractor other than Landlord's pre-approved contractor, and such other contractor or any subcontractor of such other contractor shall employ labor and/or suppliers, then Tenant shall be responsible for and hold Landlord harmless from any and all delays, damages and extra costs suffered by Landlord as a result of any dispute with any labor concerning the wage, hours, terms or conditions of the employment of any such labor. 6.3 All alterations, additions, and improvements proposed by Tenant shall be constructed in accordance with all government laws, ordinances, rules and regulations and Tenant shall, prior to construction, provide the additional insurance required under Article 11 in such case, and also all such assurances to Landlord, including but not limited to, waivers of lien, as Landlord shall require to assure payment of the costs thereof and to protect Landlord and the Building and appurtenant land against any loss from any mechanic's, materialmen's or other liens. Tenant shall pay in addition to any sums due pursuant to Article 4, any increase in real estate taxes attributable to any such alteration, addition or improvement for so long, during the Term, as such increase is ascertainable; at Landlord's election said sums shall be paid in the same way as sums due under Article 4. 6.4 All alterations, additions, and improvements, in, on , or to the Premises or in, on or to the Building made or installed by Tenant, including carpeting, shall be and remain the property of Tenant during the Term but, excepting furniture, furnishings, telecommunication switch equipment, batteries, generators, condensers, dry coolers, conduits, cabling, pull boxes, and other telecommunication related facilities, movable partitions of less than full height from floor to ceiling and other trade fixtures, all of which shall be removed from the Premises and the Building at Tenant's expense if required to be removed by Landlord in a written document delivered to Tenant at the time Landlord approves Tenant's plans and specifications and the Premises restored to its original condition, and any remaining improvements, shall become a part of the realty and belong to Landlord without compensation to Tenant upon the expiration or sooner termination of the Term, at which time title shall pass to Landlord under this Lease as by a bill of sale, unless Landlord elects otherwise. Upon such election by Landlord, Tenant shall upon demand by Landlord, at Tenant's sole cost and expense, forthwith and with all due diligence remove any such alterations, additions or improvements, including any which are designated by Landlord to be removed, and Tenant shall forthwith and with all due diligence, at its sole costs and expense, repair and restore the Premises and the Building to their original condition, reasonable wear and tear and damage by fire or other casualty excepted. 7. REPAIR. 7.1 Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises or the Building, except as specified in Exhibit B if attached to this Lease and except that Landlord shall repair and maintain the structural portions of the Building, including the roof and the basic plumbing, common area air conditioning, heating and electrical systems installed or furnished by Landlord and all common areas of the Building in working order and condition. By taking possession of the Premises, Tenant accepts them as being in good order condition and repair and in the condition in which Landlord is obligated to deliver them subject to the items set forth on the punchlist prepared in accordance with Section 2.1. It is hereby understood and agreed that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant, expect as specifically set forth in this Lease. 7.2 Tenant shall at its own cost and expense keep and maintain all parts of the Premises and improvements therein in good condition, promptly making all necessary repairs and replacements, whether ordinary or extraordinary, with materials and workmanship of the same character, kind and quality as the original (including, but not limited to, repair and replacement of all fixtures installed by Tenant, windows, glass and plate glass, doors, any special office entries, interior walls and finish work, floors and floor coverings, heating and air conditioning systems serving the Premises, electrical systems and fixtures and sprinkler systems), if applicable. Tenant as part of its obligations hereunder shall keep the Premises in a clean and sanitary condition. Tenant will, as far as possible keep all such parts of the Premises from deterioration due to ordinary wear and from falling temporarily out of repair, and upon termination of this Lease in any way Tenant will deliver the Premises to Landlord in good condition and repair, loss by fire or other casualty excepted and ordinary wear and tear excepted. Tenant shall, at its own cost and expense, repair any damage to the Premises or the Building resulting from and/or caused in whole or in part by Tenant, its agents, employees, invitees, or any other person entering upon the Premises as a result of Tenant's business activities or caused by Tenant's default hereunder. 7.3 Landlord shall not be liable for any failure to make any repairs or to perform any maintenance unless such failure shall persist for an unreasonable time which shall be determined in Landlord's reasonable discretion after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. 7.4 Except as provided in Articles 22, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or to fixtures, appurtenances and equipment in the Building unless due to Landlord's negligence or willful misconduct, in which event, after three (3) days, Tenant shall receive one (1) day of Rent abatement for each day Tenant is unable to operate in the Premises until Tenant can again 6 operate in the Premises. Except to the extent, if any, prohibited by law, Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect. 7.5 Tenant shall, at its own cost and expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor and/or an employee certified by manufacturer, selected by Tenant and approved by Landlord for servicing all heating and air conditioning systems and batteries, generators and fuel tanks serving the Premises (and a copy thereof shall be furnished to Landlord). The service contract must include all services suggested by the equipment manufacturer in the operation/maintenance manual and must become effective within thirty (30) days after the Commencement Date. 7.6 In recognition of Tenant's use, Landlord shall use good-faith efforts to provide Tenant (except in the case of emergency, in which event Landlord shall use reasonable efforts, but shall not be required, to provide Tenant with prior notice) not less than twenty four (24) hours prior written notice of Landlord's intent to enter the Premises provided such entry shall not disrupt Tenant's service to its clients, and not less than forty eight (48) hours prior written notice of Landlord's intention to enter the Premises to effect planned repairs (including, but not limited to electrical, mechanical or plumbing work) if such work will materially disrupt and/or interfere with the business of Tenant within the Premises or Building in a manner which will, in Landlord's reasonable opinion, affect Tenant's use. In such circumstances Tenant and Landlord will cooperate to determine an appropriate time. Further, in emergency situations Landlord shall use reasonable care and precaution in order to minimize the disruptions in Tenant's business. 8. LIENS. Tenant shall keep the Premises, the Building and appurtenant land and Tenant's leasehold interest in the Premises free from any liens arising out of any services, work or materials performed, furnished, or contracted for by Tenant, or obligations incurred by Tenant. Notice is hereby given that Landlord shall not be liable for any work performed or to be performed on the Premises, or for any materials furnished or to be furnished at or to the Premises, or any building or improvements thereon, for Tenant or any subtenant, and that no mechanic's or other lien for such work or materials shall attach to the interest of Landlord. This Lease specifically prohibits the subjecting of the Premises, or any part of it, to any liens for improvements Tenant makes or causes to be made or for which Tenant is directly or indirectly responsible for payment. Pursuant to Section 713.10, Florida Statutes, all persons dealing with Tenant are hereby given notice of this provision, and Tenant hereby covenants and agrees to provide all persons dealing with Tenant with a copy of this Section 8. If, in connection with any work being performed by Tenant or any subtenant or in connection with any materials being furnished to Tenant or any subtenant, any mechanic's lien or other lien or charge shall be filed or made against the Premises or any building or improvements thereon or any part thereof, or if any such lien or charge shall be filed or made against Landlord as owner, then Tenant, at Tenant's cost and expense, within thirty (30) days after such lien or charge shall have been filed or made (but in any event prior to foreclosure), shall cause the same to be cancelled and discharged of record by payment thereof or filing a bond or otherwise, and shall also defend any action, suit or proceeding which may be brought for the enforcement of such lien or charge, and shall pay any damages, costs and expenses, including attorneys' fees, suffered or incurred therein by Landlord, and shall satisfy and discharge any judgment entered therein within thirty (30) days from entering of such judgment by payment thereof or filing of a bond, or otherwise. In the event of the failure of Tenant to discharge within the above-mentioned thirty (30)-day period, any lien, charge or judgment herein required to be paid or discharged by Tenant, Landlord may pay such items or discharge such liability by payment or bond or both, and Tenant will repay to Landlord, upon demand, any and all amounts paid by Landlord therefor, or by reason of any liability on any such bond, and also any and all incidental expenses, including attorneys' fees and costs, incurred by Landlord in connection therewith. 9. ASSIGNMENT AND SUBLETTING. 9.1 Tenant shall not have the right to assign or pledge this Lease or to sublet the whole or any part of the Premises whether voluntarily or by operation of law, or permit the use or occupancy of the Premises by anyone other than Tenant, and shall not make, suffer or permit such assignment, subleasing or occupancy without the prior written consent of Landlord not to be unreasonably withheld or delayed and said restrictions shall be binding upon any and all assignees of the Lease and subtenants of the Premises. In the event Tenant desires to sublet, or permit such occupancy of, the Premises, or any portion thereof, or assign this Lease, Tenant shall give written notice thereof to Landlord at least thirty (30) days prior to the proposed commencement date of such subletting or assignment, which notice shall set forth the name of the proposed subtenant or assignee, the relevant terms of any sublease or assignment and copies of financial reports and other relevant financial reports and other relevant financial information of the proposed subtenant or assignee. 9.2 Notwithstanding any assignment or subletting, permitted or otherwise, Tenant shall at all times remain directly, primarily and fully responsible and liable for the payment of the rent specified in this Lease and for compliance with all of its other obligations under the terms, provisions and covenants of this Lease. Upon the occurrence of an Event of Default, if the Premises or any part of them are then assigned or sublet, Landlord, in addition to any other remedies provided in this Lease or provided by law, may, at its option, collect directly from such assignee or subtenant all rents due and becoming due to Tenant under such assignment or sublease and apply such rent against any sums due 7 to Landlord from Tenant under this Lease, and no such collection shall be construed to constitute a novation or release of Tenant from the further performance of Tenant's obligations under this Lease. 9.3 In the event that Tenant sells, sublets, assigns or transfers this Lease, Tenant shall pay to Landlord as additional rent an amount equal to fifty percent (50%) of any Increased Rent (as defined below) when and as such Increased Rent is received by tenant. As used in this Section, "Increased Rent" shall mean the excess of (i) all rent and other consideration which Tenant is entitled to receive by reason of any sale, sublease, assignment or other transfer of this Lease, over (ii) the rent otherwise payable by Tenant under this Lease at such time. For purposes of the foregoing, any consideration received by Tenant in form other than cash shall be valued at its fair market value as determined by Landlord in good faith. Tenant's expenses of assigning or subletting (including brokerage commissions, reasonable legal fees and reasonable costs of redecorating the space for the assignee or subtenant) shall also be deducted in determining the "Increased Rent". 9.4 Notwithstanding any other provision hereof, Tenant shall have no right to make any assignment of this Lease or sublease of any portion of the Premises if at the time of either Tenant's notice of the proposed assignment or sublease or the proposed commencement date thereof, there shall exist any Event of Default of Tenant or matter which will become a default of Tenant with passage of time unless cured, or if the proposed assignee or sublessee is an entity: (a) with which Landlord is already in negotiation as evidenced by the issuance of a written proposal; (b) is already an occupant of the Building; (c) is a governmental agency; (d) is incompatible with the character or occupancy of the Building; or (e) would subject the Premises to a use which would: (i) violate any exclusive right granted to another tenant of the Building; (ii) require any addition to or modification of the Premises or the Building in order to comply with building code or other governmental requirements; or, (iii) involve a violation of Section 1.2. 9.5 The assignment or other transfer of Tenant's interest under this Lease or the sublease of the Premises of an affiliate, subsidiary or successor of Tenant shall not be deemed an assignment or subletting of the Premises as to which Tenant must obtain Landlord's consent (however, Tenant must provide thirty (30) days prior written notice to Landlord). The terms affiliate and subsidiary and successor shall have the following meaning: (a) any corporation which directly or indirectly controls or is controlled by or is under common control with Tenant. (b) any subsidiary, meaning any corporation not less than 50% of whose outstanding stock shall, at the time, be owned directly or indirectly by Tenant. (c) any successor, meaning: (i) A corporation into which or with which Tenant, its corporate successors or assigns, is merged or consolidated in accordance with applicable, statutory provisions for merger or consolidation of corporations, but only if, by operation of law or by effective provisions contained in the instruments of merger or consolidation, the liabilities of the corporations participating in such merger or consolidation are assumed by the corporation surviving such merger or created by such consolidation; or, (ii) Any corporation acquiring this Lease and the Premises hereby demised and a substantial portion of the property and assets of Tenant, its corporate successors or assigns; or (iii) Any corporation or successor corporation becoming such by either of the methods described in Subsections (a) or (b) above, but only if, on the completion of such merger, consolidation, acquisition, or assumption, the successor has a net worth in excess of Tenant's immediately prior to such merger, consolidation, acquisition or assumption. Acquisition by Tenant, its corporate successors or assigns, of a substantial portion of the assets, together with the assumption of all or substantially all the obligations and liabilities of any corporation, shall be deemed a merger of such corporation into Tenant for purposes of this Section. 10. INDEMNIFICATION. None of the Landlord Entities shall be liable and Tenant hereby waives all claims against them for any damage to any property or any injury to any person in or about the Premises or the Building by or from any cause whatsoever (including without limiting the foregoing, rain or water leakage of any character from the roof, windows, walls, basement, pipes, plumbing works or appliances, the Building not being in good condition or repair, gas, fire, oil, electricity or theft), except to the extent caused by or arising from the negligence or willful misconduct of Landlord or its agents, employees or contractors. Tenant shall protect, indemnify and hold the Landlord Entities harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of (a) any damage to any property (including but not limited to property of any Landlord Entity) or any injury (including but not limited to death) to any person occurring in, on or about the Premises or the Building to the extent that such injury or damage shall be caused by or arise from any act or omission of Tenant, its agents, servants, employees, invitees, or visitors; (b) the conduct or management of any work or thing whatsoever done by the Tenant in or about the Premises; or (c) Tenant's failure to comply with any and all governmental laws, ordinances and regulations applicable to the condition or use of the Premises or its occupancy which are Tenant's responsibility under 8 the Lease. The provisions of this Article shall survive the termination of this Lease with respect to any claims or liability accruing prior to such termination. Tenant shall not be liable and Landlord hereby waives all claims against Tenant for any damage to any property or any injury to any person in or about the Premises or the Building by or from any cause whatsoever (including without limiting the foregoing, rain or water leakage of any character from the roof, windows, walls, basement, pipes, plumbing works or appliances, the Building not being in good condition or repair, gas, fire, oil, electricity or theft), except to the extent caused by or arising from the negligence or willful misconduct of Tenant or its agents, employees or contractors. Landlord shall protect, indemnify and hold Tenant harmless from and against any and all loss, claims, liability or costs (including court costs and attorney's fees) incurred by reason of (a) any damage to any property or any injury (including but not limited to death) to any person occurring in, on or about the Premises or the Building to the extent that such injury or damage shall be caused by or arise from any act or omission of Landlord, its agents, servants, employees, invitees, or visitors; or (b) the conduct or management of any work or thing whatsoever done by the Landlord in or about the Premises. The provisions of this Article shall survive the termination of this Lease with respect to any claims or liability accruing prior to such termination. 11. INSURANCE. 11.1 Tenant shall keep in force throughout the Term: (a) a Commercial General Liability insurance policy or policies to protect the Landlord Entities against any liability to the public or to any invitee of Tenant or a Landlord Entity incidental to the use of or resulting from any accident occurring in or upon the Premises with a limit of not less than $2,000,000.00 per occurrence and not less than $4,000,000.00 in the annual aggregate (part of which may come from an umbrella insurance policy), or such larger amount as Landlord may prudently require from time to time, covering bodily injury and property damage liability and $1,000,000 products/completed operations aggregate; (b) Business Auto Liability covering owned, non-owned and hired vehicles with a limit of not less than $1,000,000 per accident; (c) insurance protecting against liability under Worker's Compensation Laws with limits at least as required by statute; (d) Employers Liability with limits of $500,000 each accident, $500,000 disease policy limit, $500,000 disease--each employee; (e) All Risk or Special Form coverage protecting Tenant against loss of or damage to Tenant's alterations, additions, improvements, carpeting, floor coverings, paneling, decorations, fixtures, inventory and other business personal property situated in or about the Premises to the full replacement value of the property so insured; and, (f) Business Interruption Insurance with limit of liability representing loss of at least approximately six months of rent. 11.2 Each of the aforesaid policies shall (a) be provided at Tenant's expense; (b) name the Landlord Entities and building management company, if any, as additional insureds as their interests may appear; (c) be issued by an insurance company with a minimum Best's rating of "A:VII" during the Term; and (d) provide that said insurance shall not be canceled unless thirty (30) days prior written notice (ten days for non-payment of premium) shall have been given to the Landlord; and said policy or policies or certificates thereof shall be delivered to the Landlord by Tenant upon the Commencement Date and at least thirty (30) days prior to each renewal of said insurance. 11.3 Whenever Tenant shall undertake any Alterations in, to or about the Premises ("Work") the aforesaid insurance protection must extend to and include injuries to persons and damage to property arising in connection with such Work, without limitation including liability under any applicable structural work act, and such other insurance as Landlord shall require; and the policies of or certificates evidencing such insurance must be delivered to Landlord prior to the commencement of any such Work. 12. WAIVER OF SUBROGATION. So long as their respective insurers so permit, Tenant and Landlord hereby mutually waive their respective rights of recovery against each other for any loss insured by fire, extended coverage, All Risks or other insurance now or hereafter existing for the benefit of the respective party but only to the extent of the net insurance proceeds payable under such policies. Each party shall obtain any special endorsements required by their insurer to evidence compliance with the aforementioned waiver. 13. SERVICES AND UTILITIES. 13.1 Subject to the other provisions of this Lease, Landlord agrees to furnish to the common areas of the Building, the following services and utilities subject to the rules and regulations of the Building prescribed from time to time: (a) water suitable for normal office use of the Premises; (b) heat and air conditioning required in Landlord's judgment for the use and occupation of the common areas of the Building; (c) cleaning and janitorial service for common areas; (d) elevator service by nonattended automatic elevators; (e) such window washing as may from time to time in Landlord's judgment by reasonably required; and, (f) provisions to bring electricity to the floor of the Premises an amount equal to no less than 800 amps @ 480V on or before the Commencement Date with ultimate requirement of 1,250 amps @ 480V on or before one hundred eighty (180) days after the Rent Commencement Date. To the extent that Tenant is not billled directly by a public utility, Tenant shall pay, upon demand, as additional rent, for all electricity used by Tenant in the Premises, including the usage of any temporary power supplied to Tenant prior to the Commencement Date. The charge shall be at the pro rata rates charged for such services by the local public utility. Landlord shall not be liable for, and Tenant shall not be entitled to, any abatement or reduction of rental by reason of Landlord's failure to furnish any of the foregoing, unless such failure shall persist for an unreasonable time after written 9 notice of such failure is given to Landlord by Tenant and provided further that Landlord shall not be liable when such failure is caused by accident, breakage, repairs, labor disputes of any character, energy usage restrictions or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. If the disruption of services is due to Landlord's negligence or willful misconduct and, as a result thereof, Tenant is unable to operate in the Premises more than five (5) days, then Tenant shall receive an abatement of Rent after the fifth (5th) day until Tenant is again able to operate in the Premises. Landlord shall use reasonable efforts to remedy any interruption in the furnishing of services and utilities. Landlord shall not (except in the event of an emergency or a force majeure event) exercise any right of Landlord to reduce, interrupt or cease service of the heating, air conditioning, ventilation, elevator, plumbing, electrical systems, telephone systems and/or utilities services of the Premises, the Building or the Property, without advising Tenant in advance of Landlord's requirements so that Landlord and Tenant may arrange procedures for accomplishing Landlord's goals and minimize the interruption to Tenant's use, possession and occupancy of the Premises for the purpose of conducting its business on a continuing basis. 13.2 Should Tenant require any additional work or service, as described above and in Paragraph 38, Landlord may, on terms to be agreed, upon reasonable advance notice by Tenant, furnish such additional service and Tenant agrees to pay Landlord such charges as may be agreed upon, including any tax imposed thereon, but in no event at a charge less than Landlord's actual cost for such additional service and, where appropriate, a reasonable allowance for depreciation of any systems being used to provide such service. 13.3 If Tenant shall require water or electric current in excess of that required to be furnished or supplied for use in the Premises as set forth in the Lease, Landlord may cause a water meter or electric current meter to be installed so as to measure the amount of such excess water and electric current. The cost of any such meters and any additional installations or expense required or incurred as a result of the increased capacity shall be paid for by Tenant. Tenant agrees to pay as additional rent to Landlord promptly upon demand therefor, the cost of all such excess water and electric current consumed (as shown by said meters, if any, or, if none, as reasonably estimated by Landlord) at the rates charged for such services by the local public utility or agency, as the case may be, furnishing the same, plus any additional expense incurred in keeping account of the water and electric current so consumed. 14. HOLDING OVER. Tenant shall pay Landlord for each day Tenant retains possession of the Premises or part of them after termination of this Lease by lapse of time or otherwise at the rate ("Holdover Rate") which shall be (a) 150% of the amount of the Annual Rent for the last period prior to the date of such termination plus (b) 150% of all Rent Adjustments under Article 4. If Landlord gives notice to Tenant of Landlord's election to that effect, such holding over shall constitute renewal of this Lease for a period from month to month. In any event, no provision of this Article 14 shall be deemed to waive Landlord's right of reentry or any other right under this Lease or at law. 15. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, this Lease shall be subject and subordinate at all times to ground or underlying leases and to the lien of any mortgages or deeds of trust now or hereafter placed on, against or affecting the Building, Landlord's interest or estate in the Building, or any ground or underlying lease; provided, however, that if the lessor, mortgagee, trustee, or holder of any such mortgage or deed of trust elects to have Tenant's interest in this Lease be superior to any such instrument, then, by notice to Tenant, this Lease shall be deemed superior, whether this Lease was executed before or after said instrument. Notwithstanding the foregoing, Tenant covenants and agrees to execute and deliver upon demand such further instruments evidencing such subordination or superiority of this Lease as may be required by Landlord. As a condition precedent to the effectiveness of any such subordination of this Lease to any future ground or underlying lease or the lien of any future mortgages, deeds of trust, or like encumbrances. Landlord shall provide to Tenant within thirty (30) days of the recording of the lien, a commercially reasonable non-disturbance and attornment agreement in favor of Tenant executed by such future ground lessor, master lessor, mortgagee or deed of trust beneficiary, as the case may be, which shall provide that Tenant's quiet possession of the premises shall not be disturbed on account of such subordination to such future lease or lien so long as Tenant is not in default following the expiration of any applicable cure period under any provisions of this Lease. In addition, within thirty (30) days of execution of this Lease, Landlord shall provide to Tenant a commercially reasonable non-disturbance and attornment agreement in favor of Tenant executed by any existing ground lessor, master lessor, mortgagee or deed of trust beneficiary, as the case may be, which shall provide that Tenant's quiet possession of the Premises shall not be disturbed on account of such subordination to such existing lease or lien so long as Tenant is not default following the expiration of any applicable cure period under any provisions of this Lease. 16. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with all the rules and regulations as set forth in Exhibit C to this Lease and all reasonable modifications of and additions to them from time to time put into effect by Landlord. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Building of any such rules and regulations. 10 17. REENTRY BY LANDLORD. 17.1 Landlord reserves and shall at all times have the right upon reasonable notice to re-enter the Premises to inspect the same, to supply janitorial service and any other service to be provided by Landlord to Tenant under this Lease, to show said Premises to prospective purchasers, mortgagees or tenants, and to alter, improve or repair the Premises and any portion of the Building, without abatement of rent, and may for that purpose erect, use and maintain scaffolding, pipes, conduits and other necessary structures and open any wall, ceiling or floor in and through the Building and Premises where reasonably required by the character of the work to be performed, provided entrance to the Premises shall not be blocked thereby, and further provided that the business of Tenant shall not be interfered with unreasonably. 17.2 Landlord shall have the right at any time to change the arrangement and/or location of entrances, or passageways, doors and doorways, and corridors, windows, elevators, stairs, toilets or other public parts of the Building and to change the name, number or designation by which the Building is commonly known. In the event that Landlord damages any portion of any wall or wall covering, ceiling, or floor or floor covering within the Premises, Landlord shall repair or replace the damaged portion to match the original as nearly as commercially reasonable but shall not be required to repair or replace more than the portion actually damaged. 17.3 For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in the Premises, excluding Tenant's vaults and safes or special security areas (designated in advance), except as required by law, and Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency to obtain entry to any portion of the Premises. As to any portion to which access cannot be had by means of a key or keys in Landlord's possession, Landlord is authorized to gain access by such means as Landlord shall elect and the cost of repairing any damage occurring in doing so shall be borne by Tenant and paid to Landlord as additional rent upon demand. 18. DEFAULT. 18.1 Except as otherwise provided in Article 20, the following events shall be deemed to be Events of Default under this Lease: 18.1.1 Tenant shall fail to pay within ten (10) days any sum of money becoming due to be paid to Landlord under this Lease, whether such sum be any installment of the rent reserved by this Lease, any other amount treated as additional rent under this Lease, or any other payment or reimbursement to Landlord required by this Lease, whether or not treated as additional rent under this Lease, and such failure shall continue for a period of five days after written notice that such payment was not made when due, but if any such notice shall be given, for the twelve month period commencing with the date of such notice, the failure to pay within five days after due any additional sum of money becoming due to be paid to Landlord under this Lease during such period shall be an Event of Default, without notice. 18.1.2 Tenant shall fail to comply with any term, provision or covenant of this Lease which is not provided for in another Section of this Article and shall not cure such failure within twenty (20) days (forthwith, if the failure involves a hazardous condition) after written notice of such failure to Tenant. Any nonmonetary defaults which cannot be cured within twenty (20) days for reasons beyond Tenant's reasonable control, Tenant will be given such additional time as is reasonably necessary to cure such default, so long as Tenant commences such cure within twenty (20) days after receipt of Landlord's notice and thereafter diligently proceeds withthe same. 18.1.3 Tenant shall fail to vacate the Premises immediately upon termination of this Lease, by lapse of time or otherwise, or upon termination of Tenant's right to possession only. 18.1.4 Tenant shall become insolvent, admit in writing its inability to pay its debts generally as they become due, file a petition in bankruptcy or a petition to take advantage of any insolvency statute, make an assignment for the benefit of creditors, make a transfer in fraud of creditors, apply for or consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, or file a petition or answer seeking reorganization or arrangement under the federal bankruptcy laws, as now in effect or hereafter amended, or any other applicable law or statute of the United States or any state thereof. 18.1.5 A court of competent jurisdiction shall enter an order, judgment or decree adjudicating Tenant bankrupt, or appointing a receiver of Tenant, or of the whole or any substantial part of its property, without the consent of Tenant, or approving a petition filed against Tenant seeking reorganization or arrangement of Tenant under the bankruptcy laws of the United States, as now in effect or hereafter amended, or any state thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within thirty (30) days from the date of entry thereof. 11 19. REMEDIES. 19.1 Except as otherwise provided in Article 20, upon the occurrence of any of the Events of Default described or referred to in Article 18, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever, concurrently or consecutively and not alternatively: 19.1.1 Landlord may, at its election, terminate this Lease or terminate Tenant's right to possession only, without terminating the Lease. 19.1.2 Upon any termination of this Lease, whether by lapse of time or otherwise, or upon any termination of Tenant's right to possession without termination of the Lease, Tenant shall surrender possession and vacate the Premises immediately, and deliver possession thereof to Landlord, and Tenant hereby grants to Landlord full and free license to enter into and upon the Premises in such event and to repossess Landlord of the Premises as of Landlord's former estate and to expel or remove Tenant and any others who may be occupying or be within the Premises and to remove Tenant's signs and other evidence of tenancy and all other property of Tenant therefrom without being deemed in any manner guilty of trespass, eviction or forcible entry or detainer, and without incurring any liability for any damage resulting therefrom, Tenant waiving any right to claim damages for such re-entry and expulsion, and without relinquishing Landlord's right to rent or any other right given to Landlord under this Lease or by operation of law. 19.1.3 Upon any termination of this Lease, whether by lapse of time or otherwise, Landlord shall be entitled to recover as damages, all rent, including any amounts treated as additional rent under this Lease, and other sums due and payable by Tenant on the date of termination, plus as liquidated damages and not as a penalty, an amount equal to the sum of: (a) an amount equal to the then present value of the rent reserved in this Lease for the residue of the stated Term of this Lease including any amounts treated as additional rent under this Lease and all other sums provided in this Lease to be paid by Tenant, minus the fair rental value of the Premises for such residue; (b) the value of the time and expense necessary to obtain a replacement tenant or tenants, and the estimated expenses described in Section 19.1.4 relating to recovery of the Premises, preparation for reletting and for reletting itself; and (c) the cost of performing any other covenants which would have otherwise been performed by Tenant. 19.1.4 Upon any termination of Tenant's right to possession only without termination of the Lease: 19.1.4.1 Neither such termination of Tenant's right to possession nor Landlord's taking and holding possession thereof as provided in Section 19.1.2 shall terminate the Lease or release Tenant, in whole or in part, from any obligation, including Tenant's obligation to pay the rent, including any amounts treated as additional rent, under this Lease for the full Term, and if Landlord so elects Tenant shall pay forthwith to Landlord the sum equal to the entire amount of the rent, including any amounts treated as additional rent under this Lease, for the remainder of the Term plus any other sums provided in this Lease to be paid by Tenant for the remainder of the Term. 19.1.4.2 Landlord may, but need not, relet the Premises or any part thereof for such rent and upon such terms as Landlord, in its sole discretion, shall determine (including the right to relet the premises for a greater or lesser term than that remaining under this Lease, the right to relet the Premises as a part of a larger area, and the right to change the character or use made of the Premises). In connection with or in preparation for any reletting, Landlord may, but shall not be required to, make repairs, alterations and additions in or to the Premises and redecorate the same to the extent Landlord deems necessary or desirable, and Tenant shall, upon demand, pay the cost thereof, together with Landlord's expenses of reletting, including, without limitation, any commission incurred by Landlord. If Landlord decides to relet the Premises or a duty to relet is imposed upon Landlord by law, Landlord and Tenant agree that nevertheless Landlord shall at most be required to use only the same efforts Landlord then uses to lease premises in the Building generally and that in any case that Landlord shall not be required to give any preference or priority to the showing or leasing of the Premises over any other space that Landlord may be leasing or have available and may place a suitable prospective tenant in any such other space regardless of when such other space becomes available. Landlord shall not be required to observe any instruction given by Tenant about any reletting or accept any tenant offered by Tenant unless such offered tenant has a creditworthiness acceptable to Landlord and leases the entire Premises upon terms and conditions including a rate of rent (after giving effect to all expenditures by Landlord for tenant improvements, broker's commissions and other leasing costs) all no less favorable to Landlord than as called for in this Lease, nor shall Landlord be required to make or permit any assignment or sublease for more than the current term or which Landlord would not be required to permit under the provisions of Article 9. Landlord will use such efforts to relet the Premises as required by law. In the event Tenant is in default in this Lease and is not occupying the Premises, but tenders a replacement occupant to Landlord, Landlord must use the same standard for accepting such replacement occupant as set forth in the assignment and subletting sections of this Lease, notwithstanding the fact that there is an Event of Default. 19.1.4.3 Until such time as Landlord shall elect to terminate the Lease and shall thereupon be entitled to recover the amounts specified in such case in Section 19.1.3, Tenant shall pay to Landlord upon demand the full amount of all rent, including any amounts as additional rent under this Lease and other sums reserved 12 in this Lease for the remaining Term, together with the costs of repairs, alterations, additions, redecorating and Landlord's expenses of reletting and the collection of the rent accruing therefrom (including attorney's fees and broker's commissions), as the same shall then be due or become due from time to time, less only such consideration as Landlord may have received from any reletting of the Premises; and Tenant agrees that Landlord may file suits from time to time to recover any sums falling due under this Article 19 as they become due. Any proceeds of reletting by Landlord in excess of the amount then owed by Tenant to Landlord from time to time shall be credited against Tenant's future obligations under this Lease but shall not otherwise be refunded to tenant or inure to Tenant's benefit. 19.2 Landlord may, at Landlord's option, enter into and upon the Premises if Landlord determines in its sole discretion that Tenant is not acting within a commercially reasonable time to maintain, repair or replace anything for which Tenant is not acting within a commercially reasonable time to maintain, repair or replace anything for which Tenant is responsible under this Lease and correct the same, without being deemed in any manner guilty of trespass, eviction or forcible entry and detainer and without incurring any liability for any damage or interruption of Tenant's business resulting therefrom. If Tenant shall have vacated the Premises, Landlord may at Landlord's option re-enter the Premises at any time and make any and all such changes, alterations, revisions, additions and tenant and other improvements in or about the Premises as Landlord shall elect, all without any abatement of any of the rent otherwise to be paid by Tenant under this Lease. 19.3 If, on account of any breach or default by Tenant in Tenant's obligations under the terms and conditions of this Lease, it shall become necessary or appropriate for Landlord to employ or consult with an attorney concerning or to enforce or defend any of Landlord's rights or remedies arising under this Lease, Tenant agrees to pay all Landlord's attorney's fees and costs so incurred. Tenant expressly waives any right: (a) trial by jury; and (b) service of any notice required by any present or future law or ordinance applicable to Landlords or tenants but not required by the terms of this Lease. 19.4 Pursuit of any of the foregoing remedies shall not preclude pursuit of any of the other remedies provided in this Lease or any other remedies provided by law or equity (all such remedies being cumulative), nor shall pursuit of any remedy provided in this Lease constitute a forfeiture or waiver of any rent due to Landlord under this Lease or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions and covenants contained in this Lease. 19.5 No act or thing done by Landlord or its agents during the Term shall be deemed a termination of this Lease or any acceptance of the surrender of the Premises, and except as expressly provided for in this Lease, no agreement to terminate this Lease or accept a surrender of said Premises shall be valid, unless in writing signed by Landlord. No waiver by Landlord or Tenant of any violation or breach of any of the terms, provisions and covenants contained in this Lease shall be deemed or construed to constitute a waiver of any other violation or breach of any of the terms, provisions and covenants contained in this Lease. Landlord's acceptance of the payment of rental or other payments after the occurrent of an Event of Default shall not be construed as a waiver of such Default, unless Landlord so notifies Tenant in writing. Forbearance by Landlord in enforcing one or more of the remedies provided in this Lease upon an Event of Default shall not be deemed or construed to constitute a waiver of such Default or of Landlord's right to enforce any such remedies with respect to such Default or any subsequent Default. 19.6 Any and all property which may be removed from the Premises by Landlord pursuant to the authority of this Lease or of law, to which Tenant is or may be entitled, may be handled, removed and/or stored, as the case may be, by or at the direction of Landlord but at the risk, cost and expense of Tenant, and Landlord shall in no event be responsible for the value, preservation or safekeeping thereof. Tenant shall pay to Landlord, upon demand, any and all expenses incurred in such removal and all storage charges against such property so long as the same shall be in Landlord's possession or under Landlord's control. Any such property of Tenant not retaken by Tenant from storage within thirty (30) days after removal from the Premises shall, at Landlord's option, be deemed conveyed by Tenant to Landlord under this Lease as by a bill of sale without further payment or credit by Landlord to Tenant. 20. TENANT'S BANKRUPTCY OR INSOLVENCY. 20.1 If at any time and for so long as Tenant shall be subjected to the provisions of the United States Bankruptcy Code or other law of the United States or any state thereof for the protection of debtors as in effect at such time (each a "Debtor's Law"): 20.1.1 Tenant, Tenant as debtor-in-possession, and any trustee or receiver of Tenant's assets (each a "Tenant's Representative") shall have no greater right to assume or assign this Lease or any interest in this Lease, or to sublease any of the Premises than accorded to Tenant in Article 9, except to the extent Landlord shall be required to permit such assumption, assignment or sublease by the provisions of such Debtor's Law. Without limitation of the generality of the foregoing, any right of any Tenant's Representative to assume or assign this Lease or to sublease any of the Premises shall be subject to the conditions that: 13 20.1.1.1 Such Debtor's Law shall provide to Tenant's Representative a right of assumption of this Lease which Tenant's Representative shall have timely exercised and Tenant's Representative shall have fully cured any default of Tenant under this Lease. 20.1.1.2 Tenant's Representative or the proposed assignee, as the case shall be, shall have deposited with Landlord as security for the timely payment of rent an amount equal to the larger of: (a) three months' rent and other monetary charges accruing under this Lease; and (b) any sum specified in Article 5; and shall have provided Landlord with adequate other assurance of the future performance of the obligations of the Tenant under this Lease. Without limitation, such assurances shall include, at least, in the case of assumption of this Lease, demonstration to the satisfaction of the Landlord that Tenant's Representative has and will continue to have sufficient unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that Tenant's Representative will have sufficient funds to fulfill the obligations of Tenant under this Lease; and, in the case of assignment, submission of current financial statements of the proposed assignee, audited by an independent certified public accountant reasonably acceptable to Landlord and showing a net worth and working capital in amounts determined by Landlord to be sufficient to assure the future performance by such assignee of all of the Tenant's obligations under this Lease. 20.1.1.3 The assumption or any contemplated assignment of this Lease or subleasing any part of the Premises, as shall be the case, will not breach any provision in any other lease, mortgage, financing agreement or other agreement by which Landlord is bound. 20.1.1.4 Landlord shall have, or would have had absent the Debtor's Law, no right under Article 9 to refuse consent to the proposed assignment or sublease by reason of the identity or nature of the proposed assignee or sublessee or the proposed use of the Premises concerned. 21. QUIET ENJOYMENT. Landlord represents and warrants that it has full right and authority to enter into this Lease and that Tenant, while paying the rental and performing its other covenants and agreements contained in this Lease, shall peaceably and quietly have, hold and enjoy the Premises for the Term without hindrance or molestation from Landlord subject to the terms and provisions of this Lease. Landlord shall not be liable for any interference or disturbance by other tenants or third persons, unless resulting from Landlord's negligence or wrongful misconduct. 22. DAMAGE BY FIRE, ETC. 22.1 In the event the Premises or the Building are damaged by fire or other cause and in Landlord's reasonable estimation such damage can be materially restored within one hundred twenty (120) days of the casualty, Landlord shall forthwith repair the same and this Lease shall remain in full force and effect, except that Tenant shall be entitled to a proportionate abatement in rent from the date of such damage. Such abatement of rent shall be made pro rata in accordance with the extent to which the damage and the making of such repairs shall interfere with the use and occupancy by Tenant of the Premises from time to time. Within sixty (60) days from the date of such damage, Landlord shall notify Tenant, in writing, of Landlords's reasonable estimation of the length of time within which material restoration can be made, and Landlord's determination shall be binding on Tenant. For purposes of this Lease, the Building or Premises shall be deemed "materially restored" if they are in such condition as would allow Tenant to use the Premises for the purpose for which it was being used immediately before such damage. Rent abatement will also apply during the period when the Tenant is performing its restoration work to the Premises, not to exceed ninety (90) days. 22.2 If such repairs cannot, in Landlord's architects or engineers reasonable estimation, be made within one hundred twenty (120) days from the date of the casualty, Landlord and Tenant shall each have the option of giving the other, at any time within sixty (60) days after Landlord's notice of its estimate of the time within which restoration can be made, notice terminating this Lease as of the date of such damage. In the event of the giving of such notice, this Lease shall expire and all interest of the Tenant in the Premises shall terminate as of the date of such damage as if such date had been originally fixed in this Lease for the expiration of the Term. In the event that neither Landlord nor Tenant exercises its option to terminate this Lease, then Landlord shall repair or restore such damage, this Lease continuing in full force and effect, and the rent and additional payments due hereunder shall be proportionately abated as provided in Section 22.1. 22.3 Landlord shall not be required to repair or replace any damage or loss by or from fire or other cause to any paneling, decorations, partitions, additions, railings, ceilings, floor coverings, office fixtures or any other property or improvements installed on the Premises or belonging to Tenant. Any insurance which may be carried by Landlord or Tenant against loss or damage to the Building or Premises shall be for the sole benefit of the party carrying such insurance and under its sole control. 22.4 In the event that Landlord does not commence such repairs and material restoration within forty five (45) days after the date estimated by Landlord therefor as extended by this Section 22.4, and, diligently complete within forty five (45) days of such estimation, Tenant may at its option and as its sole remedy terminate this Lease by delivering written notice to Landlord, within fifteen (15) days after the expiration of said period of time, whereupon the Lease shall 14 end on the date of such notice or such later date fixed in such notice as if the date of such notice was the date originally fixed in this Lease for the expiration of the Term; provided, however, that if construction is delayed because of changes, deletions or additions in construction requested by Tenant, strikes, lockouts, casualties, Acts of God, war, material or labor shortages, government regulation or control or other causes beyond the reasonable control of Landlord, the period for restoration, repair or rebuilding shall be extended for the amount of time Landlord is so delayed. 22.5 Notwithstanding anything to the contrary contained in this Article: (a) Landlord shall not have any obligation whatsoever to repair, reconstruct, or restore the Premises when the damages resulting from any casualty covered by the provisions of this Article 22 occur during the last twelve (12) months of the Term or any extension thereof, but if Landlord determines not to repair such damages Landlord shall notify Tenant and if such damages shall render any material portion of the Premises untenantable Tenant shall have the right to terminate this Lease by notice to Landlord within fifteen (15) days after receipt of Landlord's notice; and (b) in the event the holder of any indebtedness secured by a mortgage or deed of trust covering the Premises or Building requires that any insurance proceeds be applied to such indebtedness, then Landlord shall have the right to terminate this Lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is made by any such holder, whereupon this Lease shall end on the date of such damage as if the date of such damage were the date originally fixed in this Lease for the expiration of the Term. 22.6 In the event of any damage or destruction to the Building or Premises by any peril covered by the provisions of this Article 22, it shall be Tenant's responsibility to properly secure the Premises and upon notice from Landlord to remove forthwith, at its sole cost and expense, such portion or all of the property belonging to Tenant or its licensees from such portion or all of the Building or Premises as Landlord shall request. 23. EMINENT DOMAIN. If all or any substantial part of the Premises shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain, or conveyance in lieu of such appropriation, either party to this Lease shall have the right, at its option, of giving the other, at any time within thirty (30) days after such taking, notice terminating this Lease, except that Tenant may only terminate this Lease by reason of taking or appropriation, if such taking or appropriation shall be so substantial as to materially interfere with Tenant's use and occupancy of the Premises. If neither party to this Lease shall so elect to terminate this Lease, the rental thereafter to be paid shall be adjusted on a fair and equitable basis under the circumstances. In addition to the rights of Landlord above, if any substantial part of the Building shall be taken or appropriated by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, and regardless of whether the Premises or any part thereof are so taken or appropriated, Landlord shall have the right, at its sole option, to terminate this Lease. Landlord shall be entitled to any and all income, rent, award, or any interest whatsoever in or upon any such sum, which may be paid or made in connection with any such public or quasi-public use or purpose, and Tenant hereby assigns to Landlord any interest it may have in or claim to all or any part of such sums, other than any separate award which may be made with respect to Tenant's trade fixtures and moving expenses and which does not reduce Landlord's award; Tenant shall make no claim for the value of any unexpired Term. 24. SALE BY LANDLORD. In event of a sale or conveyance by Landlord of the Building, the same shall operate to release Landlord from any future liability upon any of the covenants or conditions, expressed or implied, contained in this Lease, and in such event Tenant agrees to look solely to the successor in interest of Landlord in and to this Lease. Except as set forth in this Article 24, this Lease shall not be affected by any such sale and Tenant agrees to attorn to the purchaser or assignee. If any security has been given by Tenant to secure the faithful performance of any of the covenants of this Lease. Landlord shall transfer or deliver said security, as such, to Landlord's successor in interest and thereupon Landlord shall be discharged from any further liability with regard to said security. 25. ESTOPPEL CERTIFICATES. Within ten (10) days following any written request which Landlord may make from time to time, in connection with the sale, financing or refinancing of the Building, Tenant shall execute and deliver to Landlord or its mortgagee or prospective mortgagee a sworn statement certifying: (a) the date of commencement of this Lease; (b) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications to this Lease, that this lease is in full force and effect, as modified, and stating the date and nature of such modifications); (c) the date to which the rent and other sums payable under this Lease have been paid; (d) the fact that there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant's statement; and (e) such other matters as may be requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Article 25 may be relied upon by any mortgagee, beneficiary or purchaser and Tenant shall be liable for all loss, cost or expense resulting from the failure of any sale or funding of any loan caused by any material misstatement contained in such estoppel certificate. 15 26. SURRENDER OF PREMISES. 26.1 Landlord shall, at least thirty (30) days before the last day of the Term, arrange to meet Tenant for a joint inspection of the Premises. 26.2 At the end of the Term or any renewal of the Term or other sooner termination of this Lease, Tenant will peaceably deliver up to Landlord possession of the Premises, together with all improvements or additions upon or belonging to the same, by whomsoever made, whether in the Premises or in, on or to the Building, in the same conditions received or first installed, broom clean and free of all debris, excepting only ordinary wear and tear and damage by fire or other casualty. Tenant may, and at Landlord's request shall, at Tenant's sole cost, remove upon termination of this Lease, any and all furniture, furnishings, movable partitions of less than full height from floor to ceiling, trade fixtures and other property installed by Tenant, including, but not limited to, raised flooring, conduits, cabling, condensers, dry coolers, generators, pull boxes, junction boxes, supplemental HVAC units, electrical equipment, fire suppression systems, etc., title to which shall not be in or pass automatically to Landlord upon such termination, repairing all damage caused by such removal. Property not so removed shall, unless requested to be removed, be deemed abandoned by the Tenant and title to the same shall thereupon pass to Landlord under this Lease as by a bill of sale. All other alterations, additions and improvements in, on or to the Premises shall be dealt with and disposed of as provided in Article 6 hereof. 26.3 All obligations of Landlord and Tenant under this Lease not fully performed as of the expiration or earlier termination of the Term shall survive the expiration or earlier termination of the Term. 27. NOTICES. Any notice or document required or permitted to be delivered under this Lease shall be addressed to the intended recipient, shall be transmitted personally, by fully prepaid registered or certified United States Mail return receipt requested by facsimile transmission, or by reputable independent contract delivery service furnishing a written record of attempted or actual delivery, and shall be deemed to be delivered when tendered for delivery to the addressee at its address set forth on the Reference Page, or at such other address as it has then last specified by written notice delivered in accordance with this Article 27, or if to Tenant at either its aforesaid address or its last known registered office or home of a general partner or individual owner, whether or not actually accepted or received by the addressee. 28. TAXES PAYABLE BY TENANT. In addition to rent and other charges to be paid by Tenant under this Lease, Tenant shall reimburse to Landlord, upon demand, any and all taxes payable by landlord (other than net income taxes) whether or not now customary or within the contemplation of the parties to this Lease: (a) upon, allocable to, or measured by or on the gross or net rent payable under this Lease, including without limitation any rental tax or excise tax levied by the State, any political subdivision thereof, or the Federal Government with respect to the receipt of such rent; (b) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of the Premises or any portion thereof, including any sales, use or service tax imposed as a result thereof; (c) upon or measured by the Tenant's gross receipts or payroll or the value of Tenant's equipment, furniture, fixtures and other personal property of Tenant or leasehold improvements, alterations or additions located in the Premises; or (d) upon this transaction or any document to which Tenant is a party creating or transferring any interest of Tenant in this Lease or the Premises. In addition to the foregoing, Tenant agrees to pay, before delinquency, any and all taxes levied or assessed against Tenant and which become payable during the term hereof upon Tenant's equipment, furniture, fixtures and other personal property of Tenant located in the Premises. 29. DEFINED TERMS AND HEADINGS. The Article headings shown in this Lease are for convenience of reference and shall in no way define, increase, limit or describe the scope or intent of any provision of this Lease. Any indemnification or insurance of Landlord shall apply to and inure to the benefit of all the following "Landlord Entities", being Landlord, and the trustees, boards of directors, officers, general partners, beneficiaries, stockholders, employees and agents of each of them. In any case where this Lease is signed by more than one person, the obligations under this Lease shall be joint and several. The terms "Tenant" and "Landlord" or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individuals, firms or corporations, and their and each of their respective successors, executors, administrators and permitted assigns, according to the context hereof. The term "rentable area" shall mean the rentable area of the Premises or the Building as calculated by the Landlord on the basis of the plans and specifications of the Building including a proportionate share of any common areas. 30. TENANT'S AUTHORITY. If Tenant signs as a corporation each of the persons executing this Lease on behalf of Tenant represents and warrants that Tenant has been and is qualified to do business in the state in which the Building is located, that the corporation has full right and authority to enter into this Lease, and that all persons signing on behalf of the corporation were authorized to do so by appropriate corporate actions. If Tenant signs as a partnership, trust or other legal entity, each of the persons executing this Lease on behalf of Tenant represents and warrants that Tenant has complied with all applicable laws, rules and governmental regulations relative to its right to do business in the state and that such entity on behalf of the Tenant was authorized to do so by any and all appropriate partnership, trust or other actions. Tenant agrees to furnish promptly upon request a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of Tenant to enter into this Lease. 16 31. COMMISSIONS. Each of the parties represents and warrants to the other that it has not dealt with any broker or finder in connection with this Lease, except as described on the Reference Page. Tenant represents and warrants that it has not dealt with a real estate broker, agent or finder in connection with this Lease with the exception of the broker named in the Reference Pages to this Lease whose commission Landlord agrees to pay. Landlord shall not pay a commission or fee due any other brokers, agents or finders as a result of this Lease. Tenant and Landlord agree to indemnify, defend and hold harmless the other party hereto against and from all liabilities claims and damages arising from any claim by any broker (other than said named broker), finder or agent claiming to have dealt with Tenant in connection with this Lease. 32. TIME AND APPLICABLE LAW. Time is of the essence of this Lease and all of its provisions. This Lease shall in all respects be governed by the laws of the state in which the Building is located. 33. SUCCESSORS AND ASSIGNS. Subject to the provisions of Article 9, the terms, covenants and conditions contained in this Lease shall be binding upon and inure to the benefit of the heirs, successors, executors, administrators and assigns of the parties to this Lease. 34. ENTIRE AGREEMENT. This Lease, together with its exhibits, contains all agreements of the parties to this Lease and supersedes any previous negotiations. There have been no representations made by the Landlord or understandings made between the parties other than those set forth in this Lease and its exhibits. This Lease may not be modified except by a written instrument duly executed by the parties to this Lease. 35. EXAMINATION NOT OPTION. Submission of this Lease shall not be deemed to be a reservation of the Premises. Neither Tenant nor Landlord shall be bound by this Lease until each has received a copy of this Lease duly executed by Tenant and has delivered to Tenant a copy of this Lease duly executed by Landlord, and until such delivery Landlord reserves the right to exhibit and lease the Premises to other prospective tenants. Notwithstanding anything to the contrary, Landlord may withhold delivery of possession of the Premises from Tenant until such time as Tenant has paid to landlord any security deposit required by Article 5, the first month's rent as set forth in Article 3 and any sum owed pursuant to this Lease. 36. RECORDATION. Tenant may not record or register this lease or a short form memorandum of this Lease without the prior written consent of Landlord. 37. LIMITATION OF LANDLORD'S LIABILITY. Redress for any claim against Landlord under this Lease shall be limited to and enforceable only against and to the extent of Landlord's interest in the Building. The obligations of Landlord under this Lease are not intended to and shall not be personally binding on, nor shall any resort be had to the private properties of, any of its members, or its or their trustees or board of directors and officers, as the case may be, its manager, the general partners thereof, or any beneficiaries, stockholders, employees, or agents of Landlord, the manager or the members. 38. MISCELLANEOUS. 38.1 Subject to compliance with all applicable governmental codes, regulations and ordinances, including approval of Tenant's plans, Landlord hereby grants Tenant the right to install up to a 500KW diesel fuel emergency generator in a location deemed feasible by Landlord and Tenant, including an associated 500 gallon diesel fuel-tank as necessary to support the generator on the ground floor or roof of the Building. Subject to Landlord's approval of Tenant's detailed plans as to method of installation and location, Landlord shall permit Tenant, at its sole cost and expense, to install, use, operate and maintain electrical and telecommunications conduits, condenser and fuel piping, in the riser or other locations in, on or to the Building (as noted in Exhibit E attached hereto (the "Designated Areas"), as necessary to connect to Tenants': (a) emergency generator and fuel to each other and to the Premises; (b) generator transfer switch for portable "roll-up" generator; (c) telecommunication service providers, CLEC's, IXC's, and ILEC, etc.; (d) Telco and Hogan grounds and; (e) GPS antenna on the roof. Tenant shall have the ability to test its generator on a reasonable basis as recommended by the manufacturer. In addition, Landlord may install a diesel fuel tank and/or emergency generator and/or fuel pump (the "Emergency Facilities") to service multiple Tenants of the Building. Should Tenant request to utilize Landlord's Emergency Facilities, Tenant shall pay its proportionate share of the installation, maintenance, repair and operation of the Emergency Facilities, in which case Landlord and Tenant shall enter into a separate agreement which governs its use, rules and regulations. Landlord will permit Tenant to install, use, operate and maintain condensing units or dry coolers (sized to meet Tenant's air conditioning requirements for operation of its system in a designated area of the roof). In addition, Tenant shall have the right to tie into the Building's existing ground field or, if the existing grid does not meet Tenant's requirement, to install its own ground system. Nothing permitted in this paragraph shall permit Tenant to interfere with other occupants' use of similar facilities in their designated locations. Tenant's preapproved vertical riser locations are designated on Exhibit E. 17 38.2 Subject to compliance with all applicable governmental codes, regulations and ordinances, including approval of Tenant's plans, Tenant shall have the right to construct a dry pipe, pre-action system for the Premises, including the right to relocate or encase any water mains or other water pipes (whether or not related to fire safety) running through the Premises, at Tenant's sole cost and expense and subject to Landlord's approval, not to be unreasonably withheld. Tenant shall also have the right to install a FM 200 fire suppression system in the Premises. Tenant shall not penetrate the floor or ceiling on any floor of the Building with any water or liquid piping, supply or drains, or install any pull boxes or junction boxes, without the Landlord's expressed written approval of Tenant's detailed plans, which consent shall not be be unreasonably withheld, conditioned or delayed. 38.3 Tenant shall be permitted to erect and operate, at its sole cost and expense, and if Tenant does so erect, Tenant shall be required to maintain, operate, repair and replace, at its sole cost and expense, one (1) GPS antenna on the roof of the Building and to run necessary conduit and cabling from the antenna to the Premises, provided that Tenant installs any screening device requested by Landlord to insure the antenna cannot be viewed by the public. Tenant shall have access to roof at all times, subject to Section 38.4, to install, maintain, operate and repair the antenna and to the risers, floor space and ceiling space to run the necessary cabling and conduit. Any antenna shall be installed in a good and workmanlike manner and in compliance with all applicable laws and plans approved by Landlord. Tenant shall indemnify and hold Landlord harmless from and against any loss, cost, damage, claim or liability, including loss or diminution of any roof warranties, that Landlord may suffer as a result of Tenant's actions pursuant to this section. Landlord's approval shall not be deemed to give Tenant the exclusive right to use the roof and shall not preclude Landlord from granting similar rights to others. The rights of other tenants or licensees shall be exercised without causing unreasonable interference with the antennae and associated activities being carried on by Tenant. Similarly, the rights of Tenant shall be exercised without causing interference with antennae and associated activities being carried on by other tenants or licensees. Tenant shall not change, substitute or materially alter the antennae or related equipment agreed to herein without the prior written consent of Landlord, which consent shall not be be unreasonably withheld, conditioned or delayed. 38.4 Landlord hereby grants Tenant access to the Premises, the roof, the tunnel and the risers housing Tenant's wiring, conduit and cabling twenty four (24) hours per day, three hundred sixty-five (365) days per year. However, if access is needed to areas not otherwise available to Tenant during normal business hours, Tenant must notify Landlord and Landlord will provide escorted access, at Tenant's expense (if Landlord incurs any actual expenses). In addition, Landlord shall give Tenant reasonable access to prearranged and demised vertical risers exclusively allocated to such purposes to enable Tenant to provide Tenant's telecommunications services and to interconnect to tenants and other occupants of the Building in Designated Areas as shown on Exhibit E. Tenant may install in the aforementioned risers, conduit and other such cabling as set forth in Section 38.6(b) for its services within the Building. Tenant shall have the right to permit its customers to collocate telecommunications equipment in the Premises that are serviced and maintained by Tenant. 38.5 Tenant may use Landlord's approved contractors in connection with Tenant's Improvements and may competitively bid to tenant finish contractors acceptable to Landlord and to select and/or approve the successful contractor. In the event of a renovation, Tenant shall have the right to use any of the approved contractors and competitively bid the renovations in the same manner. Landlord shall not charge any supervision or management fee, however, Tenant shall be responsible for and reimburse Landlord for any actual and reasonable out of pocket expenses relating to the approval, or review of Tenant's plans. 38.6 Landlord shall make the following available for Tenant's installation or use which, if Tenant accepts, shall be installed, performed or used at Tenant's sole cost and expense: (a) 480/277 volt three-phase, 4 wire electrical service at the bus duct to the floor of the Building in which the Premises is located, at Landlord's costs (however Tenant shall pay all costs associated with its connection to the electrical service, the disconnect switch, meter, and associated utility costs. Pursuant to Paragraph 9 of Exhibit B, the cost to provide 1250 amp service shall be borne by Landlord. Tenant shall, prior to Landlord providing any electricity for Tenant's use at the Premises (as described in subparagraph 13.1(f) above), and installing the disconnect switch, supply Landlord with its certified electrical load calculations and Landlord shall arrange for the installation of a multimeter (in the case of a multi-tenant floor) for the recording of electrical usage, and Tenant agrees to reimburse Landlord for tenant's proportionate share of the cost of said multimeter and disconnect switch if purchased and installed by Landlord or Landlord's contractor. Notwithstanding the above, should Tenant, during the term of the Lease, require additional electrical service over and above its initial electrical load calculations, Landlord shall cooperate and coordinate with Tenant to provide the increased requirements, all in the same manner as described above for Tenant's initial requirements. 18 (b) Riser capacity, shown on Exhibit E, to enable Tenant to interconnect with other occupants of the building without any additional cost or fees from Tenant to Landlord. This does not imply that Landlord is providing any conduit, cabling or other facilities for Tenant's interconnection purposes. All of Tenant's conduits and cabling shall be clearly labeled and tagged with Tenant's name and an emergency contact phone number at each floor and at a maximum of twenty feet apart. Tenant shall not allow any cabling or loose wiring to exist in the Building, outside the Premises, except as otherwise permitted in this Lease to be field verified and approved by Landlord, such approval not to be unreasonably withheld. Landlord may also install dedicated pull boxes (one or more for each tenant) for Tenant's conduits at the floor of the Premises and at the basement level for the purposes of coordinating and segregating the telecommunications conduits within the Building. Tenant shall pay Landlord's actual costs for the pull boxes. (c) Ability to ventilate supplemental HVAC through louvers to the exterior of the south side of the Building and Landlord shall provide Tenant with Tenant's Proportionate Share of available space in the common areas on the roof of the Building for Tenant's condenser/dry coolers and generator on the roof of the Building. There shall be no additional costs or feees from Tenant to Landlord for this service. (d) Location for A/C grounding for Tenant's main distribution cabinets and transformers. The ground will be chosen and installed by Tenant in a grounding area selected by Landlord and feasible for Tenant's use in accordance with Bellcore standards. There shall be no additional costs or feees from Tenant to Landlord for this service. (e) Existing slab to underside of concrete deck above has been measured at a minimum 13'-0" clearance. There shall be no additional costs or feees from Tenant to Landlord for this service. (f) 5000# capacity freight elevator approximately 10'0"w x 6'0" interior. There shall be no additional costs or feees from Tenant to Landlord for this service. (g) Loading dock. There shall be no additional costs or feees from Tenant to Landlord for this service. (h) Permission for Tenant to have diverse dual entrances into the Premises for fiber optic cable service. Landlord will permit the use of or installation of all conduits reasonably necessary to connect the fiber optic cable service to the Premises, provided within the permissible area shown on Exhibit E. Landlord shall not limit Tenant in its choice of which telecommunication carrier to utilize. There shall be no additional costs or feees from Tenant to Landlord for this service. (i) Permission for Tenant to install and maintain on the roof of the Building (in a location and manner reasonably approved by Landlord) protection against damage by lightning to Tenant's telecommunications equipment. There shall be no additional costs or feees from Tenant to Landlord for this service. 38.7 Landlord's and Tenant's work shall each be performed in compliance with the ADA. 38.8 Landlord shall provide within the passenger and freight elevators accommodations to separately lock-out Tenant's floor subject to Landlord's security and aesthetic requirements. Landlord shall provide a guard twenty-four (24) hours a day, and a security system for the Building operated seven (7) days per week 24 hours a day. Tenant shall have the right to install its own security system in the Premises. Building shall be fully sprinkled, to the extent required by applicable law. 38.9 Prior to the commencement of Tenant's initial alterations to the Premises and the Building (collectively, the "Initial Alterations"), Tenant shall deliver the plans and specifications to Landlord for its written approval, which approval shall not be unreasonably withheld or delayed. Tenant's plans and specifications for Tenant's Initial Alterations must comply with all applicable laws, introduce no hazardous materials into the Building (other than batteries and diesel fuel to be stored in the tank and generator permitted hereunder), impose on Landlord no additional ADA compliance requirements within the Building or the Premises, and be reasonable and compatible with the systems and structure of the Building. Tenant shall deliver to Landlord a report from a structural engineer that all of Tenant's Initial Alterations comply with building structural capacities, applicable laws and codes. Landlord shall respond to Tenant's request for approval of Tenant's plans and specifications within ten (10) business days after receipt thereof. In the event Landlord shall not approve the plans and specifications, Landlord shall notify Tenant of its objections thereto. Landlord and Tenant shall thereafter work cooperatively and in good faith to reach agreement upon mutually acceptable plans and specifications. Tenant shall pay all Landlord's reasonable third party engineering and out of pocket expenses relating to the review of Tenant's plans and specifications related to the Initial Alterations. Tenant at its sole cost and expense shall obtain any permits, licenses, variances, or other approvals required with respect to the installation or operation of the improvement, equipment, cabling or wiring to be installed by Tenant or to the alterations to be 19 performed by Tenant. Tenant shall deliver true and complete copies thereof to Landlord prior to permit application and commencing any improvement or alteration. Tenant, its contractors and/or agents shall not tie into, disrupt, disengage, terminate, or violate any building systems, fire protection, fire alarm, security, HVAC, electrical, etc., unless coordinated, scheduled in advanced and approved with the Buildings' engineer, manager and contractor to assure integrity with the system and continued applicability of the Buildings' warranties and guaranties. Any violation of the above is subject to default under this Lease. 38.10 Provided no Event of Default hereunder has occurred and is continuing, Tenant shall have continuing rights of first offer to lease the balance of the 3rd floor, in the Building which is contiguous to the Premises and which may become available on and after the date of this Lease. At such time that Landlord has knowledge that such space ("Offered Space") is or will become available, Landlord will give Tenant notice (the "Offering Notice") of the terms and conditions Landlord would be willing to accept with respect to the Offered Space (including, without limitation, the proposed rent, additional rent, scope of Landlord's proposed tenant improvements, location and floor area), and Tenant shall have five (5) business days within which to respond to Landlord's offer. In the event Tenant elects to accept Landlords' offer, then Tenant shall notify Landlord of such election by giving notice to Landlord during such five (5) days period and Landlord and Tenant shall thereupon enter into an amendment to this Lease for the leasing of the Offered Space, which amendment shall contain (i) the terms and conditions set forth in the Offering Notice, (ii) provide that the term thereunder shall expire or sooner terminate contemporaneously with the expiration or sooner termination of the Term hereof, and (iii) contain such other terms and provisions as either Landlord or Tenant may reasonably require in order to effectuate the incorporation of the Offered Space into the Premises and to otherwise effectuate the intent of this Section 38.10. Should Tenant decline Landlord's offer or fail to respond thereto, then, and in such event, Tenant shall have been deemed to have waived any prospective rights of first offer to the Offered Space and Landlord may lease the Offered Space to any other party on the same terms and conditions set forth in the Offering Notice. If Tenant declines Landlord's offer or fails to respond thereto, Landlord may not lease the Offered Space to any other party on any terms other than those set forth in the Offering Notice without first offering it to Tenant on those terms. 38.11 Thirty (30) days after fulfillment of the requirements set forth below, Landlord agrees to pay to Tenant $240,000.00 ($20.00/sf) as and for Landlord's contribution to Tenant's Work ("Construction Allowance"). A) Completion of Tenant's work in accordance with approved plans and specifications in a manner reasonably satisfactory to Landlord or Landlord's Architect. B) Presentation to Landlord of the following: i) General Contractor's executed and notarized final waiver of Lien/affidavit form listing all subcontractors and material suppliers and the amounts they were paid for work and materials supplied for the Premises which equal or exceed the Construction Allowance; ii) Executed and notarized final Waiver of Lien/Affidavit form from HVAC, plumbing, electrical, drywall/carpentry subcontractors and material suppliers; iii) Waivers/Affidavits must be satisfactory to Landlord. C) Presentation to Landlord of a Certificate of Occupancy. D) Tenant shall have paid to Landlord the first monthly installment of Annual Rent. E) Tenant shall have not been in default under the terms and conditions of this Lease. 38.12 Tenant shall have the right to display its signage at the entrance to its Premises. In addition, Landlord shall provide and pay for all standard building directory ground floor lobby signage for Tenant. 38.13 Tenant acknowledge there is no on-site parking, and Landlord shall arrange for four (4) parking spaces off-site for Tenant at Tenant's sole cost and expense, within a one (1) block radius of the Premises. 20 38.14 As required by Section 404.56(6), Florida Statutes, the following notification is made regarding radon gas: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit. LANDLORD: TENANT: 36 North East Second Street, L.L.C. Startec Global Communications Corporation By: By: /s/ By: /s/ Prabhav V. Maniyar Title: Manager Title: Secretary, Sr. VP & CFO Dated: 10/29/98 Dated: 10/28/98 Witnesses: Witnesses: /s/ /s/
21 EX-21.1 11 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES Startec Global Operating Company Startec Global Licensing Company EX-23.1 12 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into Startec Global Communications Corporation's previously filed Registration Statement on Form S-8, File No. 333-44317. ARTHUR ANDERSEN LLP Washington, D.C. March 30, 1999 EX-27 13 FDS --
5 1,000 US DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 81,456 0 43,029 (2,659) 0 4,600 47,018 (3,493) 225,982 45,012 158,022 0 0 90 15,390 225,982 161,169 161,169 141,176 141,176 30,649 0 (12,830) (18,060) 0 (18,060) 0 (514) 0 (18,574) (2.08) (2.08)
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